UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 0-16852
KOMAG, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 94-2914864
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1704 Automation Parkway, San Jose, California 95131
(previously 275 South Hillview Drive, Milpitas, California 95035)
(Address of Principal Executive Offices, including Zip Code)
Registrant's telephone number, including area code: (408) 576-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendment of this Form 10-K. [X]
[Cover page 1 of 2 pages]
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The aggregate market value of voting stock held by non-affiliates of
the Registrant as of February 21, 1997 was approximately $1,093,933,984 (based
upon the closing sale price for shares of the Registrant's Common Stock as
reported by the Nasdaq National Market for the last trading date prior to that
date). Shares of Common Stock held by each officer, director and holder of 5% or
more of the outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On February 21, 1997 approximately 51,856,539 shares of the
Registrant's Common Stock, $0.01 par value, were outstanding.
Documents Incorporated by Reference
Designated portions of the following document are incorporated by
reference into this Report on Form 10-K where indicated:
Komag, Incorporated Proxy Statement for the Annual Meeting of
Stockholders to be held on May 14, 1997, Part III.
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PART I
ITEM 1. BUSINESS
Komag, Incorporated ("Komag" or the "Company") designs, manufactures and
markets thin-film media ("disks"), the primary storage medium for digital data
used in computer hard disk drives. Komag believes it is the world's largest
independent manufacturer of thin-film media and is well positioned as a
broad-based strategic supplier of choice for the industry's leading disk drive
manufacturers. The Company's business strategy relies on the combination of
advanced technology and high-volume manufacturing. Komag's products address the
high-capacity/high-performance segment of the disk drive market and are used in
products such as disk arrays, network file servers, high-end personal computers
and engineering workstations. The Company manufactures leading-edge disk
products primarily for 5 1/4-inch and 3 1/2-inch form factor hard disk drives.
The Company was organized in 1983 and is incorporated in the State of Delaware.
The Company's business is subject to risks and uncertainties, a number of
which are discussed under "Risk Factors".
Increasing demand for digital storage and low-cost, high-performance hard
disk drives has resulted in strong unit demand for these products. International
Data Corporation ("IDC") forecasts that worldwide disk drive unit shipments in
1997 through 2000 will grow at a 20% compound annual growth rate. Greater
processing power, more sophisticated operating systems and application software,
high-resolution graphics and larger data bases are among the developments that
have required ever higher performance from disk drives. For example, the first 5
1/4-inch hard disk drive, introduced in 1980, offered a capacity of five
megabytes (one million bytes is a megabyte or "MB") with a storage density of
less than ten megabits (one million bits is a megabit; eight bits is one byte)
per square inch. Current high-performance 3 1/2-inch drives have capacities of
three to nine gigabytes (one billion bytes is a gigabyte or "GB") with densities
typically of 650 to 850 megabits per square inch. Advances in component
technology have been critical to improving the performance and storage capacity
of disk drives and lowering cost per bit stored.
The Company has capitalized on its technological strength in thin-film
processes and its manufacturing capabilities to achieve and maintain its
position as the leading independent supplier to the thin-film media market. The
Company's technological strength stems from knowledge of materials science and
an understanding of the interplay between disks, heads and other drive
components. Komag's manufacturing expertise in thin-film media is evidenced by
its history of delivering reliable products in high volume. Current
manufacturing operations are conducted by the Company in the United States and
Malaysia as well as through a joint venture in Japan. Asahi Komag Co., Ltd.
("AKCL"), a joint venture with Asahi Glass Co., Ltd. ("Asahi Glass") and Vacuum
Metallurgical Company, manufactures thin-film media in Japan. The Company
manufactures disk substrates in the U.S. for internal use through its
subsidiary, Komag Material Technologies, Inc. ("KMT"). A 20% minority interest
in KMT is held by Kobe Steel USA Holdings Inc. (together with Kobe Steel, Ltd.
and other affiliated companies, "Kobe").
Technology
Komag manufactures and sells thin-film magnetic media on rigid disk
platters for use in hard disk drives. These drives are used in computer systems
to record, store and retrieve digital information. Inside a disk drive, the
media or disk rotates at speeds of up to 10,000 RPM. The head scans across the
disk as it spins, magnetically recording or reading information. The domains
where each bit of magnetic code is
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stored are extremely small (now typically 650 to 850 million bits per square
inch in high-performance drives) and precisely placed. The tolerances of the
disks and recording heads are extremely demanding and the interaction between
these components is one of the most critical design aspects in an advanced disk
drive.
The primary factors governing the density of storage achievable on a disk's
surface are (1) the minimum distance at which read/write heads can reliably pass
over the surface of the disk to detect a change in magnetic polarity when
reading from the disk, defined as glide height (measured in microinches or
millionths of an inch), and (2) the strength of the magnetic field required to
change the polarity of a bit of data on the magnetic layer of a disk when
writing, defined as coercivity (measured in oersteds--"Oe"). As glide height is
reduced, smaller bits can be read. The higher the coercivity of the media, the
smaller the width of the bit that can be stored. The Company's plating,
polishing and texturing processes result in a uniform surface with relatively
few defects which permits the read/write heads to fly over the disk surface at
glide heights of 1.2 microinches. The platinum-cobalt based alloy deposited on
the surfaces of Komag's disks has high coercivity, low noise and other desirable
magnetic characteristics. The combination of these factors results in more data
stored in a given area on the disk surface.
The Company currently manufactures inductive and magnetoresistive ("MR")
media. Designed for use with an MR head, magnetic bits are reduced in size and
packed in significantly higher densities on the surface of an MR disk than on
inductive disks. The MR head uses separate read and write elements. The write
element is made from conventional inductive materials, but the read element is a
made of a material whose electrical resistance changes when subjected to changes
in a magnetic field. MR heads are more sensitive to magnetic fields which
enables them to read the more densely-packed, smaller-sized bits contained on an
MR disk. The Company believes that MR disks will become the predominant media
for disk drives over the next several years. In 1996, the Company began
production of MR media. The Company also currently manufactures proximity media,
an advanced version of inductive media. Proximity media interfaces with
proximity recording heads and allows for higher density recording due to low
glide heights attainable with proximity media and heads.
Products, Customers and Marketing
Komag's thin-film disk products generally can be classified by size and
type of media. The diameter of the disk corresponds roughly with the width of
the disk drive. The Company sells primarily 95 mm and 130 mm disks for 3
1/2-inch and 5 1/4-inch drives, respectively. The Company currently sells
inductive, proximity and MR media. Within each of these sizes and types of
media, Komag offers a range of coercivities, glide height capabilities, and
other parameters to meet specific customer requirements.
Komag primarily sells its media products to independent OEM disk drive
manufacturers for incorporation into hard disk drives which are marketed under
the manufacturers' own labels. The Company also currently sells its disks to
computer system manufacturers. The Company works closely with customers as they
design new high-performance disk drives and generally customizes its products
according to customer specifications.
Net sales to major customers in 1996 were as follows: Seagate Technology,
Inc. ("Seagate")--52%, Western Digital Corporation ("Western Digital")--22% and
Quantum Corporation ("Quantum") including its Japanese manufacturing partner,
Matsushita-Kotobuki Electronics Industries, Ltd. ("MKE")--18%. Sales are
generally concentrated in a small number of customers due to the high volume
requirements of the dominant disk drive manufacturers and their tendency to rely
on a few suppliers because of the close interrelationship between media and
other disk drive components. Given the relatively small number of
high-performance disk drive manufacturers, the Company expects that it will
continue its dependence on a very limited number of customers. Further there
were consolidations among the Company's disk drive customers in 1996. Seagate
and Conner Peripherals, Inc. merged and Quantum ceased disk drive
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production in Milpitas, California and Penang, Malaysia and contracted with MKE
to manufacture all of its disk drives. AKCL, the Company's Japanese joint
venture, has a long established working relationship with MKE and MKE has
remained AKCL's largest customer for the past several years. During 1996 the
Company sold product to MKE in Japan and to MKE's Singapore manufacturing
facility through AKCL.
Sales are made directly to disk drive manufacturers worldwide (except media
sales into Japan) from the Company's U.S. and Malaysian operations. Sales of
media for assembly into disk drives within Japan are made solely through AKCL.
On a selective basis the Company has used AKCL to distribute its products to
Japanese drive manufacturers for assembly outside of Japan. Media sales to the
Far East from the Company's U.S. and Malaysian operations represented 88%, 62%
and 54% of Komag's net sales in 1996, 1995 and 1994, respectively. All foreign
sales are subject to certain risks common to all export activities, such as
government regulation and the risk of imposition of tariffs or other trade
barriers. Foreign sales must also be licensed by the Office of Export
Administration of the U.S. Department of Commerce.
The Company's sales are generally made pursuant to purchase orders rather
than long-term contracts. These purchase orders are generally subject to change
or cancellation without significant penalty. At December 29, 1996 the Company's
backlog of purchase orders scheduled for delivery within 90 days totaled $113.0
million compared to $156.0 million at December 31, 1995. The Company believes it
is a common practice for disk drive manufacturers to place orders in excess of
actual requirements when there is an industry-wide shortage of media supply (a
condition more prevalent in 1995 in comparison to 1996). These purchase orders
may be changed or canceled by customers on short notice without significant
penalty. Accordingly, the backlog should not be relied upon as indicative of
sales for any future period.
Manufacturing
Komag's manufacturing expertise in thin-film media is evidenced by its
history of delivering reliable products in high volume. Through the utilization
of proprietary processes and techniques, the Company has the capability to
cost-effectively produce advanced disk products that exhibit uniform performance
characteristics. Such uniform performance characteristics enhance the
reliability of the drive products manufactured by the Company's customers. In
addition, these characteristics raise production yields on the customers'
manufacturing lines, which is an important cost consideration in
high-performance disk drives with large component counts. Manufacturing costs
are highly dependent upon the Company's ability to effectively utilize its
installed physical capacity to produce large volumes of products at acceptable
yields. To improve yields and capacity utilization, Komag has adopted formal
continuous improvement programs at all of its worldwide operations. The process
technologies employed by the Company require substantial capital investment. In
addition, long lead times to install new increments of physical capacity
complicate capacity planning.
The manufacture of the Company's thin-film sputtered disks is a complex,
multi-step process that converts polished aluminum substrates into finished data
storage media ready for use in a hard disk drive. The process requires the
deposition of extremely thin, uniform layers of metallic film onto a disk
substrate. To achieve this end, the Company uses a vacuum deposition, or
sputtering method, similar to that used to coat semiconductor wafers. The basic
process consists of many interrelated steps which can be grouped into four major
categories:
1. Sizing and Grinding of the Substrate: A raw aluminum blank substrate is
sized by precisely cutting the inner and outer diameter of the blank. A
mechanical grinding process is then utilized to provide a relatively flat
surface on the substrate prior to nickel alloy plating.
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2. Nickel Alloy Plating of the Substrate: Through a series of chemical
baths polished aluminum substrates are plated with a uniform nickel phosphorus
layer in order to provide support for the magnetic layer.
3. Nickel Polishing, Texturing and Cleaning: During this relatively
labor-intensive process disks are smoothed and cleaned so that the read/write
heads of the disk drives can fly at low and constant levels over the disks.
4. Sputtering and Lube: By a technically demanding vacuum deposition
process, the magnetic layers are successively deposited on the disk and a hard
protective overcoat is applied. After sputtering, a microscopic layer of
lubrication is applied to the disk's surfaces to improve durability and reduce
surface friction.
5. Glide Test and Certification: In robotically controlled test cells,
disks are first tested for a specified glide height and then certified for
magnetic properties. Based on these test results, disks are graded according to
specific characteristics and sold to customers based upon their specific
performance requirements.
Most of the critical process steps are conducted in Class 100 or better
clean rooms. From the final cleaning operation forward, disks are handled by
custom designed, and in many cases Company-built, automated equipment to reduce
contamination and enhance process precision. Minute impurities in materials
used, particulate contamination, or other production problems can reduce
production yields and, in extreme cases, result in the prolonged suspension of
production. Although no problems have required prolonged suspension of the
Company's production to date, no assurance can be given that the Company will
not experience manufacturing problems from contamination or other causes in the
future.
Production Capacity
The Company currently has 23 production lines installed at its
manufacturing plants in three countries: ten in the United States, eight in
Malaysia, and five at its manufacturing joint venture in Japan. The addition of
the seventh line in the second quarter of 1996 in Penang, Malaysia utilized all
available space in the Company's first Penang manufacturing facility. During
1996 the Company completed the construction of the second manufacturing facility
in Penang and production began on the first line in this 275,000 square foot
back end disk manufacturing facility in early January 1997. The Company also
completed construction of a new back end facility in San Jose, California and
production commenced at this 225,000 square foot facility in the fourth quarter
of 1996. The Company constructed and equipped a 275,000 square foot front end
manufacturing facility in the east Malaysian state of Sarawak which began
production in the first half of the year. This new front end facility
manufactures plated, polished substrates that are shipped to the Company's back
end manufacturing facilities in the United States and Malaysia for completion.
The back end plants utilize plated, polished substrates to produce finished
sputtered disk product. AKCL completed the construction of a 225,000 square foot
facility in Thailand for front end production of thin-film disks and began
production at this site in late 1996.
The Company currently plans to add a second production line at the new
Penang plant in the second quarter of 1997. In addition, in the second quarter
at the new San Jose plant, the Company plans to commence production on the first
new design ("ND") sputtering machine which will have a rated capacity of twice
the output of the Company's existing machines. In the third quarter the Company
will add a ND machine at its new Penang plant. The addition of these production
lines in the second and third quarters of 1997, coupled with the first line in
the new Penang plant, will translate into the equivalent of six more sputtering
lines by the end of the third quarter of 1997 than at the end of 1996. Also, in
1997 the Company will complete the equipping and production expansion of the
front end manufacturing facility in Sarawak, Malaysia.
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Supplementing this new physical capacity, the Company expects that
continued focus on process improvements will result in higher unit output from
both current and planned production lines during 1997, thus leading to increased
effective capacity.
During the fourth quarter of 1994, the Company began a series of process
improvements designed to support production of future advanced disk products.
The Company believes that these improvements should enhance product performance
and should enable increased unit output through reduced process cycle times. In
order to utilize these process improvements on all of the Company's sputtering
lines, certain older machines were upgraded. Three U.S. machines were upgraded
in 1995 and three machines were upgraded in 1996. Only one sputtering line was
out of production at any given time. Certain older sputtering lines at the
Japanese joint venture were also upgraded during 1995 and 1996. This upgrade
process is now complete, however, there can be no assurance that future
modifications will not be required to meet new product needs.
Research, Development and Engineering
Since its founding, Komag has focused on the development of advanced
thin-film disk designs, as well as the process technologies necessary to produce
these designs. The Company has utilized a full scale sputtering line for pilot
production. The Company has recently completed the construction of a new 188,000
square foot research and development facility which the Company occupied in the
first quarter of 1997. The new facility is being equipped with an additional new
full scale sputter line which will be dedicated to research and development
activities and available for use in the second quarter of 1997. The Company's
spending and capital investment for R&D are focused on the investigation,
design, development, and testing of new products and processes as well as the
development of more efficient processes that can be integrated into
manufacturing in a commercially viable manner.
In the second half of 1996, the Company completed the development and
quickly ramped to volume production new proximity and magnetoresistive ("MR")
products. The new proximity products are low-glide, full-surface textured
inductive media for use with proximity heads. The new MR products are comprised
of full-surface and mechanical zone-textured MR media as well as laser
zone-textured media for use with MR recording heads.
In 1997, the Company plans to increase its R&D spending to approximately
$50 million. The Company's R&D team will focus on process changes and
improvements to increase yields on the proximity and MR products currently in
volume production. New proximity and MR products will continue to be developed
and glass media products will be developed for production in late 1997. These
advanced products require new and continuing development efforts and process
improvements in the front end manufacturing processes from substrate through
nickel polish, as well as improved cleaning processes, improved overcoats, and
improved magnetic recording characteristics for the magnetic layers on the
disks.
The Company's expenditures (and percentage of sales) on research,
development and engineering, were $29.4 million (5.1%) in fiscal 1996, $23.8
million (4.6%) in fiscal 1995, and $21.3 million (5.4%) in fiscal 1994.
Strategic Alliances
The Company has established joint ventures with Asahi Glass and Kobe. Komag
believes these alliances have enhanced the Company's competitive position by
providing research, development,
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engineering and manufacturing expertise that reduce costs and technical risks
and shorten product development cycles.
Asahi Komag Co., Ltd. ("AKCL")
In 1987 the Company formed a partnership (Komag Technology Partners) with
the U.S. subsidiaries of two Japanese companies, Asahi Glass and Vacuum
Metallurgical Company. The partners simultaneously formed a wholly owned
subsidiary, AKCL, to manufacture and distribute thin-film disks in Japan. Under
the joint venture agreement, the Company contributed technology developed prior
to January 1987, and licensed technology developed after January 1987, to the
extent such technology relates to sputtered thin-film hard disk media, for a 50%
interest in the partnership. The Japanese partners contributed equity capital
aggregating 1.5 billion yen (approximately $11 million). AKCL began commercial
production with its first production line in 1988 and added three more
production lines between 1989 and 1991. A fifth production line was added at its
manufacturing facility in Yonezawa, Japan in September 1995. During the fourth
quarter of 1995 the first sputtering line was removed from production for
upgrading, thus offsetting the incremental unit output from the newly-installed
fifth sputtering line. The second sputtering line was upgraded during the first
half of 1996 and all sputtering lines were in production during the second half
of 1996.
The terms of the joint venture agreement provide that AKCL may only sell
disks for incorporation into disk drives that are assembled in Japan, with no
limitation on the territory in which AKCL's customers can sell such assembled
disk drive products. During the term of the joint venture agreement and for five
years thereafter, the Japanese partners and their affiliates have agreed not to
develop, manufacture or sell sputtered media anywhere in the world other than
through the joint venture, and the Company and its affiliates have agreed not to
develop, manufacture or sell such media in Japan except through the joint
venture. The Company has, however, periodically granted AKCL a limited right to
sell its disks outside of Japan and has received royalties on such sales. Upon
the occurrence of certain terminating events and the subsequent acquisition of
AKCL by one or more of the joint venture partners, the restrictions related to
activities of the acquiring joint venture partner(s) within Japan may lapse.
Disk sales to AKCL represented 6% of the Company's net sales in 1996
compared to less than 1% in 1995 and 1994. The increased level of disk sales by
the Company to AKCL for distribution is expected to continue in 1997. The
Company purchased 3% of AKCL's unit output during 1996 compared to approximately
1% and 8% in 1995 and 1994, respectively. Demand within the Japanese thin-film
disk market continued to absorb most of AKCL's production. The Company
anticipates that distribution sales of AKCL-produced disks to U.S. customers in
1997 will remain a relatively small percentage of the Company's net sales.
Komag Material Technology, Inc. ("KMT")
In 1988 Komag formed a wholly owned subsidiary, KMT, to secure an
additional stable supply of aluminum substrates of satisfactory quality for the
Company's products. In 1989 Kobe, a leading worldwide supplier of blank aluminum
substrates, purchased a 45% interest in KMT for $1.4 million. In December 1995,
the Company reacquired 25% of the outstanding common stock of KMT by purchasing
shares from Kobe for $6.75 million. The Company's purchase raised its total
ownership percentage of KMT to 80%. Under the recent stock purchase and related
agreements, Kobe retained one seat on KMT's Board of Directors.
Under these agreements, Kobe will continue to supply substrate blanks to
KMT while the Company will continue to purchase KMT's entire output of finished
substrates. Further, the Company has indicated its intention to purchase a
substantial proportion of its future substrate requirements from Kobe, a
continuation of a past procurement practice. In combination, KMT and Kobe supply
in excess of 95% of the Company's substrate requirements.
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Equity Positions Held by Asahi Glass and Kobe in Komag
Asahi Glass and Kobe each purchased two million shares of newly issued
Common Stock from the Company for $20 million in January 1989 and March 1990,
respectively. In 1992 Asahi Glass transferred ownership of its shares to a U.S.
subsidiary of Asahi Glass. Under their respective stock purchase agreements,
Asahi Glass and Kobe each have the right to purchase additional shares of the
Company's Common Stock on the open market to increase their respective equity
interests in the Company to 20%, the right to maintain their percentage interest
in the Company by purchasing their pro rata shares of any new equity issuance by
the Company, and the right to require the Company to register their shares for
resale, either on a demand basis or concurrent with an offering by the Company.
Each stock purchase agreement further provides that the Company shall use its
best efforts to elect a representative of each investor to the Company's Board
of Directors and to include such representatives on the Nominating Committee of
the Board. There were no purchases or sales of the Company's stock by Asahi
Glass or Kobe in 1996 and according to the Company's stock records at February
21, 1997, Asahi America and Kobe held 2,000,000 and 2,000,002 shares of Common
Stock, respectively. Sales of significant amounts of the security holdings of
Asahi Glass and/or Kobe in the future could adversely affect the market price of
the Company's Common Stock. Any sales by either party, however, would require
relinquishment of its respective seat on the Company's Board of Directors.
Competition
Current thin-film disk competitors fall into three groups: U.S. non-captive
manufacturers, U.S. captive manufacturers, and Japanese/Asian manufacturers.
Historically, each of these groups has supplied approximately one-third of the
worldwide thin-film disk unit output. Based upon research conducted by an
independent market research firm, the Company believes it is the leading
independent supplier of thin-film disks, with a market share greater than twice
the size of any of the U.S. non-captive manufacturers. The Company's U.S.
non-captive thin-film disk competitors include Akashic Memories Corporation (a
subsidiary of Kubota, Inc.), HMT Technology Corporation and StorMedia, Inc.
Japan-based thin-film disk competitors include Fuji Electric Company, Ltd.,
Mitsubishi Kasei Corp., Showa Denko K.K. and HOYA Corporation. The U.S. captive
manufacturers include IBM and OEM disk drive manufacturers, such as Seagate and
Western Digital, which manufacture disks as a part of their vertical integration
programs. To date, IBM and these OEM disk drive manufacturers have sold nominal
quantities of disks in the open market. See "Risk Factors--Competition".
Environmental Regulation
The Company is subject to a variety of regulations in connection with its
operations, and believes that it has obtained all necessary permits for its
operations. The Company uses various industrial hazardous materials, including
metal plating solutions, in its manufacturing processes. Wastes from the
Company's manufacturing processes are either stored in areas with secondary
containment before removal to a disposal site or processed on site and
discharged to the industrial sewer system. In addition, at one of its
facilities, the Company receives industrial waste water from Headway
Technologies, Inc., ("Headway"), which subleases a portion of a building in
Milpitas, California directly from the Company. Under this arrangement, the
Company processes this received waste water together with its own industrial
waste water.
The Company has made investments in upgrading its waste water treatment
facilities to improve the performance and consistency of its waste water
processing. Nonetheless, industrial waste water discharges from the Company and
other businesses located at the southern end of the San Francisco Bay may, in
the future, be subject to more stringent regulations. Failure to comply with
present or future regulations could result in the suspension or cessation of
part or all of the Company's operations. Such
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regulations could restrict the Company's ability to expand at its present
locations or could require the Company to acquire costly equipment or incur
other significant expenses.
Patents and Proprietary Information
Komag holds and has applied for United States and foreign patents relating
to its processes and equipment for manufacturing components and the resulting
components. While possession of patents could present obstacles to the
introduction of new products by competitors and possibly result in
royalty-bearing licenses from third parties, the Company believes that its
success does not depend on the ownership of intellectual property rights, but
rather on its innovative skills, technical competence and marketing abilities.
Accordingly, the patents held and applied for will not constitute any assurance
of the Company's future success.
The Company regards elements of its equipment designs and processes as
proprietary and confidential and relies upon employee and vendor non-disclosure
agreements and a system of internal safeguards for protection. Despite these
steps for protecting proprietary and confidential information, there is a risk
that competitors may obtain and use such information. Furthermore, the laws of
certain foreign countries in which the Company does business may provide a
lesser degree of protection to the Company's proprietary and confidential
information than provided by the laws of the United States. In addition, the
Company from time to time receives proprietary and confidential information from
vendors, customers, and partners, the use and disclosure of which are governed
by non-disclosure agreements. Through internal communication and the monitoring
of use and disclosure of such information, the Company complies with its
obligations regarding use and non-disclosure. However, despite these efforts,
there is a risk that such information may be used or disclosed in violation of
the Company's obligations of non-disclosure.
The Company has occasionally received, and may receive in the future,
communications from third parties asserting violation of intellectual rights
alleged to cover certain of the Company's products or manufacturing processes or
equipment. The Company evaluates whether to seek licenses to the rights referred
to in such communications. Although the Company believes that any such licenses
or other rights could be obtained by the Company on terms that would not have a
material adverse effect on the Company, there can be no assurance that this will
be the case.
Employees
As of December 29, 1996 the Company and its consolidated subsidiaries had
4,101 employees (4,027 of which are regular employees and 74 of which were
employed on a temporary basis), including 3,708 in manufacturing, 222 in
research, development and engineering, and 171 in sales, administrative and
management positions. Of the total, 2,035 are employed at offshore facilities.
The Company believes that its future success will depend in large part upon
its ability to continue to attract, retain and motivate highly skilled and
dedicated employees. None of the Company's employees is represented by a labor
union and the Company has never experienced a work stoppage.
Risks Factors
The Company's business is subject to a number of risks and uncertainties.
As a result of those risks described below and other risks presented elsewhere
in this report, there can be no assurance that the Company will continue to be
successful or will maintain a leading market position. The discussion contained
in Item 1--"Business" and Item 7--"Management's Discussion and Analysis of
Financial
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Condition and Results of Operations" contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the risks and
future direction of the business, such risks and uncertainties could cause
actual results to differ materially from any future performance suggested
herein. Factors that could cause actual results to differ include the following:
the rate of improvement in manufacturing efficiencies on new products;
utilization of manufacturing equipment and facilities; product transitions to
next-generation products; industry supply-demand relationships and related
pricing for high-end desktop and enterprise disk products; execution of planned
capacity additions; availabilty of certain sole-sourced raw material supplies
and vertical integration and company consolidation within a limited customer
base. The Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements which may be made to reflect
events or circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
Rapid Technological Change
The thin-film disk industry has been characterized by rapid technological
developments, increasingly shorter product life cycles, and price erosion. The
Company believes that its future success depends, in large measure, on its
ability to continually improve existing process technologies and to develop and
implement new process technologies in a timely manner. Such technologies must
support cost-effective, high-volume production of thin-film disks that meet the
ever-advancing customer requirements for enhanced magnetic recording
performance.
Although the Company has a significant, ongoing research and development
effort to advance its process technologies and the resulting products, there can
be no assurance that the Company will be able to develop and implement such
technologies in a timely manner in order to compete effectively against
competitors' products and/or entirely new data storage technologies. The
Company's results of operations would be materially adversely affected if the
Company's efforts to advance its process technologies were not successful or if
the technologies that the Company had chosen not to develop were proven to be
viable competitive alternatives.
In addition, protection of technology through patents and other forms of
intellectual property rights in technically sophisticated fields is commonplace.
There can be no assurance that others have not or will not perfect such
intellectual property rights and either enforce those rights to prevent the
Company from practicing certain technologies or demand royalty payments from the
Company in return for practicing those technologies, which may have a material
adverse affect on the Company's results of operations. The Company reviews, on a
routine basis, patent issuances in the U.S. and patent applications which are
published in Japan. Through these reviews, the Company occasionally becomes
aware of a patent, or an application that may mature into a patent, which could
give rise to a claim of infringement. When such patents are identified, the
Company investigates the validity and possibility of actual infringement. The
Company is presently involved in such an investigation of several recently
issued patents. However, the Company presently believes it is unlikely that such
patents will materially adversely affect the Company's business. However, if
such patents are asserted against the Company and upheld, there can be no
assurance that they would not apply to a significant portion of the Company's
products and would not have a material adverse effect on the Company's business.
Capacity Expansion and Capital Intensity
Future sales and earnings growth will depend, in part, on the successful
expansion of the Company's manufacturing capacity. The Company plans to expand
capacity by increasing the disk output of its existing production lines through
process improvements and through the installation of new production lines at its
manufacturing facilities. In the second half of 1996, low yields on new products
and high usage of production lines for product and process development
activities constrained unit output. If planned improvements in yields, equipment
utilization and process cycle times are not achieved, the Company's rate of
growth may be constrained or curtailed.
11
<PAGE>
The Company recently completed the construction of two new back end
production facilities, one in San Jose, California and one in Penang, Malaysia.
The first production line at the new San Jose facility began operation in the
fourth quarter of 1996. The first production line at the new Penang facility
began operation at the beginning of 1997. The Company currently plans to add a
second production line at the new Penang plant in the second quarter of 1997. In
addition, in the second quarter at the new San Jose plant, the Company plans to
commence production on the first new design ("ND") sputtering machine which will
have a rated capacity of twice the output of the Company's existing machines. In
the third quarter the Company will add a ND machine at the Penang plant. Also
the Company will complete the equipping and production expansion at the front
end manufacturing plant in Sarawak, Malaysia. There can be no assurance that the
Company's additional production lines, especially the new ND sputtering
machines, will be installed as scheduled or will attain yield and utilization
rates comparable to the Company's existing production lines. Manufacturing and
other challenges in connection with the commencement and subsequent expansion of
operations in any location could have a material adverse affect on the Company's
results of operations.
Based upon industry forecasts of continued high growth in demand for
magnetic media, the Company has developed and is executing its plan to increase
its production capacity under a schedule that is substantially more aggressive
than its past expansion plans. Implementation of this plan entails parallel
expansion at multiple locations rather than serial expansion one location at a
time, thus requiring precise planning. Under this more aggressive plan, the
Company successfully completed the construction and brought into production
three new manufacturing facilities on schedule during the last twelve months.
Continued successful execution of this expansion plan will require the
installation of the appropriate equipment to support current and advanced future
products, continued recruitment and retention of high quality workforces at all
facilities worldwide, and achievement of satisfactory manufacturing results on a
scale greater than the Company's prior expansions.
The Company's capital expenditures totaled $403 million in 1996 and capital
expenditures for 1997 are planned at approximately $290 million. Due to the
capital intensive nature of the Company's business, the construction and
equipping of new manufacturing facilities requires substantial capital
investment. Further, significant amounts of continuing investment in capital
equipment are required to improve, modify and change existing manufacturing
processes to support rapidly changing process technologies. There can be no
assurance that the Company will be able to properly plan and install capable
plant and equipment to support the manufacturing processes required for advanced
future products in a timely and cost-effective manner due to the long lead times
required to design, construct and install plant and equipment. Further, required
changes in manufacturing processes could obsolete or significantly shorten the
useful lives of equipment currently in use.
There can be no assurance that the Company will successfully achieve
planned process improvements or successfully manage its aggressive expansion
plan. Failure to improve yields from the low levels experienced in the fourth
quarter of 1996 would continue to materially adversely effect the Company's
results of operations. In addition, should actual demand for the Company's
products not meet the Company's forecast, and not absorb existing or planned
additional capacity, the fixed costs and operating expenses related to unused
capacity would have a material adverse affect on the Company's results of
operations.
Dependence on a Limited Number of Customers; Dependence on the Hard Disk Drive
Industry
The Company's sales are concentrated in a small number of customers due to
the high-volume requirements of the dominant disk drive manufacturers and their
tendency to rely on a few suppliers because of the close interrelationship
between media performance and disk drive performance. Net sales to major
customers in 1996 were as follows: Seagate--52%, Western Digital--22% and
Quantum, including its Japanese manufacturing partner MKE--18%. Given the
relatively small number of high-performance disk drive manufacturers, the
Company expects that it will continue its dependence on a very
12
<PAGE>
limited number of customers. Further there were consolidations among the
Company's disk drive customers in 1996. Seagate and Conner merged and Quantum
ceased disk drive production in Milpitas, California and Penang, Malaysia and
contracted with MKE to manufacture all of its disk drives. AKCL, the Company's
Japanese joint venture, has a long established working relationship with MKE and
MKE has remained AKCL's largest customer for the past several years. During 1996
the Company sold product to MKE in Japan and to MKE's Singapore manufacturing
facility through AKCL.
Seagate currently produces over 50% of its disk requirements internally and
has announced its intentions to produce at least 70% of its internal needs by
mid-1997. In addition, Seagate currently has a long-term purchase commitment
with one of the Company's competitors. Western Digital has stated its longer
term intention to grow internal media capacity from under 30% to at least 40%.
Other customers and potential customers have, or could adopt, similar
strategies. Depending on the overall growth in market demand for disk products,
such actions could result in the reduction or cessation of purchases from the
Company, thus materially adversely affecting the Company's results of
operations. Additionally, if one or more of the Company's customers were to
begin selling disks on the open market in direct competition with the Company,
the Company's results of operations could be further adversely affected.
The demand for the Company's high-performance thin-film disks depends upon
the demand for hard disk drives and the Company's ability to provide technically
superior products at competitive prices. The hard disk drive market is
characterized by short product life cycles and rapid technological change.
Failure by the Company to qualify new products and/or successfully achieve
volume manufacturing of new customer products could adversely affect the
Company's results of operations. Furthermore, the Company's sales are generally
made pursuant to purchase orders which are subject to cancellation, modification
or rescheduling without significant penalties. There can be no assurance that
the Company's current customers will continue to place orders with the Company,
that orders by existing customers will continue at the levels of previous
periods, or that the Company will be able to obtain orders from new customers.
Capital Needs
The Company believes that, in order to achieve its long-term growth
objectives and maintain and enhance its competitive position, it will need
significant additional financial resources over the next several years for
capital expenditures, working capital and research and development. During 1996,
the Company spent approximately $403 million on property, plant and equipment
and capital expenditures in 1997 are expected to approximate $290 million. The
Company believes that it will be able to fund the 1997 expenditures from a
combination of cash flow from operations, funds available from existing bank
lines of credit, and existing cash balances. However, the Company may obtain
additional debt or equity financing in 1997 to ensure the Company maintains
adequate cash reserves. There can be no assurance that such additional funds
will be available to the Company or, if available, will be available on
favorable terms. In addition, the Company may require additional capital for
other purposes. If the Company is unable to obtain sufficient capital, it could
be required to reduce its capital equipment and research and development
expenditures, which could have a material adverse affect on the Company's
results of operations.
Fluctuations in Operating Results
The Company believes that its future operating results will continue to be
subject to quarterly variations based upon a wide variety of factors, including
the cyclical nature of the hard disk drive industry, the ability to develop and
implement new manufacturing process technologies, the ability to introduce new
products and to achieve cost-effective, high-volume production in a timely
manner, changes in product mix and average selling prices, the availability and
the extent of utilization of the Company's production capacity, manufacturing
yields, prolonged disruptions of operations at any of the Company's facilities
for any reason, changes in the cost of or limitations on availability of labor,
and increases in production and engineering costs associated with initial
production of new product programs.
13
<PAGE>
Because the thin-film disk industry is capital intensive and requires a
high level of fixed costs, gross margins are also extremely sensitive to changes
in volume. Assuming fixed average selling prices, reductions in manufacturing
efficiency cause declines in gross margins. Additionally, decreasing market
demand for the Company's products generally results in reduced average selling
prices and/or low capacity utilization that, in turn, adversely affects gross
margins and operating results. The Company's ability to maintain average selling
prices and gross margins is dependent on its ability to produce, in volume,
products that are differentiated on the basis of technological superiority. In
the first and second quarters of 1996, the Company achieved high gross margins
as a result of high manufacturing efficiencies, coupled with strong market
demand for its inductive disk products. In the third and fourth quarters of
1996, the Company made a rapid transition to new proximity and MR disk products.
The lower yields on these new products, coupled with high usage of production
equipment for product and process development activities, constrained unit
output in the second half of the year. In light of the fixed cost nature of the
business, constrained unit output resulted in high unit costs and low gross
margins in the second half of the year. The Company expects gross margins to
improve sequentially in the first two quarters of 1997 from the fourth quarter
1996 level and has targeted a gross margin range of 30-35% for the second half
of 1997. In the event that market supply meets or exceeds demand or yields on
new products do not improve at the rate expected, or the Company is unable to
introduce and ramp to volume production next-generation products in a timely
manner, the Company's operating results would likely be adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Fluctuations in the financial results of AKCL, the Company's unconsolidated
Japanese disk manufacturing joint venture, also impact the Company's financial
performance. Equity in net income of AKCL contributed 9% of the Company's 1996
consolidated net income. AKCL is subject to many of the same types of risks
facing the Company including the risks associated with a similar transition to
MR products which AKCL began in the second half of 1996. In addition, the equity
income derived from AKCL fluctuates over time due to its dependence on a more
limited customer base (MKE, Fujitsu Ltd. and Toshiba Corporation accounted for
61%, 19% and 16% respectively, of AKCL's 1996 net sales) and yen/dollar exchange
rate fluctuations. AKCL's financial results were also impacted in 1996 and 1995
by write-downs of its investment in Headway Technologies, Inc. ("Headway"). AKCL
sold its interest in Headway in the first quarter of 1997 and will include a
gain on sale of the investment in its first quarter 1997 operating results.
Risk of Foreign Operations
In 1996 sales to customers in the Far East, including foreign subsidiaries
of domestic companies, accounted for 88% of the Company's net sales from its
U.S. and Malaysian facilities, and the Company anticipates that international
sales will continue to represent the majority of its net sales. All of the
Company's sales are currently priced in U.S. dollars worldwide. Certain costs at
the Company's foreign manufacturing and marketing operations are incurred in the
local currency. The Company also purchases certain operating supplies and
production equipment from Japanese suppliers in yen denominated transactions.
Accordingly, the Company's operating results are subject to the risks inherent
with international operations, including but not limited to, compliance with or
changes in the law and regulatory requirements of foreign jurisdictions,
fluctuations in exchange rates, tariffs or other barriers, difficulties in
staffing and managing foreign operations, exposure to taxes in multiple
jurisdictions, and transportation delays and interruptions.
The Company's Malaysian operations in Penang and Sarawak accounted for a
significant portion of the Company's 1996 consolidated net sales and operating
income. Prolonged disruption of operations in Penang and or Sarawak for any
reason would cause delays in shipments of the Company's products, thus
materially adversely affecting the Company's results of operations.
14
<PAGE>
Competition
The Company's thin-film disk products are used primarily in the
high-capacity segment of the 3 1/2-inch and 5 1/4-inch hard disk drive market,
where product performance, consistent quality and availability, taken together,
are of great competitive importance. To succeed in an industry characterized by
rapid incremental technological developments, the Company must continuously
advance its thin-film technology at a pace consistent with or faster than its
competitors. However, if the technology involved in the manufacture of thin-film
disks does not continue to advance rapidly, or if the Company is not able to
keep pace with such advances, the Company may face increased price competition
from other manufacturers. Such competition could materially adversely affect its
results of operations.
Worldwide disk drive shipments grew approximately 22% in 1996 over 1995 and
are projected to grow at a 20% compound annual growth rate in 1997 through 2000
according to International Data Corporation ("IDC"). In response to the
continuing rapid growth of the disk drive market and resulting strong demand for
thin-film disk products, the Company as well as a majority of the Company's
competitors (both independent disk manufacturers and vertically-integrated disk
drive customers) are substantially increasing their disk manufacturing capacity.
The Company believes that its manufacturing operations in Penang and Sarawak,
Malaysia have provided a competitive cost advantage relative to most other
thin-film disk manufacturers that operate exclusively in the U.S. and Japan.
However, in order to remain cost competitive, many of the U.S. and Japan based
competitors are currently expanding into lower cost regions in the world such as
Southeast Asia. These significant investments in new disk production capacity
could result in an oversupply of disk media and increase price competition in
the media market. Further, slower market growth for data storage, could reduce
the number of potential customers and increase competition for the remaining
market. Such conditions could have a material adverse affect on the Company's
results of operations.
Volatility of Stock Price
The Company's Common Stock has experienced and can be expected to
experience substantial price volatility in response to actual or anticipated
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, developments
related to patents or other intellectual property rights, developments in the
Company's relationships with its customers or suppliers, announcements of
alliances, mergers or other relationships by or between the Company's
competitors and/or customers, and other events or factors. In addition, any
shortfall or changes in revenue, gross margins, earnings, or other financial
results from analysts' expectations could cause the price of the Company's
Common Stock to fluctuate significantly. In recent years the stock market in
general has experienced extreme price and volume fluctuations which have
particularly affected the market price of many technology companies and which
have often been unrelated to the operating performance of those companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Price Range of Common Stock".
Other Risk Factors
The Company relies on a limited number of suppliers, in some cases a sole
supplier, for certain materials and equipment used in its manufacturing
processes. These materials include aluminum substrates, nickel plating
solutions, certain polishing and texturing supplies and sputtering target
materials. These suppliers work closely with the Company to optimize the
Company's production processes. Although this reliance on a limited number of
suppliers, or sole supplier, entails some risk that the Company's production
capacity would be limited if one or more of such materials were to become
unavailable or available in reduced quantities, the Company believes that the
advantages of working closely with these suppliers outweigh such risks. If such
materials should be unavailable for a significant period of time, the Company's
results of operations would be adversely affected.
15
<PAGE>
The Company's California manufacturing facilities, its Japanese joint
venture (AKCL), its Japanese supplier of aluminum blanks for substrate
production, other Japanese suppliers of key manufacturing supplies, and its
Japanese supplier of sputtering machines are each located in areas with seismic
activity. The Company has incurred no significant disruptions to its business
due to seismic activity. However, there can be no assurance that seismic
activity or other natural disasters will not result in a prolonged disruption of
production in the future. Such disruptions could have a material adverse affect
on the Company's results of operations.
ITEM 2. PROPERTIES
Worldwide (excluding AKCL), the Company currently occupies facilities
totaling approximately 1,560,000 square feet. The Company owns three disk
manufacturing facilities in Malaysia, two in Penang and one in Sarawak. The
square footage of each of these facilities and acreage of the related land
parcels are 340,000 square feet and 13 acres; 275,000 square feet and 18 acres;
and 275,000 square feet and 89 acres. The Company leases five manufacturing
facilities in Milpitas, San Jose, and Santa Rosa, California. The Company's new
headquarters facility and new R&D facility in San Jose, California were occupied
in the first quarter of 1997. These facilities are leased for the following
terms:
Facility Size Current Lease
(square feet) Term Expires Extension Options
------------- ------------- -----------------
225,000 September 2006 20 years
188,000 January 2007 20 years
82,000 February 2007 20 years
103,000 July 1999 10 years
97,000 February 2001 10 years
96,000 February 2001 10 years
44,000 April 1999 10 years
39,000 May 1997 --
51,000 March 1997 --
In addition to the facilities listed above, the Company leases other
smaller facilities in California and Singapore. The Company owns approximately 6
acres of undeveloped land adjacent to its Milpitas manufacturing complex.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company or its
subsidiaries is a party or to which any of its property is subject.
16
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to the stockholders of the Company during the
Company's fourth quarter of 1996.
<TABLE>
Executive Officers of the Registrant
As of January 31, 1997 the executive officers of the Company are as
follows:
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Tu Chen...................................... 61 Chairman of the Board of Directors
Stephen C. Johnson........................... 54 President, Chief Executive Officer and Director
Christopher H. Bajorek....................... 53 Senior Vice President-Chief Technical Officer
Willard Kauffman............................. 61 Senior Vice President-Chief Operating Officer
William L. Potts, Jr. ....................... 50 Senior Vice President-Chief Financial Officer and
Secretary
Fred Wiele................................... 58 Senior Vice President-Marketing and Sales
Ronald Allen................................. 48 Vice President-Equipment Technology and
Automation
Richard Austin............................... 41 Vice President-Manufacturing and Corporate
Facilities
Venche Kao................................... 59 Vice President Manufacturing-Milpitas Operations
Elizabeth A. Lamb............................ 45 Vice President-Human Resources
Steven J. Miura.............................. 44 Vice President-Quality and Product Integration
Thian Hoo Tan................................ 48 Vice President Manufacturing-Asia Operations
Sonny Wey.................................... 56 Vice President-Product Research and Development
William V. Whitmer........................... 54 Vice President Manufacturing-U.S. Operations
Tsutomu T. Yamashita......................... 42 Vice President-Process Technology Research and
Development
</TABLE>
Dr. Chen is a founder of the Company and has served as Chairman of the
Board from its inception in June 1983. From 1971 to June 1983 he was a Member,
Research Staff and principal scientist at Xerox Corporation's Palo Alto Research
Center. From 1968 to 1971 Dr. Chen was employed as a research scientist for
Northrop Corp. Dr. Chen received his Ph.D. and M.S. in Metallurgical Engineering
from the University of Minnesota and holds a B.S. degree in Metallurgical
Engineering from Cheng Kung University in Taiwan.
Mr. Johnson has served as President and Chief Executive Officer of the
Company since September 1983. From 1977 to 1983 Mr. Johnson was an officer of
Boschert Incorporated, a manufacturer of switching power supplies, initially as
Vice President, Marketing and subsequently as President and Chief Executive
Officer. Mr. Johnson holds a B.S. degree in Engineering from Princeton
University, a M.S. degree in Electrical Engineering from the University of New
Mexico and a M.B.A. degree from the Harvard Graduate School of Business. Mr.
Johnson is a director of 3COM Corporation and Uniphase Corporation.
17
<PAGE>
Dr. Bajorek joined the Company and was elected to the newly created
position of Senior Vice President-Chief Technical Officer in June 1996. Dr.
Bajorek was most recently Vice President, Technology Development and
Manufacturing, for the Storage Systems Division of IBM in San Jose, California.
During his 25 year career with IBM, Dr. Bajorek held various positions in
research and management related to magnetic recording, magnetic bubble, and
optical storage applications. He holds a Ph.D. in Electrical Engineering and
Business Economics from Caltech.
Mr. Kauffman was appointed Senior Vice President-Chief Operating Officer in
February 1990. For three years prior to joining the Company, Mr. Kauffman was
Executive Vice President and Chief Operating Officer of Vitelic Corporation.
Prior to that he was employed at Intel Corporation for 16 years in a variety of
positions, including Vice President of Component Production and Vice President
of Component Quality. Mr. Kauffman holds B.S. and M.S. degrees in Engineering
Physics from Lehigh University.
Mr. Potts joined the Company in 1987 and served as Vice President-Chief
Financial Officer from January 1991 until his promotion to Senior Vice
President-Chief Financial Officer in January 1996. In addition Mr. Potts serves
as Secretary. Prior to joining Komag, Mr. Potts held financial management
positions at several high technology manufacturing concerns. He has also served
on the consulting staff of Arthur Andersen & Co. Mr. Potts holds a B.S. degree
in Industrial Engineering from Lehigh University and a M.B.A. degree from the
Stanford Graduate School of Business.
Mr. Wiele joined the Company as Senior Vice President-Marketing and Sales
in June 1996. Most recently, he was General Manager, Worldwide Sales and
Marketing, for the Storage Systems Division of IBM in San Jose, California.
During his 31 years with IBM, Mr. Wiele held various marketing and sales
positions within the domestic and overseas operations of IBM. He headed product
management for AS/400 hardware and software for IBM's U.S. Marketing and
Services Division. He also directed marketing and product management for IBM
Europe, Middle East, and Africa. He holds a B.S. in Mechanical Engineering from
Villanova University.
Mr. Allen was promoted to Vice President-Equipment Technology and
Automation in January 1997. Mr. Allen joined the Company in October 1983 when he
established the Company's automation manufacturing program which he has directed
since that time. Prior to joining Komag, Mr. Allen was employed with Xerox's
Palo Alto Research Center as a member of the research staff. Mr. Allen holds a
B.S. degree in Physics and a minor in Chemistry from Dillard University.
Mr. Austin was promoted to Vice President-Manufacturing and Corporate
Facilities in January 1997. Mr. Austin joined the Company in October 1988 as
Facilities and Equipment Maintenance Manager and most recently was Senior
Director of Corporate Facilities. Prior to joining Komag, Mr. Austin was an
Equipment Maintenance and Facilities Manager at VLSI Technology Inc. Mr. Austin
also worked at National Semiconductor and Rockwell International between 1975
and 1983.
Dr. Kao was promoted to Vice President for Milpitas Manufacturing in
October 1993. Dr. Kao joined Komag in November 1983 as a manager of Operations
and was promoted to Director of Manufacturing in April 1988. Previously, Dr. Kao
was a Plant Manager at Tau Laboratory, Inc. in New York. Dr. Kao holds a Ph.D.
degree from Iowa State University where he majored in Electrical Engineering and
minored in Physics.
Ms. Lamb joined the Company as Vice President-Human Resources in October
1996. From 1995 to 1996 she was Director of Worldwide Staffing and Employee
Relations at Adaptec. Prior to that, Ms. Lamb was Director of Compensation,
Benefits and Executive programs at Tandem. Ms. Lamb holds a B.A. degree in
Communications from San Jose State University.
18
<PAGE>
Mr. Miura joined the Company in 1984 and was Director of Test Engineering
prior to his promotion to Vice President-Quality and Product Integration in
November 1991. Before joining Komag, Mr. Miura held various engineering
positions at IBM. Mr. Miura holds both B.S. and M.S. degrees in Electrical
Engineering from the University of California, Davis.
Mr. Tan was appointed Vice President of Manufacturing in September 1993.
Mr. Tan currently serves as Vice President Manufacturing-Asia Operations and is
in charge of the Company's operations in Penang and Sarawak, Malaysia. He
previously served as the Managing Director of the Company's Penang, Malaysia
operation and prior to that was in charge of operations at the Company's first
San Jose, California manufacturing facility. Before joining Komag in 1989, Mr.
Tan was Vice President of Operations at HMT Technology. Mr. Tan holds a M.S.
degree in Physics from the University of Malaya at Kuala Lumpur.
Dr. Wey was appointed Vice President-Engineering in April 1988. Dr. Wey
currently serves as Vice President-Product Research and Development. Dr. Wey
joined the Company in November 1983 and has held director positions in both
engineering and manufacturing. For 10 years prior to joining the Company, Dr.
Wey worked in various engineering and engineering management positions at IBM.
Dr. Wey received his Ph.D. in Physical Chemistry from the Illinois Institute of
Technology and holds a B.S. degree in Chemical Engineering from National
Chen-Kung University in Taiwan.
Mr. Whitmer joined the Company as Vice President-Manufacturing in December
1987 and currently serves as Vice President Manufacturing-U.S. Operations. From
1972 to 1987, he held various positions with Raychem Corporation including the
General Manager of the Materials Division. Mr. Whitmer holds a B.S. degree in
Chemical Engineering from Ohio State University.
Mr. Yamashita joined the Company in 1984 and was Senior Director of
Research prior to his promotion to Vice President-Research and Development in
January 1995. Mr. Yamashita currently serves as Vice President-Process
Technology Research and Development. Prior to joining the Company, Mr. Yamashita
was a graduate research assistant in the Department of Material Science and
Engineering at Stanford University. Mr. Yamashita holds a B.S. in Chemistry and
M.S. in Materials Science from Stanford University.
19
<PAGE>
PART II
ITEMS 5, 6, 7 and 8.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol KMAG. The following table sets forth the range of high and low
closing sales prices, as reported on the Nasdaq National Market. At February 21,
1997 the Company had approximately 483 holders of record of its Common Stock and
51,856,539 shares outstanding. The share prices have been adjusted to reflect
the Company's two-for-one stock split effective December 21, 1995.
Price Range of
Common Stock
-------------- High Low
---- ---
1995
First Quarter 16 7/32 11 9/16
Second Quarter 25 3/4 15 7/8
Third Quarter 37 1/16 25 5/8
Fourth Quarter 34 3/8 21 15/16
1996
First Quarter 33 1/4 23
Second Quarter 36 9/16 24
Third Quarter 27 19 3/8
Fourth Quarter 36 21
1997
First Quarter (through February 21, 1997) 32 5/8 26 3/8
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The
Company presently intends to retain all cash for use in the operation and
expansion of the Company's business and does not anticipate paying any cash
dividends in the near future. Certain of Komag's debt agreements limit the
amount of dividend payments without the lenders' consent.
20
<PAGE>
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
The following table sets forth selected consolidated financial data and
other operating information of Komag, Incorporated. The financial data and
operating information is derived from the consolidated financial statements of
Komag, Incorporated and should be read in conjunction with the consolidated
financial statements, related notes, and other financial information included
herein.
<CAPTION>
Fiscal Year Ended
-------------------------------------------------------------------
1996 1995 1994 1993 (1) 1992 (1)
--------- --------- --------- --------- ---------
(in thousands, except per share amounts and number of employees)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net Sales $ 577,791 $ 512,248 $ 392,391 $ 385,375 $ 326,801
Gross Profit 175,567 197,486 125,386 91,439 67,765
Restructuring Charge -- -- -- 38,956 --
Income (Loss) Before
Minority Interests and Equity
in Joint Venture Income 100,553 101,410 54,156 (33,738) 4,263
Minority Interests in Net Income
(Loss) of Consolidated
Subsidiaries 695 1,957 1,091 (18,977) (9,458)
Equity in Net Income of
Unconsolidated Joint Venture 10,116 7,362 5,457 4,860 3,172
Net Income (Loss) $ 109,974 $ 106,815 $ 58,522 $ (9,901) $ 16,893
Net Income (Loss) Per Share (2) $ 2.07 $ 2.14 $ 1.27 $ (0.23) $ 0.40
Consolidated Balance Sheet Data:
Working Capital $ 142,142 $ 252,218 $ 118,230 $ 97,265 $ 97,894
Net Property, Plant & Equipment 643,706 329,174 228,883 187,267 192,051
Long-term Debt & Capital
Lease Obligations (less current portion) 70,000 -- 16,250 29,482 27,613
Stockholders' Equity 697,940 574,564 331,215 255,331 248,738
Total Assets $ 938,357 $ 686,315 $ 424,095 $ 382,297 $ 355,849
Number of Employees at Year-end 4,101 2,915 2,635 3,497 3,090
<FN>
(1) The results of operations for 1993 and 1992 included the operations of the
Company's thin-film head operation. The results of operations for 1993
included a $39.0 million restructuring charge for the winding down of the
thin-film head operation. The net effect of the restructuring charge, after
related minority interest and tax adjustments, was $35.4 million ($0.83
loss per share) for 1993.
(2) The earnings per share amounts have been restated to reflect the
two-for-one stock split effective December 21, 1995.
(3) The Company paid no cash dividends during the five-year period.
</FN>
</TABLE>
21
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Overview
The Company's business is both capital intensive and volume sensitive,
making capacity planning and efficient capacity use imperative. Physical
capacity, utilization of this physical capacity, yields and average unit sales
price constitute the key determinants of the Company's profitability. Of these
key determinants, price and utilization are the most sensitive to changes in
product demand. If capacity and product price are fixed at a given level and
demand is sufficient to support a higher level of output, then increased output
attained through improved utilization rates and higher manufacturing yields will
translate directly into increased sales and improved gross margins.
Alternatively, if demand for the Company's products decreases, falling average
selling prices and lower capacity utilization could adversely affect the results
of the Company's operations.
The following discussion contains predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested herein.
Factors that could cause actual results to differ include the following: the
rate of improvement in manufacturing efficiencies on new products; utilization
of manufacturing facilities; product transitions to next-generation products;
industry supply-demand relationship and related pricing for high-end desktop and
enterprise disk products; availability of certain sole-sourced raw material
supplies; vertical integration and consolidation within the Company's limited
customer base; and execution of planned capacity additions. See "Business--Risk
Factors" for more detailed discussions of the Company's risk factors.
1996 vs. 1995
Product transitions were significant factors in both the 1995 and 1996
fiscal years. In 1995, the Company transitioned to its then-current leading-edge
inductive disk product family. Quarterly sales and gross margins increased
sequentially during 1995 from $105.1 million and 31.2%, respectively, in the
first quarter of 1995 to $153.5 million and 42.6%, respectively, in the fourth
quarter of 1995. The Company entered 1996 with continuing strong demand for its
inductive media products. Quarterly sales in excess of $150 million and gross
margins exceeding 40% in both the first and second quarters of 1996 were at
near-record levels for the Company. During the third and fourth quarters of
1996, the Company began a rapid transition to two distinctly new product
families--proximity media (an advanced version of inductive media) and
magnetoresistive ("MR") media. Sales and gross margins decreased during the last
half of 1996 as low manufacturing yields on these new products and high usage of
production equipment for product and process development activities prevented
the Company from fulfilling customer demand for the products. In the third
quarter of 1996, net sales and gross profit decreased to $131.5 million and
24.0%. Net sales and gross profit were $141.2 million and 11.7% for the fourth
quarter of 1996. During the fourth quarter of 1996, the Company achieved volume
production of MR disk products and also increased the production volume for
proximity products. These two new products accounted for 54% of unit shipments
during the fourth quarter.
Net Sales
Net sales for 1996 increased to $577.8 million, up 13% from $512.2
million in 1995. Net sales during 1996 included $6.5 million of substrate disk
sales; no such substrate sales occurred in 1995. The
22
<PAGE>
Company may periodically sell substrate products but does not currently
anticipate that such sales will become a significant portion of its revenue.
Excluding the substrate disk sales, net sales increased 12% between the years.
The higher sales resulted from the net effect of a 21% increase in unit sales
volume and an 8% decrease in the overall average selling price. The overall
average selling price typically strengthens only as the result of product
transitions to higher-priced, more technologically advanced product offerings.
Price reductions for individual product offerings are characteristic of the
thin-film media industry. The Company rapidly transitioned to higher oersted
inductive products throughout 1995. Unit sales of these products increased from
41% of net sales in the first quarter of 1995 to 91% of net sales in the fourth
quarter of 1995. Unit sales of these products continued to exceed 90% of sales
during the first half of 1996. During the third and fourth quarters of 1996, the
Company began a transition to two new product families--proximity media and MR
media. The effects of price reductions on maturing inductive disk products were
only partially offset by the product mix shift to these higher-priced,
next-generation products.
In addition to sales of internally produced disk products, the Company
resells products manufactured by Asahi Komag Co., Ltd. ("AKCL"), its Japanese
joint venture with Asahi Glass Company, Ltd. Distribution sales of product
manufactured by AKCL increased to $5.7 million in 1996 from $0.9 million in
1995. The Company anticipates that distribution sales of AKCL-produced goods to
U.S. customers in 1997 will remain a relatively small percentage of the
Company's net sales.
Increased production volume may occur due to increased physical
capacity (additional production lines) and/or improvements in manufacturing
efficiencies (improved production throughput from higher yields, better
equipment utilization or shorter process cycle times). The increase in unit
production required to support the increase in unit sales volume for 1996
relative to 1995 was primarily achieved through the addition of production
lines. The Company added one new sputtering machine in each of March 1995,
September 1995, January 1996, May 1996 and November 1996. At the end of 1996,
the Company had ten and seven production lines in operation in the U.S. and
Malaysia, respectively. Improvements in process cycle times only slightly
outpaced decreases in manufacturing yields and equipment utilization between the
years and resulted in a marginal improvement in manufacturing efficiencies.
Manufacturing yields and equipment utilization decreased between the years
mainly due to substantially lower yield and utilization rates in the last half
of 1996 on the new MR and proximity product families. Development time for these
new products, incurred on manufacturing lines, lowered the manufacturing
equipment utilization rate in the last half of 1996.
The Company plans to increase production capacity for the first and
second quarters of 1997 through the addition of three new production lines. One
of these lines, the first new design ("ND") sputtering machine, will have a
rated capacity equal to twice the output of the Company's existing machines.
During the second half of 1997, the Company expects to add one additional ND
machine.
Gross Margin
The gross margin percentage for 1996 decreased to 30.4% from 38.6% for
1995. The combination of an 8% decrease in the overall average selling price,
lower yield and equipment utilization rates in the last half of 1996 and higher
costs associated with the production of the new MR and advanced proximity disks
resulted in the lower gross margin percentage. The Company anticipates that its
overall average selling price will likely increase through the first half of
1997 as it continues to transition its sales mix toward these higher-priced,
more technologically advanced products. While the Company expects continued
yield improvement in 1997, the rate of yield improvement on new products will
likely continue to constrain financial results during the first half of 1997.
The Company believes gross margins will show sequential improvement during the
first two quarters of 1997 and is targeting a gross margin range of 30-35% for
the second half of the year.
23
<PAGE>
Operating Expenses
Research and development ("R&D") expenses increased 24% ($5.6 million)
in 1996 relative to 1995. The increase was primarily due to development costs
associated with next-generation proximity and MR media products. The Company
plans to increase its R&D spending to approximately $50 million in 1997. The
increase is primarily due to the installation of a sputtering line devoted
exclusively to R&D efforts, completion of an R&D facility, and additional
staffing. The Company expects to fully test and develop new products and
processes on the R&D sputtering line prior to their introduction into
manufacturing. Use of the dedicated R&D sputtering line for large-scale pilot
production runs will limit the use of existing manufacturing production lines
for this purpose. Selling, general and administrative ("SG&A") expenses
decreased $10.9 million in 1996 compared to 1995. The decrease was primarily due
to a $12.0 million reduction in the provision for the Company's bonus and profit
sharing programs. Lower provisions in 1996 were primarily due to the Company's
1996 operating profit performance relative to the Company's 1996 operating
profit plan. Provisions for bad debt also decreased $2.5 million between the
years. Excluding provisions for bad debt and the Company's bonus and profit
sharing programs, SG&A expenses increased approximately $3.6 million. Increases
in administrative costs required to support the growth in operations in both the
U.S. and Malaysia accounted for the increase.
Interest Income/Expense and Other Income
Interest income increased $0.6 million (11%) in 1996 relative to 1995
primarily due to a higher average investment balance in 1996. Interest expense
decreased $1.2 million in 1996 compared to 1995. The Company repaid all of its
existing outstanding debt in September 1995 and remained debt free until
November 1996. The Company borrowed $70.0 million under its credit facilities
during November and December 1996. Other income increased $0.7 million in 1996
relative to 1995 mainly due to the commencement of a royalty from AKCL for sales
AKCL made outside of Japan. The royalty began in the second half of 1996 and
amounted to $1.3 million for the year.
Income Taxes
The effective income tax rate for 1996 of 17% was lower than the 1996
combined federal and state statutory rate of 41% and the effective income tax
rate of 25% in 1995 primarily as a result of an initial five-year tax holiday
granted to the Company's wholly owned thin-film media operation, Komag USA
(Malaysia) Sdn. ("KMS"), which commenced in July 1993. Assuming the Company
fulfills certain commitments under its license to operate within Malaysia, this
initial tax holiday may be extended for an additional five-year period by the
Malaysian government. The effective tax rate for 1996 was lower than the rate in
effect for 1995 primarily due to growth in the percentage of consolidated income
derived from the Company's Malaysian operations in 1996. The impact of the tax
holiday was to increase net income by approximately $21.8 million ($0.41 per
share) and $11.5 million ($0.23 per share) in 1996 and 1995, respectively.
Losses incurred prior to the commencement of this initial tax holiday,
approximately $6.2 million, are available for carryforward to years following
the expiration of this tax holiday. The Company has also been granted an
additional ten-year tax holiday for new operations in Malaysia. This new tax
holiday has not yet commenced at December 29, 1996.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture
The minority interest in the net income of consolidated subsidiary
during 1996 represented Kobe Steel USA Holdings Inc.'s ("Kobe USA") share of
Komag Material Technology, Inc.'s ("KMT") net income. KMT was owned 55% by the
Company and 45% by Kobe USA from November 1988 to December 1995. On December 28,
1995, the Company increased its ownership of KMT to 80% through
24
<PAGE>
the purchase of KMT Common Stock directly from Kobe USA. Kobe retained a 20%
minority interest investment in KMT. KMT recorded net income of $3.5 million and
$4.3 million in 1996 and 1995, respectively.
The Company records 50% of AKCL's net income as equity in net income of
unconsolidated joint venture. AKCL reported net income of $20.2 million for
1996, up from $14.7 million for 1995. AKCL's results included writedowns of its
investment in Headway Technologies, Inc. ("Headway") of $4.5 million and $2.2
million (net of tax) in 1996 and 1995, respectively. AKCL invested in Headway in
1994 and recorded partial writedowns of its investment through 1995 based upon
net losses incurred by Headway. During the third quarter of 1996, Headway's
major customer, Hewlett-Packard Company ("HP") announced the closure of its disk
drive manufacturing operations. Based upon anticipated future operating losses
at Headway arising from the loss of HP's business, AKCL wrote-off its remaining
Headway investment at the end of the third quarter of 1996. Subsequent to
year-end, AKCL sold its entire interest in Headway for $10.8 million to a group
of new investors as part of a recapitalization. AKCL recorded the proceeds from
this sale as a gain ($5.3 million, net of tax) in the first quarter of 1997. The
Company will reflect its 50% share of this net gain in the first quarter of
1997.
Excluding losses related to Headway, AKCL recorded net income of $24.7
million in 1996, up from $16.9 million in 1995. AKCL's improved operating
performance in 1996 was primarily due to the combination of an increase in the
overall average selling price of its products and a reduction in the overall
average unit production cost on a substantially higher unit sales volume.
Despite the improved year-to-year results, AKCL's quarterly net income decreased
substantially from $6.1 million in the third quarter of 1996 (excluding the
Headway write-off) to $0.8 million in the fourth quarter of 1996. The decrease
was primarily due to new product transition issues similar to those experienced
by the Company. Manufacturing yield and utilization issues associated with the
product transition lowered AKCL's production quantity to 2.6 million units in
the fourth quarter of 1996, down from 4.3 million units in the third quarter of
1996.
The Company translates AKCL's yen-based income statements to U.S.
dollars at the average exchange rate in effect for each quarterly period. The
Japanese yen weakened approximately 13% in 1996 relative to 1995. AKCL's net
income would have been approximately $23.9 million in 1996 had the yen-based
income statement been translated at the average rate in effect for 1995.
1995 vs. 1994
Net Sales
Net sales for 1995 rose to $512.2 million, a 31% increase over the
$392.4 million reported in 1994. The combination of unit sales volume growth and
an increase in the overall average selling price resulted in the substantially
higher net sales. The Company began a rapid transition to high oersted inductive
product offerings in the fourth quarter of 1994. Unit sales of this product
increased to 91% of unit sales volume in the fourth quarter of 1995 from 14% of
unit sales in the fourth quarter of 1994. The higher sales mix of high oersted
inductive products and a favorable pricing environment arising from an industry
shortage of this product allowed the overall average selling price to increase
7% in 1995 relative to 1994. Distribution sales of product manufactured by AKCL
decreased to $0.9 million in 1995 from $9.4 million in 1994.
The increase in unit production volume required to support the increase
in unit sales volume for 1995 relative to 1994 was primarily achieved through
the addition of production lines and improvement in cycle times. Production
yields and equipment utilization rates were relatively unchanged between the
years. Shortened process cycle times accounted for nearly one-half of the
increase in unit output in 1995 relative to 1994. Net physical capacity
additions provided the remaining increase in unit production volume.
25
<PAGE>
Gross Margin
The gross margin percentage for 1995 rose to 38.6%, up markedly from
the 32.0% gross margin achieved for 1994. The combination of the rapid
transition to high oersted inductive products in 1995, strong industry demand
for this product, and solid manufacturing performance resulted in the improved
gross margin percentage. The higher overall average selling price accounted for
over two-thirds of the gross margin percentage increase. Additionally, process
cycle time improvements allowed the Company to lower its overall average unit
cost of production despite the inherently higher costs of producing more
technologically advanced inductive products.
Operating Expenses
Research and development expenses increased 12% ($2.5 million) in 1995
relative to 1994. The increase was primarily due to development of improved
sputtering processes and next-generation thin-film media products. Selling,
general and administrative expenses increased $17.5 million in 1995 compared to
1994. The increase was primarily due to a $13.5 million increase in the
provisions for the Company's bonus and profit sharing programs resulting from
the substantially higher operating performance in 1995.
Interest Income/Expense and Other Income
Interest income increased $2.5 million (76%) in 1995 relative to 1994.
The increase was due to the combination of higher interest rates and higher
average investment balances in 1995 provided by proceeds from the Company's
third public offering in September 1995. Interest expense decreased $1.1 million
(37%) in 1995 compared to 1994 primarily due to a lower average debt balance.
The Company repaid all of its existing outstanding debt in September 1995 and
exited the year with no bank debt. Other income increased $2.1 million in 1995
relative to 1994 primarily due to receipt of an insurance recovery related to an
electrical power disruption at the Company's Malaysian manufacturing facility.
Income Taxes
The effective income tax rate for 1995 of 25% was lower than the
effective income tax rate of 30% in 1994 primarily as a result of a tax holiday
granted to the Company's wholly owned thin-film media operation in Malaysia.
Komag USA (Malaysia) Sdn. has been granted a five-year tax holiday by the
Malaysian government. The impact of the tax holiday was to increase net income
by approximately $11.5 million ($0.23 per share) and $6.4 million ($0.14 per
share) in 1995 and 1994, respectively.
Minority Interest in Consolidated Subsidiary/Equity in Unconsolidated Joint
Venture
The minority interest in the net income of consolidated subsidiary
during 1995 represented Kobe USA's 45% share of KMT's net income. KMT recorded
net income of $4.3 million and $2.4 million in 1995 and 1994, respectively.
The Company records 50% of AKCL's net income as equity in net income of
unconsolidated joint venture. AKCL reported net income of $14.7 million for
1995, up from $11.0 million for 1994. AKCL's net income reflected writedowns,
net of tax, of its investment in Headway of $2.2 million and $0.5 million in
1995 and 1994, respectively. The Company translates AKCL's yen-based income
statements to U.S. dollars at the average exchange rate in effect during the
year. The Japanese yen strengthened approximately 6% in 1995 relative to 1994.
AKCL's net income would have been approximately $13.5 million in 1995 had the
yen-based income statement been translated at the average rate in effect for
1994.
26
<PAGE>
Liquidity and Capital Resources
Consolidated cash and short-term investments of $93.2 million at the
end of 1996 decreased substantially from $213.7 million at the end of 1995.
Operating activities generated $200.9 million in cash during 1996 and partially
funded the Company's $403.1 million of capital spending during the year. The
Company borrowed $70.0 million under its credit facilities. Sales of Common
Stock under the Company's stock option and stock purchase programs during the
year generated $10.8 million. Working capital decreased to $142.1 million at the
end of 1996 from $252.2 million at the end of 1995. The decrease was primarily
due to the lower cash and short-term investment balances. Trade accounts payable
and accounts payable to related parties increased $46.9 million as a result of
the higher level of capital spending in 1996. Inventory balances, including
inventory intransit between the Company's U.S. and Malaysian facilities,
increased $32.9 million primarily due to the addition of offshore manufacturing
capacity.
Total capital expenditures for 1997 are currently planned at
approximately $290 million. The 1997 capital spending plan includes costs to
equip the Company's two recently completed back end manufacturing facilities in
Penang, Malaysia and San Jose, California. Additionally, the Company plans to
complete and equip a 188,000 square foot research and development facility and a
82,000 square foot administration building in San Jose, California for occupancy
in the first quarter of 1997.
Current noncancellable capital commitments total approximately $104.0
million. The Company believes that in order to achieve its long-term expansion
objectives and maintain and enhance its competitive position, it will need
additional financing for capital expenditures, working capital, and research and
development. The Company believes that it will be able to fund its 1997
expenditures through a combination of cash generated from operations, funds
available from existing bank lines of credit, and existing cash balances.
However, the Company may obtain additional debt or equity financing in 1997 to
maintain adequate cash reserves. If the Company is unable to obtain sufficient
capital it could be required to reduce its capital equipment and research and
development expenditures which could have a material adverse effect on the
Company's results of operations.
27
<PAGE>
[This page intentionally left blank]
28
<PAGE>
Item 8. CONSOLIDATED FINANCIAL STATEMENTS
KOMAG, INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors 30
Consolidated Statements of Income
1996, 1995 and 1994 31
Consolidated Balance Sheets, 1996 and 1995 32-33
Consolidated Statements of Cash Flows,
1996, 1995 and 1994 34-35
Consolidated Statements of Stockholders' Equity,
1996, 1995 and 1994 36
Notes to Consolidated Financial Statements 37-49
29
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Komag, Incorporated
We have audited the accompanying consolidated balance sheets of Komag,
Incorporated as of December 29, 1996 and December 31, 1995, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 29, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements of Asahi Komag Co., Ltd. (a corporation in which the Company has a
50% interest) as of December 29, 1996 and December 31, 1995, and for each of the
three years in the period ended December 29, 1996. Those financial statements
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to data included for Asahi Komag Co., Ltd. as of
December 29, 1996 and December 31, 1995, and for each of the three years in the
period ended December 29, 1996, is based solely on the report of the other
auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Komag, Incorporated at December 29, 1996
and December 31, 1995, and the consolidated results of its income and its cash
flows for each of the three years in the period ended December 29, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
San Jose, California
January 16, 1997
30
<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
-----------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Net sales (see Note 12) $ 577,791 $ 512,248 $ 392,391
Cost of sales (see Notes 11 and 12) 402,224 314,762 267,005
--------- --------- ---------
Gross profit 175,567 197,486 125,386
Operating expenses:
Research, development and engineering 29,409 23,804 21,340
Selling, general and administrative 33,665 44,598 27,101
--------- --------- ---------
63,074 68,402 48,441
--------- --------- ---------
Operating income 112,493 129,084 76,945
Other income (expense):
Interest income 6,437 5,802 3,306
Interest expense (625) (1,856) (2,933)
Other, net 2,843 2,189 48
--------- --------- ---------
8,655 6,135 421
--------- --------- ---------
Income before income taxes, minority
interest and equity in joint venture income 121,148 135,219 77,366
Provision for income taxes 20,595 33,809 23,210
--------- --------- ---------
Income before minority interest and equity
in joint venture income 100,553 101,410 54,156
Minority interest in net income of
consolidated subsidiary 695 1,957 1,091
Equity in net income of unconsolidated joint venture 10,116 7,362 5,457
--------- --------- ---------
Net income $ 109,974 $ 106,815 $ 58,522
========= ========= =========
Net income per share $ 2.07 $ 2.14 $ 1.27
========= ========= =========
Number of shares used in per share computation 53,132 49,905 45,994
========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
31
<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year End
-------------------------
1996 1995
---------- ------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 90,741 $ 14,879
Short-term investments 2,500 198,799
Accounts receivable, less allowances of $3,087 in 1996
and $4,279 in 1995 55,676 61,660
Accounts receivable from related parties 8,449 5,034
Inventories:
Raw materials 33,734 20,213
Work-in-process 21,774 7,431
Finished goods 6,452 1,377
--------- ---------
Total inventories 61,960 29,021
Prepaid expenses and deposits 16,192 5,196
Deferred income taxes 15,579 8,569
--------- ---------
Total current assets 251,097 323,158
Investment in Unconsolidated Joint Venture 39,754 30,143
Property, Plant and Equipment:
Land 9,367 5,268
Building 110,991 38,357
Leasehold improvements 131,737 51,088
Furniture 7,754 6,118
Equipment 673,210 443,011
--------- ---------
933,059 543,842
Less allowances for depreciation and amortization (289,353) (214,668)
--------- ---------
Net property, plant and equipment 643,706 329,174
Deposits and Other Assets 3,800 3,840
--------- ---------
$ 938,357 $ 686,315
========= =========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year End
---------------------------
1996 1995
--------- ----------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities
Trade accounts payable $ 80,089 $ 28,717
Accounts payable to related parties 3,294 7,761
Accrued compensation and benefits 21,835 31,966
Other liabilities 1,913 2,096
Income taxes payable 1,824 400
-------- --------
Total current liabilities 108,955 70,940
Long-term Debt 70,000 --
Deferred Income Taxes 57,806 37,643
Other Long-term Liabilities 497 474
Minority Interest in Consolidated Subsidiary 3,159 2,694
Commitments
Stockholders' Equity
Preferred Stock, $0.01 par value per share:
Authorized--1,000 shares
No shares issued and outstanding -- --
Common Stock, $0.01 par value per share:
Authorized--85,000 shares
Issued and outstanding--51,696 shares
in 1996 and 50,714 shares in 1995 517 507
Additional paid-in capital 388,305 374,399
Retained earnings 303,579 193,605
Accumulated translation adjustment 5,539 6,053
-------- --------
Total stockholders' equity 697,940 574,564
-------- --------
$938,357 $686,315
======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Fiscal Year Ended
------------------------------------
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Operating Activities
Net cash provided by operating activities--
see detail on following page $ 200,892 $ 188,792 $ 97,517
Investing Activities
Acquisition of property, plant and equipment (403,062) (166,450) (102,435)
Purchase of subsidiary shares from minority interest holder -- (6,750) --
Purchases of short-term investments (163) (177,993) (86,402)
Proceeds from short-term investments 196,462 50,478 90,518
Proceeds from disposal of equipment 1,883 916 12,072
Deposits and other assets (649) 113 983
--------- --------- ---------
Net cash used in investing activities (205,529) (299,686) (85,264)
Financing Activities
Increase in notes payable -- -- 1,500
Payments of notes payable -- -- (4,500)
Proceeds from long-term obligations 70,000 -- --
Payments of long-term obligations -- (29,482) (14,505)
Sale of Common Stock, net of issuance costs 10,778 132,871 12,037
Distribution to minority interest holder (279) (280) (280)
--------- --------- ---------
Net cash provided by (used in) financing activities 80,499 103,109 (5,748)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 75,862 (7,785) 6,505
Cash and cash equivalents at beginning of year 14,879 22,664 16,159
--------- --------- ---------
Cash and cash equivalents at end of year $ 90,741 $ 14,879 $ 22,664
========= ========= =========
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
-----------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
Net income $ 109,974 $ 106,815 $ 58,522
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 86,928 65,483 47,591
Provision for losses on accounts receivable (1,011) 1,519 (195)
Undistributed earnings of unconsolidated
joint venture (10,117) (7,362) (5,457)
Loss on disposal of equipment 445 508 1,156
Deferred income taxes 13,153 17,418 8,709
Deferred rent 23 (74) (7)
Minority interest in net income of
consolidated subsidiary 695 1,957 1,091
Changes in operating assets and liabilities:
Accounts receivable 6,995 (18,615) (1,649)
Accounts receivable from related parties (3,415) (4,820) 73
Inventories (32,939) (4,920) 6,981
Prepaid expenses and deposits 974 (2,811) 1,419
Trade accounts payable 51,372 10,875 (4,923)
Accounts payable to related parties (4,467) 5,407 (1,072)
Accrued compensation and benefits (10,131) 14,053 1,344
Other liabilities (183) 431 (809)
Income taxes payable (refundable) (7,404) 2,928 630
Restructuring liability -- -- (15,887)
--------- --------- ---------
Net cash provided by operating activities $ 200,892 $ 188,792 $ 97,517
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid for interest $ 340 $ 2,204 $ 2,892
Cash paid for income taxes 13,655 13,463 12,937
Income tax benefit from stock
options exercised 3,138 3,582 2,851
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
KOMAG, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Common Stock Additional Accumulated
-------------------------- Paid-in Retained Translation
Shares Amount Capital Earnings Adjustment
------------- ------------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 2, 1994 43,532 $ 436 $223,167 $ 28,268 $ 3,460
Common Stock issued under stock
option and purchase plans, including
related tax benefits 2,268 22 14,865
Common Stock issued upon exercise
of stock warrants 3 1
Net income 58,522
Accumulated translation adjustment 2,474
-------- -------- -------- -------- --------
Balance at January 1, 1995 45,803 458 238,033 86,790 5,934
Common Stock issued under stock
option and purchase plans, including
related tax benefits 1,411 14 14,298
Sale of Common Stock, net of
issuance costs 3,500 35 122,068
Net income 106,815
Accumulated translation adjustment 119
-------- -------- -------- -------- --------
Balance at December 31, 1995 50,714 507 374,399 193,605 6,053
Common Stock issued under stock
option and purchase plans, including
related tax benefits 982 10 13,906
Net income 109,974
Accumulated translation adjustment (514)
-------- -------- -------- -------- --------
Balance at December 29, 1996 51,696 $ 517 $388,305 $303,579 $ 5,539
======== ======== ======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
KOMAG, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation: The consolidated financial statements include the
accounts of the Company, its wholly owned and majority-owned subsidiaries (see
Note 11) and equity in its unconsolidated joint venture (see Note 12). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Foreign Currency Translation: The functional currency of the Company's
unconsolidated joint venture is the Japanese yen. Translation adjustments
relating to the translation of these statements are included as a separate
component of stockholders' equity and not included in net income. The functional
currency for the Company's Malaysian operation is the U.S. dollar. Remeasurement
gains and losses, resulting from the process of remeasuring these foreign
currency financial statements into U.S. dollars, are included in operations.
Foreign Exchange Gains and Losses: The Company enters into foreign currency
forward exchange contracts to reduce the impact of currency fluctuations on firm
purchase order commitments for equipment and construction-in-process. Gains and
losses related to these contracts are included in the cost of the assets
acquired. The Company had approximately $10,320,000 and $17,125,000 in foreign
exchange forward purchase contracts outstanding at December 29, 1996 and
December 31, 1995, respectively. These forward exchange contracts were comprised
of Yen, Malaysian Ringgit, and Singapore Dollar foreign currencies. The fair
market value of these foreign exchange contracts was not materially different
from the contract value at December 29, 1996. The Company had approximately
$358,000 of unhedged Japanese yen-based firm purchase commitments at December
31, 1995. There were no such unhedged purchase commitments at December 29, 1996.
Cash Equivalents: The Company considers as a cash equivalent any highly liquid
investment that matures within three months of its purchase date.
Short-Term Investments: The Company invests its excess cash in high-quality,
short-term debt instruments. None of the Company's debt security investments
have maturities greater than one year. At December 29, 1996, all short-term
investments are designated as available for sale. Interest and dividends on the
investments are included in interest income.
The following is a summary of the Company's investments by major security type
at amortized cost, which approximates fair value:
Fiscal Year Ended
-----------------------
1996 1995
---------- ------------
(in thousands)
Municipal auction rate preferred stock $2,500 $198,636
Corporate debt securities 55,618 3,062
Mortgage-backed securities 35,699 19,462
---------- ------------
$93,817 $221,160
========== ============
Amounts included in cash and cash equivalents $91,317 $22,361
Amounts included in short-term investments 2,500 198,799
---------- ------------
$93,817 $221,1
========== ============
37
<PAGE>
There were no realized gains or losses on the Company's investments during 1996
as all investments were held to maturity during the year. The Company utilizes
zero-balance accounts and other cash management tools to invest all available
funds, including bank balances in excess of book balances.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property, Plant and Equipment: Property, plant and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation is computed by the
straight-line method over the estimated useful lives of the assets. The
estimated useful life of the Company's buildings is 30 years. Furniture and
equipment are generally depreciated over 3 to 5 years and leasehold improvements
are amortized over the shorter of the lease term or the useful life.
Revenue Recognition: The Company records sales upon shipment and provides an
allowance for estimated returns of defective products.
Research and Development: Research and development costs are expensed as
incurred.
Stock Compensation: The Company has adopted Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). In
accordance with the provisions of FAS 123, the Company applies APB Opinion 25
and related Interpretations in accounting for its stock-based compensation
plans. Note 5 to the Consolidated Financial Statements contains a summary of the
pro forma effects to reported net income and earnings per share for 1996 and
1995 as if the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by FAS 123.
Income Taxes: The provision for income taxes is based on pretax financial
accounting income. Deferred tax assets and liabilities are recognized for the
expected tax consequences of temporary differences between the tax and book
basis of assets and liabilities.
Income Per Share: Income per share has been computed using the weighted-average
number of shares of Common Stock and dilutive common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
upon the assumed exercise of options reflected under the treasury stock method.
Fiscal Year: The Company uses a 52--53 week fiscal year ending on the Sunday
closest to December 31. The years ended December 29, 1996, December 31, 1995 and
January 1, 1995 were each comprised of 52 weeks.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
NOTE 2. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment which is the development,
production and marketing of high-performance thin-film media for use in hard
disk drives. The Company sells to original equipment manufacturers in the rigid
disk drive market and computer system manufacturers that produce their own disk
drives.
38
<PAGE>
<TABLE>
Summary information for the Company's operations by geographic location is as
follows:
<CAPTION>
1996 1995 1994
----------- ----------- -----------
(in thousands)
<S> <C> <C> <C>
Net sales
To customers from U.S. operations $ 316,658 $ 344,218 $ 315,540
To customers from Far East operations 261,133 168,030 76,851
Intercompany from Far East operations 75,608 25,123 16,881
Intercompany from U.S. operations 22,232 6,683 --
----------- ----------- -----------
675,631 544,054 409,272
Eliminations (97,840) (31,806) (16,881)
----------- ----------- -----------
Total net sales $ 577,791 $ 512,248 $ 392,391
=========== =========== ===========
Operating income
U.S. operations $ 9,108 $ 63,755 $ 52,104
Far East operations 107,774 67,930 25,080
----------- ----------- -----------
116,882 131,685 77,184
Eliminations (4,389) (2,601) (239)
----------- ----------- -----------
Total operating income $ 112,493 $ 129,084 $ 76,945
=========== =========== ===========
Identifiable assets
U.S. operations $ 708,436 $ 573,006 $ 387,907
Far East operations 381,015 201,915 124,048
----------- ----------- -----------
1,089,451 774,921 511,955
Eliminations (151,094) (88,606) (87,860)
----------- ----------- -----------
Total identifiable assets $ 938,357 $ 686,315 $ 424,095
=========== =========== ===========
Export sales by domestic operations included the following:
Fiscal Year Ended
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
(in thousands)
Far East (see Note 12) $ 249,130 $ 151,000 $ 133,574
Europe -- -- 1,258
</TABLE>
39
<PAGE>
NOTE 3. CONCENTRATION OF CUSTOMER AND SUPPLIER RISK
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally requires no collateral. Significant customers accounted
for the following percentages of net sales in 1996, 1995 and 1994:
Fiscal Year Ended
------------------------------------
1996 1995 1994
----------- ------------ -----------
Seagate Technology, Inc. 52% 44% 40%
Western Digital Corporation 22% 12% 12%
Quantum Corporation/MKE 18% 23% 23%
Hewlett-Packard Company -10% 15% 21%
In 1996, Seagate merged with Conner Peripherals, Inc. In addition, Quantum
ceased disk drive production in Milpitas, California and Penang, Malaysia and
contracted with its Japanese manufacturing partner, Matsushita-Kotobuki
Electronics Industries, Ltd. ("MKE"), to manufacture all of its disk drives.
Percentages for 1996, 1995 and 1994 represent the combined sales to
Seagate/Conner and Quantum/MKE.
Kobe Steel, Ltd. ("Kobe") supplies aluminum substrate blanks to Komag Material
Technology, Inc. ("KMT"), and the Company in turn purchases KMT's entire output
of finished substrates. The Company also purchases substantial quantities of
finished substrates from Kobe in addition to the substrates purchased from KMT.
In combination, KMT and Kobe supply in excess of 95% of the Company's substrate
requirements. The Company also relies on a limited number of other suppliers, in
some cases a sole supplier, for certain other materials used in its
manufacturing processes. These materials include nickel plating solutions,
certain polishing and texturing supplies and sputtering target materials. These
suppliers work closely with the Company to optimize the Company's production
processes. Although this reliance on a limited number of suppliers, or sole
supplier, entails some risk that the Company's production capacity would be
limited if one or more of such materials were to become unavailable or available
in reduced quantities, the Company believes that the advantages of working
closely with these suppliers outweigh such risks. If such materials should be
unavailable for a significant period of time, the Company's results of
operations could be adversely affected.
NOTE 4. STOCKHOLDER'S EQUITY
In 1995, the Company raised $122,100,000 from the sale of 3,500,000 shares of
Common Stock in a follow-on public stock offering.
40
<PAGE>
NOTE 5. STOCK OPTION PLANS AND STOCK PURCHASE PLAN
At December 29, 1996, the Company has stock-based compensation plans, which are
described below. The Company has elected to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recorded in the financial statements for its stock option and stock
purchase plans. Had compensation cost for the stock-based compensation plans
been determined consistent with Statement of Financial Accounting Standard No.
123, "Accounting for Stock-Based Compensation," the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
Fiscal Year Ended
-------------------------------
1996 1995
-------- ---------
(in thousands, except per
share amounts)
Net income: As reported $109,974 $106,815
Pro forma 102,355 103,584
EPS: As reported $2.07 $2.14
Pro forma 1.93 2.08
FAS 123 is applicable only to options granted subsequent to December 31, 1994,
its pro forma effect will not be fully reflected until 1999.
Under the Company's stock option plans ("Plans"), options to purchase up to
15,760,000 shares of Common Stock may be granted to key employees and directors.
The Plans provide for issuing both incentive stock options and non-qualified
stock options, both of which must be granted at fair market value at the date of
grant. Outstanding options generally vest over four years and expire no later
than ten years from the date of grant. Options may be exercised in exchange for
cash or outstanding shares of the Company's Common Stock. Approximately 5,400,
17,000 and 11,000 shares of the Company's Common Stock were received in exchange
for option exercises in 1996, 1995 and 1994, respectively. At December 29, 1996,
approximately 2,191,000 options were available for grant and 7,936,000 shares of
Common Stock were reserved for future issuance under these Plans. Approximately
1,917,000 and 1,487,000, of the outstanding options were exercisable at December
29, 1996 and December 31, 1995, respectively.
For purposes of the pro forma disclosure, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions used for grants in 1996 and 1995, respectively:
risk-free interest rates of 6.1% and 6.4%; volatility factors of the expected
market price of the Company's Common Stock of 60.0% and 59.3%; and a
weighted-average expected life of the options of 5.9 and 6.2 years. There was no
dividend yield included in the calculation as the Company does not pay
dividends. The weighted-average fair value of options granted during 1996 and
1995 is $12.88 and $8.58, respectively.
41
<PAGE>
A summary of stock option transactions is as follows:
Shares Exercise Price Total
-------- --------------------- --------
(in thousands, except
per share amounts)
Outstanding at January 2, 1994 6,382 $ 0.49 - $ 12.00 $ 48,194
Granted 1,382 7.88 - 13.38 12,551
Exercised (1,811) 0.49 - 12.00 (9,850)
Cancelled (1,254) 2.17 - 12.00 (10,728)
-------- --------------------- --------
Outstanding at January 1, 1995 4,699 2.90 - 13.38 40,167
Granted 1,479 11.63 - 35.94 24,528
Exercised (997) 2.90 - 12.94 (7,174)
Cancelled (153) 2.90 - 25.63 (1,567)
-------- --------------------- --------
Outstanding at December 31, 1995 5,028 3.13 - 35.94 55,954
Granted 1,651 20.38 - 36.00 42,351
Exercised (635) 3.13 - 29.81 (5,714)
Cancelled (299) 8.13 - 35.25 (4,913)
-------- --------------------- --------
Outstanding at December 29, 1996 5,745 $ 3.13 - $ 36.00 $ 87,678
======== ===================== ========
<TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options (option shares in thousands):
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Remaining
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (yrs)* Price* Exercisable Price*
- -------------------- -------------- ------------- -------- ------------- -----------
<C> <C> <C> <C> <C> <C>
$3.13 - $12.00 2,838 6.0 $8.93 1,711 $9.00
12.01 - 20.00 1,015 8.1 13.33 60 16.40
20.01 - 28.00 1,581 9.1 24.46 108 21.98
28.01 - 36.00 311 9.2 31.79 38 31.46
---------- --------
5,745 1,917
========== ========
<FN>
*Weighted-Average
</FN>
</TABLE>
Under the terms of the Employee Stock Purchase Plan, employees may elect to
contribute up to 10% of their compensation toward the purchase of shares of the
Company's Common Stock. The purchase price per share will be the lesser of 85%
of the fair market value of the stock on the first day of enrollment in a
twenty-four month offering period or the last day of each semi-annual period
within the twenty-four month offering period. The total number of shares of
stock that may be issued under the Plan cannot exceed 2,800,000 shares. Shares
issued under this plan approximated 352,000, 431,000 and 469,000 in 1996, 1995
and 1994, respectively. At December 29, 1996 approximately 46,000 shares of
Common Stock were reserved for future issuance under this Plan.
42
<PAGE>
For purposes of the pro forma disclosure, the fair value of the employees'
purchase rights has been estimated using the Black-Scholes model with
assumptions that, except for an expected life of six months and risk-free
interest rates of 5.6% and 6.4% in 1996 and 1995, were consistent with those
used for the Company's stock option plans described above. The weighted-average
fair value of those purchase rights granted in 1996 and 1995 was $5.09 and
$6.36, respectively.
NOTE 6. BONUS AND PROFIT SHARING PLANS
The Company and its subsidiaries maintain various cash profit sharing plans.
Under the terms of the cash profit sharing plans, a percentage of semi-annual
operating profit, as defined in the plans, is allocated among all employees who
meet certain criteria. In 1996, under the terms of the Company's bonus plans, a
percentage of consolidated annual operating profit, as defined in the respective
bonus plans, was paid to eligible employees. In 1995 and 1994, various
percentages of an operating unit's annual operating profit, as defined in the
respective bonus plans, was paid to eligible employees. The Company expensed
$9,078,000, $19,990,000 and $9,083,000 under these bonus and cash profit sharing
plans in 1996, 1995 and 1994, respectively.
The Company and its subsidiaries maintain savings and deferred profit sharing
plans. Employees who meet certain criteria are eligible to participate. In
addition to voluntary employee contributions to these plans, the Company
contributes four percent of semi-annual consolidated operating profit, as
defined in the plans. These contributions are allocated to all eligible
employees. Furthermore, the Company matches a portion of each employee's
contributions to the plans up to a maximum amount. The Company contributed
$5,573,000, $6,653,000 and $4,081,000 to the plans in 1996, 1995 and 1994,
respectively.
Expenses for the Company's bonus and profit sharing plans are included in
selling, general and administrative expenses.
NOTE 7. INCOME TAXES
The provision for income taxes consists of the following:
Fiscal Year Ended
---------------------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Federal:
Current $ 3,988 $ 16,496 $ 13,482
Deferred 10,265 14,830 4,437
-------- -------- --------
14,253 31,326 17,919
State:
Current 496 (1,284) 264
Deferred 2,888 2,588 4,272
-------- -------- --------
3,384 1,304 4,536
Foreign:
Current 2,958 1,179 755
-------- -------- --------
$ 20,595 $ 33,809 $ 23,210
======== ======== ========
The foreign provision above consists of withholding taxes on royalty and
interest payments and foreign taxes of subsidiaries.
43
<PAGE>
Deferred tax assets (liabilities) are comprised of the following:
Fiscal Year End
----------------------------
1996 1995
-------- ---------
(in thousands)
Depreciation $ (9,656) $ (7,284)
State income taxes (11,988) (7,295)
Deferred income (25,764) (13,588)
Other (10,398) (9,476)
-------- --------
Gross deferred tax liabilities (57,806) (37,643)
-------- --------
Inventory valuation adjustments 3,448 1,578
Accrued compensation and benefits 2,956 2,270
State income taxes 5,123 901
Other 4,052 3,820
Tax benefit of net operating losses 35,046 34,789
-------- --------
Gross deferred tax assets 50,625 43,358
-------- --------
Deferred tax asset valuation allowance (35,046) (34,789)
-------- --------
$(42,227) $(29,074)
======== ========
As of December 29, 1996, a 60%-owned subsidiary of the Company, Dastek Holding
Company, has a federal tax net operating loss carryforward of approximately
$100,000,000. The Company has fully reserved for the potential future federal
tax benefit of this net operating loss in the deferred tax asset valuation
allowance due to the fact that its utilization is limited to the subsidiary's
separately computed future taxable income and that the subsidiary has no history
of operating profits. The deferred tax asset valuation allowance increased
$257,000, $1,189,000 and $7,308,000 in fiscal years 1996, 1995 and 1994,
respectively. The $100,000,000 net operating loss carryforward expires at
various dates through 2010.
<TABLE>
A reconciliation of the income tax provision at the 35% federal statutory rate
to the income tax provision at the effective tax rate is as follows:
<CAPTION>
Fiscal Year Ended
----------------------------------------------
1996 1995 1994
-------------- ---------------- ------------
(in thousands)
<S> <C> <C> <C>
Income taxes computed at federal statutory rate $42,402 $47,327 $27,078
State and foreign income taxes, net of federal
benefit 5,021 868 2,961
Tax-exempt interest income (1,193) (1,434) (827)
Permanently reinvested foreign earnings (26,050) (12,634) (6,473)
Other 415 (318) 471
-------------- ---------------- ------------
$20,595 $33,809 $23,210
============== ================ =============
</TABLE>
Foreign pretax income was $104,300,000, $65,903,000 and $23,882,000 in 1996,
1995 and 1994, respectively.
44
<PAGE>
Komag USA (Malaysia) Sdn. ("KMS"), the Company's wholly owned thin-film media
operation in Malaysia, was granted its initial tax holiday for a period of five
years commencing in July 1993. Assuming the Company fulfills certain commitments
under its license to operate within Malaysia, this initial tax holiday may be
extended for an additional five-year period by the Malaysian government. The
impact of this tax holiday was to increase net income by approximately
$21,800,000 ($0.41 per share) and $11,500,000 ($0.23 per share) in 1996 and
1995, respectively. Losses incurred prior to the commencement of this initial
tax holiday, approximately $6,237,000, are available for carryforward to years
following the expiration of the tax holiday. The Company has also been granted
an additional ten-year tax holiday for new operations in Malaysia. This new tax
holiday has not yet commenced at December 29, 1996.
The Company has generated $163,600,000 of earnings for which no U.S. tax has
been provided as of December 29, 1996. These earnings are considered to be
permanently invested outside the United States.
NOTE 8. TERM DEBT AND LINES OF CREDIT
The Company has borrowed $70,000,000 under its line of credit facilities at
December 29, 1996. These borrowings bear interest at 5.9% to 6.4%, with
interest-only payments due quarterly. Principal payments under the line of
credit agreements are due six and twelve months after the borrowing date but may
be extended for additional one- to twelve-month periods through the year 2000.
The Company intends to extend the principal repayment and has classified the
principal as long-term debt. Interest rates in effect for the extension periods
will be based upon prevailing Eurodollar, Federal Funds and/or LIBOR rates plus
0.375% to 0.55% at the time of principal extension.
The Company's credit facilities total $175,000,000 and are comprised of two
separate four-year revolving line of credit agreements which expire in 2000 and
two separate four-year revolving line of credit agreements which expire in 1999.
These agreements may be extended, subject to bank approvals, annually for an
additional year, thus perpetuating their multi-year tenors. At December 29,
1996, $105,000,000 was available under these unsecured credit facilities.
Subsequent to year-end the Company increased its total credit facilities to
$265,000,000 through the addition of a new five-year $75,000,000 term loan and a
$15,000,000 increase in an existing credit facility. The term loan expires in
2002.
The Company's credit facilities require maintenance of certain financial ratios
and compliance with covenants that limit the amount of dividend payments without
the lenders' consents. At December 29, 1996, the Company is in compliance with
these debt covenants.
NOTE 9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and short-term investments, accounts receivable and
certain other liabilities on the Consolidated Balance Sheets approximate fair
value at December 29, 1996 and December 31, 1995 due to the relatively short
period to maturity of the instruments. Fair value of long-term debt was based on
quoted market prices or pricing models using current market rates. The carrying
value on the Consolidated Balance Sheet approximates fair value at December 29,
1996.
45
<PAGE>
NOTE 10. LEASES AND COMMITMENTS
The Company leases certain production, research and administrative facilities
under operating leases that expire at various dates between 1997 and 2007.
Certain of these leases include renewal options varying from five to twenty
years.
At December 29, 1996, the future minimum commitments for all noncancellable
operating leases are as follows (in thousands):
1997 $7,682
1998 7,814
1999 7,003
2000 6,268
2001 4,995
Thereafter 25,550
-------
Total minimum lease payments $59,312
=======
Rental expense for all operating leases amounted to $4,838,000, $4,212,000 and
$4,319,000 in 1996, 1995 and 1994, respectively.
The Company has current noncancellable capital commitments of approximately
$104,000,000.
NOTE 11. KOMAG MATERIAL TECHNOLOGY, INC.
The Company's financial statements include the consolidation of the financial
results of Komag Material Technology, Inc. ("KMT"), which manufactures and sells
aluminum disk substrate products for high-performance magnetic storage media.
KMT is owned 80% by the Company and 20% by Kobe Steel USA Holdings Inc. ("Kobe
USA"), a U.S. subsidiary of Kobe Steel, Ltd. ("Kobe").
Other transactions between Kobe or its distributors and the Company were as
follows:
Fiscal Year Ended
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Accounts payable to Kobe or its distributors:
Balance at beginning of year $ 3,302 $ 2,234 $ 2,728
Purchases 53,554 34,478 34,657
Payments (54,426) (33,410) (35,151)
-------- -------- --------
Balance at end of year $ 2,430 $ 3,302 $ 2,234
======== ======== ========
NOTE 12. UNCONSOLIDATED JOINT VENTURE
In 1987, the Company formed a partnership, Komag Technology Partners
("Partnership"), with the U.S. subsidiaries of two Japanese companies and
simultaneously formed a subsidiary, Asahi Komag Co., Ltd. ("AKCL"). The Company
contributed technology in exchange for a 50% interest in the Partnership. The
Partnership and its subsidiary (joint venture) established a facility in Japan
to manufacture and sell the Company's thin-film media products in Japan. AKCL
also sells its products to the Company for resale
46
<PAGE>
outside of Japan. In 1996, the company granted AKCL various licenses to sell its
products to specified customers outside of Japan in exchange for a 5% royalty on
these sales. The Company recorded approximately $1,305,000 of royalty in other
income in 1996.
The Company's share of the joint venture's net income was $10,116,000,
$7,362,000 and $5,457,000 in 1996, 1995 and 1994, respectively.
Other transactions between the joint venture and the Company were as follows:
Fiscal Year Ended
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Accounts receivable from joint venture:
Balance at beginning of year $ 4,906 $ 96 $ 227
Sales 69,311 21,224 1,375
Cash receipts (65,901) (16,414) (1,506)
-------- -------- --------
Balance at end of year $ 8,316 $ 4,906 $ 96
======== ======== ========
Accounts payable to joint venture:
Balance at beginning of year $ 355 $ 46 $ 592
Purchases 12,145 5,460 9,752
Payments (11,951) (5,151) (10,298)
-------- -------- --------
Balance at end of year $ 549 $ 355 $ 46
======== ======== ========
Equipment purchases by the Company from its joint venture partners were
$20,655,000, $18,195,000 and $11,571,000 in 1996, 1995 and 1994, respectively.
47
<PAGE>
Summary combined financial information for the Partnership and AKCL for the
years ended December 31, 1996, 1995 and 1994, and as of December 31, 1996 and
1995 is as follows. The subsidiary's total assets, liabilities, revenues, costs
and expenses approximate 100% of the combined totals.
Fiscal Year Ended
------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
Summarized Income Statements:
Net sales $230,904 $173,177 $131,335
Costs and expenses 188,707 143,766 109,674
Provision for income taxes 21,965 14,687 10,626
-------- -------- --------
Net Income $ 20,232 $ 14,724 $ 11,035
======== ======== ========
Fiscal Year End
-------------------
1996 1995
-------- --------
(in thousands)
Summarized Balance Sheets:
Current assets $ 79,619 $ 52,302
Noncurrent assets 129,068 99,765
-------- --------
Total Assets $208,687 $152,067
======== ========
Current liabilities $110,239 $ 71,811
Long-term obligations 19,902 10,412
Partners' capital 78,546 69,844
-------- --------
Total Liabilities and Partners' Capital $208,687 $152,067
======== ========
NOTE 13. PARTICIPATION IN HEADWAY TECHNOLOGIES, INC.
Headway Technologies, Inc. ("Headway") was formed in 1994 to research, develop
and manufacture advanced magnetoresistive ("MR") heads for the data storage
industry. Hewlett-Packard Company ("HP") and AKCL (see Note 12) provided the
initial cash funding to Headway in exchange for equity interests. The Company
and Asahi America licensed to Headway MR technology developed through a prior
joint venture and contributed certain research and production equipment in
exchange for equity. As a result of these transactions, the Company held a
direct voting interest in Headway of less than 20% and had no cost basis in its
investment in Headway. Subsequent to year-end, the Company sold its interest in
Headway for $132,000.
AKCL invested in Headway in 1994 and recorded partial writedowns of its
investment through 1995 based upon net losses incurred at Headway. During the
third quarter of 1996, Headway's major customer, HP, announced the closure of
its disk drive manufacturing operations. Based upon anticipated future operating
losses at Headway arising from the loss of HP's business, AKCL wrote-off its
remaining Headway investment at the end of the third quarter of 1996. Subsequent
to year-end, AKCL sold its entire interest in Headway for $10,800,000 to a group
of new investors as part of a recapitalization. AKCL recorded the proceeds from
this sale as a gain ($5,300,000, net of tax) in the first quarter of 1997. The
Company will reflect its 50% share of this net gain in the first quarter of
1997.
48
<PAGE>
<TABLE>
NOTE 14. QUARTERLY SUMMARIES
(in thousands, except per share amounts, unaudited)
<CAPTION>
1996
--------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales $152,839 $152,208 $131,533 $141,211
Gross profit 64,489 62,956 31,585 16,537
Net income 42,504 42,560 16,498 8,412
Net income per share $0.80 $0.80 $0.31 $0.16
1995
--------------------------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------- ----------------- ---------------- ----------------
Net sales $105,063 $120,807 $132,835 $153,543
Gross profit 32,767 46,020 53,322 65,377
Net income 14,880 23,361 30,399 38,175
Net income per share $0.31 $0.48 $0.61 $0.72
</TABLE>
49
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
Not Applicable.
PART III
ITEMS 10, 11, 12 and 13.
<TABLE>
Items 10 through 13 of Part III will be contained in the Komag,
Incorporated Proxy Statement For the Annual Meeting of Stockholders to be held
May 14, 1997 (the "1997 Proxy Statement") which will be filed with the
Securities and Exchange Commission no later than April 28, 1997. The cross
reference table below sets forth the captions under which the responses to these
items are found:
<CAPTION>
10-K Item Description Caption in 1997 Proxy Statement
- --------- ----------- -------------------------------
<S> <C> <C>
10 Directors and Executive Officers "Item No. 1--Election of Directors:
Nominees; Business
Experience of Directors and
Nominees" and "Additional
Information: Certain
Relationships and Related
Transactions; Other Matters"
11 Executive Compensation "Additional Information: Executive
Compensation and Related
Information"
12 Security Ownership of Certain Beneficial "Additional Information: Principal
Owners and Management Stockholders"
13 Certain Relationships and Related "Additional Information: Certain
Transactions Relationships and Related
Transactions"
</TABLE>
The information set forth under the captions listed above, contained in
the 1997 Proxy Statement, are hereby incorporated herein by reference in
response to Items 10 through 13 of this Report on Form 10-K.
50
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents filed as part of this Report.
1. Financial Statements.
The following consolidated financial statements of Komag, Incorporated
are filed in Part II, Item 8 of this Report on Form 10-K:
Consolidated Statements of Income--Fiscal Years 1996, 1995 and 1994
Consolidated Balance Sheets--December 29, 1996 and December 31, 1995
Consolidated Statements of Cash Flows--Fiscal Years 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity--Fiscal Years 1996, 1995 and
1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
The following financial statement schedule of Komag, Incorporated is
filed in Part IV, Item 14(d) of this report on Form 10-K:
Schedule II-Valuation and Qualifying Accounts
Report of Other Auditor
--Report of Chuo Audit Corporation on Asahi Komag Co., Ltd.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.
51
<PAGE>
3. Exhibits.
3.1 Amended and Restated Certificate of Incorporation (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-K for the year ended December 31, 1995).
3.2 Bylaws (incorporated by reference from Exhibit 3.3 filed with the
Company's Report on Form 10-K for the year ended December 30, 1990).
4.2 Specimen Stock Certificate (incorporated by reference from a similarly
numbered exhibit filed with Amendment No. 1 to the Registration
Statement).
10.1.1 Lease Agreement dated May 24, 1991 between Milpitas-Hillview and Komag,
Incorporated (incorporated by reference from Exhibit 10.1.2 filed with
the Company's report on Form 10-K for the year ended December 29,
1991).
10.1.2 Lease Agreement dated May 24, 1991, between Milpitas-Hillview II and
Komag, Incorporated (incorporated by reference from Exhibit 10.1.3
filed with the Company's report on Form 10-K for the year ended
December 29, 1991).
10.1.3 Lease Agreement dated July 29, 1988 by and between Brokaw Interests and
Komag Corporation (incorporated by reference from Exhibit 10.1.6 filed
with the Company's Report on Form 10-K for the year ended January 1,
1989).
10.1.4 Lease Agreement dated May 2, 1989 by and between Stony Point Associates
I and Komag Material Technology, Inc. (incorporated by reference from
Exhibit 10.1.6 filed with the Company's Report on Form 10-K for the
year ended December 31, 1989).
10.1.5 Amendment to Lease Agreement dated December 28, 1990 by and between
Milpitas- Hillview II and Komag, Incorporated (incorporated by
reference from Exhibit 10.1.11 filed with the Company's Report on Form
10-K for the year ended December 30, 1990).
10.1.6 Second Amendment to Lease dated December 28, 1990 by and between
Milpitas-Hillview and Komag, Incorporated (incorporated by reference
from Exhibit 10.1.12 filed with the Company's Report on Form 10-K for
the year ended December 30, 1990).
10.1.7 First Amendment to Lease dated November 1, 1993 by and between Wells
Fargo Bank et al and Komag Material Technology, Inc. (incorporated by
reference from Exhibit 10.1.14 filed with the Company's Report on Form
10-K for the year ended January 2, 1994).
10.1.8 Lease Agreement dated May 27, 1994 by and between Hillview I Partners
and Komag, Incorporated (incorporated by reference from Exhibit 10.1.16
filed with the Company's Report on Form 10-Q for the quarter ended July
3, 1994).
10.1.9 Lease Agreement dated August 4, 1995 by and between Great Oaks
Interests and Komag, Incorporated (incorporated by reference from
Exhibit 10.11.12 filed with Form 10-Q for the quarter ended October 1,
1995).
10.1.10 First Amendment to Lease dated November 3, 1995 by and between Great
Oaks Interests and Komag, Incorporated.
10.1.11 Lease Agreement (B10) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated.
52
<PAGE>
10.1.12 Lease Agreement (B11) dated May 24, 1996 between Sobrato Development
Companies #871 and Komag, Incorporated.
10.2 Form of Directors' Indemnification Agreement (incorporated by reference
from Exhibit 10.9 filed with the Company's Report on Form 10-K for the
year ended December 30, 1990).
10.3.1 Joint Venture Agreement by and among Komag, Inc., Asahi Glass Co.,
Ltd., and Vacuum Metallurgical Company dated November 9, 1986, as
amended January 7, 1987 and January 27, 1987 (incorporated by reference
from Exhibit 10.10.1 filed with the Registration Statement on Form
S-1--File No. 33-13663) (confidential treatment obtained as to certain
portions).
10.3.2 General Partnership Agreement for Komag Technology Partners dated
January 7, 1987 (incorporated by reference from Exhibit 10.10.2 filed
with the Registration Statement on Form S-1--File No. 33-13663).
10.3.3 Technology Contribution Agreement dated January 7, 1987 by and between
Komag, Incorporated and Komag Technology Partners (incorporated by
reference from Exhibit 10.10.3 filed with the Registration Statement on
Form S-1--File No. 33-13663) (confidential treatment obtained as to
certain portions).
10.3.4 Technical Cooperation Agreement dated January 7, 1986 by and between
Asahi Glass Company, Ltd. and Komag, Incorporated (incorporated by
reference from Exhibit 10.10.4 filed with the Registration Statement on
Form S-1--File No. 33-13663).
10.3.5 Third Amendment to Joint Venture Agreement by and among Komag, Inc.,
Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et al dated March
21, 1990 (incorporated by reference from Exhibit 10.10.5 filed with the
Company's Report on Form 10-K for the year ended December 31, 1989).
10.3.6 Fourth Amendment to Joint Venture Agreement by and among Komag, Inc.,
Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et al dated May
24, 1990 (incorporated by reference from Exhibit 10.10.11 filed with
the Company's Report on Form 10-K for the year ended January 1, 1995).
10.3.7 Fifth Amendment to Joint Venture Agreement by and among Komag, Inc.,
Asahi Glass Co., Ltd., Vacuum Metallurgical Company, et al dated
November 4, 1994 (incorporated by reference from Exhibit 10.10.12 filed
with the Company's Report on Form 10-K for the year ended January 1,
1995).
10.3.8 Joint Venture Agreement dated March 6, 1989 by and between Komag,
Incorporated, Komag Material Technology, Inc. and Kobe Steel USA
Holdings Inc. (incorporated by reference from Exhibit 10.10.6 filed
with the Company's Report on Form 10-K for the year ended December 31,
1989) (confidential treatment obtained as to certain portions).
10.3.9 Joint Development and Cross-License Agreement dated March 10, 1989 by
and between Komag, Incorporated, Kobe Steel, Ltd., and Komag Material
Technology, Inc. (incorporated by reference from Exhibit 10.10.7 filed
with the Company's Report on Form 10-K for the year ended December 31,
1989).
53
<PAGE>
10.3.10 Blank Sales Agreement dated March 10, 1989 by and between Komag,
Incorporated, Kobe Steel, Ltd., and Komag Material Technology, Inc.
(incorporated by reference from a similarly numbered exhibit filed with
the Company's Report on Form 10-K for the year ended December 31,
1989).
10.3.11 Finished Substrate Agreement dated March 10, 1989 by and between Komag,
Incorporated, Kobe Steel, Ltd., and Komag Material Technology, Inc.
(incorporated by reference from Exhibit 10.10.9 filed with the
Company's Report on Form 10-K for the year ended December 31, 1989)
(confidential treatment obtained as to certain portions).
10.3.12 Stock Purchase Agreement between Komag, Incorporated and Kobe Steel USA
Holdings Inc. dated November 17, 1995 (incorporated by reference from a
similarly numbered exhibit filed with the Company's Report on Form 10-K
for the year ended December 31, 1995).
10.3.13 Substrate Agreement by and between Kobe Steel, Ltd. and Komag,
Incorporated dated November 17, 1995 (incorporated by reference from a
similarly numbered exhibit filed with the Company's Report on Form 10-K
for the year ended December 31, 1995) (confidential treatment obtained
as to certain portions).
10.3.14 License Amendment Agreement among Komag, Incorporated, Komag Material
Technology, Inc. and Kobe Steel, Ltd. dated November 17, 1995
(incorporated by reference from a similarly numbered exhibit filed with
the Company's Report on Form 10-K for the year ended December 31,
1995).
10.3.15 Substrate Sales Amendment Agreement among Komag, Incorporated, Komag
Material Technology, Inc. and Kobe Steel, Ltd. dated November 17, 1995
(incorporated by reference from a similarly numbered exhibit filed with
the Company's Report on Form 10-K for the year ended December 31,
1995).
10.3.16 Joint Venture Amendment Agreement among Komag, Incorporated, Komag
Material Technology, Inc. and Kobe Steel USA Holdings Inc. dated
November 17, 1995 (incorporated by reference from a similarly numbered
exhibit filed with the Company's Report on Form 10-K for the year ended
December 31, 1995) (confidential treatment obtained as to certain
portions).
10.4.1 Restated 1987 Stock Option Plan, effective January 31, 1996 and forms
of agreement thereunder (incorporated by reference from a similarly
numbered exhibit filed with the Company's report on Form 10-Q for the
quarter ended June 30, 1996).
10.4.2 Komag, Incorporated 1996 Management Bonus Plan (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-Q for the quarter ended June 30, 1996).
10.4.3 1988 Employee Stock Purchase Plan Joinder Agreement dated July 1, 1993
between Komag, Incorporated and Komag USA (Malaysia) Sdn. (incorporated
by reference from Exhibit 10.11.11 filed with the Company's Report on
Form 10-K for the year ended January 2, 1994).
10.4.4 Komag, Incorporated Discretionary Bonus Plan.
54
<PAGE>
10.5.1 Komag, Incorporated Deferred Compensation Plan (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-K for the year ended January 1, 1995).
10.5.2 Amendment No. 1 to Komag, Incorporated Deferred Compensation Plan dated
January 1, 1997.
10.5.3 Komag Material Technology, Inc. 1995 Stock Option Plan (incorporated by
reference from Exhibit 10.11.12 filed with Form 10-Q for the Quarter
ended October 1, 1995).
10.6 Common Stock Purchase Agreement dated December 9, 1988 by and between
Komag, Incorporated and Asahi Glass Co., Ltd. (incorporated by
reference from Exhibit 1 filed with the Company's Report on Form 8-K
filed with the Securities and Exchange Commission on December 20,
1988).
10.7 Common Stock Purchase Agreement dated February 6, 1990 by and between
Komag, Incorporated and Kobe Steel USA Holdings Inc. (incorporated by
reference from Exhibit 10.17 filed with the Company's Report on Form
10-K for the year ended December 31, 1989).
10.8 Registration Rights Agreement dated March 21, 1990 by and between
Komag, Incorporated and Kobe Steel USA Holdings Inc. (incorporated by
reference from Exhibit 10.18 filed with the Company's Report on Form
10-K for the year ended December 31, 1989).
10.9 Amendment No. 1 to Common Stock Purchase Agreement dated March 21, 1990
by and between Komag, Incorporated and Asahi Glass Co., Ltd.
(incorporated by reference from Exhibit 10.19 filed with Amendment No.
1 to the Registration Statement filed with the Securities and Exchange
Commission on May 26, 1987).
10.10 Amended and Restated Registration Rights Agreement dated March 21, 1990
by and between Komag, Incorporated and Asahi Glass Co., Ltd.
(incorporated by reference from Exhibit 10.20 filed with Amendment No.
1 to the Registration Statement filed with the Securities and Exchange
Commission on May 26, 1987).
10.11 Letter dated February 10, 1992 from the Malaysian Industrial
Development Authority addressed to Komag, Incorporated approving the
"Pioneer Status" of the Company's thin- film media venture in Malaysia
(incorporated by reference from Exhibit 10.28 filed with the Company's
report on Form 10-K for the year ended January 3, 1993).
10.12 Credit Agreement between Komag, Incorporated and Wells Fargo Bank, N.A.
(formerly First Interstate Bank of California)--Three Year
Facility--dated December 15, 1994 (incorporated by reference from
Exhibit 10.24 filed with the Company's report on Form 10-K for the year
ended January 1, 1995).
10.13 Credit Agreement between Komag, Incorporated and Wells Fargo Bank,
N.A.(formerly First Interstate Bank of California)--One Year
Facility--dated December 15, 1994 (incorporated by reference from
Exhibit 10.25 filed with the Company's report on Form 10-K for the year
ended January 1, 1995).
10.14 First Amendment to Credit Agreement--Three Year Facility--by and
between Komag, Incorporated and Wells Fargo Bank, N.A. (formerly First
Interstate Bank of California) dated March 29, 1995 (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-K for the year ended December 31, 1995).
55
<PAGE>
10.15 Second Amendment to Credit Agreement--Three Year Facility--by and
between Komag, Incorporated and Wells Fargo Bank, N.A. (formerly First
Interstate Bank of California) dated December 15, 1995 (incorporated by
reference from a similarly numbered exhibit filed with the Company's
Report on Form 10-K for the year ended December 31, 1995).
10.16 Credit Agreement between Komag, Incorporated and The Industrial Bank of
Japan, Limited, San Francisco Agency dated December 15, 1995
(incorporated by reference from a similarly numbered exhibit filed with
the Company's Report on Form 10-K for the year ended December 31,
1995).
10.17 First Amendment to Credit Agreement by and between Komag, Incorporated
and The Industrial Bank of Japan, Limited, San Francisco Agency dated
November 19, 1996.
10.18 Second Amendment to Credit Agreement by and between Komag, Incorporated
and The Industrial Bank of Japan, Limited, San Francisco Agency dated
January 31, 1997.
10.19 Credit Agreement between Komag, Incorporated and The Dai-Ichi Kangyo
Bank, Limited, San Francisco Agency dated October 7, 1996.
10.20 First Amendment to Credit Agreement between Komag, Incorporated and The
Dai-Ichi Kangyo Bank, Limited, San Francisco Agency dated November 25,
1996.
10.21 Third Amendment to Credit Agreement--Three Year Facility--by and
between Komag, Incorporated and Wells Fargo Bank, N.A. dated January
31, 1997.
10.22 Credit Agreement dated as of February 7, 1997 among Komag,
Incorporated, institutional lenders and The Industrial Bank of Japan,
Limited, San Francisco Agency, as agent for the lenders.
11.1 Computation of Income per Share.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Chuo Audit Corporation.
24 Power of Attorney. Reference is made to the signature pages of this
Report.
27 Financial Data Schedule.
- -----------------
The Company agrees to furnish to the Commission upon request a copy of any
instrument with respect to long-term debt where the total amount of securities
authorized thereunder does not exceed 10% of the total assets of the Company.
56
<PAGE>
(b) Reports on Form 8-K.
Not Applicable
Undertaking
For the purposes of complying with the amendments to the rules
governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933,
the undersigned registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered on the Form S-8 identified
below, the registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The preceding undertaking shall be incorporated by reference into
registrant's Registration Statements on Form S-8 Nos. 33-16625 (filed August 19,
1987), 33-19851 (filed January 28, 1988), 33-25230 (filed October 28, 1988),
33-41945 (filed July 29, 1991), 33-45469 (filed February 3, 1992), 33-53432
(filed October 16, 1992), 33-80594 (filed June 22, 1994), 33-62543 (filed
September 12, 1995), and 333-06081 (filed June 14, 1996).
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in Milpitas, California on
this 4th day of March, 1997.
Komag, Incorporated
By Stephen C. Johnson
-----------------------------------
Stephen C. Johnson
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears herein constitutes and appoints Stephen C. Johnson and William L. Potts,
Jr., and each of them, as his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
58
<PAGE>
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
<CAPTION>
Name Title Date
<S> <C> <C>
TU CHEN Chairman of the Board March 4, 1997
- ----------------------- and Director
(Tu Chen)
STEPHEN C. JOHNSON President, Chief Executive Officer March 4, 1997
- -----------------------
(Stephen C. Johnson)
WILLIAM L. POTTS, JR. Senior Vice President-Chief March 4, 1997
- ------------------------ Financial Officer and Secretary
(William L. Potts, Jr.) (Principal Financial and
Accounting Officer)
CRAIG R. BARRETT Director March 4, 1997
- -----------------------
(Craig R. Barrett)
CHRIS A. EYRE Director March 4, 1997
- -----------------------
(Chris A. Eyre)
IRWIN FEDERMAN Director March 4, 1997
- -----------------------
(Irwin Federman)
GEORGE A. NEIL Director March 4, 1997
- -----------------------
(George A. Neil)
MAX PALEVSKY Director March 4, 1997
- -----------------------
(Max Palevsky)
ANTHONY SUN Director March 4, 1997
- -----------------------
(Anthony Sun)
MASAYOSHI TAKEBAYASHI Director March 4, 1997
- -----------------------
(Masayoshi Takebayashi)
*By WILLIAM L. POTTS, JR.
-----------------------
(William L. Potts, Jr.,
Attorney-in-Fact)
</TABLE>
59
<PAGE>
ITEM 14(d) FINANCIAL STATEMENT SCHEDULES
<TABLE>
KOMAG, INCORPORATED
Schedule II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ------ ------ ------ ------ ------
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended January 1, 1995
Allowance for doubtful accounts $ 1,682 $ (195) $ -- $ 1,487
Allowance for sales returns 1,875 2,146(1) 3,285(2) 736
-------- -------- -------- --------
Sub total 3,557 1,951 3,285 2,223
Restructuring liability 15,887(3) -- 15,887(4) --
-------- -------- -------- --------
$ 19,444 $ 1,951 $ 19,172 $ 2,223
======== ======== ======== ========
Year ended December 31, 1995
Allowance for doubtful accounts $ 1,487 $ 1,519 $ -- $ 3,006
Allowance for sales returns 736 2,351(1) 1,814(2) 1,273
-------- -------- -------- --------
$ 2,223 $ 3,870 $ 1,814 $ 4,279
======== ======== ======== ========
Year ended December 29, 1996
Allowance for doubtful accounts $ 3,006 $ (1,011) $ 11 $ 1,984
Allowance for sales returns 1,273 3,528(1) 3,698(2) 1,103
-------- -------- -------- --------
$ 4,279 $ 2,517 $ 3,709 $ 3,087
======== ======== ======== ========
<FN>
(1) Additions to the allowance for sales returns are netted against sales.
(2) Actual sales returns of subsequently scrapped product were charged against
the allowance for sales returns. Actual sales returns of product that was
subsequently tested and shipped to another customer were netted directly
against sales.
(3) Relates to the 1993 restructuring of the Company's thin-film head
operation.
(4) Primarily represents operating losses incurred during the shutdown of the
Company's thin-film head operation.
</FN>
</TABLE>
60
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Asahi Komag Co., Ltd.
We have audited the accompanying consolidated balance sheets of Asahi Komag
Co., Ltd. and subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income, cash flows, and stockholder's equity for the
years then ended. We have also audited the statements of income, cash flows, and
stockholder's equity of Asahi Komag Co., Ltd. for the year ended December 31,
1994. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Headway Technologies, Inc., a company investment accounted for using the equity
method, which represents six percent of the Company's total assets as of
December 31, 1995. Those statements were audited by other auditors whose report
has been provided to us and our opinion, insofar as it relates to the amounts
included for Headway Technologies, Inc., is based solely on the report of the
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. These 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, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects
the consolidated financial position of Asahi Komag Co., Ltd. and subsidiary as
of December 31, 1996 and 1995, and the consolidated results of its operations
and its cash flows for the years then ended, and the results of operations and
cash flows of Asahi Komag Co., Ltd. for the year ended December 31, 1994 in
conformity with generally accepted accounting principles applicable in the
United States of America.
As discussed in Note 2b of the notes to the financial statements, the
Company reporting entity changed in 1995 as a result of the establishment of a
wholly owned subsidiary.
The consolidated financial statements as of and for the year ended December
31, 1996 have been translated into United States Dollars solely for the
convenience of the reader. Our audit included the translation, and in our
opinion such translation has been made in accordance with the basis stated in
note 2g to the financial statements.
CHUO AUDIT CORPORATION
Tokyo, Japan
February 21, 1997
61
FIRST AMENDMENT TO LEASE
This first amendment to lease ("Amendment") is made this 15th day of November,
1995 by and between Great Oaks Interests, a California Limited partnership
having an address at 10600 N. De Anza Blvd., Suite 200, Cupertino, California
95014 ("Landlord") and Komag Incorporated, a Delaware corporation having its
principal place of business at 275 S. Hillview Drive Milpitas, California 95035
("Tenant").
WITNESSETH
WHEREAS Landlord and Tenant entered into a lease dated August 4, 1995 (the
"Lease") for the building at 1705 Automation Parkway to be constructed on that
certain 13.54 acre site on the south side of Automation Parkway in San Jose
("Premises"); and
WHEREAS effective the date of this Amendment, Landlord and Tenant wish to modify
the Lease to (i) limit Landlord's obligation to reimburse Tenant for the costs
of constructing the Building Shell, (ii) the change the timing of Landlord's
reimbursement to Tenant of such costs, (iii) to set forth the final square
footage of the Building, and (iv) to set forth the final Base Monthly Rent;
NOW, THEREFORE, in order to effect the intent of the parties as set forth above
and for good and valuable consideration exchanged between the parties, the Lease
is amended as follows:
1. Landlord and Tenant have agreed that Landlord's obligation to pay the costs
associated with the construction of the Building Shell shall be limited as
provided herein. Total Project Costs (as defined in Exhibit "B" of the Lease)
shall be fixed at the sum of Fourteen Million and No/100 Dollars
($14,000,000.00). This amount has been determined with reference to Exhibit "B"
of the Lease as follows:
Project Cost Item Amount
(i) Land cost $5,036,913 (13.54 acres, $8.54 psf)
(v) Interest $537,518 (1 year - 9.75%)
(vi) Loan fees $231,000 (1.75% of $13,200,000)
(vii) Real estate taxes: $123,331 (1 year - land only)
(ix) Lease commission: $597,849 ($3.00 psf)
Total $6,526,611
Total to be paid to Tenant $7,473,389
for items (ii), (iii), (viii) & (x)
<PAGE>
Landlord shall pay the loan fees, real estate taxes and lease commission
directly to the party owed as such amounts become due. In lieu of Landlord
making progress payments to Tenant during the construction of the Building
Shell, Landlord shall pay Tenant on the Commencement Date, the sum of Seven
Million Four Hundred Seventy Three Thousand Three Hundred Eighty Nine and No/100
Dollars ($7,473,389) to reimburse Tenant for Landlord's agreed share of the
balance of the costs to construct the Building Shell. Tenant agrees to pay, at
Tenant's expense, any additional costs necessary to complete the Building Shell
in substantial conformance with the building shell plans attached as Exhibit "C"
to the Lease.
2. Base Monthly Rent has been determined based on the formula contained in
Exhibit "B," the Total Project Costs of $14,000,000 and the best available
financing rate of 8% interest, 20 year amortization to be the sum of One Hundred
Forty Thousand Five Hundred Twenty One and 93/100 Dollars ($140,521.93).
3. Final square footage of the Building is agreed by Landlord and Tenant to be
199,293 square feet.
4. All defined terms shall have the same meanings as in the Lease, except as
otherwise stated in this Amendment.
5. Except as hereby amended, the Lease and all of the terms, covenants and
conditions thereof shall remain unmodified and in full force and effect. In the
event of any conflict or inconsistency between the terms and provisions of this
Amendment and the terms and provisions of the Lease, the terms and provisions of
this Amendment shall prevail.
IN WITNESS WHEREOF, the parties hereto have set their hands to this Amendment as
of the day and date first above written.
Landlord Tenant
Great Oaks Interests, Komag Incorporated,
a California limited partnership a Delaware corporation
By: ___________________________ By: _____________________________
Its: General Partner Its: VP & CFO
Page 2
Lease between
Sobrato Development Companies #871 and Komag Incorporated
Section Page #
- ------- ------
Parties......................................................................1
Premises.....................................................................1
Use..........................................................................1
Term and Rental..............................................................2
Adjustment for Variance in Building Square Footage....................2
Security Deposit.............................................................2
Late Charges.................................................................2
Construction and Possession..................................................3
Building Shell Construction...........................................3
Tenant Improvement Plans..............................................3
Preliminary Cost Estimates............................................3
Final Pricing.........................................................4
Change Orders.........................................................5
Building Shell Costs..................................................5
Tenant Improvement Costs..............................................5
Construction..........................................................6
Documents.............................................................6
Landlord Overhead & Profit............................................6
Insurance/Indemnity...................................................7
Punchlist Items.......................................................7
Other Work by Tenant..................................................7
Parking Lot...........................................................7
Tank Farm.............................................................8
Acceptance of Possession and Covenants to Surrender..........................8
Uses Prohibited..............................................................8
Alterations and Additions....................................................8
Maintenance of Premises......................................................9
Tenant's Obligations..................................................9
Landlord's Obligations...............................................10
Hazard Insurance............................................................10
Tenant's Use.........................................................10
Landlord's Liability Insurance.......................................11
<PAGE>
Property Insurance...................................................11
Tenant's Insurance...................................................11
Waiver...............................................................12
Taxes.......................................................................12
Utilities...................................................................13
Free From Liens.............................................................14
Compliance With Governmental Regulations....................................14
Toxic Waste and Environmental Damage........................................15
Landlord's Responsibility............................................15
Tenant's Responsibility..............................................15
Tenant's Indemnity Regarding Hazardous Materials.....................16
Actual Release by Tenant.............................................16
Environmental Monitoring.............................................17
Indemnity...................................................................17
Advertisements and Signs....................................................18
Attorney's Fees.............................................................18
Tenant's Default............................................................18
Remedies.............................................................19
Right to Re-enter....................................................19
Abandonment..........................................................20
No Termination.......................................................20
Surrender of Lease..........................................................20
Habitual Default............................................................21
Landlord's Default..........................................................21
Notices.....................................................................21
Entry by Landlord...........................................................21
Destruction of Premises.....................................................22
Destruction by an Insured Casualty...................................22
Destruction by an Uninsured Casualty.................................22
Damage or Destruction at End of Term.................................23
Assignment or Sublease......................................................23
Consent by Landlord..................................................23
Assignment or Subletting Consideration...............................23
No Release...........................................................24
Effect of Default....................................................24
Excluded Transfers...................................................25
Condemnation................................................................25
Effects of Conveyance.......................................................25
Subordination...............................................................26
Waiver......................................................................26
Holding Over................................................................27
Page ii
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Successors and Assigns......................................................27
Estoppel Certificates.......................................................27
Option to Extend the Lease Term.............................................27
Grant and Exercise of Option.........................................27
Determination of Fair Market Rental..................................28
Resolution of a Disagreement over the Fair Market Rental.............29
Tenant's Right of First Refusal.............................................29
Grant................................................................29
Covenants of Landlord................................................29
Exercise of Tenant's Right of First Refusal to Purchase..............30
Terms for Right of First Refusal to Purchase.........................30
Continuing Right.....................................................30
Exclusive Nature of Option...........................................30
Successors and Assigns...............................................30
Options.....................................................................31
Quiet Enjoyment.............................................................31
Brokers.....................................................................31
Landlord's Liability.......................................................31
Authority of Parties........................................................32
Transportation Demand Management programs...................................32
Dispute Resolution..........................................................32
Miscellaneous Provisions....................................................32
Rent.................................................................32
Performance by Landlord..............................................33
Interest.............................................................33
Rights and Remedies..................................................33
Survival of Indemnities..............................................33
Severability.........................................................33
Choice of Law........................................................33
Time.................................................................33
Entire Agreement.....................................................33
Representations......................................................33
Headings.............................................................34
Exhibits.............................................................34
Approvals............................................................34
Recordation..........................................................34
EXHIBIT "A" - Premises......................................................35
EXHIBIT "B" - Formula for Determination of Base Monthly Rent................36
EXHIBIT "C" - Shell Plans and Specifications................................37
EXHIBIT "D" - Building Shell Definition.....................................38
EXHIBIT "E" - Tenant Improvement Plans and Specifications...................39
Page iii
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EXHIBIT "F" - Tenant's Trade Fixtures.......................................40
EXHIBIT "G" - Fee Agreement.................................................41
Page iv
<PAGE>
1. Parties: THIS LEASE, is entered into on this 24th day of May, 1996
("Execution Date"), between Sobrato Development Companies #871, a California
Limited Partnership, whose address is 10600 North De Anza Boulevard, Suite 200,
Cupertino, CA 95014 and Komag Incorporated, a Delaware corporation, whose
address is 275 S. Hillview Drive, Milpitas, CA 95035, hereinafter called
respectively Landlord and Tenant.
2. Premises: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City of
San Jose, County of Santa Clara, State of California, and more particularly
described as follows, to-wit:
A 12.6 acre parcel ("Parcel") on the north side of Automation Parkway, San Jose,
California, including all appurtenances and buildings now or during the Term
located thereon. Pursuant to the terms of this Lease, Landlord is obligated to
construct a single story building of approximately 188,303 rentable square feet
("Building"), a parking lot consisting of a minimum of 544 parking spaces
expandable to approximately 656 spaces described as Building 10 on Exhibit "A"
attached hereto. Landlord represents and warrants that Landlord is the fee
simple owner of the Premises. Prior to the Commencement Date, Landlord shall use
its best efforts to record a parcel map to subdivide the Parcel into two
parcels, one for the Premises and the balance for a second building to be
constructed for Tenant pursuant to that certain lease between the parties of
even date herewith.
3. Use: Tenant shall use the Premises only for the following purposes and
shall not change the use of the Premises without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed: Office,
research, development, testing, manufacturing, ancillary warehouse, and other
legal uses. Landlord makes no representation or warranty that any specific use
of the Premises desired by Tenant is permitted pursuant to any Laws. Landlord
represents and warrants to Tenant that, as of the Commencement Date, (i) the
Premises are in compliance with all municipal, county, state and federal
statutes, laws, ordinances, including zoning ordinances, and regulations
governing and relating to the Building Shell; (ii) there shall exist no patent
or, to the best of Landlord's knowledge, latent defect in the Premises; and
(iii) the Premises shall be in good condition and repair and fit for Tenant's
particular purposes. Landlord represents and warrants to Tenant that, as of the
Commencement Date, the land is zoned industrial ("I").
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4. Term and Rental: The term ("Lease Term") shall be for one hundred twenty
(120) months, commencing on the date on which the Building Shell and Tenant
Improvements are Substantially Complete as defined in Article 7.H below
("Commencement Date"), and ending one hundred twenty (120) months thereafter,
("Expiration Date"). In addition to all other sums payable by Tenant under this
Lease, Tenant shall pay as base monthly rent ("Base Monthly Rent") below for the
Premises in an amount determined pursuant to Exhibit "B" attached hereto. Base
Monthly Rent shall increase at the end of the forty-second and eighty fourth
month of the Lease Term by the product of the Base Monthly Rent payable for the
preceding month and one and 147/1000 (1.147). The parties agree to enter into an
amendment to this Lease setting forth the exact amount of the Base Monthly Rent
payable during the Lease Term within fourteen (14) days following determination
by Landlord.
Base Monthly Rent shall be due on or before the first day of each calendar month
during Lease Term. All sums payable by Tenant under this Lease shall be paid in
lawful money of the United States of America, without offset or deduction, and
shall be paid to Landlord at the address specified in Article 1 of this Lease or
at such place or places as may be designated from time to time by Landlord. Base
Monthly Rent for any period less than a calendar month shall be a pro rata
portion of the monthly installment.
A. Adjustment for Variance in Building Square Footage: In the event the
square footage of the Building is other than 188,303 determined by measurement
after completion of construction, within thirty (30) days after the Commencement
Date, Landlord and Tenant shall execute an amendment to the Lease setting forth
the actual rentable square feet of the Building, which calculation shall be
consistent with the BOMA standard for Industrial Buildings (i.e. outside of
outside wall to outside of outside wall without deduction).
5. Security Deposit: None required.
6. Late Charges: Tenant hereby acknowledges that late payment by Tenant to
Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
administrative, processing, accounting charges, and late charges, which may be
imposed on Landlord by the terms of any contract, revolving credit, mortgage or
trust deed covering the Premises. Accordingly, if any installment of Base
Monthly Rent or any other sum due from Tenant shall not be received by Landlord
or Landlord's designee within ten (10) days after Tenant's receipt of written
notice from Landlord that such amount is delinquent, Tenant shall pay to
Landlord a late charge equal to five (5%) percent of such overdue amount which
late charge shall be due and payable with the payment then delinquent. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by
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reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
7. CONSTRUCTION AND POSSESSION:
A. Building Shell Construction. Landlord shall cause the shell of the
Building ("Building Shell") to be constructed by independent contractors to be
employed by and under the supervision of Landlord, in accordance with the
building shell plans prepared by Comprehensive Architectural Services ("Tenant's
Architect") and approved by Landlord and Tenant and guideline specifications,
which are attached hereto as Exhibit "C" and are incorporated herein by this
reference ("Shell Plans and Specifications"). Landlord shall construct the
Building Shell in accordance with all applicable municipal, local, state and
federal laws, statutes, rules, regulations and ordinances. Landlord shall pay
for all costs and expenses associated with the construction of the Building
Shell up to a maximum amount of Six Million Six Hundred Thousand and No/100
Dollars ($6,600,000.00) ("Building Shell Allowance"). The Building Shell shall
include all items customarily included within the definition of a speculative
"building shell," including without limitation, those items set forth in the
Building Shell Definition, attached hereto as Exhibit "D", and incorporated
herein by this reference. Landlord shall provide Tenant half-size vellum
as-built drawings of the Building Shell within thirty (30) days following
completion of construction thereof.
B. Tenant Improvement Plans. Tenant, at Tenant's sole cost and expense, has
also hired Tenant's Architect, to prepare plans and outline specifications
("Tenant Improvement Plans and Specifications") which are attached hereto as
Exhibit "E" with respect to the construction of improvements to the interior
premises ("Tenant Improvements"). The Tenant Improvements shall consist of all
those items not included within in the scope of the Building Shell definition
pursuant to Article 7.A above and Exhibit "D". The Tenant Improvement Plans and
Specifications shall be prepared in sufficient detail to allow Landlord to
construct the Tenant Improvements. Landlord shall construct the Tenant
Improvements in accordance with all Tenant Improvement Plans and Specifications.
Tenant shall pay for all costs and expenses associated with the construction of
the Tenant Improvements.
C. Preliminary Cost Estimates.
i. Building Shell. Within fourteen (14) days after Tenant's
delivery of the Shell
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Plans and Specifications to Landlord, Landlord shall deliver to Tenant a
preliminary cost estimate of the cost to construct the Building Shell. The
preliminary cost estimate shall contain sufficient detail for Tenant to
understand the cost element of each portion of the proposed Building Shell.
ii. Tenant Improvements. Within fourteen (14) days after
Tenant's delivery of the Tenant Improvement Plans and Specifications to
Landlord, Landlord shall also deliver to Tenant a preliminary cost estimate of
the cost to construct the Tenant Improvements. The preliminary cost estimate
shall contain sufficient detail for Tenant to understand the cost element of
each portion of the proposed Tenant Improvements.
D. Final Pricing.
i. Building Shell. Within ten (10) days after Tenant's
approval of the preliminary cost estimate for the Building Shell, Landlord shall
submit to Tenant competitive bids from a minimum of three (3) subcontractors for
each aspect of the work which is to be performed. Landlord must utilize the low
bid in each case, unless Tenant approves Landlord's use of another
subcontractor, and the cost of the Building Shell shall be based upon
construction expenses equal to the sum of the bid amounts as approved by Tenant.
Upon Tenant's written approval of the contract bids, Landlord and Tenant shall
each be deemed to have given their approval of the final Shell Plans and
Specifications on which the cost estimate was made, and Landlord shall proceed
with the construction of the Building Shell in accordance with the terms of
Article 7.H below. If Tenant does not specifically approve or disapprove the
bids within seven (7) days, Tenant shall be deemed to have approved the bids.
ii. Tenant Improvements. Within ten (10) days after Tenant's
approval of the preliminary cost estimate for the Tenant Improvements, Landlord
shall submit to Tenant competitive bids from a minimum of three (3)
subcontractors for each aspect of the work which is to be performed. Landlord
must utilize the low bid in each case, unless Tenant approves Landlord's use of
another subcontractor, and the cost of the Tenant Improvements shall be based
upon construction expenses equal to the sum of the bid amounts as approved by
Tenant. Upon Tenant's written approval of the contract bids, Landlord and Tenant
shall each be deemed to have given their approval of the final Tenant
Improvement Plans and Specifications on which the cost estimate was made, and
Landlord shall proceed with the construction of the Tenant Improvements in
accordance with the terms of Article 7.H below. If Tenant does not specifically
approve or disapprove the bids within seven (7) days, Tenant shall be deemed to
have approved the bids.
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E. Change Orders. Tenant shall have the right to order changes in the
manner and type of construction of the Building Shell or the Tenant
Improvements. Any change orders which are submitted by Tenant after the date
which is ten (10) days after the issuance by the City of San Jose of a building
permit for the construction of the Building Shell, which cause Landlord's
construction schedule to be delayed shall cause the Commencement Date to occur
one (1) day in advance of the date the Building Shell is Substantially Complete,
as defined in Article 7.H, for each day of delay. Upon request and prior to
Tenant's submitting any binding change order, Landlord shall promptly provide
Tenant with written statements of the cost to implement and the time delay and
increased construction costs associated with any proposed change order, which
statements shall be binding on Landlord. If no time delay or increased
construction cost amount is noted on the written statement, the parties agree
that there shall be no adjustment to the construction cost or the Commencement
Date associated with such change order. If ordered by Tenant, Landlord shall
implement such change order, and the cost of constructing the Tenant
Improvements shall be increased in accordance with the cost statement previously
delivered by Landlord to Tenant for any such change order.
F. Building Shell Costs. Landlord shall pay all costs associated with the
Building Shell. The costs of the Building Shell shall consist of only the
following costs to the extent actually incurred by Landlord in connection with
the construction of the Building Shell: costs of construction, costs of permits,
and the general contractor overhead described in Article 7.J below. During the
course of construction of the Building Shell, Landlord may deliver to Tenant not
more than once each calendar month a written request for payment which shall
include and be accompanied by: (i) Landlord's certified statements setting forth
the amount requested certifying the percentage of completion of each item for
which reimbursement is requested and certifying that the progress payment
requested is due to a subcontractor of Landlord pursuant to a contract between
Landlord and Landlord's subcontractor. Tenant shall pay to Landlord, within
fifteen (15) days after Tenant's receipt of the above items, any costs incurred
by Landlord in excess of the Building Shell Allowance in connection with the
Building Shell in accordance with the Shell Plans and Specifications minus the
retainage set forth below. Tenant shall be entitled to retain ten percent (10%)
of the amount invoiced by Landlord until the Building Shell is "Substantially
Complete" (defined in Article 7.H below). Tenant shall pay the retained balance
owing to Landlord within fifteen (15) days following the date that the Building
Shell is Substantially Complete. All costs for Building Shell shall be fully
documented to and verified by Tenant. The amounts charged to Tenant shall be
limited as provided in Article 7.D.i above.
G. Tenant Improvement Costs. The costs of the Tenant Improvements shall
consist of only the following costs to the extent actually incurred by Landlord
in connection with the construction of the Tenant Improvements: costs of
construction, costs of permits, and the Landlord overhead described in Article
7.J below. During the course of construction of the Tenant Improvements,
Landlord may deliver to Tenant not more than once each calendar month a written
Page 5
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request for payment which shall include and be accompanied by: (i) Landlord's
certified statements setting forth the amount requested certifying the
percentage of completion of each item for which reimbursement is requested and
certifying that the progress payment requested is due to a subcontractor of
Landlord pursuant to a contract between Landlord and Landlord's subcontractor.
Tenant shall pay to Landlord, within fifteen (15) days after Tenant's receipt of
the above items, the costs incurred by Landlord in connection with the Tenant
Improvements installed in the Building in accordance with the Tenant Improvement
Plans and Specifications minus the retainage set forth below. Tenant shall be
entitled to retain ten percent (10%) of the amount invoiced by Landlord until
the Tenant Improvements are "Substantially Complete" (defined in Article 7.H
below). Tenant shall pay the retained balance owing to Landlord within fifteen
(15) days following the date that the Tenant Improvements are Substantially
Complete. All costs for Tenant Improvements shall be fully documented to and
verified by Tenant. The amounts charged to Tenant shall be limited as provided
in Article 7.D.ii above.
H. Construction. Landlord shall use its best efforts to obtain a building
permit from the City of San Jose as soon as possible after Tenant's approval of
the Shell Plans and Specifications. The Building Shell and Tenant Improvements
shall be deemed substantially complete ("Substantially Complete") when the
Building Shell and Tenant Improvements have been substantially completed in
accordance with the Shell Plans and Specifications and Tenant Improvement Plans
and Specifications, as evidenced by the issuance of a certificate of occupancy
or its equivalent by the appropriate governmental authority for the Building
Shell and Tenant Improvements, and the issuance of a certificate by Tenant's
Architect certifying that the Building Shell and Tenant Improvements have been
completed in accordance with the plans.
I. Documents. Landlord shall at all times keep one (1) complete set of all
contract documents (i.e., approved drawings, shop and setting drawings,
specifications, samples, addenda and change orders) current and in good order on
the job site. Such documents shall be available for review by representatives of
Tenant, its consultants and any public officials at any time. Record drawings
marked with all changes made during the job shall be kept on the job site by
Landlord. Upon acceptance of the work, the record document print set shall be
immediately forwarded to Tenant's Architect for changes to the originals. The
changes shall be noted on the originals and one (1) mylar reproducible set of
the originals shall be forwarded to Tenant. Tenant shall be provided with two
(2) copies of these specifications.
J. Landlord Overhead & Profit. As compensation to Landlord for its services
as general contractor for the Building Shell and Tenant Improvements, Landlord
shall be entitled to a fee as specified in the Fee Agreement attached as Exhibit
"G". Except as provided therein, Landlord
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shall not be entitled to any other fee or payment from Tenant in connection with
Landlord's services as general contractor.
K. Insurance/Indemnity. Landlord shall indemnify, protect, defend and
hold Tenant harmless from and against all liability, cost, expense, or damage
(including, without limitation, attorneys fees) arising from: (i) the
construction of the Building Shell or the Tenant Improvements; or (ii) any
construction defects, or (iii) any failure to properly construct the Building
Shell or Tenant Improvements in accordance with the approved Shell Plans and
Specifications or Tenant Improvement Plans and Specifications. Tenant's review
and approval of any plans, specifications, or any other documents shall not
relieve Landlord from Landlord's obligations under the foregoing
indemnification. Landlord shall procure (as a cost of the Building Shell) and
keep in effect from the execution date of this Lease until the termination of
this Lease a "Broad Form" liability insurance policy in the amount of Three
Million Dollars ($3,000,000.00), insuring all of Landlord's activities with
respect to the Building and Premises, including Landlord's indemnity obligations
under this Article 7.K. In addition, Landlord shall procure (as a cost of the
Building Shell) builder's risk insurance, insuring the Building Shell and Tenant
Improvements for their full replacement cost while the Building and Tenant
Improvements are under construction, and until the date that the fire insurance
policy described in Article 12 of the Lease is in full force and effect.
L. Punchlist Items. After the Building Shell and Tenant Improvements
are Substantially Complete, Landlord shall immediately correct any construction
defect or other "punchlist" item which Tenant brings to Landlord's attention.
All such work shall be performed in a manner designed to cause the least
possible interruption to Tenant and Tenant's activities on the Premises.
M. Other Work by Tenant. All work not within the scope of work normally
constructed by the construction trades employed on the Building and not
described in the Shell Plans and Specifications or Tenant Improvement Plans and
Specifications, such as furniture, telephone equipment, telephone wiring and
office equipment work, shall be furnished and installed by Tenant.
O. Parking Lot. Landlord, at Landlord's sole cost and expense, shall
construct a parking lot, with a minimum of approximately 544 parking spaces, on
the Premises in the location set forth in Exhibit "C". Landlord shall cause the
parking lot to comply in all respects with all applicable governmental rules,
regulations, and orders, and shall create a sufficient number of parking spaces
to comply with all governmental requirements in connection with the Building.
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P. Tank Farm. Landlord shall not develop any portion of the "tank farm
pad" as set forth in Exhibit "C", without the prior written consent of Tenant.
Tenant shall have the right at any time to construct a tank farm, designed by
Tenant, on the tank farm pad.
8. Acceptance of Possession and Covenants to Surrender: Tenant agrees on
Expiration Date, or on the sooner termination of this Lease, to surrender the
Premises to Landlord in good condition and repair, reasonable wear and tear,
actions of Landlord or Landlord's Parties, or damage due to casualty excepted.
"Good Condition" shall mean that the interior walls of all office and warehouse
areas, the floors of all office and warehouse areas, all suspended ceilings and
carpeting will be cleaned and free of any major defacements. Tenant on or before
the Expiration Date or sooner termination of this Lease, shall remove all its
personal property and trade fixtures from the Premises, and all property and
fixtures not so removed shall be deemed to be abandoned by Tenant. Tenant shall
ascertain from Landlord at the time Tenant desires to make any Alteration
(including Permitted Alterations), whether Landlord desires to have such
Alteration removed at the Expiration Date or to cause Tenant to surrender the
Alteration to Landlord. If Landlord so notifies Tenant in writing within fifteen
(15) days after Tenant's notice to Landlord that Tenant intends to alter the
Building, then Tenant shall remove such Alteration, as Landlord may require in
such written notice, and shall repair and restore said Building or such part or
parts thereof before the Expiration Date at Tenant's sole cost and expense. If
Landlord has not provided Tenant with such written notice within said fifteen
(15) day period, then Tenant shall have no obligation to remove such Alteration
from the Premises upon the Expiration Date or earlier termination of this Lease.
Notwithstanding the terms of this Article 8, Tenant shall not have an obligation
to remove any Tenant Improvements installed prior to the first anniversary of
the Commencement Date from the Premises at any time.
9. Uses Prohibited: Tenant shall not commit, or suffer to be committed, any
waste upon the said Premises, or any nuisance, or allow any sale by auction upon
the Premises, or allow the Premises to be used for any unlawful purpose, or
place any loads upon the floor, walls, or ceiling which endanger the structure,
or use any machinery or apparatus which will in any manner vibrate or shake the
Premises. Except for materials which may be stored in the enclosed tank farm
area outside the Building, no materials, supplies, equipment, finished products
or semi-finished products, raw materials or articles of any nature or any waste
materials, refuse, scrap or debris shall be stored upon or permitted to remain
on any portion of the Premises outside of the Building proper without Landlord's
prior approval, which approval shall not be unreasonably withheld.
10. Alterations and Additions: Except for those improvements installed
prior to the first anniversary of the Commencement Date and Permitted
Alterations (as defined below), Tenant shall not make, or suffer to be made, any
alteration or addition to the said Premises ("Alterations"), or any part
thereof, without (i) the written consent of Landlord first had and
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obtained, which consent shall not be unreasonably withheld or delayed, and (ii)
delivering to Landlord the proposed architectural and structural plans, if any,
for all such Alterations. After having obtained Landlord's consent, Tenant
agrees that it shall not proceed to make such Alterations until Tenant has
obtained all required governmental approvals and permits. Tenant further agrees
to provide Landlord (i) written notice of the anticipated start date and actual
start date of the work, and (ii) a complete set of half-size (15" X 21") vellum
as-built drawings. All Alterations shall be constructed in compliance with
applicable buildings codes and laws. Alterations which are not to be deemed as
trade fixtures shall include heating, lighting, electrical systems, air
conditioning, partitioning, carpeting, or any other installation which has
become affixed to the Premises. All Alterations shall be maintained, replaced or
repaired by Tenant at Tenant's sole cost and expense, except as provided in
Section 11 below. Notwithstanding the above, Tenant shall have the right to
remove any trade fixtures, furniture, or process equipment paid for by Tenant
from the Premises at the expiration of the Lease, which items shall include,
without limitation, the items set forth in Exhibit "F" attached hereto and
incorporated herein by this reference.
Notwithstanding the foregoing, Tenant shall have the right,
without the prior written consent of Landlord, to make certain alterations,
additions or improvements (the "Permitted Alterations") which (i) do not affect
the Building systems or structural components of the Building and (ii) which
cost less, on an individual basis, than One Hundred Fifty Thousand Dollars
($150,000), provided that each such Permitted Alteration is otherwise performed
in accordance with the terms of this Section 10. Ownership of any Alterations,
Permitted Alterations or Tenant Improvements paid for by Tenant shall remain in
Tenant throughout the Term of this Lease, and Tenant shall be entitled to the
benefit of any depreciation or other tax benefits arising therefrom, provided
that Landlord shall, upon the Expiration Date or earlier termination of the Term
hereof, become the owner of any Alterations or Tenant Improvements made to the
Premises which, pursuant to the terms of this Lease, are left on the Premises by
Tenant. Tenant shall give Landlord at least ten (10) days' prior written notice
of any Alteration or Permitted Alteration so that Landlord can post a notice of
non-responsibility with respect thereto.
11. Maintenance of Premises:
A. Tenant's Obligations: Tenant shall, at its sole cost, keep and
maintain and repair and said Premises and appurtenances and every part hereof,
including but not limited to, roof membrane, glazing, sidewalks, parking areas,
telephone, plumbing, electrical and HVAC systems, and all the Tenant
Improvements in good and sanitary order, condition, and repair. Tenant shall
enter into a service contract with a licensed air-conditioning and heating
contractor which contract shall provide for maintenance of all air conditioning
and heating equipment at the Premises in accordance with general industry
practices. Tenant shall pay the cost of all air-conditioning heating, and
elevator equipment repairs which are either excluded from such service contract
or any existing equipment warranties. All wall surfaces and floor tile are to be
maintained in an as good a condition
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as when Tenant took possession free of holes, gouges, or defacements, except for
damage resulting from normal wear and tear, casualty or other acts of God,
Landlord, Landlord's agents, employees, contractors or invitees ("Landlord
Parties") In no event, however, shall Tenant's obligation to repair under this
subsection extend to (i) damage and repairs covered under any insurance policy
carried by Landlord in connection with the Building; (ii) damage caused in whole
or in part by the negligence or willful misconduct of Landlord or Landlord's
agents, employees, invitees or licensees, (iii) reasonable wear and tear; (iv)
conditions covered under any warranties of contractors; or (v) damage by fire
and other casualties, or acts of governmental authorities, or acts of God and
the elements.
Tenant shall also be responsible, at its sole cost and expense for the
preventive maintenance of the membrane of the roof, which responsibility shall
be deemed properly discharged if (i) Tenant contracts with a licensed roof
contractor who is reasonably satisfactory to both Tenant and Landlord, at
Tenant's sole cost, to inspect the roof membrane at least every six (6) months,
with the first inspection due the sixth (6th) month after the Commencement Date,
and (ii) Tenant performs, at Tenant's sole cost, all preventive maintenance
recommendations made by such contractor within a reasonable time after such
recommendations are made. Such preventive maintenance might include acts such as
clearing storm gutters and drains, removing debris from the roof membrane,
trimming trees overhanging the roof membrane, applying coating materials to seal
roof penetrations, repairing blisters, and other routine measures. Tenant make
available for Landlord's inspection such preventive maintenance contracts and
paid invoices for the recommended work. Tenant agrees, at its expense, to water,
maintain and replace, when necessary, any shrubbery and landscaping. Nothing
herein shall require either Landlord or Tenant to replace any Tenant
Improvements.
B. Landlord's Obligations: Landlord at its sole cost and expense, and
without reimbursement of all or any such costs from Tenant, shall (i) maintain
in good condition, order, and repair, and replace as and when necessary the
structural portions of the building including: the foundation, exterior walls,
structure and structural members, and roof structure of the Building; and (ii)
repair and damage caused by the acts or omissions of Landlord or Landlord's
Parties. Subject to the obligations of Tenant to provide periodic inspections
and perform maintenance of the membrane of the roof in accordance with the
provisions set forth in Article 11.A above, Landlord shall also replace as and
when necessary, the membrane of the roof. Tenant may give Landlord notice of any
repairs or replacements that are required of Landlord under the terms of this
Lease and Landlord shall proceed forthwith to effect the same with reasonable
diligence. In the event of an emergency Tenant shall be empowered to undertake
immediate repairs of such nature as would be Landlord's responsibility and
notify Landlord promptly after such repairs have been undertaken.
12. Hazard Insurance:
A. Tenant's Use: Tenant shall not use, or permit said Premises, or any
part thereof, to
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be used, for any purpose other than that for which the said Premises are hereby
leased; and no use shall be made or permitted to be made of the said Premises,
nor acts done, which will cause a cancellation of any insurance policy covering
said Building, or any part thereof, nor shall Tenant sell or permit to be kept,
used or sold, in or about said Premises, any article which may be prohibited by
the standard form of fire insurance policies. Tenant shall (subject to the
provisions of Article 17 as to Alterations required which are not a result of
Tenant's specific use), at its sole cost and expense, comply with any and all
reasonable requirements, pertaining to said Premises, of any insurance
organization or company, necessary for the maintenance of reasonable fire and
public liability insurance, covering said Premises and appurtenances.
B. Landlord's Liability Insurance. Landlord shall procure and maintain
during the Term of this Lease a policy of (i) commercial general liability
insurance having a combined single limit for bodily injury and property damage
of not less than One Million Dollars ($1,000,000.00) per occurrence; and (ii) a
general aggregate insurance in an amount of not less than Five Million Dollars
($5,000,000.00). The policy shall provide coverage for blanket contractual
liability (except for the negligence or willful misconduct of the non-insured
party) premises and personal injury coverage. Landlord shall furnish to Tenant
prior to the Commencement Date, and thereafter within thirty (30) days prior to
the expiration of each such policy, a certificate of insurance issued by the
insurance carrier of each policy of insurance carried hereunder.
C. Property Insurance: Landlord agrees to purchase and keep in force
fire, and extended coverage ("All Risk" excluding earthquake) insurance covering
the Premises pursuant to the provisions of Article 10) in amounts not less than
the replacement cost of said Premises as mutually determined by Landlord and
Tenant. Tenant agrees to pay to the Landlord as additional rent, on demand, the
full cost of said insurance as evidenced by insurance billings to the Landlord,
and in the event of damage covered by said insurance which does not result in a
termination of this Lease, the amount of any deductible under such policy,
provided such deductible is not greater than $20,000.00. Payment shall be due to
Landlord within ten (10) days after written invoice to Tenant. It is understood
and agreed that Tenant's obligation under this Article will be prorated to
reflect the commencement and termination dates of this Lease.
Notwithstanding the forgoing, Tenant shall have the right to provide
the hazard insurance for the Premises provided (i) Tenant can obtain such
insurance at a more favorable rate than Landlord; (ii) the form of coverage and
insurer are satisfactory to Landlord and its lender; (iii) Landlord and its
lender are named as additional insured; (iv) such insurance provides that it may
not be subject to cancellation or change except after at least thirty (30) days
written notice to Landlord; and (v) Tenant has delivered to Landlord a
certificate of insurance and additional insured endorsement evidencing such
policy is in effect.
E. Tenant's Insurance: In addition, Tenant agrees to insure its
personal property, the
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Tenant Improvements, any Alterations not owned by Landlord pursuant to the terms
of Article 10 and to obtain worker's compensation and public liability and
property damage insurance for occurrences within the Premises with combined
limits for bodily injury and property damage of not less than $1,000,000.00 per
occurrence and a general aggregate limit of not less than $5,000,000.00. Tenant
shall name Landlord and Landlord's lender as an additional insured, shall
deliver a copy of the policies and renewal certificates to Landlord. All such
policies shall provide for thirty (30) days' prior written notice to Landlord of
any cancellation, termination, or reduction in coverage.
D. Waiver: Landlord and Tenant hereby waive any and all rights each may
have against the other on account of any loss or damage occasioned to the
Landlord or the Tenant as the case may be, or to the Premises or its contents,
and which may arise from any risk covered by their respective insurance policies
(or which would have been covered had such insurance policies been maintained in
accordance with this Lease), as set forth above. The parties shall obtain from
their respective insurance companies a waiver of any right of subrogation which
said insurance company may have against the Landlord or the Tenant, as the case
may be.
E. General: Insurance required hereunder shall be written by companies
licensed to do business in the state in which the Premises are located and have
a General Policyholder's rating of at least A8 (or such higher rating as may be
required by a lender having a lien on the Property) as set forth in the most
current issue of Best's Insurance Guide. All insurance shall expressly provide
that such policies shall not be cancelable or subject to reduction of coverage
or otherwise be subject to modification except after thirty (30) days prior
written notice to any other party named as additional insureds.
13. Taxes: Tenant shall be liable for, and shall pay prior to delinquency,
all taxes and assessments levied against personal property and trade or business
fixtures, and agrees to pay, as additional rental, all real estate taxes and
assessment installments (special or general) or other impositions or charges
which may be levied on the Premises, upon the occupancy of the Premises and
including any substitute or additional charges which may be imposed during, or
applicable to the Lease Term including real estate tax increases due to a sale
or other transfer of the Premises, as they appear on the City and County tax
bills during the Lease Term, and as they become due. It is understood and agreed
that Tenant's obligation under this Article will be prorated to reflect the
Commencement and Expiration Dates. If, at any time during the Lease Term a tax,
excise on rents, business license tax, or any other tax, however described, is
levied or assessed against Landlord, as a substitute or addition in whole or in
part for taxes assessed or imposed on land or Buildings, Tenant shall pay and
discharge his pro rata share of such tax or excise on rents or other tax before
it becomes delinquent. In the event that a tax is placed, levied, or assessed
against Landlord and the taxing authority takes the position that the Tenant
cannot pay and discharge his pro rata share of such tax on behalf of the
Landlord, then at the sole election of the Landlord, the Landlord may increase
the rental charged hereunder by the exact amount of such tax and Tenant shall
pay such increase as
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additional rent hereunder. Landlord hereby grants to Tenant the right to
contest, on behalf and in the name of Landlord, all taxes and assessments which
are imposed upon the Premises; Landlord agrees to cooperate fully with Tenant
and to execute all documents requested by Tenant, in connection with any such
contest. If by virtue of any application or proceeding brought by Landlord
results a reduction in the assessed value of the Building during the Lease Term,
Tenant agrees to reimburse Landlord its reasonable, actual third party out of
pocket costs incurred by Landlord in connection with such application or
proceeding.
Notwithstanding the foregoing, the following shall not constitute real
estate taxes for the purposes of this Lease, and nothing contained herein shall
be deemed to require Tenant to pay any of the following: (i) any state, local,
federal, personal or corporate income tax measured by the income of Landlord;
(ii) any estate or inheritance taxes; (iii) any franchise, succession or
transfer taxes; (iv) interest on taxes or penalties resulting from Landlord's
failure to pay taxes, except to the extent such failure is due to Tenant's
failure to pay such taxes to Landlord when provided under this Lease; (v) any
assessments for public improvements or any taxes initiated by Landlord which are
essentially payments to a governmental agency for the right to make improvements
to the Building or surrounding area, to the extent such assessments are not in
effect as of the Execution Date and have not received the prior written consent
of Tenant; and (vi) any environmental tax, surcharge or other fee affecting the
Premises due to Landlord's activities with respect to Hazardous Materials, as
opposed to general, areawide taxes or surcharges with respect to the remediation
or testing for Hazardous Materials. If any assessments affecting the Premises
are payable in installments and Landlord should prepay such assessments in
advance of the date such installments would become due, Tenant shall be solely
responsible for the portion of such assessment that would have normally come due
as an installment, unless consented to by Tenant in writing.
Notwithstanding anything to the contrary contained in this Lease,
Landlord shall pay, and Tenant shall have no responsibility for, any real
property taxes resulting from any change in ownership, sale, or other transfer
of the Premises or Building during the initial Term of the Lease to the extent
that such amount reflects an assessed valuation of the Premises in excess of one
hundred fifty percent (150%) of the "Commencement Date Valuation." The
"Commencement Date Valuation" shall mean the assessed valuation of the Premises
(as improved with the Building) as determined by the Santa Clara County
Assessor, as of the first date after the Commencement Date that the Santa Clara
County Assessor reassesses the Premises based on the completion of construction
of the Building and Tenant Improvements.
14. Utilities: Tenant shall pay directly to the providing utility all
water, gas, heat, light, power, telephone and other utilities supplied to the
Premises. Except for any damages resulting from the negligence, willful
misconduct, or breach of contract by Landlord, or its agents, or contractors
Landlord shall not be liable for a loss of or injury to property, however
occurring, through or in connection with or incidental to furnishing or failure
to furnish any utilities to the
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Premises and Tenant shall not be entitled to abatement or reduction of any
portion of the Base Monthly Rent so long as any failure to provide and furnish
the utilities to the Premises is due to a cause beyond the Landlord's reasonable
control, and is not the result of the negligence, willful misconduct, or breach
of contract by Landlord, or its agents, or contractors.
In the event of any interruption in utilities or services to be
provided to the Premises, Tenant's rights and remedies shall be as follows: (i)
if such interruption is due to a failure of Tenant to pay the providing utility
when due, Base Rent due hereunder shall not be abated and Landlord shall have no
liability to Tenant whatsoever as a result of such interruption; (ii) if such
interruption is due to the actions of Landlord or Landlord's Parties, the Base
Rent hereunder shall be equitably abated as of the time such interruption
commenced and Landlord shall be liable to Tenant for loss or injury to property
and Tenant's business as a result thereof; (iii) if such interruption is due to
the failure of the providing utility to provide such utility or service to the
Premises and such interruption continues for more than ninety (90) continuous
days, then Tenant shall be entitled to terminate this Lease by delivery of
written notice to Landlord within five (5) days following the expiration of such
ninety (90) day period; and (iv) if such interruption is due to an event of
damage or destruction, the rights of the parties hereunder shall be as described
in Section 28 below.
15. This paragraph intentionally left blank
16. Free From Liens: Except for obligations arising from the construction
of the Building Shell , Tenant Improvements, and parking lot, Tenant shall keep
the Premises free from any liens arising out of any work performed, materials
furnished, or obligations incurred by Tenant. Landlord shall keep the Premises
free from any liens arising out of any work performed, materials furnished, or
obligations incurred in connection with the Building Shell, Tenant Improvements,
or parking lot. In the event Tenant fails to discharge or bond over any such
lien within thirty (30) days after receiving notice of the filing, Landlord
shall be entitled to discharge such lien at Tenant's expense and all resulting
costs incurred by Landlord, including reasonable attorney's fees shall be due
from Tenant as additional rent.
17. Compliance With Governmental Regulations: Tenant shall, at its sole
cost and expense, comply with all of the requirements of all Municipal, State
and Federal authorities now in force, or which may hereafter be in force, which
are imposed as a result of Tenant's particular and specific use of the Premises,
and shall faithfully observe in the use of the Premises all Municipal ordinances
and State and Federal statutes now in force or which may hereafter be in force.
The judgment of any court of competent jurisdiction, or the admission of Tenant
in any action or proceeding against Tenant, whether Landlord be a party thereto
or not, that Tenant has violated any such ordinance or statute in the use of the
Premises, shall be conclusive of that fact as between Landlord and Tenant. In
the event an Alteration is required to the Building Shell by any law, rule,
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ordinance or decision not in effect as of the Commencement Date of this Lease
which is not imposed as a result of Tenant's particular and specific use of the
Premises (whether pursuant to Article 12 or this Article 17), Tenant shall only
be required to pay that portion of the cost equal to the product of such total
cost multiplied by a fraction, the numerator of which is the number of months
remaining in the Lease Term, the denominator of which is the useful life (in
months) of the Alteration.
18. Toxic Waste and Environmental Damage:
A. Landlord's Responsibility: Landlord represents and warrants to
Tenant that, except as disclosed in the attached environmental studies dated
June 18, 1990, July 2, 1990, July 25, 1994, and the Burrowing Owl study from
H.T. Harvey & Associates, to the best of Landlord's knowledge, the Premises and
the Building, as of the Commencement Date, do not contain any chemicals, toxic
or hazardous gaseous, liquid or solid materials or waste, including without
limitation, material or substance having characteristics of ignitability,
corrosivity, reactivity, or extraction procedure toxicity or substances or
materials which are listed on any of the Environmental Protection Agency's list
of hazardous wastes or which are identified in Section 66680 through 66685 of
Title 22 of the California Administrative Code, 42 U.S.C. Sections 9601, et
seq., 49 U.S.C. Sections 1801, et seq., 42 U.S.C. Sections 6901, et seq., or
California Health and Safety Code Section 25117, as the same may be amended from
time to time ("Hazardous Materials"). Landlord shall indemnify, protect, defend
and hold Tenant harmless from and against all liability, cost, damage and
expense (including, without limitation attorneys' fees) arising from either: (i)
the failure of the representation and warranty contained in the immediately
preceding sentence; (ii) the presence of any Hazardous Materials or Burrowing
Owls on or about the Premises on or prior to the Commencement Date; or (iii) the
presence, release, storage or use of Hazardous Materials on the Premises during
the Term by any party other than Tenant, Tenant's agents, employees, contractors
or invitees ("Tenant's Parties").
B. Tenant's Responsibility: Landlord hereby approves Tenant's use on or
about the Premises of Hazardous Materials used by Tenant in connection with
Tenant's business. Tenant represents and warrants that Tenant will (i) adhere to
all reporting and inspection requirements imposed by Federal, State, County or
Municipal laws, ordinances or regulations and will make available for inspection
by Landlord a copy of any such reports or agency inspections, (ii) obtain and
make available for inspection by Landlord copies of all necessary permits
required for the use and handling Hazardous Materials on the Premises, (iii)
enforce Hazardous Materials handling and disposal practices consistent with
industry standards, (iv) surrender the Premises free from any Hazardous
Materials arising from Tenant's bringing, using, permitting, generating,
emitting or disposing of Hazardous Materials, and (v) properly close the
facility with regard to Hazardous Materials including the removal or
decontamination of any process piping, mechanical ducting, storage tanks,
containers, or trenches which have come become contaminated with Hazardous
Materials and obtain a closure certificate from the local administering agency
prior to the Expiration
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Date to the extent required by Law.
C. Tenant's Indemnity Regarding Hazardous Materials: Tenant shall
comply, at its sole cost, with all laws pertaining to, and shall indemnify and
hold Landlord harmless from any claims, liabilities, costs or expenses incurred
or suffered by Landlord arising from such bringing, using, permitting,
generating, emitting or disposing of Hazardous Materials on the Premises by
Tenant or Tenant's Parties. Tenant's indemnification and hold harmless
obligations include, without limitation, (i) claims, liability, costs or
expenses resulting from or based upon administrative, judicial (civil or
criminal) or other action, legal or equitable, brought by any private or public
person under common law or under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and
Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal
law, ordinance or regulation, (ii) claims, liabilities, costs or expenses
pertaining to the identification, monitoring, cleanup, containment, or removal
of Hazardous Materials from soils, riverbeds or aquifers including the provision
of an alternative public drinking water source, and (iii) all reasonable costs
of defending such claims.
D. Actual Release by Tenant: Tenant agrees to notify Landlord upon
learning of any lawsuits which relate to, or orders which relate to the
remedying of, the actual release by Tenant or Tenant's Parties of Hazardous
Materials on or into the soils or groundwater at or under the Premises. Tenant
shall also provide to Landlord all notices required by Section 25359.7(b) of the
Health and Safety Code and all other notices required by law to be given to
Landlord in connection with Hazardous Materials. Without limiting the foregoing,
Tenant shall also deliver to Landlord, within twenty (20) days after receipt
thereof, any written notices from any governmental agency alleging a material
violation of, or material failure to comply with, any federal, state or local
laws, regulations, ordinances or orders, the violation of which of failure to
comply with, poses a foreseeable and material risk of contamination of the
groundwater or injury to humans (other than injury solely to Tenant, its agents
and employees within the Improvements on the Property).
In the event of any release on or into the Premises or into the soil or
groundwater under the Premises of any Hazardous Materials used, treated, stored
or disposed of by Tenant, Tenant agrees to comply, at its sole cost and expense,
with all laws, regulations, ordinances and orders of any federal, state or local
agency relating to the monitoring or remediation of such Hazardous Materials. In
the event of any such release of Hazardous Materials, Tenant agrees to meet and
confer with Landlord and its Lender to attempt to eliminate and mitigate any
financial exposure to such Lender and resultant exposure to Landlord under
California Code of Civil Procedure section 736(b) as a result of such release
and promptly to take reasonable monitoring, cleanup and remedial steps given,
inter alia, the historical uses to which the Property has and continues to be
used, the risks to public health posed by the release, the then available
technology and the costs of remediation, cleanup and monitoring, consistent with
acceptable customary practices for the type and severity of such contamination
and all applicable laws. Nothing in the preceding sentence shall eliminate,
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modify or reduce the obligation of Tenant under Article 18.B of this Lease to
indemnify and hold Landlord harmless from any claims liabilities, costs or
expenses incurred or suffered by Landlord as provided in Article 18.B of this
Lease. Tenant shall provide Landlord prompt written notice of Tenant's
monitoring, cleanup and remedial steps. Tenant shall have the right, at Tenant's
expense and in Tenant's name, to contest or object in good faith to any alleged
violation by Tenant of any applicable law relating to the use of Hazardous
Materials by appropriate legal proceedings which are not prejudicial to
Landlord's rights if (i) Tenant shall have demonstrated to Landlord's
satisfaction that such legal proceedings shall conclusively operate to prevent
enforcement prior to final determination of any such proceedings. In the event
that, by non-performance of any such items, the Premises is subject to imminent
loss or forfeiture, Tenant shall perform any such act required by the relevant
governmental authority.
In the absence of an order of any federal, state or local governmental
or quasi-governmental agency relating to the cleanup, remediation or other
response action required by applicable law, any dispute arising between Landlord
and Tenant concerning Tenant's obligation to Landlord under this Article 18.D
concerning the Level, method, and manner of cleanup, remediation or response
action required in connection with such a release of Hazardous Materials shall
be resolved by mediation and/or arbitration pursuant to the provisions of
Article 45 of this Lease.
E. Environmental Monitoring: Landlord and its agents shall have the
right, at Landlord's sole cost and expense, (unless Tenant is in violation of
this Article 18 in which event such monitoring shall be at Tenant's expense) to
inspect, investigate, sample and/or monitor the Premises, including any air,
soil, water, groundwater or other sampling or any other testing, digging,
drilling or analysis to determine whether Tenant is complying with the terms of
this Article 18. If Landlord discovers that Tenant is not in compliance with the
terms of this Article 18, any such reasonable costs incurred by Landlord,
including attorneys' and consultants' fees shall be due and payable by Tenant to
Landlord within thirty (30) days following Landlord's written demand therefore.
19. Indemnity: As a material part of the consideration to be rendered to
Landlord, Tenant hereby waives all claims against Landlord for damages to goods,
wares and merchandise, and all other personal property in, upon or about said
Premises and for injuries to persons in or about said Premises, from any cause
except to the extent due to the negligence or willful misconduct of Landlord or
Landlord's Parties to the fullest extent permitted by law, and Tenant shall
indemnify and hold Landlord exempt and harmless from any damage or injury to any
person, or to the goods, wares and merchandise and all other personal property
of any person, arising from the use of the Premises, Building, and/or Project by
Tenant, its employees, contractors, agents and invitees or from the failure of
Tenant to keep the Premises in good condition and repair, as herein provided,
except to the extent due to the negligence or willful misconduct of Landlord or
Landlord's Parties. Further, in the event Landlord is made party to any
litigation due to the acts or omission of Tenant, its
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employees, contractors, agents and invitees, Tenant will indemnify and hold
Landlord harmless from any such claim or liability including Landlord's costs
and expenses and reasonable attorney's fees incurred in defending such claims.
Landlord shall defend, indemnify by counsel acceptable to Tenant,
protect Tenant, its officers, employees and agents harmless from and against any
liabilities, loss, cost, damage, injury or expense (including reasonable
attorneys' fees and court costs) arising out of or related to the willful
misconduct or negligence of Landlord or Landlord's Parties.
20. Advertisements and Signs: Tenant will not place or permit to be placed,
in, upon or about the exterior of the Building any signs which are prohibited by
the city or other governing authority. The Tenant will not place, or permit to
be placed, upon the exterior of the Building, any signs, advertisements or
notices without the written consent of the Landlord as to type, size, design,
lettering, coloring and location, and such consent will not be unreasonably
withheld. Any sign so placed on the exterior of the Building shall be so placed
upon the understanding and agreement that Tenant will remove same at the
termination of the tenancy herein created and repair any damage or injury to the
exterior of the Building caused thereby, and if not so removed by Tenant then
Landlord may have same so removed at Tenant's expense.
21. Attorney's Fees: In case a suit or alternative form of dispute
resolution should be brought for the possession of the Premises, for the
recovery of any sum due hereunder, or because of the breach of any other
covenant herein, the losing party shall pay to the prevailing party a reasonable
attorney's fee including the expense of expert witnesses, depositions and court
testimony as part of its costs which shall be deemed to have accrued on the
commencement of such action. In addition, the prevailing party shall be entitled
to recover all costs and expenses including reasonable attorney's fees incurred
by the prevailing party in enforcing any judgment or award against the other
party. The foregoing provision relating to post-judgment costs is intended to be
severable from all other provisions of this Lease.
22. Tenant's Default: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: a) Any failure
by Tenant to pay the rental or to make any other payment required to be made by
Tenant hereunder, where such failure continues for ten (10) days after Tenant's
receipt of written notice thereof by Landlord to Tenant; b) A failure by Tenant
to observe and perform any other provision of this Lease to be observed or
performed by Tenant, where such failure continues for thirty (30) days after
Tenant's receipt of written notice thereof by Landlord; provided, however, that
if the nature of such default is such that the same cannot reasonably be cured
within such thirty (30) day period Tenant shall not be deemed to be in default
if Tenant shall within such period commence such cure and thereafter diligently
prosecute the same to completion; c) The making by Tenant of any general
assignment for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or of a
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petition for reorganization or arrangement under any law relating to bankruptcy
(unless, in the case of a petition filed against Tenant, the same is dismissed
after the filing); the appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within ninety
(90) days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within ninety (90)
days. The notice requirements set forth herein are in lieu of and not in
addition to the notices required by California Code of Civil Procedure Section
1161. Any notice given by Landlord to Tenant pursuant to California Civil Code
1161 with respect to any failure by Tenant to pay rent under this Lease on or
before the date the rent is due shall provide Tenant with a period of no less
than ten (10) days to pay such rent or quit.
A. Remedies: In the event of any such default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all rights
of Tenant hereunder by giving written notice of such intention to terminate. In
the event that Landlord shall elect to so terminate this Lease then Landlord may
recover from Tenant: a) the worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus b) the worth at the time
of award of the amount by which the unpaid rent which would have been earned
after termination until the time of award exceeds the amount of such rental loss
for the same period that Tenant proves could have been reasonably avoided; plus
c) the worth at the time of award of the amount by which the unpaid rent for the
balance of the Lease Term after the time of award exceeds the amount of such
rental loss that Tenant proves could be reasonably avoided; plus d) any other
amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom, and 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 applicable California law.
The term "rent", as used herein, shall be deemed to be and to mean the minimum
monthly installments of Base Monthly Rent and all other sums required to be paid
by Tenant pursuant to the terms of this Lease, all other such sums being deemed
to be additional rent due hereunder. As used in (a) and (b) above, the "worth at
the time of award" is to be computed by allowing interest at the rate of the
discount rate of the Federal Reserve Bank of San Francisco plus five (5%)
percent per annum. As used in (c) above, the "worth at the time of award" is to
be computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one (1%) percent.
B. Right to Re-enter: In the event of any such default by Tenant,
Landlord shall also have the right, with or without terminating this Lease, to
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 and disposed of by Landlord in any
manner permitted by law.
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C. Abandonment: In the event of the vacation or abandonment of the
Premises by Tenant or in the event that Landlord shall elect to re-enter as
provided in Article 22.B above or shall take possession of the Premises pursuant
to legal proceeding or pursuant to any notice provided by law, then if Landlord
does not elect to terminate this Lease as provided in Article 22.A above, then
the provisions of California Civil Code Section 1951.4, (Landlord may continue
the lease in effect after Tenant's breach and abandonment and recover rent as it
becomes due, if Tenant has a right to sublet and assign, subject only to
reasonable limitations) as amended from time to time, shall apply and Landlord
may from time to time, without terminating this Lease, either recover all rental
as it becomes due or relet the Premises or any part thereof for such term or
terms and at such rental or rentals and upon such other terms and conditions as
Landlord in its sole discretion may deem advisable with the right to make
alterations and repairs to the Premises. In the event that Landlord shall elect
to so relet, then rentals received by Landlord from such reletting shall be
applied: first, to the payment of any indebtedness other than Base Monthly Rent
due hereunder from Tenant to Landlord; second, to the payment of any cost of
such reletting; third, to the payment of the cost of any alterations and repairs
to the Premises; fourth, to the payment of Base Monthly Rent due and unpaid
hereunder; and the residue, if any, shall be held by Landlord and applied in
payment of future Base Monthly Rent as the same may become due and payable
hereunder. Landlord shall have no obligation to relet the Premises following a
default if Landlord has other available space within the Building or Project.
Should that portion of such rentals received from such reletting during any
month, which is applied by the payment of rent hereunder, be less than the rent
payable during that month by Tenant hereunder, then Tenant shall pay such
deficiency to Landlord immediately upon demand therefor by Landlord. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
D. No Termination: No re-entry or taking possession of the Premises by
Landlord pursuant to 22.B or 22.C of this Article 22 shall be construed as an
election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Landlord because of any default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such default.
23. Surrender of Lease: The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not automatically effect a
merger of the Lease with Landlord's ownership of the Premises. Instead, at the
option of Landlord, Tenant's surrender may terminate all or any existing
sublease or subtenancies, or may operate as an assignment to Landlord of any or
all such subleases or subtenancies, thereby creating a direct Landlord-Tenant
relationship between Landlord and any subtenants.
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24. Habitual Default: Deleted.
25. Landlord's Default: In the event of Landlord's failure to perform any
of its covenants or agreements under this Lease, Tenant shall give Landlord
written notice of such failure and shall give Landlord thirty (30) days to cure
such failure; provided, however, that if the nature of such default is such that
the same cannot reasonably be cured within such thirty (30) day period Landlord
shall not be deemed to be in default if Landlord shall within such period
commence such cure and thereafter diligently prosecute the same to completion.
In addition, upon any such failure by Landlord, Tenant shall give notice by
registered or certified mail or national overnight courier service to any person
or entity with a security interest in the Premises ("Mortgagee") that has
provided Tenant with written notice (including such Mortgagee's address) of its
interest in the Premises, and shall provide such Mortgagee a period of thirty
(30) days beyond the cure period provided Landlord hereunder to cure such
failure. Tenant shall not make any prepayment of rent more than one (1) month in
advance without the prior written consent of such Mortgagee. Tenant waives any
right under California Civil Code Section 1950.7 or any other present or future
law to the collection of any payment or deposit from such Mortgagee or any
purchaser at a foreclosure sale of such Mortgagee's interest unless such
Mortgagee or such purchaser shall have actually received (or have credited to
it) and not refunded the applicable payment or deposit.
26. Notices: All notices, demands, requests, or consents required to be
given under this Lease shall be sent in writing by U.S. certified mail, return
receipt requested, national overnight courier service or by personal delivery
addressed to the party to be notified at the address for such party specified in
Article 1 of this Lease, or to such other place as the party to be notified may
from time to time designate by at least five (5) days prior notice to the
notifying party.
27. Entry by Landlord: Upon 24 hours prior notice, Tenant shall permit
Landlord and his agents to enter into and upon said Premises at all reasonable
times subject to any security regulations of Tenant for the purposes of (i)
inspecting the same, (ii) maintaining the Premises, (iii) making repairs,
alterations or additions to the Premises, (iv) erecting additional building(s)
and improvements on the land where the Premises are situated, or on adjacent
land owned by Landlord, or (v) performing any obligations of the Landlord under
the Lease including remediation of hazardous materials if determined to be the
responsibility of Landlord, without any abatement or reduction of rent or
without any liability to Tenant for any loss of occupation or quiet enjoyment of
the Premises thereby occasioned. Tenant shall permit Landlord and Landlord's
Parties, at any time within one hundred eighty (180) days prior to the
Expiration Date, unless Tenant has exercised its option to extend the term
pursuant to Section 37.A (or at any time during the Lease if Tenant is in
default hereunder beyond the applicable cure period), to place upon the Premises
"For Lease" signs and exhibit the Premises to real estate brokers and
prospective tenants at reasonable hours. Landlord agrees that Landlord and
Landlord's Parties shall conduct all of their activities under this
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Section 27 in a manner which minimizes the interruption to Tenant or Tenant's
activities on the Premises.
28. Destruction of Premises: PREMISES
A. Destruction by an Insured Casualty: In the event of a partial
destruction of the Premises by a casualty for which Landlord has received
insurance proceeds sufficient to repair the damage or destruction during the
Lease Term from any cause, Landlord shall forthwith repair the same to the
extent of such proceeds, provided such repairs can be made within twelve (12)
months from the date of destruction as reasonably determined by the architect
responsible for the reconstruction such determination to be made within sixty
(60) days of the date of destruction, and such partial destruction shall in no
way annul or void this Lease, except that Tenant shall be entitled to a
proportionate reduction of Base Monthly Rent while such repairs are being made,
such proportionate reduction to be based upon the extent to which the making of
such repairs shall interfere with the business carried on by Tenant in the
Premises. For purposes of this Article "partial destruction" shall mean
destruction of no greater than one-third (1/3) of the replacement cost of the
Premises, including the replacement cost of the Tenant Improvements paid for by
Landlord. In the event the Premises (i) are more than partially destroyed, or
(ii) the repairs cannot be made within twelve (12) months from the date of
destruction as reasonably determined by the architect responsible for the
reconstruction such determination to be made within sixty (60) days of the date
of destruction. Landlord shall not be required to restore Alterations or replace
Tenant's fixtures or personal property. In respect to any partial destruction
which Landlord is obligated to repair or may elect to repair under the terms of
this Article, the provision of Section 1932, Subdivision 2, and of Section 1933,
Subdivision 4, of the Civil Code of the State of California and any other
similarly enacted statute are waived by Tenant and the provisions of this
Article 28 shall govern in the case of such destruction. Any disputes between
Landlord and Tenant with respect to the degree of damage or destruction of the
Premises or the time necessary to rebuild shall be resolved by arbitration
pursuant to Section 47 of this Lease.
B. Destruction by an Uninsured Casualty: In the event of a total or
partial destruction of the Premises by a casualty for which Landlord has not
received insurance proceeds sufficient to repair the damage or destruction
during the Lease Term and which would cost in excess of Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00) to repair, Landlord shall have the
option to terminate this Lease, unless Tenant agrees to contribute the amount of
such uninsured loss beyond the initial $250,000 to repair, which amount shall be
the sole obligation of Landlord. Further if the uninsured damage can not be
repaired within twelve (12) months from the date of destruction as reasonably
determined by the architect responsible for the reconstruction such
determination to be made within sixty (60) days of the date of destruction,
either Landlord or Tenant shall have the option to terminate this lease.
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C. Damage or Destruction at End of Term: If the Building or Premises is
damaged or destroyed during the last twenty-four (24) months of the Term of the
Lease, and the Premises or Building cannot be fully repaired or restored by
Landlord within ninety (90) days after the date of the damage or destruction,
either Landlord or Tenant may terminate this Lease upon notice to the other,
provided, that Tenant may prevent Landlord's termination of this Lease under
this Section 28.C by exercising Tenant's right to extend the Lease Term as
described in Section 37.
29. Assignment or Sublease:
A. Consent by Landlord: In the event Tenant desires to assign this
Lease or any interest therein including, without limitation, a pledge, mortgage
or other hypothecation, or sublet the Premises or any part thereof, Tenant shall
deliver to Landlord executed counterparts of any such agreement and of all
ancillary agreements with the proposed assignee or subtenant, such assignee or
subtenant's most recent financial statements, and any additional information as
reasonably required by Landlord to determine whether it will consent to the
proposed assignment or sublease. The notice shall give the name and current
address of the proposed assignee/subtenant, proposed use of the Premises, rental
rate and current financial statement; and upon request to Tenant, Landlord shall
be given additional information as reasonably required by Landlord to determine
whether it will consent to the proposed assignment or sublease. Landlord shall
then have a period of ten (10) days following receipt of the foregoing
agreement, statements and additional information within which to notify Tenant
in writing that Landlord elects (i) to permit Tenant to assign or sublet such
space to the named assignee/subtenant on the terms and conditions set forth in
the notice, or (ii) to refuse consent, which consent shall not be unreasonably
withheld or delayed. If Landlord should fail to notify Tenant in writing of such
election within said ten (10) day period, Landlord shall be deemed to have
elected option (i) above. Landlord's consent (which must be in writing and in
form reasonably satisfactory to Landlord) to the proposed assignment or sublease
shall not be unreasonably withheld or delayed. Tenant shall not advertise or
publicize the availability of the Premises without prior notice to Landlord.
B. Assignment or Subletting Consideration: If Tenant shall assign,
sublease or otherwise transfer all or any portion of the Premises to a party
other than Tenant Affiliate (as defined in 29.E below), Landlord and Tenant
shall evenly divide any rent or other consideration paid to Tenant in connection
with such assignment, sublease or other transfer which is in excess of the base
rent due under this Lease, after first deducting out for the Tenant's account
the cost of (i) broker's commissions paid by Tenant with regard to the transfer;
(ii) legal fees; (iii) the cost of improvements made to the Premises at Tenant's
expense to the extent such improvements increase the rent paid under the
sublease over that which would have been paid without such improvements; (iv)
any tenant improvements made by Tenant at Tenant's expense for the purpose of
transfer; (v) all rent paid by Tenant to Landlord while the Premises were vacant
prior to such transfer; and (vi) any other expenses incurred by Tenant in
effectuating the transfer. The terms of this section shall survive the
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expiration or earlier termination of the Lease. The above provision relating to
the allocation of bonus rent are independently negotiated terms of the Lease,
constitute a material inducement for the Landlord to enter into the Lease, and
are agreed as between the parties to be commercially reasonable. No assignment
or subletting by Tenant shall relieve Tenant of any obligation under this Lease.
Any assignment or subletting which conflicts with the provisions hereof shall be
void.
C. No Release: Any assignment or sublease shall be made only if and
shall not be effective until the assignee or subtenant shall execute,
acknowledge and deliver to Landlord an agreement, in form and substance
satisfactory to Landlord, whereby the assignee or subtenant shall assume all of
the obligations of this Lease on the part of Tenant to be performed or observed
and shall be subject to all of the covenants, agreements, terms, provisions and
conditions contained in this Lease, except as expressly provided for therein.
Notwithstanding any such sublease or assignment and the acceptance of rent by
Landlord from any subtenant or assignee, Tenant and any guarantor shall and will
remain fully liable for the payment of the rent and additional rent due
hereunder, and to become due hereunder, for the performance of all of the
covenants, agreements, terms, provisions and conditions contained in this Lease
on the part of Tenant to be performed and for all acts and omissions of any
licensee, subtenant, assignee or any other person claiming under or through any
subtenant or assignee that shall be in violation of any of the terms and
conditions of this Lease, and any such violation shall be deemed to be a
violation by Tenant. Tenant shall further indemnify, defend and hold Landlord
harmless from and against any and all losses, liabilities, damages, costs and
expenses (including reasonable attorney fees) resulting from any claims that may
be made against Landlord by the proposed assignee or subtenant or by any real
estate brokers or other persons claiming a commission or similar compensation in
connection with the proposed assignment or sublease.
D. Effect of Default: In the event of Tenant's default, Tenant hereby
assigns all rents due from any assignment or subletting to Landlord as security
for performance of its obligations under this Lease and Landlord may collect
such rents, except that Tenant may collect such rents unless a default occurs as
described in Article 22 and 24 above. The termination of this Lease due to
Tenant's default shall not automatically terminate any assignment or sublease
then in existence; at the election of Landlord, such assignment or sublease
shall survive the termination of this Lease and, upon such election, the
assignee or subtenant shall attorn to Landlord and Landlord shall undertake the
obligations of the Tenant under the sublease or assignment; provided the
Landlord shall not be liable for prepaid rent, or security deposits not received
by Landlord or other defaults of the Tenant to the subtenant or assignee, or any
acts or omissions of Tenant, its agents, employees, contractors or invitees.
Notwithstanding anything to the contrary in this Lease, no event of default
shall be deemed to have occurred by virtue of any act or omission of any
subtenant or assignee of Tenant, unless Landlord has delivered to Tenant written
notice of such act or omission, and has given Tenant the period(s) of time
specified in Article 22 to cure such default.
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E. Excluded Transfers: Tenant may assign this Lease or sublet any
portion of the Premises without Landlord's consent to any of the following (i)
any corporation which controls, is controlled by or under common control with
Tenant; (ii) any corporation resulting from the merger or consolidation of
Tenant if (a) the successor to Tenant has a net worth, computed in accordance
with generally accepted accounting principles, at least equal to the greater of
(1) the net worth of Tenant immediately prior to such transfer or (2) the net
worth of Tenant herein named on the date of this Lease, and (b) proof
satisfactory to Landlord of such net worth shall have been delivered to Landlord
at least ten (10) days prior to the effective date of any such transaction;
(iii) any person or entity which acquires all of the assets of Tenant as a going
concern of the business that is being conducted on the Premises (collectively,
"Tenant Affiliate"), provided that such assignee assumes in full the obligations
of Tenant under the Lease.
30. Condemnation: If any part of the Premises shall be taken for any public
or quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and only a part thereof remains which is susceptible
of occupation hereunder, this Lease shall as to the part so taken, terminate as
of the day before title shall vest in the condemnor or purchaser ("Vesting
Date"), and the Base Monthly Rent payable hereunder shall be adjusted so that
the Tenant shall be required to pay for the remainder of the Lease Term only
such portion of such Base Monthly Rent as the value of the part remaining after
such taking bears to the value of the entire Premises prior to such taking; but
in such event Landlord and Tenant shall have the option to terminate this Lease
as of the Vesting Date. If all of the Premises, or such part thereof be taken so
that the remaining portion is unusable for Tenant's business therein, as
reasonably determined by Tenant, Tenant may terminate this Lease as of Vesting
Date. Landlord shall be entitled to any award paid for if the Premises is wholly
or partially condemned, except that Tenant shall have the right to receive from
either the condemning authority or Landlord, as applicable, all proceeds and
other compensation received in connection with condemnation to the extent paid
for (i) any Tenant Improvements or Alterations made by or at the expense of
Tenant; (ii) Tenant's loss of goodwill; (iii) Tenant's relocation costs; and
(iv) Tenant's loss of business and business interruption. Tenant hereby waives
the provisions of California Code of Civil Procedures Section 1265.130 and any
other similarly enacted statue are waived by Tenant and the provisions of this
Article 30 shall govern in the case of such destruction.
31. Effects of Conveyance: The term "Landlord" as used in this Lease, means
only the owner for the time being of the Premises so that, in the event of any
sale or other conveyance of the Premises, or in the event of a master lease of
the Premises, the Landlord shall be and hereby is entirely freed and relieved of
all covenants and obligations of the "Landlord" hereunder, but only so long as
the new Landlord expressly assumes in writing all the obligations of Landlord
under this Lease, and delivers to Tenant a written agreement by which the new
Landlord assumes such obligations, and it shall be deemed and construed, without
further agreement between the parties
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and the purchaser at any such sale, or the master tenant of the Premises, that
the purchaser or master tenant of the Premises has assumed and agreed to carry
out any and all covenants and obligations of the Landlord hereunder arising
after the effective date of the transfer to the new Landlord. Such transferor
shall transfer and deliver Tenant's security deposit to the purchaser at any
such sale or the master tenant of the Premises, and thereupon the such
transferor shall be discharged from any further liability in reference thereto.
32. Subordination: Simultaneously with the execution of this Lease,
Landlord shall deliver to Tenant a non-disturbance agreement from Landlord's
existing lender or lenders, if any, in form and substance acceptable to Tenant,
by which such lender or lenders agree not to disturb Tenant's possession of the
Premises so long as Tenant is not in material default of the terms of this Lease
beyond any applicable cure period at the time such lender or lenders foreclose
on the Premises. This Lease shall be subordinate to any future ground lease,
deed of trust, or other hypothecation for security only so long as Landlord
delivers to Tenant prior to the effective of such subordination a written
non-disturbance agreement, in form and substance acceptable to Tenant, by which
such Lender or other party agrees not to disturb Tenant's possession of the
Premises if Tenant is not in material default of Tenant's obligations under this
Lease beyond any applicable cure period at the time such party becomes the fee
owner of the Premises. Subject to the above, in the event Landlord notifies
Tenant in writing, this Lease shall be subordinate to any ground Lease, deed of
trust, or other hypothecation for security now or hereafter placed upon the real
property of which the Premises are a part and to any and all advances made on
the security thereof and to renewals, modifications, replacements and extensions
thereof. Tenant agrees to promptly execute and deliver any documents which may
be required to effectuate such subordination.
33. Waiver: The waiver by Landlord or Tenant of any breach of any term,
covenant or condition, herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent. No payment by Tenant or receipt by Landlord of a lesser amount than any
installment of rent due shall be deemed to be other than payment on account of
the amount due. No delay or omission in the exercise of any right or remedy by
Landlord or Tenant shall impair such right or remedy or be construed as a waiver
thereof by the non-defaulting party. No act or conduct of Landlord, including,
without limitation, the acceptance of keys to the Premises, shall constitute
acceptance of the surrender of the Premises by Tenant before the Expiration Date
(only written notice from Landlord to Tenant of acceptance shall constitute such
acceptance of surrender of the Premises). Landlord's consent to or approval of
any act by Tenant which require Landlord's consent or approvals shall not be
deemed to waive or render unnecessary Landlord's consent to or approval of any
subsequent act by Tenant.
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34. Holding Over: Any holding over after the termination or Expiration
Date, shall be construed to be a tenancy from month to month, terminable on
thirty (30) days written notice from either party, and Tenant shall pay Base
Monthly Rent to Landlord at a rate equal to one hundred twenty five percent
(125%) of the Base Monthly Rent due in the month preceding the termination or
Expiration Date for the first two (2) months of any hold over and one hundred
fifty percent (150%) of the Base Monthly Rent thereafter plus all other amounts
payable by Tenant under this Lease. Any holding over shall otherwise be on the
terms and conditions herein specified, except those provisions relating to the
Lease Term and any options to extend or renew, which provisions shall be of no
further force and effect following the expiration of the applicable exercise
period.
35. Successors and Assigns: The covenants and conditions herein contained
shall, subject to the provisions of Article 29, apply to and bind the heirs,
successors, executors, administrators and assigns of all the parties hereto; and
all of the parties hereto shall be jointly and severally liable hereunder.
36. Estoppel Certificates: Tenant shall at any time during the Lease Term,
within ten (10) days following receipt of written notice from Landlord, respond
to any request by Landlord for a statement in writing certifying (i) that this
Lease is unmodified and in full force and effect (or, if modified, stating the
nature of such modification); (ii) the date to which the rent and other charges
are paid in advance, if any; (iii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder or specifying
such defaults if they are claimed; and (iv) such other information as Landlord
may reasonably request. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Premises. Tenant also agrees to
provide the most current three (3) years of audited financial statements within
five (5) days of a request by Landlord for Landlord's use in financing the
Premises with commercial lenders.
37. Option to Extend the Lease Term:
A. Grant and Exercise of Option: Landlord hereby grants to Tenant, upon
and subject to the terms and conditions set forth in this Article 37 four (4)
options (the "Options") to extend the Lease Term for an additional term (the
"Option Term"), each Option Term shall be for a period of sixty (60) months.
Each such Option shall be exercised, if at all, by written notice to Landlord no
earlier than the date that is twenty four (24) months prior to the Expiration
Date but no later than the date that is twelve (12) months prior to the
Expiration Date. Thirteen (13) months prior to the Expiration Date Landlord
shall provide Tenant with a written notice of the fact that the Option will
expire in thirty (30) days. If Tenant exercises the Option, each of the terms,
covenants and conditions of this Lease except this Article shall apply during
the Option Term as though the expiration date of the Option Term was the date
originally set forth herein as the Expiration Date, provided that the Base
Monthly Rent to be paid by Tenant during the Option Term shall be the greater of
(i) the Base
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Monthly Rent payable on the Commencement Date, or (ii) ninety five percent (95%)
of the Fair Market Rental, as hereinafter defined, for the Premises for the
Option Term. Anything contained herein to the contrary notwithstanding, if
Tenant is in monetary or material non-monetary default beyond any applicable
cure period under any of the terms, covenants or conditions of this Lease either
at the time Tenant exercises the Option or at any time thereafter prior to the
commencement date of the Option Term, Landlord shall have, in addition to all of
Landlord's other rights and remedies provided in this Lease, the right to
terminate the Option upon notice to Tenant, in which event the expiration date
of this Lease shall be and remain the Expiration Date or the expiration of the
then relevant Option Term. As used herein, the term "Fair Market Rental" for the
Premises shall mean the rental and all other monetary payments including any
escalations and adjustments thereto (including without limitation Consumer Price
Indexing) then being obtained for leases of space comparable in age and quality
to the Premises in the locality of the Building that Landlord could obtain
during the Option Term from a third party desiring to lease the Premises for the
Option Term based upon the current use and other potential uses of the Premises.
The appraisers shall be instructed that the foregoing five percent (5%) discount
is intended to reduce comparable rents which include (i) brokerage commissions,
(ii) tenant improvement allowances, and (iii) vacancy costs, to account for the
fact that Landlord will not suffer such costs in the event Tenant exercises its
Option. The Fair Market Rental shall specifically exclude any additional rental
attributable to the value of the Tenant Improvements or Alterations paid for by
Tenant.
B. Determination of Fair Market Rental: If Tenant exercises the Option,
Landlord shall send to Tenant a notice setting forth the Fair Market Rental for
the Premises for the Option Term within thirty (30) days of Tenant's exercise of
the Option. If Tenant disputes Landlord's determination of the Fair Market
Rental for the Option Term, Tenant shall, within thirty (30) days after the date
of Landlord's notice setting forth the Fair Market Rental for the Option Term,
send to Landlord a notice stating that Tenant either (i) elects to terminate its
exercise of the Option, in which event the Option shall lapse and this Lease
shall terminate on the Expiration Date, or (ii) disagrees with Landlord's
determination of Fair Market Rental for the Option Term and elects to resolve
the disagreement as provided in Article 37.C below. If Tenant does not send to
Landlord a notice as provided in the previous sentence, Landlord's determination
of the Fair Market Rental shall be the basis for determining the Base Monthly
Rent to be paid by Tenant hereunder during the Option Term. If Tenant elects to
resolve the disagreement as provided in Article 37.C below and such procedures
shall not have been concluded prior to the commencement date of the Option Term,
Tenant shall pay as Base Monthly Rent to Landlord the rent due hereunder during
the month preceding the Expiration Date. If the amount of Fair Market Rental as
finally determined pursuant to Article 37.C below is greater than Landlord's
determination, Tenant shall pay to Landlord the difference between the amount
paid by Tenant and the he rent due hereunder during the month preceding the
Expiration Date within thirty (30) days after the determination. If the Fair
Market Rental as finally determined in Article 37.C below is less than
Landlord's determination, the difference between the amount paid by Tenant and
the Fair Market Rental as so determined in
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Article 37.C below shall be credited against the next installments of rent due
from Tenant to Landlord hereunder.
C. Resolution of a Disagreement over the Fair Market Rental: Any
disagreement regarding the Fair Market Rental shall be resolved as follows:
1. Within thirty (30) days after Tenant's response to
Landlord's notice to Tenant of the Fair Market Rental, Landlord and Tenant shall
meet no less than two (2) times, at a mutually agreeable time and place, to
attempt to resolve any such disagreement.
2. If within the thirty (30) day period referred to in (i)
above, Landlord and Tenant can not reach agreement as to the Fair Market Rental,
they shall each select one appraiser to determine the Fair Market Rental. Each
such appraiser shall arrive at a determination of the Fair Market Rental and
submit their conclusions to Landlord and Tenant within thirty (30) days after
the expiration of the thirty (30) day consultation period described in (i)
above.
3. If only one appraisal is submitted within the requisite
time period, it shall be deemed to be the Fair Market Rental. If both appraisals
are submitted within such time period, and if the two appraisals so submitted
differ by less than ten percent (10%) of the higher of the two, the average of
the two shall be the Fair Market Rental. If the two appraisals differ by more
than ten percent (10%) of the higher of the two, then the two appraisers shall
immediately select a third appraiser who shall within thirty (30) days after his
or her selection shall select one of the two (2) existing determinations of Fair
Market Rental as correct. This third appraiser's conclusion shall be the Fair
Market Rental.
4. All appraisers specified pursuant to this Article shall
be members of the American Institute of Real Estate Appraisers with not less
than five (5) years experience appraising office and industrial properties in
the Santa Clara Valley. Each party shall pay the cost of the appraiser selected
by such party and one-half of the cost of the third appraiser.
38. Tenant's Right of First Refusal:
A. Grant. Landlord hereby grants to Tenant a right of first refusal
during the Term of this Lease and any extension thereof to purchase the Premises
("Right of First Refusal to Purchase").
B. Covenants of Landlord. Landlord hereby covenants and agrees with
Tenant that if, during the Term of the Lease, Landlord shall receive or solicit
a bona fide offer from a prospective buyer to purchase either the Premises,
Landlord shall furnish Tenant with a copy of the proposed contract and notify
Tenant of the intention of Landlord to accept the same (the "Notice of Intention
to Sell"). Such Notice of Intention to Sell shall contain all material business
terms on which
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Landlord intends to sell the Premises. Landlord shall not sell the space in
question to anyone other than Tenant without first providing Tenant the
opportunity to buy the space in question upon the same terms and conditions
described in the Notice of Intention to Sell.
C. Exercise of Tenant's Right of First Refusal to Purchase. Provided
that Tenant is not in default under the terms and conditions of this Lease
beyond any applicable grace periods, Tenant may exercise Tenant's Right of First
Refusal to Purchase by providing Landlord with written notice thereof within
fifteen (15) days of Tenant's receipt of the Notice of Landlord's Intention to
Sell. If Tenant does not exercise its Right of First Offer to Purchase within
said fifteen (15) day period, then Landlord shall be relieved of Landlord's
obligation to offer the space identified in the Notice of Intention to Sell to
Tenant, except as provided for in Section 38.E below.
D. Terms for Right of First Refusal to Purchase. In the event that
Tenant exercises Tenant's Right of First Refusal to Purchase, Tenant's purchase
shall be on all of the same terms and conditions as are offered to a bona-fide
third-party purchaser of the space identified in the Notice of Intention to
Sell.
E. Continuing Right. In no event shall Tenant's failure to exercise its
Right of First Refusal to Purchase be deemed a waiver or relinquishment by
Tenant of Tenant's Right of First Refusal to Purchase should (i) the space
identified in the Notice of Intention to Sell be offered for sale to a potential
purchaser other than the purchaser specified in the Notice of Landlord's
Intention to Sell during the Term of this Lease or any extension thereof, or
(ii) the space identified in the Notice of Landlord's Intention to Sell be
offered for sale to any purchaser on terms different than those specified in the
Notice of Landlord's Intention to Sell during the Term of this Lease or any
extension thereof.
F. Exclusive Nature of Option. Landlord represents and warrants to
Tenant that no party other than Tenant has any option, right of first offer or
right of first refusal to purchase the Premises. Landlord hereby covenants to
Tenant that Landlord shall not grant an option to purchase, right of first offer
or right of first refusal to purchase the Premises during the Term of this Lease
or any extension thereof
G. Successors and Assigns. Except as provided in this paragraph 38.G,
this Right of First Refusal to Purchase shall be binding on the successors and
assigns of Landlord and Tenant. This Right of First Refusal shall not
specifically not apply to (but shall survive the same and be binding upon any
purchaser or successor of such sale or foreclosure) (i) any transfer of
ownership of the Premises by a judicial foreclosure sale or sale pursuant to a
power of sale provision in any relevant deed of trust or mortgage lien
,transfers of the Building, or (ii) a "Sobrato Family Transfer". A Sobrato
Family Transfer shall be a transfer of the Premises to (i) John A. Sobrato
and/or John M. Sobrato (individually and collectively "Sobrato"), (ii) any
immediate family member of Sobrato, (iii)
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any trust established, in whole or in part, for the benefit of Sobrato and/or
any immediate family member of Sobrato, (iv) any partnership in which Sobrato or
any immediate family member, either directly or indirectly (e.g., through a
partnership or corporate entity or a trust) retains a general partner interest,
and/or (v) any corporation under the control, either directly or indirectly, by
Sobrato or any immediate family member of Sobrato.
39. Options: Except with respect to any Tenant Affiliate, all Options
provided Tenant in this Lease are personal and granted to original Tenant and
are not exercisable by any third party should Tenant assign or sublet (except
for any assignment permitted by the third to last paragraph of Article 29) all
or a portion of its rights under this Lease, unless Landlord consents to permit
exercise of any option by any assignee or subtenant, in Landlord's sole
discretion. In the event that Tenant hereunder has any multiple options to
extend this Lease, a later option to extend the Lease cannot be exercised unless
the prior option to extend has been so exercised.
40. Quiet Enjoyment: Landlord covenants with Tenant for itself and
Landlord's successors that so long as no Event of Default on the part of Tenant
has occurred hereunder, (i) Tenant shall and may peaceably and quietly have,
hold and enjoy the Premises for the Term of this Lease, and any renewals or
extensions thereof; and (ii) neither Landlord, nor any party claiming under or
through Landlord, shall disturb the use or the occupancy of the Premises by
Tenant.
41. Brokers: Landlord and Tenant each warrants and represents for the
benefit of the other that it has had no dealings with any real estate broker or
agent in connection with the negotiation of this Lease, except for CB Madison,
and that it knows of no other real estate broker or agent who is or might be
entitled to a real estate brokerage commission or finder's fee in connection
with this Lease. Each party shall indemnify and hold harmless the other from and
against any and all liabilities or expenses arising out of claims made by any
broker (other than CB Madison) or individual for commissions or fees resulting
from the actions of the indemnifying party in connection with this Lease.
42. Landlord's Liability: If Tenant should recover a money judgment against
Landlord arising in connection with this Lease, the judgment shall be satisfied
only out of Landlord's interest in the Premises including the improvements and
real property and neither Landlord or any of its partners, officers, directors,
agents, trustees, shareholders or employees shall be liable personally for any
deficiency. And furthermore, Tenant expressly waives any and all rights to
proceed against the individual partners or the officers, directors or
shareholders of any corporate partner, except to the extent of their interest in
said limited partnership.
Notwithstanding the foregoing, the following shall apply with respect
to claims by Tenant directly resulting from any and all defaults by Landlord
with respect to any of its obligations under
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(i) Section 18 with respect to Hazardous Materials, or (ii) Section 28 with
respect to destruction to the Premises (collectively, the "Special Defaults").
In the event of any Special Defaults, Tenant shall be entitled to seek recourse
against any assets of Landlord, and the recourse of Tenant against Landlord for
any Special Default shall not be limited to Landlord's interest in the Premises
and the rents and other forms of income originating therefrom.
43. Authority of Parties: Landlord and Tenant represents and warrants to
each other that it is duly formed and in good standing and is duly authorized to
execute and deliver this Lease on behalf of said corporation or partnership, as
relevant, in accordance with a duly adopted resolution of the Board of Directors
of said corporation or in accordance with the by-laws of said corporation, and
that this Lease is binding upon said corporation or partnership, as relevant in
accordance with its terms. At either party's request, the other party shall
provide the requesting party with corporate resolutions or other proof in a form
acceptable to the requesting party, authorizing the execution of the Lease.
44. Transportation Demand Management Programs: Should a government agency
or municipality require Landlord to institute TDM (Transportation Demand
Management) facilities and/or program, Tenant hereby agrees that the cost of TDM
imposed facilities required on the Premises, including but not limited to
employee showers, lockers, cafeteria, or lunchroom facilities, shall be included
as Tenant Improvement Costs (unless such costs qualify for amortization pursuant
to Article 17) and any ongoing costs or expenses associated with a TDM program,
such as an on-site TDM coordinator, which are required for the Premises and not
provided by Tenant shall be provided by Landlord with such costs being included
as additional rent and reimbursed to Landlord by Tenant.
45. DISPUTE RESOLUTION: Except for the failure by Tenant to timely pay the
Base Monthly Rent, any controversy, dispute, or claim of whatever nature arising
out of, in connection with, or in relation to the interpretation, performance or
breach of this agreement, including any claim based on contract, tort, or
statute, shall be resolved at the request of any party to this agreement through
a two-step dispute resolution process administered by JAMS or another judicial
and mediation service mutually acceptable to the parties involving first
mediation, followed, if necessary, by final and binding arbitration administered
by and in accordance with the then existing rules and practice of the judicial
and mediation service selected, and judgment upon any award rendered by the
arbitrator(s) may be entered by any State or Federal Court having jurisdiction
thereof.
46. Miscellaneous Provisions:
A. Rent: All monetary sums due from Tenant to Landlord under this
Lease, including, without limitation those referred to as "additional rent",
shall be deemed to be rent.
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B. Performance by Landlord: If Tenant fails to perform any obligation
required under this Lease or by law or governmental regulation and Tenant is not
disputing such law or governmental regulation in accordance with the terms of
this Lease, Landlord, in its sole discretion may without notice and without
releasing Tenant from its obligations hereunder or waiving any rights or
remedies, perform such obligation, in which event Tenant shall pay Landlord as
additional rent all sums reasonably paid by Landlord in connection with such
substitute performance including interest as provided in Article 48.C below
within thirty (30) days following Landlord's written notice for such payment.
C. Interest: All rent due hereunder (but not late charges thereon), if
not paid when due, shall bear interest at the reference rate of Union Bank plus
two percent (2%) accruing from the date due until the date paid to Landlord.
D. Rights and Remedies: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law and are in
addition to all other rights and remedies in law and in equity.
E. Survival of Indemnities: All indemnification, defense, and hold
harmless obligations of Landlord and Tenant under this Lease shall survive the
expiration or sooner termination of the Lease for a period of four (4) years.
F. Severability: If any term or provision of this Lease is held
unenforceable or invalid by a court of competent jurisdiction, the remainder of
the Lease shall not be invalidated thereby but shall be enforceable in
accordance with its terms, omitting the invalid or unenforceable term.
G. Choice of Law: This Lease shall be governed by and construed in
accordance with California law. Venue shall be Santa Clara County.
H. Time: Time is of the essence hereunder.
I. Entire Agreement: This instrument contains all of the agreements and
conditions made between the parties hereto and may not be modified orally or in
any other manner other than by an agreement in writing signed by all of the
parties hereto or their respective successors in interest.
J. Representations: Tenant acknowledges that neither Landlord nor any
of its employees or agents have made any agreements, representations, warranties
or promises with respect to the demised Premises or with respect to present or
future rents, expenses, operations, tenancies or any other matter. Except as
herein expressly set forth herein, Tenant relied on no
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statement of Landlord or its employees or agents for that purpose.
K. Headings: The headings or titles to the Articles of this Lease are
not a part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof.
L. Exhibits: All exhibits referred to are attached to this Lease and
incorporated by reference.
M. Approvals: With respect to any consent of Landlord which Tenant may
request pursuant to the terms of this Lease, such consent shall not be
unreasonably withheld or delayed by Landlord. If Landlord fails to grant or
withhold such requested consent within five (5) business days after request by
Tenant, such consent shall be deemed granted.
N. Recordation. Within twenty (20) days following the execution of this
Lease, both Landlord and Tenant shall execute, acknowledge and cause to be
recorded in the Official Records of County of Santa Clara, California a short
form memorandum of this Lease in form reasonably acceptable to Landlord and
Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and
year first above written.
Landlord: Sobrato Development Cos. #871 Tenant: Komag Incorporated
a California Limited Partnership a Delaware Corporation
By: _____________________________ By: ____________________________
Its: _____________________________ Its: ___________________________
Page 34
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EXHIBIT "A" - Premises
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EXHIBIT "B" - Formula for Determination of Base Monthly Rent
After receipt of the final pricing for the Building Shell, Landlord shall
determine Total Project Costs (as defined below) based on competitive bids.
During this period Landlord shall also solicit permanent loan quotes from
institutional lenders to determine the best available financing. Based on these
inputs Landlord shall then apply the following formula to determine the Base
Monthly Rent due under this Lease.
Base Monthly Rent shall be equal to one hundred twenty percent of (i) the
product of the (i) Total Project Costs as defined below and (ii) the best
non-participating ten (10) year fixed rate permanent loan constant available
prior to the start of construction of the Option Building. The determination of
which loan comprises the best available financing shall be made in good faith by
both Landlord and Tenant. The parties acknowledge that it is their current
intention that such amortization schedule shall be for a minimum period of
twenty (20) years and Landlord shall use its best efforts to obtain such
financing.
Total Project Costs shall be equal to the sum of (i) the value of the land based
on a land value of Nine and 90/100 Dollars ($9.90) per square foot, (ii) the
Building Shell Allowance, (iii) fees for building permits, licenses, inspection,
utility connections or extensions, and any other fees imposed by governmental
entities, (iv) fees of engineers, architects, consultants and others providing
professional services in connection with the construction of the Building, (v)
construction loan interest paid by Landlord including interest on Landlord's
equity with respect to the construction of the Building, calculated at the
reference rate charged by Union Bank plus one percent (1%), (vi) loan fees
payable for the construction and/or permanent loan for the Building (vii) real
property taxes and assessments levied against the Property during the period the
Building is constructed, (viii) liability and builders risk insurance premiums
paid by Landlord with respect to the construction of the Building, and (ix) real
estate leasing commissions or fees payable by Landlord with respect to the
Building.
For example, if Total Project Costs were $14,000,000, and Landlord was able to
obtain a 7.75% loan with a 20 year amortization, the Base Monthly Rent would be
120% X ($14,000,000 X .008209), or $137,911.
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EXHIBIT "C" - Shell Plans and Specifications
(sheet references to be attached)
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EXHIBIT "D" - Building Shell Definition
The Building Shell includes the following items:
1. Site Work
a. Asphalt concrete paving, wheel stops, and striping.
b. Concrete sidewalks, curbs, gutter, driveway, approaches, and planter
walls.
c. Landscaping, landscape lighting, waterscape, and irrigation.
d. Underground utilities - water, gas, fire line, sanitary line
(including pump station if required), site storm drainage system, transformers
and primary and secondary electrical lines stubbed into building. The routing of
the under slab utilities shall be done as part of the Building Shell
construction if the location of the lines are determined prior to the pouring of
the floor slab.
e. Service area of approximately 12,500 SF including the mezzanine. The
Building Shell shall include the pad of such area and all structures related to
the tank farm shall be considered Tenant Improvements.
f. Offsite improvement work required by the City of San Jose to obtain
building permits.
2. Building Structure
Includes all elements necessary to provide for a completely waterproof Building
Shell including but not limited to:
a. Concrete foundation and slab on grade including all reinforcing steel
and wire mesh including four loading docks.
b. Structural steel columns and beams.
c. Steel joist and girder second floor system with concrete and metal
deck (if multi-story building).
d. Wood panelized glulam roof structure or steel frame with metal deck
and rigid insulation with fiberglass built-up roofing including roof drainage
plumbing.
e. Glass, glazing and perimeter roll up or hollow metal doors including
normal passage hardware.
f. Concrete tilt up or plaster on metal stud framed exterior walls.
g. Exterior painting.
h. All city permits, fees, and taxes, connection charges related to the
Building Shell construction.
i. Main fire sprinkler grid.
j. All architectural and engineering costs related to the design of the
Building Shell.
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EXHIBIT "E" - Tenant Improvement Plans and Specifications
(sheet references to be attached)
Page 39
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EXHIBIT "F" - Tenant's Trade Fixtures
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EXHIBIT "G" - Fee Agreement
Tenant shall pay to Sobrato Construction Corporation, an affiliate of Landlord,
a fee of One Million Five Hundred Thousand and No/100 Dollars ($1,500,000.00) as
compensation to Landlord for its services as general contractor for the Building
Shell and Tenant Improvements ("Construction Fee").
The Construction Fee shall be paid in monthly installments of One Hundred Fifty
Thousand and No/100 Dollars ($150,000.00). In no event, however, shall the final
installment of the Construction Fee be due from Tenant until Substantial
Completion of the Premises has occurred.
The Construction Fee includes the general conditions associated with the
construction of the Building Shell and Tenant Improvements. It is agreed by the
parties that the general conditions included in the Construction Fee consist of
the following costs: (i) all project management and scheduling personnel costs,
(ii) field office expenses including set-up and rent, janitorial, security and
furniture, (iii) general office expenses including supplies, computers, postage,
telephone, reproduction and copying, travel expenses, subsistence, drinking
water, etc., (iv) management vehicles and fuel, (v) general safety costs
including a safety engineer, flagman/traffic control, barricades and signs,
protective equipment and first aid supplies, and fire protection, (vi) temporary
services including temporary electrical (light strings, tempower boxes, cords,
trailer office connection, light stands and transformer), utility
costs/generator, water (installation, connection and utility), heating, ladders
and stairs, and chemical toilets, (vii) field services such as janitorial,
security, interim clean-up, debris boxes, project sign, (viii) worker/employee
parking and drinking water, (ix) insurance (liability and building risk), (x)
City Gross Receipts Tax, (xi) gas, oil, diesel fuel and lubrication for
equipment owned by general contractor, and (xii) site conditions including
temporary roads, staging and storage areas, site dewatering, winter protection
and maintenance, site fencing, tree protection, dust control, tool shed,
walkietalkies, etc.
Page 41
Lease between
Sobrato Development Companies #871 and Komag Incorporated
Section Page #
- ------- ------
Parties........................................................................1
Premises.......................................................................1
Use............................................................................1
Term and Rental................................................................2
Adjustment for Variance in Building Square Footage......................2
Security Deposit...............................................................2
Late Charges...................................................................2
Construction and Possession....................................................3
Building Shell Construction.............................................3
Tenant Improvement Plans................................................3
Preliminary Cost Estimates..............................................3
Final Pricing...........................................................4
Change Orders...........................................................5
Building Shell Costs....................................................5
Tenant Improvement Costs................................................5
Construction............................................................6
Documents...............................................................6
Landlord Overhead & Profit..............................................6
Insurance/Indemnity.....................................................7
Punchlist Items.........................................................7
Other Work by Tenant....................................................7
Parking Lot.............................................................7
Tank Farm...............................................................8
Acceptance of Possession and Covenants to Surrender............................8
Uses Prohibited................................................................8
Alterations and Additions......................................................8
Maintenance of Premises........................................................9
Tenant's Obligations....................................................9
Landlord's Obligations.................................................10
Hazard Insurance..............................................................10
Tenant's Use...........................................................10
Landlord's Liability Insurance.........................................11
<PAGE>
Property Insurance.....................................................11
Tenant's Insurance.....................................................11
Waiver.................................................................12
Taxes.........................................................................12
Utilities.....................................................................13
Free From Liens...............................................................14
Compliance With Governmental Regulations......................................14
Toxic Waste and Environmental Damage..........................................15
Landlord's Responsibility..............................................15
Tenant's Responsibility................................................15
Tenant's Indemnity Regarding Hazardous Materials.......................16
Actual Release by Tenant...............................................16
Environmental Monitoring...............................................17
Indemnity.....................................................................17
Advertisements and Signs......................................................18
Attorney's Fees...............................................................18
Tenant's Default..............................................................18
Remedies...............................................................19
Right to Re-enter......................................................19
Abandonment............................................................20
No Termination.........................................................20
Surrender of Lease............................................................20
Habitual Default..............................................................21
Landlord's Default............................................................21
Notices.......................................................................21
Entry by Landlord.............................................................21
Destruction of Premises.......................................................22
Destruction by an Insured Casualty.....................................22
Destruction by an Uninsured Casualty...................................22
Damage or Destruction at End of Term...................................23
Assignment or Sublease........................................................23
Consent by Landlord....................................................23
Assignment or Subletting Consideration.................................23
No Release.............................................................24
Effect of Default......................................................24
Excluded Transfers.....................................................25
Condemnation..................................................................25
Effects of Conveyance.........................................................25
Subordination.................................................................26
Waiver........................................................................26
Holding Over..................................................................27
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Successors and Assigns........................................................27
Estoppel Certificates.........................................................27
Option to Extend the Lease Term...............................................27
Grant and Exercise of Option...........................................27
Determination of Fair Market Rental....................................28
Resolution of a Disagreement over the Fair Market Rental...............29
Tenant's Right of First Refusal...............................................29
Grant..................................................................29
Covenants of Landlord..................................................29
Exercise of Tenant's Right of First Refusal to Purchase................30
Terms for Right of First Refusal to Purchase...........................30
Continuing Right.......................................................30
Exclusive Nature of Option.............................................30
Successors and Assigns.................................................30
Options.......................................................................31
Quiet Enjoyment...............................................................31
Brokers.......................................................................31
Landlord's Liability.........................................................31
Authority of Parties..........................................................32
Transportation Demand Management programs.....................................32
Dispute Resolution............................................................32
Miscellaneous Provisions......................................................32
Rent...................................................................32
Performance by Landlord................................................33
Interest...............................................................33
Rights and Remedies....................................................33
Survival of Indemnities................................................33
Severability...........................................................33
Choice of Law..........................................................33
Time...................................................................33
Entire Agreement.......................................................33
Representations........................................................33
Headings...............................................................34
Exhibits...............................................................34
Approvals..............................................................34
Recordation............................................................34
EXHIBIT "A" - Premises........................................................35
EXHIBIT "B" - Formula for Determination of Base Monthly Rent..................36
EXHIBIT "C" - Shell Plans and Specifications..................................37
EXHIBIT "D" - Building Shell Definition.......................................38
EXHIBIT "E" - Tenant Improvement Plans and Specifications.....................39
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EXHIBIT "F" - Tenant's Trade Fixtures.........................................40
EXHIBIT "G" - Fee Agreement...................................................41
Page iv
<PAGE>
1. Parties: THIS LEASE, is entered into on this 24th day of May, 1996
("Execution Date"), between Sobrato Development Companies #871, a California
Limited Partnership, whose address is 10600 North De Anza Boulevard, Suite 200,
Cupertino, CA 95014 and Komag Incorporated, a Delaware corporation, whose
address is 275 S. Hillview Drive, Milpitas, CA 95035, hereinafter called
respectively Landlord and Tenant.
2.Premises: Landlord hereby leases to Tenant, and Tenant hires from
Landlord those certain Premises with the appurtenances, situated in the City of
San Jose, County of Santa Clara, State of California, and more particularly
described as follows, to-wit:
A 5.60 acre parcel ("Parcel") on the north side of Automation Parkway, San Jose,
California, including all appurtenances and buildings now or during the Term
located thereon. Pursuant to the terms of this Lease, Landlord is obligated to
construct a single story building of approximately 81,778 rentable square feet
("Building"), a parking lot consisting of a minimum of 303 parking spaces
expandable to approximately 341 spaces described as Building 11 on Exhibit "A"
attached hereto. Landlord represents and warrants that Landlord is the fee
simple owner of the Premises. Prior to the Commencement Date, Landlord shall use
its best efforts to record a parcel map to subdivide the Parcel into two
parcels, one for the Premises and the balance for a second building to be
constructed for Tenant pursuant to that certain lease between the parties of
even date herewith.
3. Use: Tenant shall use the Premises only for the following purposes and
shall not change the use of the Premises without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed: Office,
research, development, testing, manufacturing, ancillary warehouse, and other
legal uses. Landlord makes no representation or warranty that any specific use
of the Premises desired by Tenant is permitted pursuant to any Laws. Landlord
represents and warrants to Tenant that, as of the Commencement Date, (i) the
Premises are in compliance with all municipal, county, state and federal
statutes, laws, ordinances, including zoning ordinances, and regulations
governing and relating to the Building Shell; (ii) there shall exist no patent
or, to the best of Landlord's knowledge, latent defect in the Premises; and
(iii) the Premises shall be in good condition and repair and fit for Tenant's
particular purposes. Landlord represents and warrants to Tenant that, as of the
Commencement Date, the land is zoned industrial ("I").
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4. Term and Rental: The term ("Lease Term") shall be for one hundred twenty
(120) months, commencing on the date on which the Building Shell and Tenant
Improvements are Substantially Complete as defined in Article 7.H below
("Commencement Date"), and ending one hundred twenty (120) months thereafter,
("Expiration Date"). In addition to all other sums payable by Tenant under this
Lease, Tenant shall pay as base monthly rent ("Base Monthly Rent") below for the
Premises in an amount determined pursuant to Exhibit "B" attached hereto. Base
Monthly Rent shall increase at the end of the forty-second and eighty fourth
month of the Lease Term by the product of the Base Monthly Rent payable for the
preceding month and one and 147/1000 (1.147). The parties agree to enter into an
amendment to this Lease setting forth the exact amount of the Base Monthly Rent
payable during the Lease Term within fourteen (14) days following determination
by Landlord.
Base Monthly Rent shall be due on or before the first day of each calendar month
during Lease Term. All sums payable by Tenant under this Lease shall be paid in
lawful money of the United States of America, without offset or deduction, and
shall be paid to Landlord at the address specified in Article 1 of this Lease or
at such place or places as may be designated from time to time by Landlord. Base
Monthly Rent for any period less than a calendar month shall be a pro rata
portion of the monthly installment.
A. Adjustment for Variance in Building Square Footage: In the event the
square footage of the Building is other than 81,778 determined by measurement
after completion of construction, within thirty (30) days after the Commencement
Date, Landlord and Tenant shall execute an amendment to the Lease setting forth
the actual rentable square feet of the Building, which calculation shall be
consistent with the BOMA standard for Industrial Buildings (i.e. outside of
outside wall to outside of outside wall without deduction).
5. Security Deposit: None required.
6. Late Charges: Tenant hereby acknowledges that late payment by Tenant to
Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
administrative, processing, accounting charges, and late charges, which may be
imposed on Landlord by the terms of any contract, revolving credit, mortgage or
trust deed covering the Premises. Accordingly, if any installment of Base
Monthly Rent or any other sum due from Tenant shall not be received by Landlord
or Landlord's designee within ten (10) days after Tenant's receipt of written
notice from Landlord that such amount is delinquent, Tenant shall pay to
Landlord a late charge equal to five (5%) percent of such overdue amount which
late charge shall be due and payable with the payment then delinquent. The
parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Landlord will incur by
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reason of late payment by Tenant. Acceptance of such late charge by Landlord
shall in no event constitute a waiver of Tenant's default with respect to such
overdue amount, nor prevent Landlord from exercising any of the other rights and
remedies granted hereunder.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
7. CONSTRUCTION AND POSSESSION:
A. Building Shell Construction. Landlord shall cause the shell of the
Building ("Building Shell") to be constructed by independent contractors to be
employed by and under the supervision of Landlord, in accordance with the
building shell plans prepared by Comprehensive Architectural Services ("Tenant's
Architect") and approved by Landlord and Tenant and guideline specifications,
which are attached hereto as Exhibit "C" and are incorporated herein by this
reference ("Shell Plans and Specifications"). Landlord shall construct the
Building Shell in accordance with all applicable municipal, local, state and
federal laws, statutes, rules, regulations and ordinances. Landlord shall pay
for all costs and expenses associated with the construction of the Building
Shell up to a maximum amount of Three Million One Hundred Thousand and No/100
Dollars ($3,100,000.00) ("Building Shell Allowance"). The Building Shell shall
include all items customarily included within the definition of a speculative
"building shell," including without limitation, those items set forth in the
Building Shell Definition, attached hereto as Exhibit "D", and incorporated
herein by this reference. Landlord shall provide Tenant half-size vellum
as-built drawings of the Building Shell within thirty (30) days following
completion of construction thereof.
B. Tenant Improvement Plans. Tenant, at Tenant's sole cost and expense,
has also hired Tenant's Architect, to prepare plans and outline specifications
("Tenant Improvement Plans and Specifications") which are attached hereto as
Exhibit "E" with respect to the construction of improvements to the interior
premises ("Tenant Improvements"). The Tenant Improvements shall consist of all
those items not included within in the scope of the Building Shell definition
pursuant to Article 7.A above and Exhibit "D". The Tenant Improvement Plans and
Specifications shall be prepared in sufficient detail to allow Landlord to
construct the Tenant Improvements. Landlord shall construct the Tenant
Improvements in accordance with all Tenant Improvement Plans and Specifications.
Tenant shall pay for all costs and expenses associated with the construction of
the Tenant Improvements.
C. Preliminary Cost Estimates.
i. Building Shell. Within fourteen (14) days after Tenant's
delivery of the Shell
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Plans and Specifications to Landlord, Landlord shall deliver to Tenant a
preliminary cost estimate of the cost to construct the Building Shell. The
preliminary cost estimate shall contain sufficient detail for Tenant to
understand the cost element of each portion of the proposed Building Shell.
ii. Tenant Improvements. Within fourteen (14) days after
Tenant's delivery of the Tenant Improvement Plans and Specifications to
Landlord, Landlord shall also deliver to Tenant a preliminary cost estimate of
the cost to construct the Tenant Improvements. The preliminary cost estimate
shall contain sufficient detail for Tenant to understand the cost element of
each portion of the proposed Tenant Improvements.
D. Final Pricing.
i. Building Shell. Within ten (10) days after Tenant's
approval of the preliminary cost estimate for the Building Shell, Landlord shall
submit to Tenant competitive bids from a minimum of three (3) subcontractors for
each aspect of the work which is to be performed. Landlord must utilize the low
bid in each case, unless Tenant approves Landlord's use of another
subcontractor, and the cost of the Building Shell shall be based upon
construction expenses equal to the sum of the bid amounts as approved by Tenant.
Upon Tenant's written approval of the contract bids, Landlord and Tenant shall
each be deemed to have given their approval of the final Shell Plans and
Specifications on which the cost estimate was made, and Landlord shall proceed
with the construction of the Building Shell in accordance with the terms of
Article 7.H below. If Tenant does not specifically approve or disapprove the
bids within seven (7) days, Tenant shall be deemed to have approved the bids.
ii. Tenant Improvements. Within ten (10) days after Tenant's
approval of the preliminary cost estimate for the Tenant Improvements, Landlord
shall submit to Tenant competitive bids from a minimum of three (3)
subcontractors for each aspect of the work which is to be performed. Landlord
must utilize the low bid in each case, unless Tenant approves Landlord's use of
another subcontractor, and the cost of the Tenant Improvements shall be based
upon construction expenses equal to the sum of the bid amounts as approved by
Tenant. Upon Tenant's written approval of the contract bids, Landlord and Tenant
shall each be deemed to have given their approval of the final Tenant
Improvement Plans and Specifications on which the cost estimate was made, and
Landlord shall proceed with the construction of the Tenant Improvements in
accordance with the terms of Article 7.H below. If Tenant does not specifically
approve or disapprove the bids within seven (7) days, Tenant shall be deemed to
have approved the bids.
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E. Change Orders. Tenant shall have the right to order changes in the
manner and type of construction of the Building Shell or the Tenant
Improvements. Any change orders which are submitted by Tenant after the date
which is ten (10) days after the issuance by the City of San Jose of a building
permit for the construction of the Building Shell, which cause Landlord's
construction schedule to be delayed shall cause the Commencement Date to occur
one (1) day in advance of the date the Building Shell is Substantially Complete,
as defined in Article 7.H, for each day of delay. Upon request and prior to
Tenant's submitting any binding change order, Landlord shall promptly provide
Tenant with written statements of the cost to implement and the time delay and
increased construction costs associated with any proposed change order, which
statements shall be binding on Landlord. If no time delay or increased
construction cost amount is noted on the written statement, the parties agree
that there shall be no adjustment to the construction cost or the Commencement
Date associated with such change order. If ordered by Tenant, Landlord shall
implement such change order, and the cost of constructing the Tenant
Improvements shall be increased in accordance with the cost statement previously
delivered by Landlord to Tenant for any such change order.
F. Building Shell Costs. Landlord shall pay all costs associated with
the Building Shell. The costs of the Building Shell shall consist of only the
following costs to the extent actually incurred by Landlord in connection with
the construction of the Building Shell: costs of construction, costs of permits,
and the general contractor overhead described in Article 7.J below. During the
course of construction of the Building Shell, Landlord may deliver to Tenant not
more than once each calendar month a written request for payment which shall
include and be accompanied by: (i) Landlord's certified statements setting forth
the amount requested certifying the percentage of completion of each item for
which reimbursement is requested and certifying that the progress payment
requested is due to a subcontractor of Landlord pursuant to a contract between
Landlord and Landlord's subcontractor. Tenant shall pay to Landlord, within
fifteen (15) days after Tenant's receipt of the above items, any costs incurred
by Landlord in excess of the Building Shell Allowance in connection with the
Building Shell in accordance with the Shell Plans and Specifications minus the
retainage set forth below. Tenant shall be entitled to retain ten percent (10%)
of the amount invoiced by Landlord until the Building Shell is "Substantially
Complete" (defined in Article 7.H below). Tenant shall pay the retained balance
owing to Landlord within fifteen (15) days following the date that the Building
Shell is Substantially Complete. All costs for Building Shell shall be fully
documented to and verified by Tenant. The amounts charged to Tenant shall be
limited as provided in Article 7.D.i above.
G. Tenant Improvement Costs. The costs of the Tenant Improvements shall
consist of only the following costs to the extent actually incurred by Landlord
in connection with the construction of the Tenant Improvements: costs of
construction, costs of permits, and the Landlord overhead described in Article
7.J below. During the course of construction of the Tenant Improvements,
Landlord may deliver to Tenant not more than once each calendar month a written
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request for payment which shall include and be accompanied by: (i) Landlord's
certified statements setting forth the amount requested certifying the
percentage of completion of each item for which reimbursement is requested and
certifying that the progress payment requested is due to a subcontractor of
Landlord pursuant to a contract between Landlord and Landlord's subcontractor.
Tenant shall pay to Landlord, within fifteen (15) days after Tenant's receipt of
the above items, the costs incurred by Landlord in connection with the Tenant
Improvements installed in the Building in accordance with the Tenant Improvement
Plans and Specifications minus the retainage set forth below. Tenant shall be
entitled to retain ten percent (10%) of the amount invoiced by Landlord until
the Tenant Improvements are "Substantially Complete" (defined in Article 7.H
below). Tenant shall pay the retained balance owing to Landlord within fifteen
(15) days following the date that the Tenant Improvements are Substantially
Complete. All costs for Tenant Improvements shall be fully documented to and
verified by Tenant. The amounts charged to Tenant shall be limited as provided
in Article 7.D.ii above.
H. Construction. Landlord shall use its best efforts to obtain a
building permit from the City of San Jose as soon as possible after Tenant's
approval of the Shell Plans and Specifications. The Building Shell and Tenant
Improvements shall be deemed substantially complete ("Substantially Complete")
when the Building Shell and Tenant Improvements have been substantially
completed in accordance with the Shell Plans and Specifications and Tenant
Improvement Plans and Specifications, as evidenced by the issuance of a
certificate of occupancy or its equivalent by the appropriate governmental
authority for the Building Shell and Tenant Improvements, and the issuance of a
certificate by Tenant's Architect certifying that the Building Shell and Tenant
Improvements have been completed in accordance with the plans.
I. Documents. Landlord shall at all times keep one (1) complete set of
all contract documents (i.e., approved drawings, shop and setting drawings,
specifications, samples, addenda and change orders) current and in good order on
the job site. Such documents shall be available for review by representatives of
Tenant, its consultants and any public officials at any time. Record drawings
marked with all changes made during the job shall be kept on the job site by
Landlord. Upon acceptance of the work, the record document print set shall be
immediately forwarded to Tenant's Architect for changes to the originals. The
changes shall be noted on the originals and one (1) mylar reproducible set of
the originals shall be forwarded to Tenant. Tenant shall be provided with two
(2) copies of these specifications.
J. Landlord Overhead & Profit. As compensation to Landlord for its
services as general contractor for the Building Shell and Tenant Improvements,
Landlord shall be entitled to a fee as specified in the Fee Agreement attached
as Exhibit "G". Except as provided therein, Landlord
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shall not be entitled to any other fee or payment from Tenant in connection with
Landlord's services as general contractor.
K. Insurance/Indemnity. Landlord shall indemnify, protect, defend and
hold Tenant harmless from and against all liability, cost, expense, or damage
(including, without limitation, attorneys fees) arising from: (i) the
construction of the Building Shell or the Tenant Improvements; or (ii) any
construction defects, or (iii) any failure to properly construct the Building
Shell or Tenant Improvements in accordance with the approved Shell Plans and
Specifications or Tenant Improvement Plans and Specifications. Tenant's review
and approval of any plans, specifications, or any other documents shall not
relieve Landlord from Landlord's obligations under the foregoing
indemnification. Landlord shall procure (as a cost of the Building Shell) and
keep in effect from the execution date of this Lease until the termination of
this Lease a "Broad Form" liability insurance policy in the amount of Three
Million Dollars ($3,000,000.00), insuring all of Landlord's activities with
respect to the Building and Premises, including Landlord's indemnity obligations
under this Article 7.K. In addition, Landlord shall procure (as a cost of the
Building Shell) builder's risk insurance, insuring the Building Shell and Tenant
Improvements for their full replacement cost while the Building and Tenant
Improvements are under construction, and until the date that the fire insurance
policy described in Article 12 of the Lease is in full force and effect.
L. Punchlist Items. After the Building Shell and Tenant Improvements
are Substantially Complete, Landlord shall immediately correct any construction
defect or other "punchlist" item which Tenant brings to Landlord's attention.
All such work shall be performed in a manner designed to cause the least
possible interruption to Tenant and Tenant's activities on the Premises.
M. Other Work by Tenant. All work not within the scope of work normally
constructed by the construction trades employed on the Building and not
described in the Shell Plans and Specifications or Tenant Improvement Plans and
Specifications, such as furniture, telephone equipment, telephone wiring and
office equipment work, shall be furnished and installed by Tenant.
O. Parking Lot. Landlord, at Landlord's sole cost and expense, shall
construct a parking lot, with a minimum of approximately 303 parking spaces, on
the Premises in the location set forth in Exhibit "C". Landlord shall cause the
parking lot to comply in all respects with all applicable governmental rules,
regulations, and orders, and shall create a sufficient number of parking spaces
to comply with all governmental requirements in connection with the Building.
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8. Acceptance of Possession and Covenants to Surrender: Tenant agrees
on Expiration Date, or on the sooner termination of this Lease, to surrender the
Premises to Landlord in good condition and repair, reasonable wear and tear,
actions of Landlord or Landlord's Parties, or damage due to casualty excepted.
"Good Condition" shall mean that the interior walls of all office and warehouse
areas, the floors of all office and warehouse areas, all suspended ceilings and
carpeting will be cleaned and free of any major defacements. Tenant on or before
the Expiration Date or sooner termination of this Lease, shall remove all its
personal property and trade fixtures from the Premises, and all property and
fixtures not so removed shall be deemed to be abandoned by Tenant. Tenant shall
ascertain from Landlord at the time Tenant desires to make any Alteration
(including Permitted Alterations), whether Landlord desires to have such
Alteration removed at the Expiration Date or to cause Tenant to surrender the
Alteration to Landlord. If Landlord so notifies Tenant in writing within fifteen
(15) days after Tenant's notice to Landlord that Tenant intends to alter the
Building, then Tenant shall remove such Alteration, as Landlord may require in
such written notice, and shall repair and restore said Building or such part or
parts thereof before the Expiration Date at Tenant's sole cost and expense. If
Landlord has not provided Tenant with such written notice within said fifteen
(15) day period, then Tenant shall have no obligation to remove such Alteration
from the Premises upon the Expiration Date or earlier termination of this Lease.
Notwithstanding the terms of this Article 8, Tenant shall not have an obligation
to remove any Tenant Improvements installed prior to the first anniversary of
the Commencement Date from the Premises at any time.
9. Uses Prohibited: Tenant shall not commit, or suffer to be committed,
any waste upon the said Premises, or any nuisance, or allow any sale by auction
upon the Premises, or allow the Premises to be used for any unlawful purpose, or
place any loads upon the floor, walls, or ceiling which endanger the structure,
or use any machinery or apparatus which will in any manner vibrate or shake the
Premises. Except for materials which may be stored in the enclosed tank farm
area outside the Building, no materials, supplies, equipment, finished products
or semi-finished products, raw materials or articles of any nature or any waste
materials, refuse, scrap or debris shall be stored upon or permitted to remain
on any portion of the Premises outside of the Building proper without Landlord's
prior approval, which approval shall not be unreasonably withheld.
10. Alterations and Additions: Except for those improvements installed
prior to the first anniversary of the Commencement Date and Permitted
Alterations (as defined below), Tenant shall not make, or suffer to be made, any
alteration or addition to the said Premises ("Alterations"), or any part
thereof, without (i) the written consent of Landlord first had and
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obtained, which consent shall not be unreasonably withheld or delayed, and (ii)
delivering to Landlord the proposed architectural and structural plans, if any,
for all such Alterations. After having obtained Landlord's consent, Tenant
agrees that it shall not proceed to make such Alterations until Tenant has
obtained all required governmental approvals and permits. Tenant further agrees
to provide Landlord (i) written notice of the anticipated start date and actual
start date of the work, and (ii) a complete set of half-size (15" X 21") vellum
as-built drawings. All Alterations shall be constructed in compliance with
applicable buildings codes and laws. Alterations which are not to be deemed as
trade fixtures shall include heating, lighting, electrical systems, air
conditioning, partitioning, carpeting, or any other installation which has
become affixed to the Premises. All Alterations shall be maintained, replaced or
repaired by Tenant at Tenant's sole cost and expense, except as provided in
Section 11 below. Notwithstanding the above, Tenant shall have the right to
remove any trade fixtures, furniture, or process equipment paid for by Tenant
from the Premises at the expiration of the Lease, which items shall include,
without limitation, the items set forth in Exhibit "F" attached hereto and
incorporated herein by this reference.
Notwithstanding the foregoing, Tenant shall have the right, without the
prior written consent of Landlord, to make certain alterations, additions or
improvements (the "Permitted Alterations") which (i) do not affect the Building
systems or structural components of the Building and (ii) which cost less, on an
individual basis, than One Hundred Fifty Thousand Dollars ($150,000), provided
that each such Permitted Alteration is otherwise performed in accordance with
the terms of this Section 10. Ownership of any Alterations, Permitted
Alterations or Tenant Improvements paid for by Tenant shall remain in Tenant
throughout the Term of this Lease, and Tenant shall be entitled to the benefit
of any depreciation or other tax benefits arising therefrom, provided that
Landlord shall, upon the Expiration Date or earlier termination of the Term
hereof, become the owner of any Alterations or Tenant Improvements made to the
Premises which, pursuant to the terms of this Lease, are left on the Premises by
Tenant. Tenant shall give Landlord at least ten (10) days' prior written notice
of any Alteration or Permitted Alteration so that Landlord can post a notice of
non-responsibility with respect thereto.
11. Maintenance of Premises:
A. Tenant's Obligations: Tenant shall, at its sole cost, keep and
maintain and repair and said Premises and appurtenances and every part hereof,
including but not limited to, roof membrane, glazing, sidewalks, parking areas,
telephone, plumbing, electrical and HVAC systems, and all the Tenant
Improvements in good and sanitary order, condition, and repair. Tenant shall
enter into a service contract with a licensed air-conditioning and heating
contractor which contract shall provide for maintenance of all air conditioning
and heating equipment at the Premises in accordance with general industry
practices. Tenant shall pay the cost of all air-conditioning heating, and
elevator equipment repairs which are either excluded from such service contract
or any existing equipment warranties. All wall surfaces and floor tile are to be
maintained in an as good a condition
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as when Tenant took possession free of holes, gouges, or defacements, except for
damage resulting from normal wear and tear, casualty or other acts of God,
Landlord, Landlord's agents, employees, contractors or invitees ("Landlord
Parties") In no event, however, shall Tenant's obligation to repair under this
subsection extend to (i) damage and repairs covered under any insurance policy
carried by Landlord in connection with the Building; (ii) damage caused in whole
or in part by the negligence or willful misconduct of Landlord or Landlord's
agents, employees, invitees or licensees, (iii) reasonable wear and tear; (iv)
conditions covered under any warranties of contractors; or (v) damage by fire
and other casualties, or acts of governmental authorities, or acts of God and
the elements.
Tenant shall also be responsible, at its sole cost and expense for the
preventive maintenance of the membrane of the roof, which responsibility shall
be deemed properly discharged if (i) Tenant contracts with a licensed roof
contractor who is reasonably satisfactory to both Tenant and Landlord, at
Tenant's sole cost, to inspect the roof membrane at least every six (6) months,
with the first inspection due the sixth (6th) month after the Commencement Date,
and (ii) Tenant performs, at Tenant's sole cost, all preventive maintenance
recommendations made by such contractor within a reasonable time after such
recommendations are made. Such preventive maintenance might include acts such as
clearing storm gutters and drains, removing debris from the roof membrane,
trimming trees overhanging the roof membrane, applying coating materials to seal
roof penetrations, repairing blisters, and other routine measures. Tenant make
available for Landlord's inspection such preventive maintenance contracts and
paid invoices for the recommended work. Tenant agrees, at its expense, to water,
maintain and replace, when necessary, any shrubbery and landscaping. Nothing
herein shall require either Landlord or Tenant to replace any Tenant
Improvements.
B. Landlord's Obligations: Landlord at its sole cost and expense, and
without reimbursement of all or any such costs from Tenant, shall (i) maintain
in good condition, order, and repair, and replace as and when necessary the
structural portions of the building including: the foundation, exterior walls,
structure and structural members, and roof structure of the Building; and (ii)
repair and damage caused by the acts or omissions of Landlord or Landlord's
Parties. Subject to the obligations of Tenant to provide periodic inspections
and perform maintenance of the membrane of the roof in accordance with the
provisions set forth in Article 11.A above, Landlord shall also replace as and
when necessary, the membrane of the roof. Tenant may give Landlord notice of any
repairs or replacements that are required of Landlord under the terms of this
Lease and Landlord shall proceed forthwith to effect the same with reasonable
diligence. In the event of an emergency Tenant shall be empowered to undertake
immediate repairs of such nature as would be Landlord's responsibility and
notify Landlord promptly after such repairs have been undertaken.
12. Hazard Insurance:
A. Tenant's Use: Tenant shall not use, or permit said Premises, or any
part thereof, to
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be used, for any purpose other than that for which the said Premises are hereby
leased; and no use shall be made or permitted to be made of the said Premises,
nor acts done, which will cause a cancellation of any insurance policy covering
said Building, or any part thereof, nor shall Tenant sell or permit to be kept,
used or sold, in or about said Premises, any article which may be prohibited by
the standard form of fire insurance policies. Tenant shall (subject to the
provisions of Article 17 as to Alterations required which are not a result of
Tenant's specific use), at its sole cost and expense, comply with any and all
reasonable requirements, pertaining to said Premises, of any insurance
organization or company, necessary for the maintenance of reasonable fire and
public liability insurance, covering said Premises and appurtenances.
B. Landlord's Liability Insurance. Landlord shall procure and maintain
during the Term of this Lease a policy of (i) commercial general liability
insurance having a combined single limit for bodily injury and property damage
of not less than One Million Dollars ($1,000,000.00) per occurrence; and (ii) a
general aggregate insurance in an amount of not less than Five Million Dollars
($5,000,000.00). The policy shall provide coverage for blanket contractual
liability (except for the negligence or willful misconduct of the non-insured
party) premises and personal injury coverage. Landlord shall furnish to Tenant
prior to the Commencement Date, and thereafter within thirty (30) days prior to
the expiration of each such policy, a certificate of insurance issued by the
insurance carrier of each policy of insurance carried hereunder.
C. Property Insurance: Landlord agrees to purchase and keep in force
fire, and extended coverage ("All Risk" excluding earthquake) insurance covering
the Premises pursuant to the provisions of Article 10) in amounts not less than
the replacement cost of said Premises as mutually determined by Landlord and
Tenant. Tenant agrees to pay to the Landlord as additional rent, on demand, the
full cost of said insurance as evidenced by insurance billings to the Landlord,
and in the event of damage covered by said insurance which does not result in a
termination of this Lease, the amount of any deductible under such policy,
provided such deductible is not greater than $20,000.00. Payment shall be due to
Landlord within ten (10) days after written invoice to Tenant. It is understood
and agreed that Tenant's obligation under this Article will be prorated to
reflect the commencement and termination dates of this Lease.
Notwithstanding the forgoing, Tenant shall have the right to provide
the hazard insurance for the Premises provided (i) Tenant can obtain such
insurance at a more favorable rate than Landlord; (ii) the form of coverage and
insurer are satisfactory to Landlord and its lender; (iii) Landlord and its
lender are named as additional insured; (iv) such insurance provides that it may
not be subject to cancellation or change except after at least thirty (30) days
written notice to Landlord; and (v) Tenant has delivered to Landlord a
certificate of insurance and additional insured endorsement evidencing such
policy is in effect.
E. Tenant's Insurance: In addition, Tenant agrees to insure its
personal property, the
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Tenant Improvements, any Alterations not owned by Landlord pursuant to the terms
of Article 10 and to obtain worker's compensation and public liability and
property damage insurance for occurrences within the Premises with combined
limits for bodily injury and property damage of not less than $1,000,000.00 per
occurrence and a general aggregate limit of not less than $5,000,000.00. Tenant
shall name Landlord and Landlord's lender as an additional insured, shall
deliver a copy of the policies and renewal certificates to Landlord. All such
policies shall provide for thirty (30) days' prior written notice to Landlord of
any cancellation, termination, or reduction in coverage.
D. Waiver: Landlord and Tenant hereby waive any and all rights each may
have against the other on account of any loss or damage occasioned to the
Landlord or the Tenant as the case may be, or to the Premises or its contents,
and which may arise from any risk covered by their respective insurance policies
(or which would have been covered had such insurance policies been maintained in
accordance with this Lease), as set forth above. The parties shall obtain from
their respective insurance companies a waiver of any right of subrogation which
said insurance company may have against the Landlord or the Tenant, as the case
may be.
E. General: Insurance required hereunder shall be written by companies
licensed to do business in the state in which the Premises are located and have
a General Policyholder's rating of at least A8 (or such higher rating as may be
required by a lender having a lien on the Property) as set forth in the most
current issue of Best's Insurance Guide. All insurance shall expressly provide
that such policies shall not be cancelable or subject to reduction of coverage
or otherwise be subject to modification except after thirty (30) days prior
written notice to any other party named as additional insureds.
13. Taxes: Tenant shall be liable for, and shall pay prior to delinquency,
all taxes and assessments levied against personal property and trade or business
fixtures, and agrees to pay, as additional rental, all real estate taxes and
assessment installments (special or general) or other impositions or charges
which may be levied on the Premises, upon the occupancy of the Premises and
including any substitute or additional charges which may be imposed during, or
applicable to the Lease Term including real estate tax increases due to a sale
or other transfer of the Premises, as they appear on the City and County tax
bills during the Lease Term, and as they become due. It is understood and agreed
that Tenant's obligation under this Article will be prorated to reflect the
Commencement and Expiration Dates. If, at any time during the Lease Term a tax,
excise on rents, business license tax, or any other tax, however described, is
levied or assessed against Landlord, as a substitute or addition in whole or in
part for taxes assessed or imposed on land or Buildings, Tenant shall pay and
discharge his pro rata share of such tax or excise on rents or other tax before
it becomes delinquent. In the event that a tax is placed, levied, or assessed
against Landlord and the taxing authority takes the position that the Tenant
cannot pay and discharge his pro rata share of such tax on behalf of the
Landlord, then at the sole election of the Landlord, the Landlord may increase
the rental charged hereunder by the exact amount of such tax and Tenant shall
pay such increase as
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additional rent hereunder. Landlord hereby grants to Tenant the right to
contest, on behalf and in the name of Landlord, all taxes and assessments which
are imposed upon the Premises; Landlord agrees to cooperate fully with Tenant
and to execute all documents requested by Tenant, in connection with any such
contest. If by virtue of any application or proceeding brought by Landlord
results a reduction in the assessed value of the Building during the Lease Term,
Tenant agrees to reimburse Landlord its reasonable, actual third party out of
pocket costs incurred by Landlord in connection with such application or
proceeding.
Notwithstanding the foregoing, the following shall not constitute real
estate taxes for the purposes of this Lease, and nothing contained herein shall
be deemed to require Tenant to pay any of the following: (i) any state, local,
federal, personal or corporate income tax measured by the income of Landlord;
(ii) any estate or inheritance taxes; (iii) any franchise, succession or
transfer taxes; (iv) interest on taxes or penalties resulting from Landlord's
failure to pay taxes, except to the extent such failure is due to Tenant's
failure to pay such taxes to Landlord when provided under this Lease; (v) any
assessments for public improvements or any taxes initiated by Landlord which are
essentially payments to a governmental agency for the right to make improvements
to the Building or surrounding area, to the extent such assessments are not in
effect as of the Execution Date and have not received the prior written consent
of Tenant; and (vi) any environmental tax, surcharge or other fee affecting the
Premises due to Landlord's activities with respect to Hazardous Materials, as
opposed to general, areawide taxes or surcharges with respect to the remediation
or testing for Hazardous Materials. If any assessments affecting the Premises
are payable in installments and Landlord should prepay such assessments in
advance of the date such installments would become due, Tenant shall be solely
responsible for the portion of such assessment that would have normally come due
as an installment, unless consented to by Tenant in writing.
Notwithstanding anything to the contrary contained in this Lease,
Landlord shall pay, and Tenant shall have no responsibility for, any real
property taxes resulting from any change in ownership, sale, or other transfer
of the Premises or Building during the initial Term of the Lease to the extent
that such amount reflects an assessed valuation of the Premises in excess of one
hundred fifty percent (150%) of the "Commencement Date Valuation." The
"Commencement Date Valuation" shall mean the assessed valuation of the Premises
(as improved with the Building) as determined by the Santa Clara County
Assessor, as of the first date after the Commencement Date that the Santa Clara
County Assessor reassesses the Premises based on the completion of construction
of the Building and Tenant Improvements.
14. Utilities: Tenant shall pay directly to the providing utility all
water, gas, heat, light, power, telephone and other utilities supplied to the
Premises. Except for any damages resulting from the negligence, willful
misconduct, or breach of contract by Landlord, or its agents, or contractors
Landlord shall not be liable for a loss of or injury to property, however
occurring, through or in connection with or incidental to furnishing or failure
to furnish any utilities to the
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Premises and Tenant shall not be entitled to abatement or reduction of any
portion of the Base Monthly Rent so long as any failure to provide and furnish
the utilities to the Premises is due to a cause beyond the Landlord's reasonable
control, and is not the result of the negligence, willful misconduct, or breach
of contract by Landlord, or its agents, or contractors.
In the event of any interruption in utilities or services to be
provided to the Premises, Tenant's rights and remedies shall be as follows: (i)
if such interruption is due to a failure of Tenant to pay the providing utility
when due, Base Rent due hereunder shall not be abated and Landlord shall have no
liability to Tenant whatsoever as a result of such interruption; (ii) if such
interruption is due to the actions of Landlord or Landlord's Parties, the Base
Rent hereunder shall be equitably abated as of the time such interruption
commenced and Landlord shall be liable to Tenant for loss or injury to property
and Tenant's business as a result thereof; (iii) if such interruption is due to
the failure of the providing utility to provide such utility or service to the
Premises and such interruption continues for more than ninety (90) continuous
days, then Tenant shall be entitled to terminate this Lease by delivery of
written notice to Landlord within five (5) days following the expiration of such
ninety (90) day period; and (iv) if such interruption is due to an event of
damage or destruction, the rights of the parties hereunder shall be as described
in Section 28 below.
15. This paragraph intentionally left blank
16. Free From Liens: Except for obligations arising from the construction
of the Building Shell , Tenant Improvements, and parking lot, Tenant shall keep
the Premises free from any liens arising out of any work performed, materials
furnished, or obligations incurred by Tenant. Landlord shall keep the Premises
free from any liens arising out of any work performed, materials furnished, or
obligations incurred in connection with the Building Shell, Tenant Improvements,
or parking lot. In the event Tenant fails to discharge or bond over any such
lien within thirty (30) days after receiving notice of the filing, Landlord
shall be entitled to discharge such lien at Tenant's expense and all resulting
costs incurred by Landlord, including reasonable attorney's fees shall be due
from Tenant as additional rent.
17. Compliance With Governmental Regulations: Tenant shall, at its sole
cost and expense, comply with all of the requirements of all Municipal, State
and Federal authorities now in force, or which may hereafter be in force, which
are imposed as a result of Tenant's particular and specific use of the Premises,
and shall faithfully observe in the use of the Premises all Municipal ordinances
and State and Federal statutes now in force or which may hereafter be in force.
The judgment of any court of competent jurisdiction, or the admission of Tenant
in any action or proceeding against Tenant, whether Landlord be a party thereto
or not, that Tenant has violated any such ordinance or statute in the use of the
Premises, shall be conclusive of that fact as between Landlord and Tenant. In
the event an Alteration is required to the Building Shell by any law, rule,
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ordinance or decision not in effect as of the Commencement Date of this Lease
which is not imposed as a result of Tenant's particular and specific use of the
Premises (whether pursuant to Article 12 or this Article 17), Tenant shall only
be required to pay that portion of the cost equal to the product of such total
cost multiplied by a fraction, the numerator of which is the number of months
remaining in the Lease Term, the denominator of which is the useful life (in
months) of the Alteration.
18. Toxic Waste and Environmental Damage:
A. Landlord's Responsibility: Landlord represents and warrants to
Tenant that, except as disclosed in the attached environmental studies dated
June 18, 1990, July 2, 1990, July 25, 1994, and the Burrowing Owl study from
H.T. Harvey & Associates, to the best of Landlord's knowledge, the Premises and
the Building, as of the Commencement Date, do not contain any chemicals, toxic
or hazardous gaseous, liquid or solid materials or waste, including without
limitation, material or substance having characteristics of ignitability,
corrosivity, reactivity, or extraction procedure toxicity or substances or
materials which are listed on any of the Environmental Protection Agency's list
of hazardous wastes or which are identified in Section 66680 through 66685 of
Title 22 of the California Administrative Code, 42 U.S.C. Sections 9601, et
seq., 49 U.S.C. Sections 1801, et seq., 42 U.S.C. Sections 6901, et seq., or
California Health and Safety Code Section 25117, as the same may be amended from
time to time ("Hazardous Materials"). Landlord shall indemnify, protect, defend
and hold Tenant harmless from and against all liability, cost, damage and
expense (including, without limitation attorneys' fees) arising from either: (i)
the failure of the representation and warranty contained in the immediately
preceding sentence; (ii) the presence of any Hazardous Materials or Burrowing
Owls on or about the Premises on or prior to the Commencement Date; or (iii) the
presence, release, storage or use of Hazardous Materials on the Premises during
the Term by any party other than Tenant, Tenant's agents, employees, contractors
or invitees ("Tenant's Parties").
B. Tenant's Responsibility: Landlord hereby approves Tenant's use on or
about the Premises of Hazardous Materials used by Tenant in connection with
Tenant's business. Tenant represents and warrants that Tenant will (i) adhere to
all reporting and inspection requirements imposed by Federal, State, County or
Municipal laws, ordinances or regulations and will make available for inspection
by Landlord a copy of any such reports or agency inspections, (ii) obtain and
make available for inspection by Landlord copies of all necessary permits
required for the use and handling Hazardous Materials on the Premises, (iii)
enforce Hazardous Materials handling and disposal practices consistent with
industry standards, (iv) surrender the Premises free from any Hazardous
Materials arising from Tenant's bringing, using, permitting, generating,
emitting or disposing of Hazardous Materials, and (v) properly close the
facility with regard to Hazardous Materials including the removal or
decontamination of any process piping, mechanical ducting, storage tanks,
containers, or trenches which have come become contaminated with Hazardous
Materials and obtain a closure certificate from the local administering agency
prior to the Expiration
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Date to the extent required by Law.
C. Tenant's Indemnity Regarding Hazardous Materials: Tenant shall
comply, at its sole cost, with all laws pertaining to, and shall indemnify and
hold Landlord harmless from any claims, liabilities, costs or expenses incurred
or suffered by Landlord arising from such bringing, using, permitting,
generating, emitting or disposing of Hazardous Materials on the Premises by
Tenant or Tenant's Parties. Tenant's indemnification and hold harmless
obligations include, without limitation, (i) claims, liability, costs or
expenses resulting from or based upon administrative, judicial (civil or
criminal) or other action, legal or equitable, brought by any private or public
person under common law or under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and
Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal
law, ordinance or regulation, (ii) claims, liabilities, costs or expenses
pertaining to the identification, monitoring, cleanup, containment, or removal
of Hazardous Materials from soils, riverbeds or aquifers including the provision
of an alternative public drinking water source, and (iii) all reasonable costs
of defending such claims.
D. Actual Release by Tenant: Tenant agrees to notify Landlord upon
learning of any lawsuits which relate to, or orders which relate to the
remedying of, the actual release by Tenant or Tenant's Parties of Hazardous
Materials on or into the soils or groundwater at or under the Premises. Tenant
shall also provide to Landlord all notices required by Section 25359.7(b) of the
Health and Safety Code and all other notices required by law to be given to
Landlord in connection with Hazardous Materials. Without limiting the foregoing,
Tenant shall also deliver to Landlord, within twenty (20) days after receipt
thereof, any written notices from any governmental agency alleging a material
violation of, or material failure to comply with, any federal, state or local
laws, regulations, ordinances or orders, the violation of which of failure to
comply with, poses a foreseeable and material risk of contamination of the
groundwater or injury to humans (other than injury solely to Tenant, its agents
and employees within the Improvements on the Property).
In the event of any release on or into the Premises or into the soil or
groundwater under the Premises of any Hazardous Materials used, treated, stored
or disposed of by Tenant, Tenant agrees to comply, at its sole cost and expense,
with all laws, regulations, ordinances and orders of any federal, state or local
agency relating to the monitoring or remediation of such Hazardous Materials. In
the event of any such release of Hazardous Materials, Tenant agrees to meet and
confer with Landlord and its Lender to attempt to eliminate and mitigate any
financial exposure to such Lender and resultant exposure to Landlord under
California Code of Civil Procedure section 736(b) as a result of such release
and promptly to take reasonable monitoring, cleanup and remedial steps given,
inter alia, the historical uses to which the Property has and continues to be
used, the risks to public health posed by the release, the then available
technology and the costs of remediation, cleanup and monitoring, consistent with
acceptable customary practices for the type and severity of such contamination
and all applicable laws. Nothing in the preceding sentence shall eliminate,
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modify or reduce the obligation of Tenant under Article 18.B of this Lease to
indemnify and hold Landlord harmless from any claims liabilities, costs or
expenses incurred or suffered by Landlord as provided in Article 18.B of this
Lease. Tenant shall provide Landlord prompt written notice of Tenant's
monitoring, cleanup and remedial steps. Tenant shall have the right, at Tenant's
expense and in Tenant's name, to contest or object in good faith to any alleged
violation by Tenant of any applicable law relating to the use of Hazardous
Materials by appropriate legal proceedings which are not prejudicial to
Landlord's rights if (i) Tenant shall have demonstrated to Landlord's
satisfaction that such legal proceedings shall conclusively operate to prevent
enforcement prior to final determination of any such proceedings. In the event
that, by non-performance of any such items, the Premises is subject to imminent
loss or forfeiture, Tenant shall perform any such act required by the relevant
governmental authority.
In the absence of an order of any federal, state or local governmental
or quasi-governmental agency relating to the cleanup, remediation or other
response action required by applicable law, any dispute arising between Landlord
and Tenant concerning Tenant's obligation to Landlord under this Article 18.D
concerning the Level, method, and manner of cleanup, remediation or response
action required in connection with such a release of Hazardous Materials shall
be resolved by mediation and/or arbitration pursuant to the provisions of
Article 45 of this Lease.
E. Environmental Monitoring: Landlord and its agents shall have the
right, at Landlord's sole cost and expense, (unless Tenant is in violation of
this Article 18 in which event such monitoring shall be at Tenant's expense) to
inspect, investigate, sample and/or monitor the Premises, including any air,
soil, water, groundwater or other sampling or any other testing, digging,
drilling or analysis to determine whether Tenant is complying with the terms of
this Article 18. If Landlord discovers that Tenant is not in compliance with the
terms of this Article 18, any such reasonable costs incurred by Landlord,
including attorneys' and consultants' fees shall be due and payable by Tenant to
Landlord within thirty (30) days following Landlord's written demand therefore.
19. Indemnity: As a material part of the consideration to be rendered to
Landlord, Tenant hereby waives all claims against Landlord for damages to goods,
wares and merchandise, and all other personal property in, upon or about said
Premises and for injuries to persons in or about said Premises, from any cause
except to the extent due to the negligence or willful misconduct of Landlord or
Landlord's Parties to the fullest extent permitted by law, and Tenant shall
indemnify and hold Landlord exempt and harmless from any damage or injury to any
person, or to the goods, wares and merchandise and all other personal property
of any person, arising from the use of the Premises, Building, and/or Project by
Tenant, its employees, contractors, agents and invitees or from the failure of
Tenant to keep the Premises in good condition and repair, as herein provided,
except to the extent due to the negligence or willful misconduct of Landlord or
Landlord's Parties. Further, in the event Landlord is made party to any
litigation due to the acts or omission of Tenant, its
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employees, contractors, agents and invitees, Tenant will indemnify and hold
Landlord harmless from any such claim or liability including Landlord's costs
and expenses and reasonable attorney's fees incurred in defending such claims.
Landlord shall defend, indemnify by counsel acceptable to Tenant,
protect Tenant, its officers, employees and agents harmless from and against any
liabilities, loss, cost, damage, injury or expense (including reasonable
attorneys' fees and court costs) arising out of or related to the willful
misconduct or negligence of Landlord or Landlord's Parties.
20. Advertisements and Signs: Tenant will not place or permit to be placed,
in, upon or about the exterior of the Building any signs which are prohibited by
the city or other governing authority. The Tenant will not place, or permit to
be placed, upon the exterior of the Building, any signs, advertisements or
notices without the written consent of the Landlord as to type, size, design,
lettering, coloring and location, and such consent will not be unreasonably
withheld. Any sign so placed on the exterior of the Building shall be so placed
upon the understanding and agreement that Tenant will remove same at the
termination of the tenancy herein created and repair any damage or injury to the
exterior of the Building caused thereby, and if not so removed by Tenant then
Landlord may have same so removed at Tenant's expense.
21. Attorney's Fees: In case a suit or alternative form of dispute
resolution should be brought for the possession of the Premises, for the
recovery of any sum due hereunder, or because of the breach of any other
covenant herein, the losing party shall pay to the prevailing party a reasonable
attorney's fee including the expense of expert witnesses, depositions and court
testimony as part of its costs which shall be deemed to have accrued on the
commencement of such action. In addition, the prevailing party shall be entitled
to recover all costs and expenses including reasonable attorney's fees incurred
by the prevailing party in enforcing any judgment or award against the other
party. The foregoing provision relating to post-judgment costs is intended to be
severable from all other provisions of this Lease.
22. Tenant's Default: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: a) Any failure
by Tenant to pay the rental or to make any other payment required to be made by
Tenant hereunder, where such failure continues for ten (10) days after Tenant's
receipt of written notice thereof by Landlord to Tenant; b) A failure by Tenant
to observe and perform any other provision of this Lease to be observed or
performed by Tenant, where such failure continues for thirty (30) days after
Tenant's receipt of written notice thereof by Landlord; provided, however, that
if the nature of such default is such that the same cannot reasonably be cured
within such thirty (30) day period Tenant shall not be deemed to be in default
if Tenant shall within such period commence such cure and thereafter diligently
prosecute the same to completion; c) The making by Tenant of any general
assignment for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or of a
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petition for reorganization or arrangement under any law relating to bankruptcy
(unless, in the case of a petition filed against Tenant, the same is dismissed
after the filing); the appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where possession is not restored to Tenant within ninety
(90) days; or the attachment, execution or other judicial seizure of
substantially all of Tenant's assets located at the Premises or of Tenant's
interest in this Lease, where such seizure is not discharged within ninety (90)
days. The notice requirements set forth herein are in lieu of and not in
addition to the notices required by California Code of Civil Procedure Section
1161. Any notice given by Landlord to Tenant pursuant to California Civil Code
1161 with respect to any failure by Tenant to pay rent under this Lease on or
before the date the rent is due shall provide Tenant with a period of no less
than ten (10) days to pay such rent or quit.
A. Remedies: In the event of any such default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all rights
of Tenant hereunder by giving written notice of such intention to terminate. In
the event that Landlord shall elect to so terminate this Lease then Landlord may
recover from Tenant: a) the worth at the time of award of any unpaid rent which
had been earned at the time of such termination; plus b) the worth at the time
of award of the amount by which the unpaid rent which would have been earned
after termination until the time of award exceeds the amount of such rental loss
for the same period that Tenant proves could have been reasonably avoided; plus
c) the worth at the time of award of the amount by which the unpaid rent for the
balance of the Lease Term after the time of award exceeds the amount of such
rental loss that Tenant proves could be reasonably avoided; plus d) any other
amount necessary to compensate Landlord for all the detriment proximately caused
by Tenant's failure to perform its obligations under this Lease or which in the
ordinary course of things would be likely to result therefrom, and 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 applicable California law.
The term "rent", as used herein, shall be deemed to be and to mean the minimum
monthly installments of Base Monthly Rent and all other sums required to be paid
by Tenant pursuant to the terms of this Lease, all other such sums being deemed
to be additional rent due hereunder. As used in (a) and (b) above, the "worth at
the time of award" is to be computed by allowing interest at the rate of the
discount rate of the Federal Reserve Bank of San Francisco plus five (5%)
percent per annum. As used in (c) above, the "worth at the time of award" is to
be computed by discounting such amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of award plus one (1%) percent.
B. Right to Re-enter: In the event of any such default by Tenant,
Landlord shall also have the right, with or without terminating this Lease, to
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 and disposed of by Landlord in any
manner permitted by law.
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C. Abandonment: In the event of the vacation or abandonment of the
Premises by Tenant or in the event that Landlord shall elect to re-enter as
provided in Article 22.B above or shall take possession of the Premises pursuant
to legal proceeding or pursuant to any notice provided by law, then if Landlord
does not elect to terminate this Lease as provided in Article 22.A above, then
the provisions of California Civil Code Section 1951.4, (Landlord may continue
the lease in effect after Tenant's breach and abandonment and recover rent as it
becomes due, if Tenant has a right to sublet and assign, subject only to
reasonable limitations) as amended from time to time, shall apply and Landlord
may from time to time, without terminating this Lease, either recover all rental
as it becomes due or relet the Premises or any part thereof for such term or
terms and at such rental or rentals and upon such other terms and conditions as
Landlord in its sole discretion may deem advisable with the right to make
alterations and repairs to the Premises. In the event that Landlord shall elect
to so relet, then rentals received by Landlord from such reletting shall be
applied: first, to the payment of any indebtedness other than Base Monthly Rent
due hereunder from Tenant to Landlord; second, to the payment of any cost of
such reletting; third, to the payment of the cost of any alterations and repairs
to the Premises; fourth, to the payment of Base Monthly Rent due and unpaid
hereunder; and the residue, if any, shall be held by Landlord and applied in
payment of future Base Monthly Rent as the same may become due and payable
hereunder. Landlord shall have no obligation to relet the Premises following a
default if Landlord has other available space within the Building or Project.
Should that portion of such rentals received from such reletting during any
month, which is applied by the payment of rent hereunder, be less than the rent
payable during that month by Tenant hereunder, then Tenant shall pay such
deficiency to Landlord immediately upon demand therefor by Landlord. Such
deficiency shall be calculated and paid monthly. Tenant shall also pay to
Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
D. No Termination: No re-entry or taking possession of the Premises by
Landlord pursuant to 22.B or 22.C of this Article 22 shall be construed as an
election to terminate this Lease unless a written notice of such intention be
given to Tenant or unless the termination thereof be decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Landlord because of any default by Tenant, Landlord may at any time after such
reletting elect to terminate this Lease for any such default.
23. Surrender of Lease: The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not automatically effect a
merger of the Lease with Landlord's ownership of the Premises. Instead, at the
option of Landlord, Tenant's surrender may terminate all or any existing
sublease or subtenancies, or may operate as an assignment to Landlord of any or
all such subleases or subtenancies, thereby creating a direct Landlord-Tenant
relationship between Landlord and any subtenants.
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24. Habitual Default: Deleted.
25. Landlord's Default: In the event of Landlord's failure to perform any
of its covenants or agreements under this Lease, Tenant shall give Landlord
written notice of such failure and shall give Landlord thirty (30) days to cure
such failure; provided, however, that if the nature of such default is such that
the same cannot reasonably be cured within such thirty (30) day period Landlord
shall not be deemed to be in default if Landlord shall within such period
commence such cure and thereafter diligently prosecute the same to completion.
In addition, upon any such failure by Landlord, Tenant shall give notice by
registered or certified mail or national overnight courier service to any person
or entity with a security interest in the Premises ("Mortgagee") that has
provided Tenant with written notice (including such Mortgagee's address) of its
interest in the Premises, and shall provide such Mortgagee a period of thirty
(30) days beyond the cure period provided Landlord hereunder to cure such
failure. Tenant shall not make any prepayment of rent more than one (1) month in
advance without the prior written consent of such Mortgagee. Tenant waives any
right under California Civil Code Section 1950.7 or any other present or future
law to the collection of any payment or deposit from such Mortgagee or any
purchaser at a foreclosure sale of such Mortgagee's interest unless such
Mortgagee or such purchaser shall have actually received (or have credited to
it) and not refunded the applicable payment or deposit.
26. Notices: All notices, demands, requests, or consents required to be
given under this Lease shall be sent in writing by U.S. certified mail, return
receipt requested, national overnight courier service or by personal delivery
addressed to the party to be notified at the address for such party specified in
Article 1 of this Lease, or to such other place as the party to be notified may
from time to time designate by at least five (5) days prior notice to the
notifying party.
27. Entry by Landlord: Upon 24 hours prior notice, Tenant shall permit
Landlord and his agents to enter into and upon said Premises at all reasonable
times subject to any security regulations of Tenant for the purposes of (i)
inspecting the same, (ii) maintaining the Premises, (iii) making repairs,
alterations or additions to the Premises, (iv) erecting additional building(s)
and improvements on the land where the Premises are situated, or on adjacent
land owned by Landlord, or (v) performing any obligations of the Landlord under
the Lease including remediation of hazardous materials if determined to be the
responsibility of Landlord, without any abatement or reduction of rent or
without any liability to Tenant for any loss of occupation or quiet enjoyment of
the Premises thereby occasioned. Tenant shall permit Landlord and Landlord's
Parties, at any time within one hundred eighty (180) days prior to the
Expiration Date, unless Tenant has exercised its option to extend the term
pursuant to Section 37.A (or at any time during the Lease if Tenant is in
default hereunder beyond the applicable cure period), to place upon the Premises
"For Lease" signs and exhibit the Premises to real estate brokers and
prospective tenants at reasonable hours. Landlord agrees that Landlord and
Landlord's Parties shall conduct all of their activities under this
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Section 27 in a manner which minimizes the interruption to Tenant or Tenant's
activities on the Premises.
28. Destruction of Premises:
A. Destruction by an Insured Casualty: In the event of a partial
destruction of the Premises by a casualty for which Landlord has received
insurance proceeds sufficient to repair the damage or destruction during the
Lease Term from any cause, Landlord shall forthwith repair the same to the
extent of such proceeds, provided such repairs can be made within twelve (12)
months from the date of destruction as reasonably determined by the architect
responsible for the reconstruction such determination to be made within sixty
(60) days of the date of destruction, and such partial destruction shall in no
way annul or void this Lease, except that Tenant shall be entitled to a
proportionate reduction of Base Monthly Rent while such repairs are being made,
such proportionate reduction to be based upon the extent to which the making of
such repairs shall interfere with the business carried on by Tenant in the
Premises. For purposes of this Article "partial destruction" shall mean
destruction of no greater than one-third (1/3) of the replacement cost of the
Premises, including the replacement cost of the Tenant Improvements paid for by
Landlord. In the event the Premises (i) are more than partially destroyed, or
(ii) the repairs cannot be made within twelve (12) months from the date of
destruction as reasonably determined by the architect responsible for the
reconstruction such determination to be made within sixty (60) days of the date
of destruction. Landlord shall not be required to restore Alterations or replace
Tenant's fixtures or personal property. In respect to any partial destruction
which Landlord is obligated to repair or may elect to repair under the terms of
this Article, the provision of Section 1932, Subdivision 2, and of Section 1933,
Subdivision 4, of the Civil Code of the State of California and any other
similarly enacted statute are waived by Tenant and the provisions of this
Article 28 shall govern in the case of such destruction. Any disputes between
Landlord and Tenant with respect to the degree of damage or destruction of the
Premises or the time necessary to rebuild shall be resolved by arbitration
pursuant to Section 47 of this Lease.
B. Destruction by an Uninsured Casualty: In the event of a total or
partial destruction of the Premises by a casualty for which Landlord has not
received insurance proceeds sufficient to repair the damage or destruction
during the Lease Term and which would cost in excess of Two Hundred Fifty
Thousand and No/100 Dollars ($250,000.00) to repair, Landlord shall have the
option to terminate this Lease, unless Tenant agrees to contribute the amount of
such uninsured loss beyond the initial $250,000 to repair, which amount shall be
the sole obligation of Landlord. Further if the uninsured damage can not be
repaired within twelve (12) months from the date of destruction as reasonably
determined by the architect responsible for the reconstruction such
determination to be made within sixty (60) days of the date of destruction,
either Landlord or Tenant shall have the option to terminate this lease.
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C. Damage or Destruction at End of Term: If the Building or Premises is
damaged or destroyed during the last twenty-four (24) months of the Term of the
Lease, and the Premises or Building cannot be fully repaired or restored by
Landlord within ninety (90) days after the date of the damage or destruction,
either Landlord or Tenant may terminate this Lease upon notice to the other,
provided, that Tenant may prevent Landlord's termination of this Lease under
this Section 28.C by exercising Tenant's right to extend the Lease Term as
described in Section 37.
29. Assignment or Sublease:
A. Consent by Landlord: In the event Tenant desires to assign this
Lease or any interest therein including, without limitation, a pledge, mortgage
or other hypothecation, or sublet the Premises or any part thereof, Tenant shall
deliver to Landlord executed counterparts of any such agreement and of all
ancillary agreements with the proposed assignee or subtenant, such assignee or
subtenant's most recent financial statements, and any additional information as
reasonably required by Landlord to determine whether it will consent to the
proposed assignment or sublease. The notice shall give the name and current
address of the proposed assignee/subtenant, proposed use of the Premises, rental
rate and current financial statement; and upon request to Tenant, Landlord shall
be given additional information as reasonably required by Landlord to determine
whether it will consent to the proposed assignment or sublease. Landlord shall
then have a period of ten (10) days following receipt of the foregoing
agreement, statements and additional information within which to notify Tenant
in writing that Landlord elects (i) to permit Tenant to assign or sublet such
space to the named assignee/subtenant on the terms and conditions set forth in
the notice, or (ii) to refuse consent, which consent shall not be unreasonably
withheld or delayed. If Landlord should fail to notify Tenant in writing of such
election within said ten (10) day period, Landlord shall be deemed to have
elected option (i) above. Landlord's consent (which must be in writing and in
form reasonably satisfactory to Landlord) to the proposed assignment or sublease
shall not be unreasonably withheld or delayed. Tenant shall not advertise or
publicize the availability of the Premises without prior notice to Landlord.
B. Assignment or Subletting Consideration: If Tenant shall assign,
sublease or otherwise transfer all or any portion of the Premises to a party
other than Tenant Affiliate (as defined in 29.E below), Landlord and Tenant
shall evenly divide any rent or other consideration paid to Tenant in connection
with such assignment, sublease or other transfer which is in excess of the base
rent due under this Lease, after first deducting out for the Tenant's account
the cost of (i) broker's commissions paid by Tenant with regard to the transfer;
(ii) legal fees; (iii) the cost of improvements made to the Premises at Tenant's
expense to the extent such improvements increase the rent paid under the
sublease over that which would have been paid without such improvements; (iv)
any tenant improvements made by Tenant at Tenant's expense for the purpose of
transfer; (v) all rent paid by Tenant to Landlord while the Premises were vacant
prior to such transfer; and (vi) any other expenses incurred by Tenant in
effectuating the transfer. The terms of this section shall survive the
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expiration or earlier termination of the Lease. The above provision relating to
the allocation of bonus rent are independently negotiated terms of the Lease,
constitute a material inducement for the Landlord to enter into the Lease, and
are agreed as between the parties to be commercially reasonable. No assignment
or subletting by Tenant shall relieve Tenant of any obligation under this Lease.
Any assignment or subletting which conflicts with the provisions hereof shall be
void.
C. No Release: Any assignment or sublease shall be made only if and
shall not be effective until the assignee or subtenant shall execute,
acknowledge and deliver to Landlord an agreement, in form and substance
satisfactory to Landlord, whereby the assignee or subtenant shall assume all of
the obligations of this Lease on the part of Tenant to be performed or observed
and shall be subject to all of the covenants, agreements, terms, provisions and
con[ditions contained in this Lease, except as expressly provided for therein.
Notwithstanding any such sublease or assignment and the acceptance of rent by
Landlord from any subtenant or assignee, Tenant and any guarantor shall and will
remain fully liable for the payment of the rent and additional rent due
hereunder, and to become due hereunder, for the performance of all of the
covenants, agreements, terms, provisions and conditions contained in this Lease
on the part of Tenant to be performed and for all acts and omissions of any
licensee, subtenant, assignee or any other person claiming under or through any
subtenant or assignee that shall be in violation of any of the terms and
conditions of this Lease, and any such violation shall be deemed to be a
violation by Tenant. Tenant shall further indemnify, defend and hold Landlord
harmless from and against any and all losses, liabilities, damages, costs and
expenses (including reasonable attorney fees) resulting from any claims that may
be made against Landlord by the proposed assignee or subtenant or by any real
estate brokers or other persons claiming a commission or similar compensation in
connection with the proposed assignment or sublease.
D. Effect of Default: In the event of Tenant's default, Tenant hereby
assigns all rents due from any assignment or subletting to Landlord as security
for performance of its obligations under this Lease and Landlord may collect
such rents, except that Tenant may collect such rents unless a default occurs as
described in Article 22 and 24 above. The termination of this Lease due to
Tenant's default shall not automatically terminate any assignment or sublease
then in existence; at the election of Landlord, such assignment or sublease
shall survive the termination of this Lease and, upon such election, the
assignee or subtenant shall attorn to Landlord and Landlord shall undertake the
obligations of the Tenant under the sublease or assignment; provided the
Landlord shall not be liable for prepaid rent, or security deposits not received
by Landlord or other defaults of the Tenant to the subtenant or assignee, or any
acts or omissions of Tenant, its agents, employees, contractors or invitees.
Notwithstanding anything to the contrary in this Lease, no event of default
shall be deemed to have occurred by virtue of any act or omission of any
subtenant or assignee of Tenant, unless Landlord has delivered to Tenant written
notice of such act or omission, and has given Tenant the period(s) of time
specified in Article 22 to cure such default.
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E. Excluded Transfers: Tenant may assign this Lease or sublet any
portion of the Premises without Landlord's consent to any of the following (i)
any corporation which controls, is controlled by or under common control with
Tenant; (ii) any corporation resulting from the merger or consolidation of
Tenant if (a) the successor to Tenant has a net worth, computed in accordance
with generally accepted accounting principles, at least equal to the greater of
(1) the net worth of Tenant immediately prior to such transfer or (2) the net
worth of Tenant herein named on the date of this Lease, and (b) proof
satisfactory to Landlord of such net worth shall have been delivered to Landlord
at least ten (10) days prior to the effective date of any such transaction;
(iii) any person or entity which acquires all of the assets of Tenant as a going
concern of the business that is being conducted on the Premises (collectively,
"Tenant Affiliate"), provided that such assignee assumes in full the obligations
of Tenant under the Lease.
30. Condemnation: If any part of the Premises shall be taken for any public
or quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and only a part thereof remains which is susceptible
of occupation hereunder, this Lease shall as to the part so taken, terminate as
of the day before title shall vest in the condemnor or purchaser ("Vesting
Date"), and the Base Monthly Rent payable hereunder shall be adjusted so that
the Tenant shall be required to pay for the remainder of the Lease Term only
such portion of such Base Monthly Rent as the value of the part remaining after
such taking bears to the value of the entire Premises prior to such taking; but
in such event Landlord and Tenant shall have the option to terminate this Lease
as of the Vesting Date. If all of the Premises, or such part thereof be taken so
that the remaining portion is unusable for Tenant's business therein, as
reasonably determined by Tenant, Tenant may terminate this Lease as of Vesting
Date. Landlord shall be entitled to any award paid for if the Premises is wholly
or partially condemned, except that Tenant shall have the right to receive from
either the condemning authority or Landlord, as applicable, all proceeds and
other compensation received in connection with condemnation to the extent paid
for (i) any Tenant Improvements or Alterations made by or at the expense of
Tenant; (ii) Tenant's loss of goodwill; (iii) Tenant's relocation costs; and
(iv) Tenant's loss of business and business interruption. Tenant hereby waives
the provisions of California Code of Civil Procedures Section 1265.130 and any
other similarly enacted statue are waived by Tenant and the provisions of this
Article 30 shall govern in the case of such destruction.
31. Effects of Conveyance: The term "Landlord" as used in this Lease, means
only the owner for the time being of the Premises so that, in the event of any
sale or other conveyance of the Premises, or in the event of a master lease of
the Premises, the Landlord shall be and hereby is entirely freed and relieved of
all covenants and obligations of the "Landlord" hereunder, but only so long as
the new Landlord expressly assumes in writing all the obligations of Landlord
under this Lease, and delivers to Tenant a written agreement by which the new
Landlord assumes such obligations, and it shall be deemed and construed, without
further agreement between the parties
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and the purchaser at any such sale, or the master tenant of the Premises, that
the purchaser or master tenant of the Premises has assumed and agreed to carry
out any and all covenants and obligations of the Landlord hereunder arising
after the effective date of the transfer to the new Landlord. Such transferor
shall transfer and deliver Tenant's security deposit to the purchaser at any
such sale or the master tenant of the Premises, and thereupon the such
transferor shall be discharged from any further liability in reference thereto.
32. Subordination: Simultaneously with the execution of this Lease,
Landlord shall deliver to Tenant a non-disturbance agreement from Landlord's
existing lender or lenders, if any, in form and substance acceptable to Tenant,
by which such lender or lenders agree not to disturb Tenant's possession of the
Premises so long as Tenant is not in material default of the terms of this Lease
beyond any applicable cure period at the time such lender or lenders foreclose
on the Premises. This Lease shall be subordinate to any future ground lease,
deed of trust, or other hypothecation for security only so long as Landlord
delivers to Tenant prior to the effective of such subordination a written
non-disturbance agreement, in form and substance acceptable to Tenant, by which
such Lender or other party agrees not to disturb Tenant's possession of the
Premises if Tenant is not in material default of Tenant's obligations under this
Lease beyond any applicable cure period at the time such party becomes the fee
owner of the Premises. Subject to the above, in the event Landlord notifies
Tenant in writing, this Lease shall be subordinate to any ground Lease, deed of
trust, or other hypothecation for security now or hereafter placed upon the real
property of which the Premises are a part and to any and all advances made on
the security thereof and to renewals, modifications, replacements and extensions
thereof. Tenant agrees to promptly execute and deliver any documents which may
be required to effectuate such subordination.
33. Waiver: The waiver by Landlord or Tenant of any breach of any term,
covenant or condition, herein contained shall not be deemed to be a waiver of
such term, covenant or condition or any subsequent breach of the same or any
other term, covenant or condition herein contained. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant or condition of this Lease, other than
the failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent. No payment by Tenant or receipt by Landlord of a lesser amount than any
installment of rent due shall be deemed to be other than payment on account of
the amount due. No delay or omission in the exercise of any right or remedy by
Landlord or Tenant shall impair such right or remedy or be construed as a waiver
thereof by the non-defaulting party. No act or conduct of Landlord, including,
without limitation, the acceptance of keys to the Premises, shall constitute
acceptance of the surrender of the Premises by Tenant before the Expiration Date
(only written notice from Landlord to Tenant of acceptance shall constitute such
acceptance of surrender of the Premises). Landlord's consent to or approval of
any act by Tenant which require Landlord's consent or approvals shall not be
deemed to waive or render unnecessary Landlord's consent to or approval of any
subsequent act by Tenant.
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34. Holding Over: Any holding over after the termination or Expiration
Date, shall be construed to be a tenancy from month to month, terminable on
thirty (30) days written notice from either party, and Tenant shall pay Base
Monthly Rent to Landlord at a rate equal to one hundred twenty five percent
(125%) of the Base Monthly Rent due in the month preceding the termination or
Expiration Date for the first two (2) months of any hold over and one hundred
fifty percent (150%) of the Base Monthly Rent thereafter plus all other amounts
payable by Tenant under this Lease. Any holding over shall otherwise be on the
terms and conditions herein specified, except those provisions relating to the
Lease Term and any options to extend or renew, which provisions shall be of no
further force and effect following the expiration of the applicable exercise
period.
35. Successors and Assigns: The covenants and conditions herein contained
shall, subject to the provisions of Article 29, apply to and bind the heirs,
successors, executors, administrators and assigns of all the parties hereto; and
all of the parties hereto shall be jointly and severally liable hereunder.
36. Estoppel Certificates: Tenant shall at any time during the Lease Term,
within ten (10) days following receipt of written notice from Landlord, respond
to any request by Landlord for a statement in writing certifying (i) that this
Lease is unmodified and in full force and effect (or, if modified, stating the
nature of such modification); (ii) the date to which the rent and other charges
are paid in advance, if any; (iii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder or specifying
such defaults if they are claimed; and (iv) such other information as Landlord
may reasonably request. Any such statement may be conclusively relied upon by
any prospective purchaser or encumbrancer of the Premises. Tenant also agrees to
provide the most current three (3) years of audited financial statements within
five (5) days of a request by Landlord for Landlord's use in financing the
Premises with commercial lenders.
37. Option to Extend the Lease Term:
A. Grant and Exercise of Option: Landlord hereby grants to Tenant, upon
and subject to the terms and conditions set forth in this Article 37 four (4)
options (the "Options") to extend the Lease Term for an additional term (the
"Option Term"), each Option Term shall be for a period of sixty (60) months.
Each such Option shall be exercised, if at all, by written notice to Landlord no
earlier than the date that is twenty four (24) months prior to the Expiration
Date but no later than the date that is twelve (12) months prior to the
Expiration Date. Thirteen (13) months prior to the Expiration Date Landlord
shall provide Tenant with a written notice of the fact that the Option will
expire in thirty (30) days. If Tenant exercises the Option, each of the terms,
covenants and conditions of this Lease except this Article shall apply during
the Option Term as though the expiration date of the Option Term was the date
originally set forth herein as the Expiration Date, provided that the Base
Monthly Rent to be paid by Tenant during the Option Term shall be the greater of
(i) the Base
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Monthly Rent payable on the Commencement Date, or (ii) ninety five percent (95%)
of the Fair Market Rental, as hereinafter defined, for the Premises for the
Option Term. Anything contained herein to the contrary notwithstanding, if
Tenant is in monetary or material non-monetary default beyond any applicable
cure period under any of the terms, covenants or conditions of this Lease either
at the time Tenant exercises the Option or at any time thereafter prior to the
commencement date of the Option Term, Landlord shall have, in addition to all of
Landlord's other rights and remedies provided in this Lease, the right to
terminate the Option upon notice to Tenant, in which event the expiration date
of this Lease shall be and remain the Expiration Date or the expiration of the
then relevant Option Term. As used herein, the term "Fair Market Rental" for the
Premises shall mean the rental and all other monetary payments including any
escalations and adjustments thereto (including without limitation Consumer Price
Indexing) then being obtained for leases of space comparable in age and quality
to the Premises in the locality of the Building that Landlord could obtain
during the Option Term from a third party desiring to lease the Premises for the
Option Term based upon the current use and other potential uses of the Premises.
The appraisers shall be instructed that the foregoing five percent (5%) discount
is intended to reduce comparable rents which include (i) brokerage commissions,
(ii) tenant improvement allowances, and (iii) vacancy costs, to account for the
fact that Landlord will not suffer such costs in the event Tenant exercises its
Option. The Fair Market Rental shall specifically exclude any additional rental
attributable to the value of the Tenant Improvements or Alterations paid for by
Tenant.
B. Determination of Fair Market Rental: If Tenant exercises the Option,
Landlord shall send to Tenant a notice setting forth the Fair Market Rental for
the Premises for the Option Term within thirty (30) days of Tenant's exercise of
the Option. If Tenant disputes Landlord's determination of the Fair Market
Rental for the Option Term, Tenant shall, within thirty (30) days after the date
of Landlord's notice setting forth the Fair Market Rental for the Option Term,
send to Landlord a notice stating that Tenant either (i) elects to terminate its
exercise of the Option, in which event the Option shall lapse and this Lease
shall terminate on the Expiration Date, or (ii) disagrees with Landlord's
determination of Fair Market Rental for the Option Term and elects to resolve
the disagreement as provided in Article 37.C below. If Tenant does not send to
Landlord a notice as provided in the previous sentence, Landlord's determination
of the Fair Market Rental shall be the basis for determining the Base Monthly
Rent to be paid by Tenant hereunder during the Option Term. If Tenant elects to
resolve the disagreement as provided in Article 37.C below and such procedures
shall not have been concluded prior to the commencement date of the Option Term,
Tenant shall pay as Base Monthly Rent to Landlord the rent due hereunder during
the month preceding the Expiration Date. If the amount of Fair Market Rental as
finally determined pursuant to Article 37.C below is greater than Landlord's
determination, Tenant shall pay to Landlord the difference between the amount
paid by Tenant and the he rent due hereunder during the month preceding the
Expiration Date within thirty (30) days after the determination. If the Fair
Market Rental as finally determined in Article 37.C below is less than
Landlord's determination, the difference between the amount paid by Tenant and
the Fair Market Rental as so determined in
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Article 37.C below shall be credited against the next installments of rent due
from Tenant to Landlord hereunder.
C. Resolution of a Disagreement over the Fair Market Rental: Any
disagreement regarding the Fair Market Rental shall be resolved as follows:
1. Within thirty (30) days after Tenant's response to
Landlord's notice to Tenant of the Fair Market Rental, Landlord and Tenant shall
meet no less than two (2) times, at a mutually agreeable time and place, to
attempt to resolve any such disagreement.
2. If within the thirty (30) day period referred to in (i)
above, Landlord and Tenant can not reach agreement as to the Fair Market Rental,
they shall each select one appraiser to determine the Fair Market Rental. Each
such appraiser shall arrive at a determination of the Fair Market Rental and
submit their conclusions to Landlord and Tenant within thirty (30) days after
the expiration of the thirty (30) day consultation period described in (i)
above.
3. If only one appraisal is submitted within the requisite
time period, it shall be deemed to be the Fair Market Rental. If both appraisals
are submitted within such time period, and if the two appraisals so submitted
differ by less than ten percent (10%) of the higher of the two, the average of
the two shall be the Fair Market Rental. If the two appraisals differ by more
than ten percent (10%) of the higher of the two, then the two appraisers shall
immediately select a third appraiser who shall within thirty (30) days after his
or her selection shall select one of the two (2) existing determinations of Fair
Market Rental as correct. This third appraiser's conclusion shall be the Fair
Market Rental.
4. All appraisers specified pursuant to this Article shall
be members of the American Institute of Real Estate Appraisers with not less
than five (5) years experience appraising office and industrial properties in
the Santa Clara Valley. Each party shall pay the cost of the appraiser selected
by such party and one-half of the cost of the third appraiser.
38. Tenant's Right of First Refusal:
A. Grant. Landlord hereby grants to Tenant a right of first refusal
during the Term of this Lease and any extension thereof to purchase the Premises
("Right of First Refusal to Purchase").
B. Covenants of Landlord. Landlord hereby covenants and agrees with
Tenant that if, during the Term of the Lease, Landlord shall receive or solicit
a bona fide offer from a prospective buyer to purchase either the Premises,
Landlord shall furnish Tenant with a copy of the proposed contract and notify
Tenant of the intention of Landlord to accept the same (the "Notice of Intention
to Sell"). Such Notice of Intention to Sell shall contain all material business
terms on which
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Landlord intends to sell the Premises. Landlord shall not sell the space in
question to anyone other than Tenant without first providing Tenant the
opportunity to buy the space in question upon the same terms and conditions
described in the Notice of Intention to Sell.
C. Exercise of Tenant's Right of First Refusal to Purchase. Provided
that Tenant is not in default under the terms and conditions of this Lease
beyond any applicable grace periods, Tenant may exercise Tenant's Right of First
Refusal to Purchase by providing Landlord with written notice thereof within
fifteen (15) days of Tenant's receipt of the Notice of Landlord's Intention to
Sell. If Tenant does not exercise its Right of First Offer to Purchase within
said fifteen (15) day period, then Landlord shall be relieved of Landlord's
obligation to offer the space identified in the Notice of Intention to Sell to
Tenant, except as provided for in Section 38.E below.
D. Terms for Right of First Refusal to Purchase. In the event that
Tenant exercises Tenant's Right of First Refusal to Purchase, Tenant's purchase
shall be on all of the same terms and conditions as are offered to a bona-fide
third-party purchaser of the space identified in the Notice of Intention to
Sell.
E. Continuing Right. In no event shall Tenant's failure to exercise its
Right of First Refusal to Purchase be deemed a waiver or relinquishment by
Tenant of Tenant's Right of First Refusal to Purchase should (i) the space
identified in the Notice of Intention to Sell be offered for sale to a potential
purchaser other than the purchaser specified in the Notice of Landlord's
Intention to Sell during the Term of this Lease or any extension thereof, or
(ii) the space identified in the Notice of Landlord's Intention to Sell be
offered for sale to any purchaser on terms different than those specified in the
Notice of Landlord's Intention to Sell during the Term of this Lease or any
extension thereof.
F. Exclusive Nature of Option. Landlord represents and warrants to
Tenant that no party other than Tenant has any option, right of first offer or
right of first refusal to purchase the Premises. Landlord hereby covenants to
Tenant that Landlord shall not grant an option to purchase, right of first offer
or right of first refusal to purchase the Premises during the Term of this Lease
or any extension thereof
G. Successors and Assigns. Except as provided in this paragraph 38.G,
this Right of First Refusal to Purchase shall be binding on the successors and
assigns of Landlord and Tenant. This Right of First Refusal shall not
specifically not apply to (but shall survive the same and be binding upon any
purchaser or successor of such sale or foreclosure) (i) any transfer of
ownership of the Premises by a judicial foreclosure sale or sale pursuant to a
power of sale provision in any relevant deed of trust or mortgage lien
,transfers of the Building, or (ii) a "Sobrato Family Transfer". A Sobrato
Family Transfer shall be a transfer of the Premises to (i) John A. Sobrato
and/or John M. Sobrato (individually and collectively "Sobrato"), (ii) any
immediate family member of Sobrato, (iii)
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any trust established, in whole or in part, for the benefit of Sobrato and/or
any immediate family member of Sobrato, (iv) any partnership in which Sobrato or
any immediate family member, either directly or indirectly (e.g., through a
partnership or corporate entity or a trust) retains a general partner interest,
and/or (v) any corporation under the control, either directly or indirectly, by
Sobrato or any immediate family member of Sobrato.
39. Options: Except with respect to any Tenant Affiliate, all Options
provided Tenant in this Lease are personal and granted to original Tenant and
are not exercisable by any third party should Tenant assign or sublet (except
for any assignment permitted by the third to last paragraph of Article 29) all
or a portion of its rights under this Lease, unless Landlord consents to permit
exercise of any option by any assignee or subtenant, in Landlord's sole
discretion. In the event that Tenant hereunder has any multiple options to
extend this Lease, a later option to extend the Lease cannot be exercised unless
the prior option to extend has been so exercised.
40. Quiet Enjoyment: Landlord covenants with Tenant for itself and
Landlord's successors that so long as no Event of Default on the part of Tenant
has occurred hereunder, (i) Tenant shall and may peaceably and quietly have,
hold and enjoy the Premises for the Term of this Lease, and any renewals or
extensions thereof; and (ii) neither Landlord, nor any party claiming under or
through Landlord, shall disturb the use or the occupancy of the Premises by
Tenant.
41. Brokers: Landlord and Tenant each warrants and represents for the
benefit of the other that it has had no dealings with any real estate broker or
agent in connection with the negotiation of this Lease, except for CB Madison,
and that it knows of no other real estate broker or agent who is or might be
entitled to a real estate brokerage commission or finder's fee in connection
with this Lease. Each party shall indemnify and hold harmless the other from and
against any and all liabilities or expenses arising out of claims made by any
broker (other than CB Madison) or individual for commissions or fees resulting
from the actions of the indemnifying party in connection with this Lease.
42. Landlord's Liability: If Tenant should recover a money judgment
against Landlord arising in connection with this Lease, the judgment shall be
satisfied only out of Landlord's interest in the Premises including the
improvements and real property and neither Landlord or any of its partners,
officers, directors, agents, trustees, shareholders or employees shall be liable
personally for any deficiency. And furthermore, Tenant expressly waives any and
all rights to proceed against the individual partners or the officers, directors
or shareholders of any corporate partner, except to the extent of their interest
in said limited partnership.
Notwithstanding the foregoing, the following shall apply with respect
to claims by Tenant directly resulting from any and all defaults by Landlord
with respect to any of its obligations under
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(i) Section 18 with respect to Hazardous Materials, or (ii) Section 28 with
respect to destruction to the Premises (collectively, the "Special Defaults").
In the event of any Special Defaults, Tenant shall be entitled to seek recourse
against any assets of Landlord, and the recourse of Tenant against Landlord for
any Special Default shall not be limited to Landlord's interest in the Premises
and the rents and other forms of income originating therefrom.
43. Authority of Parties: Landlord and Tenant represents and warrants to
each other that it is duly formed and in good standing and is duly authorized to
execute and deliver this Lease on behalf of said corporation or partnership, as
relevant, in accordance with a duly adopted resolution of the Board of Directors
of said corporation or in accordance with the by-laws of said corporation, and
that this Lease is binding upon said corporation or partnership, as relevant in
accordance with its terms. At either party's request, the other party shall
provide the requesting party with corporate resolutions or other proof in a form
acceptable to the requesting party, authorizing the execution of the Lease.
44. Transportation Demand Management Programs: Should a government agency
or municipality require Landlord to institute TDM (Transportation Demand
Management) facilities and/or program, Tenant hereby agrees that the cost of TDM
imposed facilities required on the Premises, including but not limited to
employee showers, lockers, cafeteria, or lunchroom facilities, shall be included
as Tenant Improvement Costs (unless such costs qualify for amortization pursuant
to Article 17) and any ongoing costs or expenses associated with a TDM program,
such as an on-site TDM coordinator, which are required for the Premises and not
provided by Tenant shall be provided by Landlord with such costs being included
as additional rent and reimbursed to Landlord by Tenant.
45. DISPUTE RESOLUTION: Except for the failure by Tenant to timely pay the
Base Monthly Rent, any controversy, dispute, or claim of whatever nature arising
out of, in connection with, or in relation to the interpretation, performance or
breach of this agreement, including any claim based on contract, tort, or
statute, shall be resolved at the request of any party to this agreement through
a two-step dispute resolution process administered by JAMS or another judicial
and mediation service mutually acceptable to the parties involving first
mediation, followed, if necessary, by final and binding arbitration administered
by and in accordance with the then existing rules and practice of the judicial
and mediation service selected, and judgment upon any award rendered by the
arbitrator(s) may be entered by any State or Federal Court having jurisdiction
thereof.
46. Miscellaneous Provisions:
A. Rent: All monetary sums due from Tenant to Landlord under this
Lease, including, without limitation those referred to as "additional rent",
shall be deemed to be rent.
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B. Performance by Landlord: If Tenant fails to perform any obligation
required under this Lease or by law or governmental regulation and Tenant is not
disputing such law or governmental regulation in accordance with the terms of
this Lease, Landlord, in its sole discretion may without notice and without
releasing Tenant from its obligations hereunder or waiving any rights or
remedies, perform such obligation, in which event Tenant shall pay Landlord as
additional rent all sums reasonably paid by Landlord in connection with such
substitute performance including interest as provided in Article 48.C below
within thirty (30) days following Landlord's written notice for such payment.
C. Interest: All rent due hereunder (but not late charges thereon), if
not paid when due, shall bear interest at the reference rate of Union Bank plus
two percent (2%) accruing from the date due until the date paid to Landlord.
D. Rights and Remedies: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law and are in
addition to all other rights and remedies in law and in equity.
E. Survival of Indemnities: All indemnification, defense, and hold
harmless obligations of Landlord and Tenant under this Lease shall survive the
expiration or sooner termination of the Lease for a period of four (4) years.
F. Severability: If any term or provision of this Lease is held
unenforceable or invalid by a court of competent jurisdiction, the remainder of
the Lease shall not be invalidated thereby but shall be enforceable in
accordance with its terms, omitting the invalid or unenforceable term.
G. Choice of Law: This Lease shall be governed by and construed in
accordance with California law. Venue shall be Santa Clara County.
H. Time: Time is of the essence hereunder.
I. Entire Agreement: This instrument contains all of the agreements and
conditions made between the parties hereto and may not be modified orally or in
any other manner other than by an agreement in writing signed by all of the
parties hereto or their respective successors in interest.
J. Representations: Tenant acknowledges that neither Landlord nor any
of its employees or agents have made any agreements, representations, warranties
or promises with respect to the demised Premises or with respect to present or
future rents, expenses, operations, tenancies or any other matter. Except as
herein expressly set forth herein, Tenant relied on no
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statement of Landlord or its employees or agents for that purpose.
K. Headings: The headings or titles to the Articles of this Lease are
not a part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof.
L. Exhibits: All exhibits referred to are attached to this Lease and
incorporated by reference.
M. Approvals: With respect to any consent of Landlord which Tenant may
request pursuant to the terms of this Lease, such consent shall not be
unreasonably withheld or delayed by Landlord. If Landlord fails to grant or
withhold such requested consent within five (5) business days after request by
Tenant, such consent shall be deemed granted.
N. Recordation. Within twenty (20) days following the execution of this
Lease, both Landlord and Tenant shall execute, acknowledge and cause to be
recorded in the Official Records of County of Santa Clara, California a short
form memorandum of this Lease in form reasonably acceptable to Landlord and
Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and
year first above written.
Landlord: Sobrato Development Cos. #871 Tenant: Komag Incorporated
a California Limited Partnership a Delaware Corporation
By: _____________________________ By: _____________________________
Its: _____________________________ Its: _____________________________
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EXHIBIT "A" - Premises
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EXHIBIT "B" - Formula for Determination of Base Monthly Rent
After receipt of the final pricing for the Building Shell, Landlord shall
determine Total Project Costs (as defined below) based on competitive bids.
During this period Landlord shall also solicit permanent loan quotes from
institutional lenders to determine the best available financing. Based on these
inputs Landlord shall then apply the following formula to determine the Base
Monthly Rent due under this Lease.
Base Monthly Rent shall be equal to one hundred twenty percent of the product of
the (i) Total Project Costs as defined below and (ii) the best non-participating
ten (10) year fixed rate permanent loan constant available prior to the start of
construction of the Option Building. The determination of which loan comprises
the best available financing shall be made in good faith by both Landlord and
Tenant. The parties acknowledge that it is their current intention that such
amortization schedule shall be for a minimum period of twenty (20) years and
Landlord shall use its best efforts to obtain such financing.
Total Project Costs shall be equal to the sum of (i) the value of the land based
on a value of Nine and 90/100 Dollars ($9.90) per land square foot, (ii) the
Building Shell Allowance, (iii) fees for building permits, licenses, inspection,
utility connections or extensions, and any other fees imposed by governmental
entities, (iv) fees of engineers, architects, consultants and others providing
professional services in connection with the construction of the Building, (v)
construction loan interest paid by Landlord including interest on Landlord's
equity with respect to the construction of the Building, calculated at the
reference rate charged by Union Bank plus one percent (1%), (vi) loan fees
payable for the construction and/or permanent loan for the Building (vii) real
property taxes and assessments levied against the Property during the period the
Building is constructed, (viii) liability and builders risk insurance premiums
paid by Landlord with respect to the construction of the Building, and (ix) real
estate leasing commissions or fees payable by Landlord with respect to the
Building.
For example, if Total Project Costs are $6,600,000, and Landlord is able to
obtain a 7.75% loan with a 20 year amortization, the Base Monthly Rent would be
120% X ($6,600,000 X .008209), or $65,015.28.
Page 36
<PAGE>
EXHIBIT "C" - Shell Plans and Specifications
(sheet references to be attached)
Page 37
<PAGE>
EXHIBIT "D" - Building Shell Definition
The Building Shell includes the following items:
1. Site Work
a. Asphalt concrete paving, wheel stops, and striping.
b. Concrete sidewalks, curbs, gutter, driveway, approaches, and planter
walls.
c. Landscaping, landscape lighting, waterscape, and irrigation.
d. Underground utilities - water, gas, fire line, sanitary line
(including pump station if required), site storm drainage system, transformers
and primary and secondary electrical lines stubbed into building. The routing of
the under slab utilities shall be done as part of the Building Shell
construction if the location of the lines are determined prior to the pouring of
the floor slab.
e. Offsite improvement work required by the City of San Jose to obtain
building permits.
2. Building Structure
Includes all elements necessary to provide for a completely waterproof Building
Shell including but not limited to:
a. Concrete foundation and slab on grade including all reinforcing steel
and wire mesh including four loading docks.
b. Structural steel columns and beams.
c. Steel joist and girder second floor system with concrete and metal
deck (if multi-story building).
d. Wood panelized glulam roof structure or steel frame with metal deck
and rigid insulation with fiberglass built-up roofing including roof drainage
plumbing.
e. Glass, glazing and perimeter roll up or hollow metal doors including
normal passage hardware.
f. Concrete tilt up or plaster on metal stud framed exterior walls.
g. Exterior painting.
h. All city permits, fees, and taxes, connection charges related to the
Building Shell construction.
i. Main fire sprinkler grid.
j. All architectural and engineering costs related to the design of the
Building Shell.
Page 38
<PAGE>
EXHIBIT "E" - Tenant Improvement Plans and Specifications
(sheet references to be attached)
Page 39
<PAGE>
EXHIBIT "F" - Tenant's Trade Fixtures
Page 40
<PAGE>
EXHIBIT "G" - Fee Agreement
Tenant shall pay to Sobrato Construction Corporation, an affiliate of Landlord,
a fee of Four Hundred Thousand and No/100 Dollars ($400,000.00) as compensation
to Landlord for its services as general contractor for the Building Shell and
Tenant Improvements ("Construction Fee").
The Construction Fee shall be paid in monthly installments of Forty Thousand and
No/100 Dollars ($40,000.00). In no event, however, shall the final installment
of the Construction Fee be due from Tenant until Substantial Completion of the
Premises has occurred.
The Construction Fee includes the general conditions associated with the
construction of the Building Shell and Tenant Improvements. It is agreed by the
parties that the general conditions included in the Construction Fee consist of
the following costs: (i) all project management and scheduling personnel costs,
(ii) field office expenses including set-up and rent, janitorial, security and
furniture, (iii) general office expenses including supplies, computers, postage,
telephone, reproduction and copying, travel expenses, subsistence, drinking
water, etc., (iv) management vehicles and fuel, (v) general safety costs
including a safety engineer, flagman/traffic control, barricades and signs,
protective equipment and first aid supplies, and fire protection, (vi) temporary
services including temporary electrical (light strings, tempower boxes, cords,
trailer office connection, light stands and transformer), utility
costs/generator, water (installation, connection and utility), heating, ladders
and stairs, and chemical toilets, (vii) field services such as janitorial,
security, interim clean-up, debris boxes, project sign, (viii) worker/employee
parking and drinking water, (ix) insurance (liability and building risk), (x)
City Gross Receipts Tax, (xi) gas, oil, diesel fuel and lubrication for
equipment owned by general contractor, and (xii) site conditions including
temporary roads, staging and storage areas, site dewatering, winter protection
and maintenance, site fencing, tree protection, dust control, tool shed,
walkietalkies, etc.
Page 41
KOMAG, INCORPORATED
DISCRETIONARY BONUS PLAN
I. PURPOSES OF THE PLAN
1.01 Komag, Incorporated (the "Company") hereby establishes
this Discretionary Bonus Plan ("Plan") as an incentive program pursuant to which
discretionary or other retention-based bonuses may be awarded for one or more
fiscal years in order to retain the services of those employees critical to the
Company's financial success.
1.02 The Company's compensation programs are designed to
retain and motivate technical and managerial staff through the delivery of
competitive cash compensation each year. Base pay is targeted at the mid-market
level of the high technology industry, and significantly greater compensation
will be delivered through the Company's variable pay programs (such as cash
profit sharing and payments under the Company's Management Bonus Plan). It is
the Company's objective to provide total cash compensation at or above the 75th
percentile of a competitive analysis. Accordingly, the Compensation Committee of
the Company's Board of Directors as plan administrator shall, with the
assistance of the Company's management and such outside compensation specialists
as the Compensation Committee may deem appropriate, undertake such a competitive
analysis for each fiscal year the Plan remains in effect. If the analysis for
any fiscal year suggests that the level of cash compensation for that year is
not significantly greater than the industry average, a cash bonus pool for that
year will be established for distribution to selected employees. The bonus
distribution will be targeted to those employees considered essential to the
Company's continued financial success who would otherwise be vulnerable to
competitor recruiting by offers of more attractive compensation.
II. ADMINISTRATION OF THE PLAN
2.01 The Plan is hereby adopted by the Company's Board of
Directors (the "Board"), effective December 1, 1996, and shall be administered
by the Compensation Committee ("Committee") of the Board.
2.02 The interpretation and construction of the Plan and the
adoption of rules and regulations for administering the Plan shall be made by
the Committee. Decisions of the Committee shall be final and binding on all
parties who have an interest in the Plan.
<PAGE>
III. DISCRETIONARY BONUS POOL
3.01 The Committee shall make an annual assessment of the
industry, including such factors as the financial performance of the Company's
competitors, the expansion plans of those competitors, and a competitive
analysis of the Company's annual cash compensation. Should such analysis suggest
that the level of annual cash compensation for the Company's key employees is
not competitive, resulting in their vulnerability to recruitment by other firms,
or should industry trends reveal that recruiting activity will in the upcoming
year be significant, the Committee shall have full power and authority to create
a bonus pool under the Plan for that fiscal year. The bonus pool shall be in
such dollar amount as the Committee deems appropriate and shall be distributed
to selected employees as an incentive for them to remain in the Company's
employ.
IV. DETERMINATION OF PARTICIPANTS
4.01 Those individuals in the employ of the Company or any
subsidiary who are significant contributors to the continued and future success
of the Company's business shall be eligible to receive a distribution from one
or more of the bonus pools established over the term of the Plan. The Company's
Chief Executive Officer and the Chairman of the Board shall provide the
Committee with recommendations each fiscal year as to the employees who should
receive bonus awards under the Plan for that fiscal year and the amount to be
allocated to each designated employee. The Committee shall, on the basis of the
competitive compensation analysis undertaken for that fiscal year, have
authority to accept or modify such recommendations. The Committee may also
recommend a bonus distribution under the Plan to the Company's Chief Executive
Officer and the Chairman of the Board.
V. PAYMENT OF BONUS AWARDS
5.01 The individual bonus awarded to each employee shall be
paid to such employee within thirty (30) days after the completion of the audit
of the fiscal year for which that award is made. In no event, however, shall a
bonus award be paid to any individual who does not continue in the Company's
employ through such payment date. Any payment to which an employee becomes
entitled under the Plan shall be made in the form of a lump sum cash
distribution, subject to the Company's collection of all applicable federal and
state income and employment withholding taxes.
5.02 Bonus payments under the Plan shall be included in the
earnings base eligible for deferral under the Company's non-qualified Deferred
Compensation Plan.
2.
<PAGE>
VI. GENERAL PROVISIONS
6.01 The Plan is effective as of December 1, 1996, and the
initial bonus pool under the Plan will be established for the Company's 1996
fiscal year. The Board may at any time amend, suspend or terminate the Plan,
provided such action is effected by written resolution and does not adversely
affect the rights and interests of Plan participants to any bonus awards made to
them prior to such amendment, suspension or termination. Neither the
implementation of the Plan nor any amendment to the Plan shall require
stockholder approval.
6.02 No bonuses awarded under the Plan shall actually be
funded, set aside or otherwise segregated prior to payment. The obligation to
pay the bonuses awarded hereunder shall at all times be an unfunded and
unsecured obligation of the Company. Plan participants shall have the status of
general creditors and shall look solely to the general assets of the Company for
the payment of their bonus awards.
6.03 No Plan participant shall have the right to alienate,
pledge or encumber his/her interest in any bonus award to which he/she may
become entitled under the Plan, and such interest shall not (to the extent
permitted by law) be subject in any way to the claims of the employee's
creditors or to attachment, execution or other process of law.
6.04 Neither the action of the Company in establishing the
Plan, nor any action taken under the Plan by the Committee, nor any provision of
the Plan shall be construed so as to grant any person the right to remain in the
employ of the Company or its subsidiaries for any period of specific duration.
Rather, each employee of the Company or any subsidiary will be employed
"at-will," which means that either such employee or the Company (or subsidiary)
may terminate the employment relationship of that individual at any time for any
reason, with or without cause.
3.
KOMAG, INCORPORATED
DEFERRED COMPENSATION PLAN
PLAN AMENDMENT NO. 1
The Komag, Incorporated Deferred Compensation Plan, as
established effective March 1, 1995 (the "Plan"), is hereby amended as follows:
1. Section 4.01 is hereby amended, effective January 1,
1997, to read as follows:
4.01 Annual Election. Each Participant shall have the
right to file a Deferral Election to defer part of the base salary
and/or Bonus earned for one or more Years of Service for which he or
she remains a Participant. However, the maximum amount which such
Participant may defer for each Year of Service shall be determined in
accordance with the following formula:
- up to twelve percent (12%) of the base salary
earned for his or her period of participation during that Year of
Service, plus
- up to twelve percent (12%) of any Bonus earned for
such Year of Service, less
- the maximum dollar amount which may be contributed
on the Participant's behalf as a Section 401(k) Contribution for that
Year of Service pursuant to the applicable limitations of Code Sections
401(k) and 402(g).
2. Section 4.03 is hereby amended, effective June 1,
1996, to read as follows:
4.03 Commencement of Deferrals. The actual deferral
of base salary pursuant to the Participant's Deferral Election shall
not begin until such time as the maximum Section 401(k) Contribution
permissible under the Qualified Plan and Code Section 402(g) for the
calendar year in which that base salary is earned shall have been made
on the Participant's behalf to the
<PAGE>
QualifiedPlan in accordance with his or her Section 401(k) Election for
that year or would have been made in the absence of any voluntary
reduction in the Participant's Section 401(k) Election for that year.
The portion of the Bonus which is the subject of the Participant's
Deferral Election shall in fact be deferred under this Plan only if the
remaining portion of that Bonus is paid after the maximum Section
401(k) Contribution permissible under the Qualified Plan and Code
Section 402(g) for the calendar year of such payment shall have been
made on the Participant's behalf to the Qualified Plan in accordance
with his or her Section 401(k) Election for that year or would have
been made in the absence of any reduction in the participant's Section
401(k) Election for that year. In the event there is no Section 401(k)
Election in effect for the Participant at the start of the calendar
year to which his or her Deferral Election pertains, then the actual
deferral of base salary pursuant to that Deferral Election shall begin
at such time as the maximum Section 401(k) Contribution permissible
under the Qualified Plan and Code Section 402(g) for that calendar year
would have been made on the Participant's behalf to the Qualified Plan
had there been in effect for that individual a Section 401(k) Election
covering ten percent (10%) or (effective January 1, 1997) twelve
percent (12%) of his or her eligible earnings for the year, with
earnings to be imputed, solely for purposes of such timing
determination, to the Participant (based on his or her annualized rate
of base salary) for any portion of that year in which such individual
was not an Employee. The same principle shall be in effect for the
portion of any Bonus subject to the Deferral Election filed by such
Participant.
3. Except as modified by this Plan Amendment, all the
terms and provisions of the Plan shall continue in full force and effect.
IN WITNESS WHEREOF, Komag, Incorporated has caused this instrument to
be executed on its behalf by a duly authorized officer on ____ day of __________
June, 1996.
KOMAG, INCORPORATED
By: _____________________
Title: __________________
FIRST AMENDMENT AGREEMENT
This FIRST AMENDMENT AGREEMENT, dated as of November 19, 1996
(this "Agreement"), is between KOMAG, INCORPORATED, a Delaware corporation
("Borrower"), and THE INDUSTRIAL BANK OF JAPAN, LIMITED, SAN FRANCISCO AGENCY
("Bank"), with respect to the Credit Agreement, dated as of December 15, 1995,
between Borrower and Bank (the "Credit Agreement").
The parties hereto agree as follows:
Section 1. Definitions. Terms defined in the Credit Agreement are used
herein with the same meanings unless otherwise specifically defined herein.
Section 2. Amendments to the Credit Agreement. The Credit Agreement is
hereby amended:
(a) To amend and restate in its entirety the following
definition in Section 1.1 thereof as follows:
"Maturity Date": December 15, 2000, unless an
extension shall occur under Section 2.1, in which case
"Maturity Date" shall mean the amended Maturity Date resulting
from such extension.
(b) To amend and restate in its entirety subsection (c) of
Section 2.3 thereof as follows:
(c) Eurodollar Rate Loans. Revolving Loans which are
Eurodollar Rate Loans shall bear interest for each Interest
Period with respect thereto on the unpaid principal amount
thereof at a rate per annum equal to the Eurodollar Rate
determined for such Interest Period plus 0.550 percentage
points.
Section 3. Effect. Except as specifically set forth herein, this
Agreement does not limit, modify, amend, waive, grant any consent with respect
to, or otherwise affect (a) any right, power or remedy of the Bank under the
Credit Agreement or any other Loan Document, (b) any provision of the Credit
Agreement or any other Loan Documents, all of which shall remain in full force
and effect and are hereby ratified and confirmed. This Agreement does not
entitle, or imply any consent or agreement to, any further or future
modification of, amendment to, waiver of, or consent with respect to any
provision of the Credit Agreement or any other Loan Document.
<PAGE>
Section 4. Conditions of Effectiveness. This Agreement shall become
effective as of the date hereof when Bank has received a counterpart hereof
signed by Borrower.
Section 5. Counterparts: Facsimile Signatures. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed to be an original with the same effect as if all the signatures were on
the same instrument. Delivery of an executed counterpart of the signature page
to this Agreement by telecopier shall be effective as delivery of a manually
executed counterpart of this Agreement. Any party delivering an executed
counterpart of the signature page to this Agreement by telecopier shall
thereafter promptly deliver a manually executed counterpart of this Agreement,
but the failure to deliver such manually executed counterpart shall not affect
the validity, enforceability, and binding effect of this Agreement.
Section 6. Governing Law and Submission to Jurisdiction. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA AND IS SUBJECT TO THE PROVISIONS OF SECTION 8.8 OF THE
CREDIT AGREEMENT, RELATING TO SUBMISSION TO JURISDICTION, THE PROVISIONS OF
WHICH ARE BY THIS REFERENCE HEREBY INCORPORATED HEREIN IN FULL.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective authorized signatories as of the
date first above written.
"BORROWER"
KOMAG, INCORPORATED
By /s/ Stephen C. Johnson
-------------------------------
Title: President & CEO
---------------------------
"BANK"
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, SAN FRANCISCO AGENCY
By /s/
-------------------------------
Title: General Manager
---------------------------
-2-
SECOND AMENDMENT AGREEMENT
THIS SECOND AMENDMENT AGREEMENT (this "Amendment"), is entered
into as of January 31, 1997, between Komag, Incorporated, a Delaware corporation
(the "Borrower"), and The Industrial Bank of Japan, Limited, San Francisco
Agency (the "Bank").
WHEREAS, the Borrower and the Bank are parties to a Credit
Agreement dated as of December 15, 1995 (as amended prior to the date hereof,
the "Credit Agreement");
WHEREAS, the Borrower has requested that the Bank agree to
increase the Commitment to $50,000,000 and to make certain other amendments to
the Credit Agreement and the Bank has agreed to such request, subject to the
terms and conditions hereof;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties hereto agree as follows:
1. Definitions. All capitalized terms used in this Amendment
(including in the recitals hereof) and not otherwise defined herein shall have
the meanings assigned to them in the Credit Agreement.
2. Amendment to the Credit Agreement.
(a) Section 1.01 of the Credit Agreement is hereby
amended by deleting the definition of "Commitment" in its entirety and replacing
it with the following
"Commitment": The Commitment of Bank to make
Revolving Loans to Borrower pursuant to Article II up to, but not
exceeding, at any time outstanding the amount of $50,000,000.
(b) Section 1.01 of the Credit Agreement is hereby
amended by adding the following definitions thereto:
"Existing Loan": The Revolving Loan in the principal
amount of $35,000,0009 outstanding on the date of the Second Amendment
Agreement.
"Interim Loan": Any Revolving Loan initially made
after the date of the Second Amendment Agreement and before December
29, 1997, and any conversion or continuation thereof made prior to
December 29, 1997.
"Second Amendment Agreement": The Second Amendment
Agreement, dated as of January 31, 1997, between Borrower and Bank.
1.
<PAGE>
(c) Section 2.1(e) of the Credit Agreement is hereby
amended by inserting at the end of the paragraph the following sentence:
Pursuant to Section 8.6(a) hereof, Bank may from time to time grant
participations (each a "Participation") in the Revolving Loans and
Commitment to one or more participants (each a "Participant"); if
Borrower should at any time or from time to time purchase any such
Participation from a Participant, then Borrower shall give Bank
immediate notice of such purchase and the outstanding amount of the
Revolving Loans shall be reduced to the extent of the interest in such
Revolving Loans so purchased by Borrower (i.e., the purchase by
Borrower of the interest of such Participant in the Revolving Loans
shall be treated as a prepayment by Borrower of the Revolving Loans to
the extent of such interest so purchased), and the Commitment shall be
reduced by such selling Participant's Participation interest in the
Commitment allocated to such Participant under the Participation so
purchased by Borrower.
(d) Section 2.1 of the Credit Agreement is hereby
amended to add a Section 2.1(i) thereto to be inserted after existing Section
2.1(h) as follows:
(i) Second Amendment Transition. Any other provision in this
Agreement to the contrary notwithstanding: (i) unless the maturity of
the Existing Loan is accelerated pursuant to the provisions of Section
7.1 hereof, the Existing Loan may not be repaid except on December 29,
1997, (ii) no Interim Loan which is a Eurodollar Rate Loan may have an
Interest Period ending after December 29, 1997, unless such Interest
Period commences on December 29, 1997, and (iii) from November 29,
1997, to December 29, 1997, Interim Loans may be made, converted, or
continued only as Prime Rate Loans.
(e) Section 8.6(D) of the Credit Agreement is hereby
amended by inserting the phrase "or amend or waive the provisions of Sections
6.2(a), (b) or (c)" after the word "sentence".
(f) The form of Exhibit B to the Credit Agreement
shall be deleted and the form of Exhibit B attached hereto shall be inserted in
lieu thereof.
3. Conditions of Effectiveness. The effectiveness of Section 2
of this Amendment shall be subject to the conditions that the Bank shall have
received, on or before the date hereof, (a) a copy of this Amendment executed
and delivered by a duly authorized officer of the Borrower, (b) a certificate of
the Secretary or Assistant Secretary of the Borrower, dated the date hereof,
certifying a copy of resolutions of the Borrower's Board of Directors that
approve the execution and delivery of this Amendment, (c) a promissory note in
the form attached as Exhibit B hereto executed and delivered by a duly
authorized officer of the Borrower, and (d) a participation agreement executed
and delivered by The First National Bank of Chicago.
2.
<PAGE>
4. Miscellaneous.
(a) Credit Agreement Otherwise Not Affected. Except
as expressly amended pursuant hereto, the Credit Agreement shall remain
unchanged and in full force and effect and is hereby ratified and confirmed in
all respects.
(b) Counterparts. This Amendment may be executed by
one or more of the parties to this Amendment in any number of separate
counterparts, each of which, when so executed, shall be deemed an original, and
all of said counterparts taken together shall be deemed to constitute but one
and the same instrument. A set of the copies of this Amendment signed by all the
parties shall be lodged with the Borrower and the Bank.
(c) Governing Law. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
3.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
KOMAG, INCORPORATED
By: /s/ William L. Potts, Jr.
------------------------------
Title: SVP, CFO
--------------------------
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, acting through its San
Francisco Agency
By:
------------------------------
Title:
--------------------------
UNSIGNED
EXECUTION COPY
CREDIT AGREEMENT
Dated as of October 7, 1996
Between
KOMAG, INCORPORATED
as Borrower
and
THE DAI-ICHI KANGYO BANK, LIMITED,
acting through its San Francisco Agency
as Lender
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms ....................................... 1
SECTION 1.02. Computation of Time Periods ................................. 10
SECTION 1.03. Accounting Terms ............................................ 10
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
AND THE LETTERS OF CREDIT
SECTION 2.01. The Advances ................................................ 11
SECTION 2.02. Making the Advances ......................................... 11
SECTION 2.03. Repayment of Advances ....................................... 12
SECTION 2.04. Termination or Reduction of the Commitments ................. 12
SECTION 2.05. Prepayments ................................................. 12
SECTION 2.06. Interest .................................................... 12
SECTION 2.07. Fees ........................................................ 13
SECTION 2.08. Conversion of Advances ...................................... 13
SECTION 2.09. Increased Costs, Etc ........................................ 14
SECTION 2.10. Payments and Computations ................................... 16
SECTION 2.11. Taxes ....................................................... 16
SECTION 2.12. Use of Proceeds ............................................. 18
SECTION 2.13. Extension of Scheduled Termination Date ..................... 18
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent to Initial Borrowing ................... 19
SECTION 3.02. Conditions Precedent to Each Borrowing ...................... 20
i
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower .............. 20
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants ....................................... 23
SECTION 5.02. Financial Covenants ......................................... 26
SECTION 5.03. Negative Covenants .......................................... 26
SECTION 5.04. Effect of Dastek Increase Notice ............................ 27
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default ........................................... 28
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Amendments, Etc ............................................. 30
SECTION 7.02. Notices, Etc ................................................ 31
SECTION 7.03. No Waiver; Remedies ......................................... 31
SECTION 7.04. Costs, Expenses ............................................. 31
SECTION 7.05. Right of Set-off ............................................ 32
SECTION 7.06. Binding Effect .............................................. 32
SECTION 7.07. Assignments and Participation ............................... 32
SECTION 7.08. Execution in Counterparts ................................... 33
SECTION 7.09. Confidentiality ............................................. 33
SECTION 7.10. Governing Law ............................................... 34
ii
<PAGE>
EXHIBITS
Exhibit A - Form of Note
Exhibit B - Form of Notice of Borrowing
Exhibit C - Form of Confidentiality Agreement
Exhibit D - Form of Compliance Computation Schedule
iii
<PAGE>
EXECUTION COPY
CREDIT AGREEMENT
CREDIT AGREEMENT dated as of October 7, 1996 (this
"Agreement") between Komag, Incorporated, a Delaware corporation (the
"Borrower"), and The Dai-Ichi Kangyo Bank, Limited (the "Lender"), acting
through its San Francisco Agency. The parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.01. Certain Defined Terms. As used in this
Agreement, the following terms shall have the following meanings (such meanings
to be equally applicable to both the singular and plural forms of the terms
defined):
"Advance" has the meaning set forth in Section 2.01.
"Affiliate" means, as to any Person, any other Person that,
directly or indirectly, controls, is controlled by or is under common
control with such Person or is a director or officer of such Person.
For purposes of this definition, the term "control" (including the
terms "controlling," "controlled by" and "under common control with")
of a Person means the possession, direct or indirect, of the power to
vote 5% or more of the Voting Stock of such Person or to direct or
cause the direction of the management and policies of such Person,
whether through the ownership of Voting Stock, by contract or
otherwise.
"Applicable Lending Office" means, the Lender's Domestic
Lending Office in the case of a Base Rate Advance or Federal Funds Rate
Advance and the Lender's LIBOR Lending Office in the case of a LIBOR
Advance.
"Base Rate" means a fluctuating interest rate per annum in
effect from time to time, which rate per annum shall at all times be
equal to the rate of interest announced publicly by the Lender in New
York, New York, from time to time, as the Lender's base rate (which
rate is not necessarily the lowest rate of interest charged by the
Lender).
"Base Rate Advance" means an Advance that bears interest as
provided in Section 2.06(a)(i).
<PAGE>
2
"Borrower" has the meaning specified in the recital of parties
to this Agreement.
"Borrower's Account" means the account of the Borrower
maintained by the Borrower with Wells Fargo Bank, N.A. at its office at
121 Park Center Plaza, San Jose, California 95172, Account No.
684501705.
"Borrowing" means a borrowing consisting of an Advance of a
single Type made by the Lender.
"Business Day" means a day of the year on which banks are not
required or authorized by law to close in San Francisco or New York
City and, if the applicable Business Day relates to any LIBOR Advances
or Federal Funds Rate Advances, on which dealings are carried on in the
London interbank market or Federal funds market, respectively.
"Capitalized Leases" means all leases that have been or should
be, in accordance with GAAP, recorded as capitalized leases.
"Commitment" means, at any time, the amount set forth opposite
the Lender's name on the signature pages hereto under the caption
"Commitment," as such amount may be reduced at or prior to such time by
reductions in the Unused Commitment pursuant to Section 2.04.
"Confidentiality Agreement" means a confidentiality agreement
in substantially the form of Exhibit C.
"Consolidated" refers to the consolidation of accounts in
accordance with GAAP; provided, however, that Asahi Komag Co., Ltd.
shall not be deemed to be a Consolidated Subsidiary of the Borrower for
purposes of this Agreement.
"Conversion", "Convert" and "Converted" each refer to a
conversion of an Advance of one Type into an Advance of another Type
pursuant to Section 2.08 or 2.09.
"Dastek Increase Notice" has the meaning specified in Section
5.03(c).
"Dastek(M)" means Dastek(M) SDN BHD, a Malaysian corporation.
"Default" means any Event of Default or any event that would
constitute an Event of Default but for the requirement that notice be
given or time elapse or both.
<PAGE>
3
"Domestic Lending Office" means the office of the Lender
specified as its "Domestic Lending Office" on the signature pages
hereto or such other office of the Lender as the Lender may from time
to time specify to the Borrower.
"EBITDA" means, for any period, the sum, determined on a
Consolidated basis, of (a) net income (or net loss), (b) interest
expense, (c) income tax expense, (d) depreciation expense and (e)
amortization expense, in each case of the Borrower and its
Subsidiaries, determined in accordance with GAAP for such period.
"Environmental Action" means any action, suit, demand, demand
letter, claim, notice of non-compliance or violation, notice of
liability or potential liability, investigation, proceeding, consent
order or consent agreement relating in any way to any Environmental
Law, any Environmental Permit or Hazardous Material or arising from
alleged injury or threat to health, safety or the environment,
including, without limitation, (a) by any governmental or regulatory
authority for enforcement, cleanup, removal, response, remedial or
other actions or damages and (b) by any governmental or regulatory
authority or third party for damages, contribution, indemnification,
cost recovery, compensation or injunctive relief.
"Environmental Law" means any federal, state, local or foreign
statute, law, ordinance, rule, regulation, code, order, writ, judgment,
injunction, decree or judicial or agency interpretation, policy or
guidance relating to pollution or protection of the environment,
health, safety or natural resources, including, without limitation,
those relating to the use, handling, transportation, treatment,
storage, disposal, release or discharge of Hazardous Materials.
"Environmental Permit" means any permit, approval,
identification number, license or other authorization required under
any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"ERISA Affiliate" means any Consolidated Subsidiary of the
Borrower that for purposes of Title IV of ERISA is a member of the
controlled group of the Borrower, or under common control with the
Borrower, within the meaning of Section 414 of the Internal Revenue
Code.
"ERISA Event" means (a)(i) the occurrence of a reportable
event, within the meaning of Section 4043 of ERISA, with respect to any
Plan unless the 30-day notice requirement with respect to such event
has been waived by the PBGC, or (ii) the requirements of subsection (1)
of Section 4043(b) of ERISA (without regard to
<PAGE>
4
subsection (2) of such Section) are met with respect to a contributing
sponsor, as defined in Section 4001(a)(13) of ERISA, of a Plan, and an
event described in paragraph (9), (10), (11), (12) or (13) of Section
4043(c) of ERISA is reasonably expected to occur with respect to such
Plan within the following 30 days; (b) the application for a minimum
funding waiver with respect to a Plan; (c) the provision by the
administrator of any Plan of a notice of intent to terminate such Plan,
pursuant to Section 4041(a)(2) of ERISA (including any such notice with
respect to a plan amendment referred to in Section 4041(e) of ERISA);
(d) the cessation of operations at a facility of the Borrower or any
ERISA Affiliate in the circumstances described in Section 4062(e) of
ERISA; (e) the withdrawal by the Borrower or any ERISA Affiliate from a
Multiple Employer Plan during a plan year for which it was a
substantial employer, as defined in Section 4001(a)(2) of ERISA; (f)
the conditions for imposition of a lien under Section 302(f) of ERISA
shall have been met with respect to any Plan; (g) the adoption of an
amendment to a Plan requiring the provision of security to such Plan
pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of
proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or
the occurrence of any event or condition described in Section 4042 of
ERISA that constitutes grounds for the termination of, or the
appointment of a trustee to administer, such Plan.
"Eurocurrency Liabilities" has the meaning specified in
Regulation D of the Board of Governors of the Federal Reserve System,
as in effect from time to time.
"Events of Default" has the meaning specified in Section 6.01.
"Federal Funds Advance Rate" means, for any Federal Funds
Interest Period, a fluctuating interest rate per annum equal from time
to time during such Federal Funds Interest Period to the Federal Funds
Rate as in effect from time to time during such Federal Funds Interest
Period.
"Federal Funds Interest Period" means, for each Federal Funds
Rate Advance, the period commencing on the date of such Federal Funds
Rate Advance or the date of the Conversion of any Base Rate Advance or
LIBOR Advance into such Federal Funds Rate Advance, and ending on the
last day of the period selected by the Borrower pursuant to the
provisions below and, thereafter, each subsequent period commencing on
the last day of the immediately preceding Federal Funds Interest Period
and ending on the last day of the period selected by the Borrower
pursuant to the provisions below. The duration of each such Federal
Funds Interest Period shall be one, two, three, six, nine or twelve
months, as the Borrower may, upon notice received by the Lender not
later than 10:00 A.M. (San Francisco time) on the Business Day that is
the first day of such Federal Funds Interest Period, select; provided,
however, that:
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5
(a) whenever the last day of any Federal Funds
Interest Period would otherwise occur on a day other than a
Business Day, the last day of such Federal Funds Interest
Period shall be extended to occur on the next succeeding
Business Day, provided, however, that, if such extension would
cause the last day of such Federal Funds Interest Period to
occur in the next following calendar month, the last day of
such Federal Funds Interest Period shall occur on the next
preceding Business Day; and
(b) whenever the first day of any Federal Funds
Interest Period occurs on a day of an initial calendar month
for which there is no numerically corresponding day in the
calendar month that succeeds such initial calendar month by
the number of months equal to the number of months in such
Federal Funds Interest Period, such Federal Funds Interest
Period shall end on the last Business Day of such succeeding
calendar month.
"Federal Funds Rate" means, for any period, a fluctuating
interest rate per annum equal for each day during such period to the
weighted average of the rates on overnight Federal funds transactions
with members of the Federal Reserve System arranged by Federal funds
brokers, as published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal Reserve Bank
of New York, or, if such rate is not so published for any day that is a
Business Day, the average of the quotations for such day for such
transactions received by the Lender from three Federal funds brokers of
recognized standing selected by it.
"Federal Funds Rate Advance" means an Advance that bears
interest as provided in Section 2.06(a)(iii).
"GAAP" has the meaning specified in Section 1.03.
"Hazardous Materials" means (a) petroleum or petroleum
products, by-products or breakdown products, radioactive materials,
asbestos-containing materials, polychlorinated biphenyls and radon gas
and (b) any other chemicals, materials or substances designated,
classified or regulated as hazardous or toxic or as a pollutant or
contaminant under any Environmental Law.
"Indebtedness" of any Person means, without duplication, (a)
all indebtedness for borrowed money, (b) that portion of obligations
with respect to Capitalized Leases which is classified as a liability
on a balance sheet in conformity with GAAP, (c) notes payable and
drafts accepted representing extensions of credit whether or not
representing obligations for borrowed money, (d) any obligation owed
for all or any part of the deferred purchase price of property or
services which purchase price is (i) due more than six months from the
date of incurrence of the obligation in respect thereof or (ii)
evidenced by a note or similar written instruments, (e) all
Indebtedness secured by any Lien on any property or asset owned or held
by that Person regardless of whether the Indebtedness secured thereby
shall have been assumed by that Person
<PAGE>
6
or is non-recourse to the credit of that Person and (f) all
Indebtedness of others referred to in clauses (a) through (e) above
where both (i) such Indebtedness has become due and payable and demand
for such payment has been made and (ii) such Indebtedness is guaranteed
directly or indirectly in any manner by such Person, or in effect
guaranteed directly or indirectly by such Person through an agreement
(A) to pay or purchase such Indebtedness or to advance or supply funds
for the payment or purchase of such Indebtedness, (B) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell
services, primarily for the purpose of enabling the debtor to make
payment of such Indebtedness or to assure the holder of such
Indebtedness against loss, (C) to supply funds to or in any other
manner invest in the debtor (including any agreement to pay for
property or services irrespective of whether such property is received
or such services are rendered) or (D) otherwise to assure a creditor
against loss.
"Insufficiency" means, with respect to any Plan, the amount,
if any, of its unfunded benefit liabilities, as defined in Section
4001(a)(18) of ERISA.
"Interest Period" means (i) in reference to any LIBOR Advance,
the LIBOR Interest Period for such Advance and (ii) in reference to any
Federal Funds Rate Advance, the Federal Funds Interest Period for such
Advance.
"Internal Revenue Code" means the Internal Revenue Code of
1986, as amended from time to time, and the regulations promulgated and
rulings issued thereunder.
"Lender" has the meaning specified in the recital of parties
to this Agreement.
"Lender's Account" means the account of the Lender maintained
by the Lender at The Dai-Ichi Kangyo Bank, Limited, New York Branch,
One World Trade Center, New York, New York 10048; ABA No. 026-004-307;
Account No. 079-740-111268; Reference: Komag, Incorporated; Attention:
DKB San Francisco Agency.
"LIBO Rate" means, for any Interest Period for all LIBOR
Advances comprising part of the same Borrowing, an interest rate per
annum equal to the rate per annum obtained by dividing
(i) the higher of (A) the rate per annum displayed at
9:00 A.M. (San Francisco time) two Business Days before the first day
of such Interest Period on Telerate page 3750 (or such other page as
may replace such page on the Telerate service for the purpose of
displaying interest rates at which deposits in U.S. dollars are offered
by prime banks in the London interbank market) for deposits in U.S.
dollars in an amount substantially equal to the Advance to which such
Interest Period pertains and for a period equal to such Interest Period
and (B) the rate per annum at which deposits in U.S. dollars are
offered by the principal office of the Lender in London, England, to
prime banks in the London interbank market at 9:00 A.M. (San
<PAGE>
7
Francisco time) two Business Days before the first day of such Interest
Period in an amount substantially equal to the Advance to which such
Interest Period pertains and for a period equal to such Interest
Period; by
(ii) a percentage equal to 100% minus the LIBOR
Reserve Percentage for such Interest Period.
"LIBOR Advance" means an Advance that bears interest as
provided in Section 2.06(a)(ii).
"LIBOR Interest Period" means, for each LIBOR Advance, the
period commencing on the date of such LIBOR Advance or the date of the
Conversion of any Base Rate Advance or Federal Funds Rate Advance into
such LIBOR Advance, and ending on the last day of the period selected
by the Borrower pursuant to the provisions below and, thereafter, each
subsequent period commencing on the last day of the immediately
preceding LIBOR Interest Period and ending on the last day of the
period selected by the Borrower pursuant to the provisions below. The
duration of each such LIBOR Interest Period shall be one, two, three,
six, nine or twelve months, as the Borrower may, upon notice received
by the Lender not later than 10:00 A.M. (San Francisco time) on the
third Business Day prior to the first day of such LIBOR Interest
Period, select; provided, however, that:
(a) whenever the last day of any LIBOR Interest
Period would otherwise occur on a day other than a Business
Day, the last day of such LIBOR Interest Period shall be
extended to occur on the next succeeding Business Day,
provided, however, that, if such extension would cause the
last day of such LIBOR Interest Period to occur in the next
following calendar month, the last day of such LIBOR Interest
Period shall occur on the next preceding Business Day; and
(b) whenever the first day of any LIBOR Interest
Period occurs on a day of an initial calendar month for which
there is no numerically corresponding day in the calendar
month that succeeds such initial calendar month by the number
of months equal to the number of months in such LIBOR Interest
Period, such LIBOR Interest Period shall end on the last
Business Day of such succeeding calendar month.
"LIBOR Lending Office" means the office of the Lender
specified as its "LIBOR Lending Office" on the signature pages hereto,
or such other office of the Lender as the Lender may from time to time
specify to the Borrower.
"LIBOR Reserve Percentage" for any LIBOR Interest Period for
all LIBOR Advances comprising part of the same Borrowing means the
reserve percentage applicable two Business Days before the first day of
such Interest Period under regulations issued from time to time by the
Board of Governors of the Federal
<PAGE>
8
Reserve System (or any successor) for determining the maximum reserve
requirement (including, without limitation, any emergency, supplemental
or other marginal reserve requirement) for a member bank of the Federal
Reserve System in New York City with respect to liabilities or assets
consisting of or including Eurocurrency Liabilities (or with respect to
any other category of liabilities that includes deposits by reference
to which the interest rate on LIBOR Advances is determined) having a
term equal to such LIBOR Interest Period.
"Lien" means any lien, security interest or other charge or
encumbrance of any kind, or any other type of preferential arrangement,
including, without limitation, the lien or retained security title of a
conditional vendor and any easement, right of way or other encumbrance
on title to real property.
"Loan Documents" means this Agreement and the Note, in each
case as amended or otherwise modified from time to time.
"Material Adverse Change" means any material adverse change in
the business, condition (financial or otherwise), operations,
performance or properties of the Borrower and its Consolidated
Subsidiaries, taken as a whole.
"Material Adverse Effect" means any material adverse effect on
(a) the business, condition (financial or otherwise), operations or
properties of the Borrower taken separately or on the Borrower and its
Consolidated Subsidiaries taken as a whole, (b) the rights and remedies
of the Lender under this Agreement or the Note or (c) the ability of
the Borrower to perform its obligations under this Agreement and the
Note.
"Multiemployer Plan" means a multiemployer plan, as defined in
Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA
Affiliate is making or accruing an obligation to make contributions, or
has within any of the preceding five plan years made or accrued an
obligation to make contributions.
"Multiple Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of the Borrower or any ERISA Affiliate and at least one
Person other than the Borrower and the ERISA Affiliates or (b) was so
maintained and in respect of which the Borrower or any ERISA Affiliate
could have liability under Section 4064 or 4069 of ERISA in the event
such plan has been or were to be terminated.
"Net Worth" of any Person means the positive excess of (i) the
Consolidated total assets of such Person and its Subsidiaries over (ii)
the Consolidated total liabilities of such Person and its Subsidiaries,
in each case determined in accordance with GAAP.
<PAGE>
9
"Note" means a promissory note of the Borrower payable to the
order of the Lender, in substantially the form of Exhibit A hereto,
evidencing the indebtedness of the Borrower to the Lender resulting
from the Advances made by the Lender.
"Notice of Borrowing" has the meaning specified in Section
2.02(a).
"OECD" means the Organization for Economic Cooperation and
Development.
"Other Taxes" has the meaning specified in Section 2.11(b).
"PBGC" means the Pension Benefit Guaranty Corporation (or any
successor).
"Person" means an individual, partnership, corporation
(including a business trust), limited liability company, joint stock
company, trust, unincorporated association, joint venture or other
entity, or a government or any political subdivision or agency thereof.
"Plan" means a Single Employer Plan or a Multiple Employer
Plan.
"Scheduled Termination Date" means the fourth anniversary of
the date of this Agreement or such later anniversary thereof as the
Lender shall have agreed to as the Scheduled Termination Date pursuant
to Section 2.13.
"Single Employer Plan" means a single employer plan, as
defined in Section 4001(a)(15) of ERISA, that (a) is maintained for
employees of the Borrower or any ERISA Affiliate and no Person other
than the Borrower and the ERISA Affiliates or (b) was so maintained and
in respect of which the Borrower or any ERISA Affiliate could have
liability under Section 4069 of ERISA in the event such plan has been
or were to be terminated.
"Subsidiary" of any Person means any corporation, partnership,
joint venture, limited liability company, trust or estate of which (or
in which) more than 50% of (a) the issued and outstanding capital stock
having ordinary voting power to elect a majority of the Board of
Directors of such corporation (irrespective of whether at the time
capital stock of any other class or classes of such corporation shall
or might have voting power upon the occurrence of any contingency), (b)
the interest in the capital or profits of such partnership, joint
venture or limited liability company or (c) the beneficial interest in
such trust or estate is at the time directly or indirectly owned or
controlled by such Person, by such Person and one or more of its other
Subsidiaries or by one or more of such Person's other Subsidiaries.
"Tangible Net Worth" means, at any date of determination, the
positive excess of total assets over total liabilities of the Borrower
and its Consolidated Subsidiaries determined on a Consolidated basis,
excluding, however from the determination of total assets (i) all
intangible assets, including, without limitation, goodwill (whether
<PAGE>
10
representing the excess cost over book value of assets acquired or
otherwise), patents, trademarks, trade names, copyrights, franchises,
and deferred charges (including, without limitation, unamortized debt
discount and expense, organization and research and product development
costs), (ii) treasury stock, (iii) cash set apart and held in a sinking
or other analogous fund established for the purpose of redemption or
other retirement of capital stock, and (iv) to the extent not already
deducted from total assets, reserves for depreciation, depletion,
obsolescence, and/or amortization of properties and all other reserves
or appropriation of retained earnings which, in accordance with GAAP,
should be established in connection with the business conducted by the
relevant entity.
"Taxes" has the meaning specified in Section 2.11(a).
"Termination Date" means the earlier of (i) the Scheduled
Termination Date and (ii) the date of termination in whole of the
Commitments pursuant to Section 2.04 or 6.01.
"Total Capitalization" of any Person means the sum of (i) the
amount of Consolidated Indebtedness of such Person and its Subsidiaries
plus (ii) the amount of the Consolidated Net Worth of such Person and
its Subsidiaries.
"Type" refers to the distinction between Advances bearing
interest at the Base Rate, Advances bearing interest at the LIBO Rate
and Advances bearing interest at the Federal Funds Advance Rate.
"Unused Commitment" means, at any time, (a) the Lender's
Commitment at such time minus (b) the sum of (i) the aggregate
principal amount of all Advances made by the Lender and outstanding at
such time.
"Voting Stock" means capital stock issued by a corporation, or
equivalent interests in any other Person, the holders of which are
ordinarily, in the absence of contingencies, entitled to vote for the
election of directors (or persons performing similar functions) of such
Person, even if the right so to vote has been suspended by the
happening of such a contingency.
"Withdrawal Liability" has the meaning specified in Part I of
Subtitle E of Title IV of ERISA.
SECTION 1.02. Computation of Time Periods. In this Agreement
in the computation of periods of time from a specified date to a later specified
date, the word "from" means "from and including" and the words "to" and "until"
each mean "to but excluding".
SECTION 1.03. Accounting Terms. All accounting terms not
specifically defined herein shall be construed in accordance with generally
accepted accounting principles
<PAGE>
11
consistent with those applied in the preparation of the financial statements
referred to in Section 4.01(e) ("GAAP").
ARTICLE II
AMOUNTS AND TERMS OF THE ADVANCES
AND THE LETTERS OF CREDIT
SECTION 2.01. The Advances. The Lender agrees, on the terms
and conditions hereinafter set forth, to make advances (each an "Advance") to
the Borrower from time to time on any Business Day during the period from the
date hereof until the Termination Date in an amount for each such Advance not to
exceed the Lender's Unused Commitment at such time. Each Borrowing shall be in
an aggregate amount of $1,000,000 or an integral multiple of $100,000 in excess
thereof. Within the limits of the Lender's Unused Commitment in effect from time
to time, the Borrower may borrow under this Section 2.01(a), prepay pursuant to
Section 2.05 and reborrow under this Section 2.01(a).
SECTION 2.02. Making the Advances. (a) Each Borrowing shall be
made on notice, given not later than 10:00 A.M. (San Francisco time) on the
third Business Day prior to the date of the proposed Borrowing, in the case of a
Borrowing consisting of a LIBOR Advance, or the Business Day that is the date of
the proposed Borrowing, in the case of a Borrowing consisting of a Base Rate
Advance or Federal Funds Rate Advance, by the Borrower to the Lender. Each such
notice of a Borrowing (a "Notice of Borrowing") shall be by telephone, confirmed
immediately in writing, or telex or telecopier, in substantially the form of
Exhibit B hereto, specifying therein the requested (i) date of such Borrowing,
(ii) Type of Advance comprising such Borrowing, (iii) amount of the Advance to
comprise such Borrowing and (iv) in the case of a Borrowing consisting of a
LIBOR Advance or Federal Funds Rate Advance, initial LIBOR Interest Period or
Federal Funds Interest Period, as the case may be, for such Advance. The Lender
shall, before 2:00 P.M. (San Francisco time) on the date of such Borrowing, make
available for the account of its Applicable Lending Office to the Borrower,
subject to fulfillment of the applicable conditions set forth in Article III,
funds in the amount of the Advance made in such Borrowing by crediting the
Borrower's Account.
(b) Anything in subsection (a) above to the contrary
notwithstanding, (i) the Borrower may not select a LIBOR Advance or Federal
Funds Rate Advance, as the case may be in an amount of less than $1,000,000 or
if the obligation of the Lender to make LIBOR Advances or Federal Funds Rate
Advances, as the case may be, shall then be suspended pursuant to Section 2.08
or Section 2.09 and (ii) not more than six Advances may be outstanding at any
time.
(c) Each Notice of Borrowing shall be irrevocable and binding
on the Borrower. In the case of any Borrowing that the related Notice of
Borrowing specifies is to be comprised of a LIBOR Advance or Federal Funds Rate
Advance, the Borrower shall
<PAGE>
12
indemnify the Lender against any loss, cost or expense incurred by the Lender as
a result of any failure to fulfill on or before the date specified in such
Notice of Borrowing for such Borrowing the applicable conditions set forth in
Article III, including, without limitation, any loss, cost or expense incurred
by reason of the liquidation or reemployment of deposits or other funds acquired
by the Lender to fund the Advance to be made by the Lender in such Borrowing
when such Advance, as a result of such failure, is not made on such date.
SECTION 2.03. Repayment of Advances. The Borrower shall repay
to the Lender on the Termination Date the aggregate outstanding principal amount
of the Advances then outstanding.
SECTION 2.04. Termination or Reduction of the Commitments. The
Borrower may, upon at least five Business Days' notice to the Lender, terminate
in whole or reduce in part the Unused Commitment; provided, however, that each
such partial reduction shall be in an aggregate amount of $1,000,000 or an
integral multiple of $100,000 in excess thereof.
SECTION 2.05. Prepayments. The Borrower may, upon at least one
Business Day's notice in the case of Base Rate Advances or Federal Funds Rate
Advances and three Business Days' notice in the case of LIBOR Advances, in each
case to the Lender stating the proposed date and aggregate principal amount of
the prepayment, and if such notice is given the Borrower shall, prepay the
outstanding aggregate principal amount of an Advance in whole or in part,
together with (i) accrued interest to the date of such prepayment on the
aggregate principal amount prepaid; provided, however, that (x) each partial
prepayment shall be in an aggregate principal amount of $1,000,000 or an
integral multiple of $100,000 in excess thereof and (y) if any prepayment of a
LIBOR Advance or Federal Funds Rate Advance is made on a date other than the
last day of an Interest Period for such Advance the Borrower shall also pay any
amounts owing pursuant to Section 7.04(b).
SECTION 2.06. Interest. (a) Scheduled Interest. The Borrower
shall pay interest on the unpaid principal amount of each Advance owing to the
Lender from the date of such Advance until such principal amount shall be paid
in full, at the following rates per annum:
(i) Base Rate Advances. During such periods as such Advance is
a Base Rate Advance, a rate per annum equal at all times to the Base
Rate in effect from time to time, payable in arrears monthly on the
first day of each month during such periods and on the date such Base
Rate Advance shall be Converted or paid in full.
(ii) LIBOR Advances. During such periods as such Advance is a
LIBOR Advance, a rate per annum equal at all times during each LIBOR
Interest Period for such Advance to the sum of (A) the LIBO Rate for
such Interest Period for such Advance plus (B) 0.375%, payable in
arrears on the last day of such Interest Period and, if such Interest
Period has a duration of more than three months, on each day
<PAGE>
13
that occurs during such Interest Period every three months from the
first day of such Interest Period and on the date such LIBOR Advance
shall be Converted or paid in full.
(iii) Federal Funds Rate Advances. During such periods as such
Advance is a Federal Funds Rate Advance, a rate per annum equal at all
times during each Federal Funds Interest Period for such Advance to the
sum of (A) the Federal Funds Advance Rate in effect from time to time
during such Interest Period plus (B) 0.375%, payable in arrears on the
last day of such Interest Period and, if such Interest Period has a
duration of more than three months, on each day that occurs during such
Interest Period every three months from the first day of such Interest
Period and on the date such Federal Funds Rate Advance shall be
Converted or paid in full.
(b) Default Interest. To the fullest extent permitted by law,
the Borrower shall pay interest on the amount of any principal, interest, fee or
other amount payable hereunder that is not paid when due, from the date such
amount shall be due until such amount shall be paid in full, payable in arrears
on the date such amount shall be paid in full and on demand, at a rate per annum
equal at all times to 2% per annum above the rate per annum required to be paid,
in the case of principal or interest, on the Type of Advance comprised of such
principal or on which such interest has accrued pursuant to clause (a)(i),
(a)(ii) or (a)(iii) above, and, in all other cases, on Base Rate Advances
pursuant to clause (a)(i) above.
SECTION 2.07. Fees. (a) Facility Fee. The Borrower shall pay
to the Lender a facility fee, payable quarterly on the first Business Day of
each December, March, June and September, commencing December 1, 1996, and on
the Termination Date, accruing from the date hereof until the Termination Date
at the rate of 0.1875% per annum on the amount of the Lender's Commitment as in
effect on such due date for payment.
(b) Upfront Fee. The Borrower agrees to pay to the Lender an
upfront fee in the amount $35,000 (being 0.10% of the Commitment on the date
hereof), payable upon execution of this Agreement.
(c) Administration Fee. The Borrower agrees to pay the Lender
an administration fee of $1000 per annum, payable in advance in semiannual
installments of $500 each, with the first such installment to be paid on the
date of execution of this Agreement and each subsequent installment to be paid
on the last day of each six month period after the date of this Agreement until
such time as all obligations under the Credit Agreement have been paid in full
and the Commitment terminated.
SECTION 2.08. Conversion of Advances. (a) Optional. The
Borrower may on any Business Day, upon notice given to the Lender not later than
10:00 A.M. (San Francisco time) on the third Business Day prior to the date of
the proposed Conversion and subject to the provisions of Sections 2.06 and 2.09,
Convert an Advance of one Type into an
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14
Advance of another Type; provided, however, that (i) any Conversion of a LIBOR
Advance into a Base Rate Advance or Federal Funds Rate Advance, and any
Conversion of a Federal Funds Rate Advance into a Base Rate Advance or LIBOR
Advance, shall be made only on the last day of an Interest Period for such LIBOR
Advance or Federal Funds Rate Advance, as the case may be, (ii) any Conversion
of an Advance into a LIBOR Advance or Federal Funds Rate Advance shall be in an
amount not less than the minimum amount specified in Section 2.02(b) and (iii)
no Conversion of any Advance shall result in more Advances being outstanding
than permitted under Section 2.02(b). Each such notice of Conversion shall,
within the restrictions specified above, specify (x) the date of such
Conversion, (y) the Advance to be Converted and (z) if such Conversion is into a
LIBOR Advance or Federal Funds Rate Advance, the duration of the initial
Interest Period for such Advance. Each notice of Conversion shall be irrevocable
and binding on the Borrower.
(b) Mandatory. (i) On the date on which the aggregate unpaid
principal amount of any LIBOR Advance or Federal Funds Rate Advance, as the case
may be, shall be reduced, by payment or prepayment or otherwise, to less than
$1,000,000, such Advance shall automatically Convert into a Base Rate Advance.
(ii) If the Borrower shall fail to select the duration of any
Interest Period for any LIBOR Advance or Federal Funds Rate Advance, as the case
may be, in accordance with the provisions contained in the definition of "LIBOR
Interest Period" or "Federal Funds Interest Period", as the case may be, in
Section 1.01, the Lender will forthwith so notify the Borrower, whereupon each
such LIBOR Advance or Federal Funds Rate Advance, as the case may be, will
automatically, on the last day of the then existing Interest Period therefor,
Convert into a Base Rate Advance.
(iii) Upon the occurrence and during the continuance of any
Event of Default, (x) each LIBOR Advance and each Federal Funds Rate Advance
will automatically, on the last day of the then existing Interest Period
therefor, Convert into a Base Rate Advance and (y) the obligation of the Lender
to make, or to Convert Advances into, LIBOR Advances or Federal Funds Rate
Advances shall be suspended.
SECTION 2.09. Increased Costs, Etc. (a) If, due to either (i)
the introduction of or any change in, or in any written interpretation by any
central bank or other governmental authority of competent jurisdiction of, any
law or regulation or (ii) the compliance with any guideline or request from any
central bank or other governmental authority (whether or not having the force of
law), there shall be any increase in the cost to the Lender of agreeing to make
or of making, funding or maintaining LIBOR Advances (excluding for purposes of
this Section 2.09 any such increased costs resulting from (i) taxes covered by
the gross-up and indemnification provisions of Section 2.11 and (ii) changes in
the basis of taxation of overall net income or overall gross income by the
United States or by the foreign jurisdiction or state under the laws of which
the Lender is organized or has its Applicable Lending Office or any political
subdivision thereof), then the Borrower shall from time to time, upon demand by
the Lender, pay to the Lender additional amounts sufficient to compensate the
Lender for such increased cost; provided, however, that if the Lender should
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15
claim additional amounts under this Section 2.09(a) the Lender agrees to use
reasonable efforts (consistent with its internal policy and legal and regulatory
restrictions) to designate a different Applicable Lending Office if the making
of such a designation would avoid the need for, or reduce the amount of, such
increased cost that may thereafter accrue and would not, in the reasonable
judgment of the Lender, be otherwise disadvantageous to the Lender. A
certificate as to the amount of such increased cost set forth in reasonable
detail, submitted to the Borrower by the Lender, shall be presumptive evidence
of such increased cost.
(b) If, due to either (i) the introduction of or any change
in, or in any written interpretation by any central bank or other governmental
authority of competent jurisdiction of, any law or regulation or (ii) the
compliance with any guideline or request from any central bank or other
governmental authority (whether or not having the force of law), there shall be
any increase in the amount of capital required or expected to be maintained by
the Lender as a result of or based upon the existence of the Lender's commitment
to lend hereunder and other commitments of such type, then, upon demand by the
Lender, the Borrower shall pay to the Lender, from time to time as specified by
the Lender, additional amounts sufficient to compensate the Lender in the light
of such circumstances, to the extent that such increase in capital is allocable
to the existence of the Lender's commitment to lend hereunder. A certificate as
to such amounts submitted to the Borrower by the Lender shall be presumptive
evidence of such increased cost.
(c) If, with respect to any LIBOR Advance or Federal Funds
Rate Advance the Lender reasonably determines that the LIBO Rate or Federal
Funds Interest Rate, as the case may be, for any Interest Period for such
Advance will not adequately reflect the cost to the Lender of making, funding or
maintaining such LIBOR Advance or Federal Funds Rate Advance, as the case may
be, for such Interest Period, the Lender shall forthwith so notify the Borrower,
whereupon (i) such LIBOR Advance or Federal Funds Rate Advance, as the case may
be, will automatically, on the last day of the then existing Interest Period
therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lender
to make, or to Convert Advances into, LIBOR Advances or Federal Funds Rate
Advances, as the case may be, shall be suspended until the Lender shall notify
the Borrower that it has determined that the circumstances causing such
suspension no longer exist.
(d) Notwithstanding any other provision of this Agreement, if
the introduction of or any change in, or in any written interpretation by any
central bank or other governmental authority of competent jurisdiction of, any
law or regulation shall make it unlawful, or any central bank or other
governmental authority shall assert that it is unlawful, for the Lender or its
LIBOR Lending Office to perform its obligations hereunder to make LIBOR Advances
or to continue to fund or maintain LIBOR Advances hereunder, then, on notice
thereof and demand therefor by the Lender to the Borrower, (i) each LIBOR
Advance will automatically, upon such demand, Convert into a Base Rate Advance
and (ii) the obligation of the Lender to make, or to Convert Advances into,
LIBOR Advances shall be suspended until the Lender shall notify the Borrower
that it has determined that the circumstances causing such suspension no longer
exist; provided, however, that, before making any such demand, the Lender agrees
to use reasonable efforts (consistent with its
<PAGE>
16
internal policy and legal and regulatory restrictions) to designate a different
LIBOR Lending Office if the making of such a designation would allow the Lender
or its LIBOR Lending Office to continue to perform its obligations to make LIBOR
Advances or to continue to fund or maintain LIBOR Advances and would not, in the
reasonable judgment of the Lender, be otherwise significantly disadvantageous to
the Lender.
SECTION 2.10. Payments and Computations. (a) The Borrower
shall make each payment hereunder and under the Note, irrespective of any right
of counterclaim or set-off, not later than 11:00 A.M. (San Francisco time) on
the day when due in U.S. dollars to the Lender at the Lender's Account in same
day funds, which shall be applied for the account of the Lender's Applicable
Lending Office.
(b) The Borrower hereby authorizes the Lender, if and to the
extent payment owed to the Lender is not made when due hereunder or under the
Note, to charge from time to time against any or all of the Borrower's accounts
with the Lender any amount so due. The Lender agrees promptly to notify the
Borrower after any such charge to the Borrower's accounts; provided, however,
that the failure to give such notice shall not affect the validity of such
charge.
(c) All computations of interest based on the Base Rate or
Federal Funds Rate shall be made by the Lender on the basis of a year of 365 or
366 days, as the case may be, and all computations of interest based on the LIBO
Rate and of fees shall be made by the Lender on the basis of a year of 360 days,
in each case for the actual number of days (including the first day but
excluding the last day) occurring in the period, if any, for which such interest
or fees are payable. Each determination by the Lender of an interest rate
hereunder or fee payable under Section 2.07, as the case may be, shall be
conclusive and binding for all purposes, absent manifest error.
(d) Whenever any payment hereunder or under the Note shall be
stated to be due on a day other than a Business Day, such payment shall be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest or accruing fees, as
the case may be; provided, however, that, if such extension would cause payment
of interest on or principal of any LIBOR Advance or Federal Funds Rate Advance
to be made in the next following calendar month, such payment shall be made on
the next preceding Business Day.
SECTION 2.11. Taxes. (a) Any and all payments by the Borrower
hereunder shall be made, in accordance with Section 2.10, free and clear of and
without deduction for any and all future (after the date hereof) taxes, levies,
imposts or withholdings, and all liabilities with respect thereto, excluding net
income taxes that are imposed on the Lender by the United States or any other
governmental entity (all such non-excluded taxes, levies, imposts, withholdings
and liabilities in respect of payments hereunder being referred to as "Taxes").
If the Borrower shall be required by law to deduct any Taxes from or in respect
of any sum payable hereunder to the Lender, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions
(including deductions
<PAGE>
17
applicable to additional sums payable under this Section 2.11) the Lender
receives an amount equal to the sum it would have received had no such
deductions been made, (ii) the Borrower shall make such deductions and (iii) the
Borrower shall pay the full amount deducted to the relevant taxation authority
or other authority in accordance with applicable law.
(b) In addition, the Borrower shall pay any present or future
stamp, documentary, excise, property or similar taxes that arise from any
payment made hereunder or from the execution, delivery or registration of,
performing under, or otherwise with respect to, this Agreement or the Note (all
such non-excluded taxes being referred to as "Other Taxes").
(c) The Borrower shall indemnify the Lender for the full
amount of Taxes and Other Taxes, and for the full amount of taxes imposed by any
jurisdiction on amounts payable under this Section 2.11, imposed on or paid by
the Lender and any liability (including penalties, additions to tax, interest
and expenses) arising therefrom or with respect thereto. This indemnification
shall be made within 30 days from the date the Lender makes written demand
therefor accompanied by a reasonably detailed explanation thereof.
(d) Within 30 days after the date of any payment of Taxes, the
Borrower shall furnish to the Lender, at its address referred to in Section
7.02, the original receipt of payment thereof or a certified copy of such
receipt, unless such payment has been made to or through the Lender. In the case
of any payment hereunder by or on behalf of the Borrower through an account or
branch outside the United States or by or on behalf of the Borrower by a payor
that is not a United States person, if the Borrower determines that no Taxes are
payable in respect thereof, the Borrower shall furnish to the Lender a
certificate of the Borrower certifying that such payment is exempt from Taxes.
For purposes of this subsection (d) and subsection (e), the terms "United
States" and "United States person" shall have the meanings specified in Section
7701 of the Internal Revenue Code.
(e) The Lender shall, on or prior to the date of its execution
and delivery of this Agreement, and from time to time thereafter as requested in
writing by the Borrower (but only so long thereafter as the Lender remains
lawfully able to do so), provide the Borrower with two original Internal Revenue
Service forms 1001 or 4224, as appropriate, or any successor or other form
prescribed by the Internal Revenue Service, certifying that the Lender is exempt
from or entitled to a reduced rate of United States withholding tax on payments
pursuant to this Agreement or the Note. If the forms provided by the Lender at
the time the Lender first becomes a party to this Agreement indicate a United
States interest withholding tax rate in excess of zero, withholding tax at such
rate shall be considered excluded from Taxes unless and until the Lender
provides the appropriate form certifying that a lesser rate applies, whereupon
withholding tax at such lesser rate only shall be considered excluded from Taxes
for periods governed by such form. If any form or document referred to in this
subsection (e) requires the disclosure of information, other than information
necessary to compute the tax payable and information required on the date hereof
by Internal Revenue Service form 1001 or 4224, that the Lender reasonably
considers to be
<PAGE>
18
confidential, the Lender shall give notice thereof to the Borrower and shall not
be obligated to include in such form or document such confidential information.
(f) For any period with respect to which the Lender has failed
to provide the Borrower with the appropriate form described in subsection (e)
(other than if such failure is due to a change in law occurring after the date
on which a form originally was required to be provided or if such form otherwise
is not required under subsection (e)), the Lender shall not be entitled to
indemnification under subsection (a) or (c) with respect to Taxes imposed by the
United States by reason of such failure; provided, however, that should the
Lender become subject to Taxes because of its failure to deliver a form required
hereunder, the Borrower shall take such steps as the Lender shall reasonably
request to assist the Lender to recover such Taxes.
(g) Without prejudice to the survival of any other agreement
hereunder, the agreements and obligations of the Borrower contained in Section
2.09 and this Section 2.11 shall survive the payment in full of principal,
interest and all other amounts payable hereunder; provided, however, that the
Borrower's obligation in respect of any claim under Section 2.09 or this Section
2.11 shall terminate on the earlier to occur of (i) the 180th day after the
expiration of all applicable periods under statutes of limitations applicable to
the matters underlying such claims and (ii) the 180th day after any officer of
the Lender having principal responsibility for administering this Agreement on
behalf of the Lender has actual knowledge of the facts giving rise to such
claim. The word "hereunder" as used in this Section 2.11 also includes under the
Note.
SECTION 2.12. Use of Proceeds. The proceeds of the Advances
shall be available solely to provide working capital for the Borrower and for
general corporate purposes of the Borrower.
SECTION 2.13. Extension of Scheduled Termination Date. At
least 45 but not more than 75 days prior to the then current Scheduled
Termination Date, the Borrower, by written notice to the Lender, may request
that the Scheduled Termination Date be extended one calendar year from such then
current Scheduled Termination Date. The Lender shall in turn, within 30 days
after receipt of such extension request notice from the Borrower, notify the
Borrower in writing regarding whether the Lender will consent to such extension.
If, and only if, the Lender consents in writing to such extension prior to the
30th day after its receipt of such extension request notice from the Borrower,
the Scheduled Termination Date shall be so extended for such one calendar year
and references herein to the "Scheduled Termination Date" shall refer to such
"Scheduled Termination Date" as so extended. It is understood that the Lender
shall not have any obligation whatsoever to agree to any request made by the
Borrower for an extension of the Scheduled Termination Date.
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19
ARTICLE III
CONDITIONS OF LENDING
SECTION 3.01. Conditions Precedent to Initial Borrowing. The
obligation of the Lender to make an Advance on the occasion of the initial
Borrowing hereunder is subject to the satisfaction of the following conditions
precedent before or concurrently with the initial Borrowing:
(a) The Borrower shall have paid all accrued fees and expenses
of the Lender (including the accrued fees (up to an amount equal to not
more than the lesser of (x) $19,000 and (y) the sum of $14,000 plus 50%
of such fees in excess of $14,000) and expenses of counsel to the
Lender) to the extent requested as of the date of the initial
Borrowing.
(b) The Lender shall have received on or before the day of the
initial Borrowing the following, each dated such day (unless otherwise
specified), in form and substance satisfactory to the Lender:
(i) A Note payable to the order of the Lender in the
face amount of the Lender's Commitment.
(ii) Certified copies of the resolutions of the Board
of Directors of the Borrower, approving this Agreement and the
Note, and of all documents evidencing other necessary
corporate action and governmental and other third party
approvals and consents, if any, with respect to this Agreement
and the Note.
(iii) A copy of a certificate of the Secretary of
State of the jurisdiction of the Borrower's incorporation,
dated reasonably near the date of the initial Borrowing,
listing the charter of the Borrower and each amendment thereto
on file in his office and certifying that (A) such amendments
are the only amendments to the Borrower's charter on file in
the Secretary of State's office, (B) the Borrower has paid all
franchise taxes to the date of such certificate and (C) the
Borrower is duly incorporated and in good standing under the
laws of the State of the jurisdiction of its incorporation.
(iv) A certificate of the Borrower, signed on behalf
of the Borrower by its Secretary or any Assistant Secretary,
dated the date of the initial Borrowing (the statements made
in which certificate shall be true on and as of the date of
the initial Borrowing), certifying as to (A) the absence of
any amendments to the charter of the Borrower since the date
of the Secretary of State's certificate referred to in Section
3.01(b)(iii) and (B) a true and correct copy of the bylaws of
the Borrower as in effect on the date of the initial
Borrowing.
<PAGE>
20
(v) A certificate of the Secretary or an Assistant
Secretary of the Borrower certifying the names and true
signatures of the officers of the Borrower authorized to sign
this Agreement, the Note and the other documents to be
delivered hereunder.
(vi) A certificate of the Borrower certifying that on
and as of the date of such certificate no event has occurred
or circumstance exists that would reasonably be expected to
result in any Material Adverse Change.
SECTION 3.02. Conditions Precedent to Each Borrowing. The
obligation of the Lender to make an Advance on the occasion of each Borrowing
(including the initial Borrowing) shall be subject to the further conditions
precedent that on the date of such Borrowing (a) the following statements shall
be true (and each of the giving of the applicable Notice of Borrowing and the
acceptance by the Borrower of the proceeds of such Borrowing shall constitute a
representation and warranty by the Borrower that both on the date of such notice
and on the date of such Borrowing such statements are true):
(i) the representations and warranties contained in Article IV
hereof are correct on and as of such date, before and after giving
effect to such Borrowing and to the application of the proceeds
therefrom, as though made on and as of such date ; and
(ii) no event has occurred and is continuing, or would result
from such Borrowing or from the application of the proceeds therefrom,
that constitutes a Default;
and (b) the Lender shall have received such other approvals or documents as the
Lender may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.01. Representations and Warranties of the Borrower.
The Borrower represents and warrants as follows:
(a) The Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction
indicated at the beginning of this Agreement.
(b) The execution, delivery and performance by the Borrower of
this Agreement and the Note are within the Borrower's corporate powers,
have been duly authorized by all necessary corporate action, and (i) do
not and will not contravene, conflict with or result in a breach of or
default under (a) the Borrower's charter or
<PAGE>
21
by-laws or (b) except in the case of any noncompliance that would not
reasonably be expected to have a Material Adverse Effect, any law or
any contractual provision binding on or affecting the Borrower or any
of its Consolidated Subsidiaries and (ii) do not and will not result in
or require the creation or imposition of any Lien upon or in respect of
any of the properties of the Borrower or any of its Consolidated
Subsidiaries. . (c) No authorization or approval or other action by,
and no notice to or filing with, any governmental authority, regulatory
body or other third party is required for the due execution, delivery
and performance by the Borrower of this Agreement or the Note.
(d) This Agreement is, and the Note when delivered hereunder
will be, the legal, valid and binding obligations of the Borrower
enforceable against the Borrower in accordance with their respective
terms, subject to the effect of any applicable bankruptcy, insolvency,
reorganization, liquidation, readjustment of debt, moratorium and other
similar laws affecting creditors' rights generally and to the effect of
general principles of equity.
(e) The Consolidated balance sheets of the Borrower and its
Subsidiaries as at December 31, 1995, and the related Consolidated
statements of income and cash flows of the Borrower and its
Subsidiaries for the fiscal year then ended, accompanied by an opinion
of Ernst & Young, independent public accountants, and the Consolidated
balance sheets of the Borrower and its Subsidiaries as at June 30,
1996, and the related Consolidated statements of income and cash flows
of the Borrower and its Subsidiaries for the six months then ended,
copies of all of which have been furnished to the Lender, fairly
present the financial condition of the Borrower and its Subsidiaries as
at such dates and the results of the operations of the Borrower and its
Subsidiaries for the periods ended on such dates (subject, in the case
of such statements as at June 30, 1996, to customary fiscal year-end
adjustments), all in accordance with generally accepted accounting
principles consistently applied, and since June 30, 1996, there has
been no Material Adverse Change.
(f) There is no pending or, to the Borrower's knowledge,
threatened action, suit, investigation, litigation or proceeding
affecting the Borrower or any of its Consolidated Subsidiaries before
any court, governmental department, commission, board, bureau, agency
or instrumentality, domestic or foreign, or any arbitrator which would
reasonably be expected to result in a Material Adverse Effect.
(g) No proceeds of the Advances will be used to acquire any
equity security, including, without limitation, any equity security of
a class which is registered pursuant to Section 12 of the Securities
Exchange Act of 1934, except to the extent permitted under Section
5.03(b).
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22
(h) The Borrower is not engaged in the business of extending
credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation U issued by the Board of Governors of the
Federal Reserve System), and no proceeds of the Advances will be used
to purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock.
(i) No ERISA Event has occurred or is reasonably expected to
occur with respect to any Plan.
(j) As of the last annual actuarial valuation date, the funded
current liability percentage, as defined in Section 302(d)(8) of ERISA,
of each Plan exceeds 90% and there has been no Material Adverse Change
arising from the funding status of any such Plan since such date.
(k) Neither the Borrower nor any ERISA Affiliate has incurred
or is reasonably expected to incur any Withdrawal Liability to any
Multiemployer Plan.
(l) Neither the Borrower nor any ERISA Affiliate has been
notified by the sponsor of a Multiemployer Plan that such Multiemployer
Plan is in reorganization or has been terminated, within the meaning of
Title IV of ERISA, and no such Multiemployer Plan is reasonably
expected to be in reorganization or to be terminated, within the
meaning of Title IV of ERISA.
(m) Except as set forth in the financial statements referred
to in this Section 4.01 and in Section 5.01, the Borrower and its
Consolidated Subsidiaries have no material liability with respect to
"expected post retirement benefit obligations" within the meaning of
Statement of Financial Accounting Standards No. 106.
(n) The operations and properties of the Borrower and each of
its Consolidated Subsidiaries comply in all material respects with all
applicable Environmental Laws and Environmental Permits, all material
past non-compliance with such Environmental Laws and Environmental
Permits has been resolved without material ongoing obligations or
costs, and no circumstances exist that would reasonably be expected to
form the basis of an Environmental Action against the Borrower or any
of its Consolidated Subsidiaries or any of their properties that would
reasonably be expected to have a Material Adverse Effect.
(o) Neither the Borrower nor any of its Consolidated
Subsidiaries is undertaking, and has not completed, either individually
or together with other potentially responsible parties, any remedial or
response action relating to any actual or threatened release, discharge
or disposal of Hazardous Materials at any site, location or operation,
either voluntarily or pursuant to the order of any governmental or
regulatory authority or the requirements of any Environmental Law,
which such release, discharge or disposal would reasonably be expected
to have a Material Adverse Effect; and all Hazardous Materials
generated, used, treated, handled or
<PAGE>
23
stored at, or transported to or from, any property currently or
formerly owned or operated by the Borrower or any of its Consolidated
Subsidiaries have been disposed of in a manner that would not
reasonably be expected to result in a Material Adverse Effect.
ARTICLE V
COVENANTS OF THE BORROWER
SECTION 5.01. Affirmative Covenants. So long as any amount of
principal or interest or other amount shall remain payable hereunder or under
the Note or the Lender shall have any Commitment hereunder, the Borrower will,
unless the Lender shall otherwise consent in writing:
(a) Compliance with Laws, Etc. Comply, and cause each of its
Consolidated Subsidiaries to comply, in all material respects with all
applicable laws, rules, regulations and orders, such compliance to
include, without limitation, compliance with ERISA and the Racketeer
Influenced and Corrupt Organizations Chapter of the Organized Crime
Control Act of 1970, except for such noncompliance as would not
reasonably be expected to result in a Material Adverse Effect.
(b) Payment of Taxes, Etc. Pay and discharge, and cause each
of its Consolidated Subsidiaries (except Dastek(M)) to pay and
discharge, before the same shall become delinquent, (i) all taxes,
assessments and governmental charges or levies imposed upon it or upon
its property and (ii) all lawful claims that, if unpaid, would be
likely by law to become a Lien upon its property; provided, however,
that neither the Borrower nor any of its Consolidated Subsidiaries
shall be required to pay or discharge any such tax, assessment, charge
or claim that is being contested in good faith and by proper
proceedings and as to which appropriate reserves are being maintained,
unless and until any Lien resulting therefrom attaches to its property,
becomes enforceable against its other creditors and secures an amount
that would be material to the Borrower and its Consolidated
Subsidiaries, taken as a whole.
(c) Compliance with Environmental Laws. Comply, and cause each
of its Consolidated Subsidiaries and all lessees and other Persons
operating or occupying its properties to comply, in all material
respects, with all applicable Environmental Laws and Environmental
Permits; obtain and renew and cause each of its Consolidated
Subsidiaries to obtain and renew all Environmental Permits necessary
for its operations and properties; and conduct, and cause each of its
Subsidiaries to conduct, any investigation, study, sampling and
testing, and undertake any cleanup, removal, remedial or other action
necessary to remove and clean up all Hazardous Materials from any of
its properties, in accordance with the requirements of all
Environmental Laws except, in each case, where the failure to do so
would not reasonably be expected to result in a Material Adverse
Effect; provided, however, that neither the
<PAGE>
24
Borrower nor any of its Consolidated Subsidiaries shall be required to
undertake any such cleanup, removal, remedial or other action to the
extent that its obligation to do so is being contested in good faith
and by proper proceedings and appropriate reserves are being maintained
with respect to such circumstances.
(d) Maintenance of Insurance. Maintain, and cause each of its
Consolidated Subsidiaries (except Dastek(M)) to maintain, insurance
with responsible and reputable insurance companies or associations in
such amounts and covering such risks as is usually carried by companies
engaged in similar businesses and owning similar properties in the same
general areas in which the Borrower or such Consolidated Subsidiary
operates.
(e) Preservation of Corporate Existence, Etc. Preserve and
maintain, and cause each of its Consolidated Subsidiaries (except
Dastek(M) and Dastek Holding Company) to preserve and maintain, its
existence, legal structure, legal name, rights (charter and statutory),
permits, licenses, approvals, privileges and franchises except, in the
case of any Consolidated Subsidiary, where failure to do so would not
reasonably be expected to result in a Material Adverse Effect;
provided, however, that the Borrower and its Consolidated Subsidiaries
may consummate any merger or consolidation permitted under Section
5.03(a).
(f) Visitation Rights. At any reasonable time, upon reasonable
prior notice, and from time to time, permit the Lender or any agents or
representatives thereof to examine and make copies of and abstracts
from the records and books of account of, and visit the properties of,
the Borrower and any of its Consolidated Subsidiaries (except Dastek(M)
and Dastek Holding Company), and to discuss the affairs, finances and
accounts of the Borrower and any of its Consolidated Subsidiaries
(except Dastek(M) and Dastek Holding Company) with any of their
officers or directors and with their independent certified public
accountants.
(g) Keeping of Books. Keep, and cause each of its Consolidated
Subsidiaries to keep, proper books of record and account, in which full
and correct entries shall be made of all financial transactions and the
assets and business of the Borrower and each such Consolidated
Subsidiary in accordance with GAAP.
(h) Maintenance of Properties, Etc. Maintain and preserve, and
cause each of its Consolidated Subsidiaries (except Dastek(M) and
Dastek Holding Company) to maintain and preserve, all of its properties
that are used or useful in the conduct of its business in good working
order and condition, except for ordinary wear and except for any
dispositions of, or alterations in, such properties as would not
reasonably be expected to result in a Material Adverse Effect.
(i) Reporting Requirements. Furnish to the Lender:
<PAGE>
25
(i) as soon as available and in any event within 60
days after the end of each of the first three quarters of each
fiscal year of the Borrower, Consolidated balance sheets of
the Borrower and its Consolidated Subsidiaries as of the end
of such quarter and Consolidated statements of income and cash
flows of the Borrower and its Consolidated Subsidiaries for
the period commencing at the end of the previous fiscal year
and ending with the end of such quarter, certified by the
chief financial officer of the Borrower as having been
prepared in accordance with GAAP, together with (i) a
certificate of said officer stating that no Default or Event
of Default has occurred and is continuing or, if a Default or
Event of Default has occurred and is continuing, a statement
as to the nature thereof and the action that the Borrower has
taken and proposes to take with respect thereto and (ii) a
schedule, in substantially the form of Exhibit D, setting
forth the computations used by the Borrower in determining
compliance, as at the end of such fiscal quarter, with the
covenants contained in Section 5.02;
(ii) as soon as available and in any event within 120
days after the end of each fiscal year of the Borrower, a copy
of the annual audit report for such year for the Borrower and
its Consolidated Subsidiaries, containing Consolidated balance
sheets of the Borrower and its Consolidated Subsidiaries as at
the end of such fiscal year and Consolidated statements of
income and cash flows of the Borrower and its Consolidated
Subsidiaries for such fiscal year, in each case accompanied by
an opinion reasonably acceptable to the Lender of Ernst &
Young or other independent public accountants of recognized
standing acceptable to the Lender, together with (i) a
certificate of the chief financial officer of the Borrower
stating that no Default or Event of Default has occurred and
is continuing or, if a Default or Event of Default has
occurred and is continuing, a statement as to the nature
thereof and the action that the Borrower has taken and
proposes to take with respect thereto and (ii) a schedule, in
substantially the form of Exhibit D, setting forth of the
computations used by the Borrower in determining compliance,
as at the end of the such fiscal year, with the covenants
contained in Section 5.02;
(iii) as soon as possible and in any event within
three Business Days occurrence of each Default or Event of
Default or any event, development or occurrence reasonably
likely to have a Material Adverse Effect continuing on the
date of such statement, a statement of the chief financial
officer of the Borrower setting forth the material details of
such Default, Event of Default or event, development or
occurrence and the action that the Borrower has taken and
proposes to take with respect thereto;
(iv) promptly after the sending or filing thereof,
copies of all proxy statements, financial statements and
reports that the Borrower or any of its Consolidated
Subsidiaries sends in a general distribution to its security
holders, and copies of all reports and registration statements
that the Borrower or any
<PAGE>
26
of its Consolidated Subsidiaries files with the Securities and
Exchange Commission or any national securities exchange;
(v) (i) promptly and in any event within 10 Business
Days after the Borrower or any ERISA Affiliate knows that any
ERISA Event has occurred, a statement of the chief financial
officer of the Borrower describing such ERISA Event and the
action, if any, that the Borrower or such ERISA Affiliate has
taken and proposes to take with respect thereto and (ii)
promptly after the filing or receiving thereof, copies of all
material reports and notices that the Borrower or any of its
Consolidated Subsidiaries files under ERISA with the Internal
Revenue Service or the PBGC or the U.S. Department of Labor or
that the Borrower or any of its Consolidated Subsidiaries
receives from the PBGC; and
(vi) such other information respecting the condition
or operations, financial or otherwise, of the Borrower or any
of its Consolidated Subsidiaries as the Lender may from time
to time reasonably request.
SECTION 5.02. Financial Covenants. So long as any amount of
principal or interest or other amount shall remain payable hereunder or under
the Note or the Lender shall have any Commitment hereunder, the Borrower will,
unless the Lender shall otherwise consent in writing:
(a) Fixed Charge Coverage Ratio. Maintain, at the end of each
fiscal quarter of the Borrower, a ratio of Consolidated EBITDA of the
Borrower and its Consolidated Subsidiaries for the four-quarter period
of such fiscal quarter and the immediately preceding three fiscal
quarters of the Borrower to the sum of (i) interest expense plus (ii)
scheduled principal amounts payable, in each case, by the Borrower and
its Consolidated Subsidiaries during such four-quarter period, of not
less than 2.00 to 1.00.
(b) Debt to Capitalization Ratio. Maintain, at all times, a
ratio of the Consolidated Indebtedness of the Borrower and its
Consolidated Subsidiaries to the Consolidated Total Capitalization of
the Borrower and its Consolidated Subsidiaries of not more that 0.60 to
1.00.
(c) Tangible Net Worth. Maintain, at the end of each fiscal
quarter of the Borrower, a Consolidated Tangible Net Worth of the
Borrower and its Consolidated Subsidiaries of not less that the sum of
(i) $400,000,000 plus (ii) 50% of the cumulative Consolidated positive
net income of the Borrower and its Consolidated Subsidiaries for the
fiscal year of the Borrower ending on or most recently prior to the
last day of such fiscal quarter.
SECTION 5.03. Negative Covenants. So long as any amount of
principal or interest or other amount shall remain payable hereunder or under
the Note or the Lender
<PAGE>
27
shall have any Commitment hereunder, the Borrower will not, without the written
consent of the Lender:
(a) Mergers, Etc. Merge or consolidate with or into, or
convey, transfer, lease or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of
its assets (whether now owned or hereafter acquired) to, any Person, or
permit any of its Consolidated Subsidiaries (except Dastek(M)) to do
so, except that any Subsidiary of the Borrower may merge or consolidate
with or into, or dispose of assets to, any Consolidated Subsidiary of
the Borrower and except that any Subsidiary of the Borrower may merge
into or dispose of assets to the Borrower, provided in each case that,
immediately after giving effect to such proposed transaction, no
Default or Event of Default would exist and in the case of any such
merger to which the Borrower is a party, the Borrower is the surviving
corporation.
(b) Use of Proceeds. Use the proceeds of any Advance to
acquire any equity security, including, without limitation, any equity
security of a class which is registered pursuant to Section 12 of the
Securities Exchange Act of 1934 unless prior to such acquisition the
Lender shall have received written evidence, in form reasonably
satisfactory to the Lender, of the prior approval of such acquisition,
to the extent required under applicable law or the organizational
documents of the issuer of such equity security for the effective
consummation of such acquisition, by the board of directors or
equivalent governing body of such issuer and the holders of stock or
other equity of such issuer.
(c) Dastek(M) and Dastek Holding Company. Make or permit any
material increase in the investment of the Borrower or any of its
Subsidiaries in Dastek(M) or Dastek Holding Company or in the
obligations of Dastek(M) or Dastek Holding Company owing to the
Borrower or any of its Subsidiaries or permit any material increase in
the operations of or business of Dastek(M) or Dastek Holding Company
unless, in any case, the Borrower shall have notified the Lender of
such increase in investment or operations in respect of Dastek(M) or
Dastek Holding Company, as the case may be, in a notice dated and
delivered before the effectiveness of such increase (such notice being
a "Dastek Increase Notice").
SECTION 5.04. Effect of Dastek Increase Notice. In the event
that the Borrower should deliver a Dastek Increase Notice in respect of
Dastek(M) or Dastek Holding Company, as the case may be, then (i) on and after
the date of such Dastek Increase Notice, in the case of a Dastek Increase Notice
in respect of Dastek(M), the terms of this Agreement shall apply, and this
Agreement shall be construed, without regard to any exception set forth in the
terms hereof for Dastek (M) and (ii) on and after the date of such Dastek
Increase Notice, in the case of a Dastek Increase Notice in respect of Dastek
Holding Company, the terms of this Agreement shall apply, and this Agreement
shall be construed, without regard to any exception set forth in the terms
hereof for Dastek Holding Company.
<PAGE>
28
ARTICLE VI
EVENTS OF DEFAULT
SECTION 6.01. Events of Default. If any of the following
events ("Events of Default") shall occur and be continuing:
(a) The Borrower (i) shall fail to pay any principal of the
Advances under this Agreement when the same becomes due and payable or
(ii) shall fail to pay any interest on the Advances under this
Agreement or any fee payable hereunder within five Business Days after
such interest or fee becomes due and payable; or
(b) Any representation or warranty made by the Borrower herein
or by the Borrower (or any of its officers) in connection with this
Agreement or in any certificate or document delivered in connection
herewith shall prove to have been incorrect in any material respect
when made; or
(c) The Borrower shall fail to perform or observe (i) any
term, covenant or agreement contained in Sections 5.01(a), (c) or (e),
Section 5.02 or Section 5.03 or (ii) any other term, covenant or
agreement contained in this Agreement on its part to be performed or
observed if such failure referred to in this clause (ii) shall remain
unremedied for 30 days after written notice thereof shall have been
given to the Borrower by the Lender; or
(d) The Borrower or any of its Consolidated Subsidiaries
(except Dastek(M)) shall fail to pay (after written demand therefor)
any amount on any Indebtedness (other than Indebtedness under this
Agreement) under any agreement, document or instrument (or related
group thereof) providing for Indebtedness in an aggregate principal or
notional amount of $20,000,000 or more when the same becomes due and
payable (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise), and such failure shall continue
after the applicable grace period, if any, specified in the agreements,
documents or instruments relating to such Indebtedness; or any other
event shall occur or condition shall exist under any agreement,
document or instrument relating to any such Indebtedness and shall
continue after the applicable grace period, if any, specified in such
agreement, document or instrument, if the effect of such event or
condition is to accelerate, or to permit the acceleration of, the
maturity of such Indebtedness; or any such Indebtedness shall be
declared in a written notice to be due and payable, or required in a
written notice to be prepaid (other than by a regularly scheduled
required prepayment), prior to the stated maturity thereof; or
(e) The Borrower or any of its Consolidated Subsidiaries
(except Dastek(M)) shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of
creditors; or any proceeding shall be instituted by or against the
<PAGE>
29
Borrower or any of its Consolidated Subsidiaries (except Dastek(M))
seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment
of a receiver, trustee, custodian or other similar official for it or
for any substantial part of its property and, in the case of any such
proceeding instituted against it (but not instituted by it), either
such proceeding shall remain undismissed or unstayed for a period of 30
days, or any of the actions sought in such proceeding (including,
without limitation, the entry of an order for relief against, or the
appointment of a receiver, trustee, custodian or other similar official
for, it or for any substantial part of its property) shall occur; or
the Borrower or any of its Consolidated Subsidiaries (except Dastek(M))
shall take corporate action to authorize any of the actions set forth
above in this subsection (e); or
(f) Any single judgment or order for the payment of money in
excess of $15 million (and which is not covered at least 75% by
insurance or an indemnity of a Person that is not an Affiliate of the
Borrower) shall be rendered against the Borrower or any of its
Consolidated Subsidiaries (except Dastek(M)) and either (i) enforcement
proceedings shall have been commenced by any creditor upon such
judgment or order or (ii) there shall be any period of 30 consecutive
days during which a stay of enforcement of such judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; or
(g) (i) any Person or two or more Persons acting in concert
shall have acquired beneficial ownership (within the meaning of Rule
13d-3 of the Securities and Exchange Commission under the Securities
Exchange Act of 1934), directly or indirectly, of Voting Stock of the
Borrower (or other securities convertible into such Voting Stock)
representing 50% or more of the combined voting power of all Voting
Stock of the Borrower; or (ii) during any period of up to 24
consecutive months, commencing before or after the date of this
Agreement, individuals who at the beginning of such 24-month period
were directors of the Borrower shall cease for any reason to constitute
a majority of the board of directors of the Borrower (excluding
ordinary course attrition of directors, which shall not be counted when
determining if the test in this clause (ii) has been satisfied and
which shall not in any way be restricted by this clause (ii)); or (iii)
any Person or two or more Persons acting in concert shall have acquired
by contract or otherwise, or shall have entered into a contract or
arrangement that, upon consummation, will result in its or their
acquisition of the power to exercise, directly or indirectly, 50% or
more of the combined voting power of all Voting Stock of the Borrower;
or
(h) any ERISA Event shall have occurred with respect to a Plan
and the sum (determined as of the date of occurrence of such ERISA
Event) of the Insufficiency of such Plan and the Insufficiency of any
and all other Plans with respect to which an ERISA Event shall have
occurred and then exist (or the liability
<PAGE>
30
of the Borrower and the ERISA Affiliates related to such ERISA Event)
exceeds $15 million; or
(i) the Borrower or any ERISA Affiliate shall have been
notified by the sponsor of a Multiemployer Plan that it has incurred
Withdrawal Liability to such Multiemployer Plan in an amount that, when
aggregated with all other amounts required to be paid to Multiemployer
Plans by the Borrower and the ERISA Affiliates as Withdrawal Liability
(determined as of the date of such notification), exceeds $15 million
or requires per annum payments exceeding $15 million; or
(j) the Borrower or any ERISA Affiliate shall have been
notified by the sponsor of a Multiemployer Plan that such Multiemployer
Plan is in reorganization or is being terminated, within the meaning of
Title IV of ERISA, and as a result of such reorganization or
termination the aggregate annual contributions of the Borrower and the
ERISA Affiliates to all Multiemployer Plans that are then in
reorganization or being terminated have been or will be increased over
the amounts contributed to such Multiemployer Plans for the plan years
of such Multiemployer Plans immediately preceding the plan year in
which such reorganization or termination occurs by an amount exceeding
$15 million;
then, and in any such event, the Lender (i) may, by notice to the Borrower,
declare any obligation to make Advances to be terminated, whereupon the same
shall forthwith terminate, and (ii) may, by notice to the Borrower, declare the
Advances and the Note, all interest thereon and all other amounts payable
thereunder and under this Agreement to be forthwith due and payable, whereupon
the Advances and the Note, all such interest and 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 hereby expressly waived by the
Borrower; provided, however, that in the event of an actual or deemed entry of
an order for relief with respect to the Borrower under the Federal Bankruptcy
Code (11 U.S.C. ss.ss. 101 et seq., as amended, or its successor), (A) any
obligation of the Lender to make any Advance shall automatically be terminated
and (B) the Advances and the Note, all such interest and all such amounts shall
automatically become and be due and payable, without presentment, demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Borrower.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Amendments, Etc. No amendment or waiver of any
provision of this Agreement or the Note, nor consent to any departure by the
Borrower therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
<PAGE>
31
SECTION 7.02. Notices, Etc. All notices and other
communications provided for hereunder shall be in writing (including telecopy
communication) and mailed, telecopied or delivered, if to the Borrower, at its
address at 275 South Hillview Drive, Milpitas, California 95035, Attention:
David Allen, Treasurer; if to the Lender, at its address at 101 California
Street, Suite 4000, San Francisco, California 94111, Attention: Mark Dirsa; or,
as to either party, at such other address as shall be designated by such party
in a written notice to the other party. All such notices and communications
shall, when mailed or telecopied, be effective when deposited in the mails or
transmitted by telecopier, respectively, except that notices and communications
to the Lender pursuant to Article II or III shall not be effective until
received by the Lender. Delivery by telecopier of an executed counterpart of any
amendment or waiver of any provision of this Agreement shall be effective as
delivery of a manually executed counterpart thereof.
SECTION 7.03. No Waiver; Remedies. No failure on the part of
the Lender to exercise, and no delay in exercising, any right hereunder or under
the Note shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right preclude any other or further exercise thereof or the
exercise of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 7.04. Costs, Expenses. (a) The Borrower agrees to pay
within 30 days after demand in the form of a reasonably detailed bill therefor
(i) all reasonable costs and expenses of the Lender in connection with the
preparation, execution, delivery, administration, modification and amendment of
the Loan Documents and the other documents to be delivered hereunder (including,
without limitation, the reasonable fees and expenses of counsel for the Lender
with respect thereto, with respect to advising the Lender as to its rights and
responsibilities, or the perfection, protection or preservation of rights or
interests, under the Loan Documents, with respect to negotiations with the
Borrower or with other creditors of the Borrower or any of its Subsidiaries
arising out of any Default or any events or circumstances that may give rise to
a Default and with respect to presenting claims in or otherwise participating in
or monitoring any bankruptcy, insolvency or other similar proceeding involving
creditors' rights generally and any proceeding ancillary thereto); provided,
however, that the Borrower's obligation hereunder to pay the fees of the
Lender's counsel, to the extent such fees are incurred in connection with the
preparation, execution and delivery of the Loan Documents and accrued through
the time of the initial Borrowing hereunder, shall be limited to an amount not
in excess of the lesser of (x) $19,000 and (y) the sum of $14,000 plus 50% of
such fees in excess of $14,000, and (ii) all reasonable costs and expenses of
the Lender in connection with the enforcement of the Loan Documents, whether in
any action, suit or litigation, any bankruptcy, insolvency or other similar
proceeding affecting creditors' rights generally (including, without limitation,
the reasonable fees and expenses of counsel for the Lender with respect thereto;
provided, however, that (1) the Borrower's obligations under this Section
7.04(a) to pay fees and expenses of counsel retained by the Lender in respect of
any matter referred to in clause (i) hereof or in respect of any single action,
suit, litigation or proceeding referred to in clause (ii) hereof shall not apply
beyond the fees and expenses of one firm of general outside counsel together
with one firm of local counsel in each relevant jurisdiction for each such
matter, action, suit, litigation
<PAGE>
32
or proceeding and (2) nothing contained herein shall obligate the Borrower to
pay the fees or expenses of any counsel retained by any assignee of the Lender
hereunder.
(b) If any payment of principal of, or Conversion of, any
LIBOR Advance or Federal Funds Rate Advance is made by the Borrower to or for
the account of the Lender other than on the last day of the Interest Period for
such Advance, as a result of a payment or Conversion pursuant to Section
2.08(b)(i) or 2.09(d), acceleration of the maturity of the Note pursuant to
Section 6.01 or for any other reason, the Borrower shall, upon demand by the
Lender (accompanied with a written statement explaining in reasonable detail the
basis of the demand), pay to the Lender any amounts required to compensate the
Lender for any additional losses, costs or expenses that it reasonably incurs as
a result of such payment, including, without limitation, any loss, cost or
expense incurred by reason of the liquidation or reemployment of deposits or
other funds acquired by the Lender to fund or maintain such Advance but not
including loss of anticipated profits.
SECTION 7.05. Right of Set-off. Upon (a) the occurrence and
during the continuance of any Event of Default and (b) the declaration of the
Note due and payable pursuant to the provisions of Section 6.01, the Lender is
hereby authorized at any time and from time to time, to the fullest extent
permitted by law, to set off and otherwise apply any and all deposits (general
or special, time or demand, provisional or final) at any time held and other
indebtedness at any time owing by the Lender to or for the credit or the account
of the Borrower against any and all of the obligations of the Borrower now or
hereafter existing under this Agreement and the Note, irrespective of whether
the Lender shall have made any demand under this Agreement or the Note. The
Lender agrees promptly to notify the Borrower after any such set-off and
application; provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application. The rights of the Lender
under this Section are in addition to other rights and remedies (including,
without limitation, other rights of set-off) that the Lender may have.
SECTION 7.06. Binding Effect. This Agreement shall become
effective when it shall have been executed by the Borrower and the Lender and
thereafter shall be binding upon and inure to the benefit of the Borrower and
the Lender and their respective successors and assigns, except that the Borrower
shall not have the right to assign its rights hereunder or any interest herein
without the prior written consent of the Lender.
SECTION 7.07. Assignments and Participation. (a) The Lender
may assign to one or more Persons all or a portion of its rights and obligations
under this Agreement (including, without limitation, all or a portion of its
Commitment, the Advances owing to it and the Note held by it); provided,
however, that (i) each such assignment (other than to an Affiliate of the
Lender) shall be made only with the written approval of the Borrower and (ii) no
such assignment shall result in the Lender holding a combination of Advances and
Unused Commitment in an aggregate amount of less than 51% of the aggregate
amount of the Advances and Unused Commitment.
<PAGE>
33
(b) The Lender may sell participations to one or more Persons
(other than (x) the Borrower or any of its Affiliates or (y) any Person that is,
or has Affiliates that are, engaged in any line of business in competition with
the Borrower or any of the Borrower's Affiliates) in or to all or a portion of
its rights and obligations under this Agreement (including, without limitation,
all or a portion of its Commitment, the Advances owing to it and the Note held
by it); provided, however, that (i) the Lender's obligations under this
Agreement (including, without limitation, its Commitment) shall remain
unchanged, (ii) the Lender shall remain solely responsible to the Borrower for
the performance of such obligations, (iii) the Lender shall remain the holder of
its Note for all purposes of this Agreement, (iv) the Borrower shall continue to
deal solely and directly with the Lender in connection with the Lender's rights
and obligations under this Agreement and (v) no participant under any such
participation shall have any right to approve any amendment or waiver of any
provision of any Loan Document, or any consent to any departure by the Borrower
therefrom, except to the extent that such amendment, waiver or consent would
reduce the principal of, or interest on, the Note or any fees payable to the
Lender or other amounts payable hereunder, in each case to the extent subject to
such participation, postpone any date fixed for any payment of principal of, or
interest on, the Note or any fees or other amounts payable hereunder, in each
case to the extent subject to such participation.
(c) The Lender may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
7.07, disclose to the assignee or participant or proposed assignee or
participant, any information relating to the Borrower furnished to the Lender by
or on behalf of the Borrower; provided, however, that, prior to any such
disclosure, the assignee or participant or proposed assignee or participant
shall agree to preserve the confidentiality of any confidential information
received by it from the Lender on the terms provided for in the Confidentiality
Agreement.
(d) Notwithstanding any other provision set forth in this
Agreement, the Lender may at any time assign any of its rights and obligations
under this Agreement to any of its Affiliates without notice to or consent of
the Borrower; and the Lender or its Affiliates may at any time create a security
interest in all or any portion of its rights under this Agreement (including,
without limitation, the Advances owing to it and the Note held by it) in favor
of any Federal Reserve Bank in accordance with Regulation A of the Board of
Governors of the Federal Reserve System without notice to or consent of the
Borrower.
SECTION 7.08. Execution in Counterparts. This Agreement may be
executed in any number of counterparts and by different parties hereto in
separate counterparts, each of which when so executed shall be deemed to be an
original and all of which taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page to this
Agreement by telecopier shall be effective as delivery of a manually executed
counterpart of this Agreement.
SECTION 7.09. Confidentiality. Concurrently with its execution
and delivery of this Agreement, the Lender will execute and deliver a
Confidentiality Agreement to the Borrower.
<PAGE>
34
SECTION 7.10. Governing Law. This Agreement and the Note shall
be governed by, and construed in accordance with, the laws of the State of
California.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
KOMAG, INCORPORATED
By ______________________________________________
Name:
Title:
THE DAI-ICHI KANGYO BANK,
LIMITED, acting through its San Francisco Agency
By ______________________________________________
Name:
Title:
Commitment: $35,000,000
Domestic Lending Office:
101 California Street, Suite 4000
San Francisco, California 94111
LIBOR Lending Office:
101 California Street, Suite 4000
San Francisco, California 94111
<PAGE>
EXHIBIT A
to
Credit Agreement dated as of October 7, 1996
PROMISSORY NOTE
$35,000,000.00 Dated: ______________
FOR VALUE RECEIVED, the undersigned, Komag, Incorporated, a
Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of
The Dai-Ichi Kangyo Bank, Limited (the "Lender"), acting through its San
Francisco Agency for the account of its Applicable Lending Office (as defined in
the Credit Agreement referred to below) the aggregate principal amount of the
Advances (as defined below) owing to the Lender by the Borrower pursuant to the
Credit Agreement dated as of October 7, 1996 (as amended, supplemented or
otherwise modified from time to time, the "Credit Agreement"; terms defined
therein being used herein as therein defined) between the Borrower and the
Lender, on the Termination Date.
The Borrower promises to pay interest on the unpaid principal
amount of each Advance from the date of such Advance until such principal amount
is paid in full, at such interest rates, and payable at such times, as are
specified in the Credit Agreement.
Both principal and interest are payable in lawful money of the
United States of America to the Lender at the Lender's Account (as defined in
the Credit Agreement), in same day funds. Each Advance owing to the Lender by
the Borrower and the maturity thereof, and all payments made on account of
principal thereof, shall be recorded by the Lender and, prior to any transfer
hereof, endorsed on the grid attached hereto, which is part of this Promissory
Note.
This Promissory Note is the Note referred to in, and is
entitled to the benefits of, the Credit Agreement. The Credit Agreement, among
other things, (i) provides for the making of advances (the "Advances") by the
Lender to the Borrower from time to time in an aggregate amount not to exceed at
any time outstanding the U.S. dollar amount first above mentioned, the
indebtedness of the Borrower resulting from each such Advance being evidenced by
this Promissory Note, and (ii) contains provisions for acceleration of the
maturity hereof upon the happening of certain stated events and also for
prepayments on
<PAGE>
2
account of principal hereof prior to the maturity hereof upon the terms and
conditions therein specified.
KOMAG, INCORPORATED
By ______________________________________________
Name:
Title:
FIRST AMENDMENT AGREEMENT
THIS FIRST AMENDMENT AGREEMENT (this "Amendment"), is entered
into as of November 25, 1996, between Komag, Incorporated, a Delaware
corporation (the "Borrower"), and The Dai-Ichi Kangyo Bank, Limited (the
"Lender").
WHEREAS, the Borrower and the Lender are parties to a Credit
Agreement dated as of October 7, 1996 (the "Agreement");
WHEREAS, the Borrower has requested that the Lender agree to a
certain amendment to the Agreement and the Lender has agreed to such request,
subject to the terms and conditions hereof;
NOW, THEREFORE, in consideration of the mutual agreements,
provisions and covenants contained herein, the parties hereto agree as follows:
1. Definitions. All capitalized terms used in this Amendment
(including in the recitals hereof) and not otherwise defined herein shall have
the meanings assigned to them in the Agreement.
2. Amendment to the Agreement. In Section 1.01 of the
Agreement, the definition of "Borrower's Account" is amended by inserting the
phrase "with the number 12336-23191 that is maintained by the Borrower with Bank
of America NT & SA at GPO-Account Administration-5693, 1850 Gateway Boulevard,
8th Floor, Concord, CA 94520 (with wire payments to be made for credit to Komag,
Incorporated, ABA No. 121000358, at such account number)" in lieu of the
existing phrase "maintained by the Borrower with Wells Fargo Bank, N.A. at its
office at 121 Park Center Plaza, San Jose, California 95172, Account No.
684501705".
3. Condition of Effectiveness. The effectiveness of Section 2
of this Amendment shall be subject to the condition that the Lender shall have
received on or before the date hereof this Amendment executed and delivered by a
duly authorized officer of the Borrower.
4. Miscellaneous.
(a) Agreement Otherwise Not Affected. Except as
expressly amended pursuant hereto, the Agreement shall remain unchanged and in
full force and effect and is hereby ratified and confirmed in all respects.
(b) Counterparts. This Amendment may be executed by
one or more of the parties to this Amendment in any number of separate
counterparts, each of which, when so executed, shall be deemed an original, and
all of said counterparts taken together shall be deemed to constitute but one
and the same instrument. A set of the copies of this Amendment signed by all the
parties shall be lodged with the Borrower and the Lender.
(c) Governing Law. THIS AMENDMENT SHALL BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.
KOMAG, INCORPORATED
1.
<PAGE>
By: /s/ William L. Potts, Jr.
----------------------------------------
Title: SVP, CFO
-------------------------------------
The DAI-ICHI KANGYO BANK, LIMITED,
acting through its San Francisco Agency
By: /s/
----------------------------------------
Title: General Manager & Agent
-------------------------------------
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment")
dated as of January 31, 1997, is entered into among Komag, Incorporated (the
"Borrower"), the several financial institutions party to the Credit Agreement
(collectively, the "Banks"), Wells Fargo Bank, N.A. as agent for the Banks (the
"Agent"), and as successor in interest to First Interstate Bank of California
("FICAL"), as the original agent (the "Prior Agent") for the Banks and as a
Bank.
RECITALS
A. The Borrower, the Prior Agent, and the Banks have entered
into a Credit Agreement dated as of December 15, 1994, as amended prior to the
date hereof (the "Credit Agreement"), pursuant to which the Prior Agent, and the
Banks agreed to make available to the Borrower a revolving credit facility.
B. Prior to the date hereof, Wells Fargo Bank, N.A. became the
successor in interest to FICAL as Prior Agent and as a Bank under the Credit
Agreement and the other Loan Documents.
C. The Borrower has requested that the Agent and the Banks
amend the Credit Agreement as hereinafter provided, and the parties hereto are
willing to so amend the Credit Agreement subject to the terms and conditions of
this Amendment.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein contained, the parties hereto agree as follows:
1. Capitalized Terms. Capitalized terms used in this Amendment
and not otherwise defined shall have the respective meanings set forth in the
Credit Agreement.
2. Amendments.
(a) In the introductory paragraph of the Credit
Agreement, the phrase "First Interstate Bank of California, a California banking
corporation ("FICAL")" shall be deleted and the following phrase "Wells Fargo
Bank, N.A., a national association" shall be inserted in lieu thereof.
<PAGE>
(b) All references in the Credit Agreement and the
other Loan Documents to "FICAL" shall be amended to refer to "Wells Fargo". All
other references in the Credit Agreement and the other Loan Documents to "First
Interstate Bank of California" shall be amended to refer to "Wells Fargo Bank,
N.A.".
(c) The term "Banks" in the introductory paragraph of
the Credit Agreement is amended to refer to all Banks executing this Amendment
and all of the duties and obligations of the Borrower under the Loan Documents
in existence prior to the date hereof shall be deemed to be duties and
obligations to the Agent and the Banks executing this Amendment.
(d) In Section 1.01 of the Credit Agreement, the prior
definition of "FICAL", now "Wells Fargo", shall be realphabetized.
(e) Section 6.02(f) to the Credit Agreement is amended
by deleting the amount "$100,000,000" wherever it appears and by inserting in
lieu thereof the amount "$300,000,000" and by deleting the amount "$50,000,000"
wherever it appears and by inserting in lieu thereof the amount "$200,000,000";
provided, that, no amendments are made with respect to clause (vii) of Section
6.02(f).
(f) All notices sent pursuant to Section 9.02 of the
Credit Agreement shall be sent to the addresses noted on the signature pages
hereto.
(g) Exhibit 4 to the Credit Agreement is deleted and
the form of Exhibit 4 attached hereto shall be inserted in lieu thereof.
3. Effective Date. This Amendment will become effective on the
date ("Effective Date") that the Agent has received from the Borrower and the
Majority Banks a fully executed copy of this Amendment.
4. Miscellaneous.
(a) All references to Loan Documents shall refer to the
Loan Documents as amended by this Amendment. This Amendment shall be deemed
incorporated into, and a part of, the Loan Documents.
(b) This Amendment shall be binding upon and inure to
the benefit of the parties hereto and thereto and their respective successors
and assigns. No third party beneficiaries are intended in connection with this
Amendment.
(c) This Amendment shall be governed by and construed
in accordance with the internal laws of the State of California without regard
to the principles of conflicts of laws.
2
<PAGE>
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument. Each of
the parties hereto understands and agrees that this Amendment (and any other
document required herein) may be delivered by any party thereto either in the
form of an executed original or an executed original sent by facsimile
transmission to be followed promptly by mailing of a hard copy original, and
that receipt by the Agent of a facsimile transmitted document purportedly
bearing the signature of the Borrower or any Bank will have the same force and
effect as the delivery of a hard copy original. Any failure by the Agent to
receive the hard copy executed original of such document shall not diminish the
binding effect of receipt of the facsimile transmitted executed original of such
document of the party whose hard copy page was not received by the Agent.
(e) This Amendment contains the entire and exclusive
agreement of the parties hereto with reference to the matters discussed herein
and therein. This Amendment supersedes all prior drafts and communications with
respect thereto. This Amendment may not be amended except in accordance with the
provisions of the Credit Agreement.
(f) If any term or provision of this Amendment shall be
deemed prohibited by or invalid under any applicable law, such provision shall
be invalidated without affecting the remaining provisions of this Amendment or
the Loan Documents, respectively.
3.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed by their duly authorized officers as of the day and
year first written above.
KOMAG INCORPORATED
By: /S/ William L. Potts, Jr.
-----------------------------------------
Title: SVP, CFO
---------------------------------------
Address: Komag, Incorporated
275 South Hillview Drive
Milpitas, California 95035
Facsimile: (408) 956-1104
WELLS FARGO BANK, N.A., assuccessor in
interest to First Interstate Bank of
California, as Agent and as a Bank
By: /S/ Karen Barone
-----------------------------------------
Title: Vice President
---------------------------------------
Address: 121 Park Center Plaza
San Jose, CA 95172
Facsimile: (408) 295-0639
4.
<PAGE>
COMERICA BANK - CALIFORNIA, as a Bank
By: /S/ Scott T. Smith
-----------------------------------------------
Title: Scott T. Smith, Assistant Vice President
-------------------------------------------
Address: 333 West Santa Clara Street
San Jose, CA 95113
Facsimile: (408) 556-5292
STANDARD CHARTERED BANK, as a Bank
By: /S/ Rita Raychaudhuri
---------------------------------------------
Title: Vice President
--------------------------------------------
Address: 707 Wilshire Blvd., W9
Los Angeles, CA 90017
Facsimile: (213) 614-5158
5.
<PAGE>
ABN - AMRO BANK, N.V., San Francisco Branch
By: /S/ Tom R. Wug
----------------------------------------------
Title: Group Vice President
--------------------------------------------
By: /S/ Bruce W. Swords
----------------------------------------------
Title: Vice President
--------------------------------------------
Address: 101 California Street, Suite 4550
San Francisco, CA 94111
Facsimile: (415) 362-3524
<PAGE>
EXHIBIT 4
SUBSIDIARIES AND CONSOLIDATED SUBSIDIARIES
Percentage of the
Borrower's Ownership
--------------------
1. Komag Material Technology, Inc. 55%
2. Komag Technology Partners 50%
3. Asahi Komag Co., Ltd. 0% *
4. Komag Bermuda Ltd. 100%
5. Komag Overseas Ltd. 100%
6. Komag USA (Malaysia) Sdn 0% **
7. Dastek Holding Company 60%
8. Dastek (M) SDN BHD 0% ***
9. Headway Technologies, Inc. 17% ****
10. Asahi Komag (Thailand) Co., Ltd. 0% *****
11. Komag (Barbados) Ltd. 100%
* The Borrower owns 50% of Komag Technology Partners, which owns 98% of
Asahi Komag Co., Ltd.
** Komag Bermuda Ltd. (97%) and Komag Overseas ltd. (3%) own 100% of Komag
USA (Malaysia) Sdn.
*** Dastek Holding Company owns 100% of Dastek (M) SDN BHD.
**** The Borrower, through Asahi Komag Co., Ltd., owns an additional 9.5% of
Headway Technologies, Inc.
***** Asahi Komag Co., Ltd. owns 100% of Asahi Komag (Thailand) Co., Ltd.
- --------------------------------------------------------------------------------
$75,000,000
CREDIT AGREEMENT
dated as of
February 7, 1997
among
KOMAG, INCORPORATED
as Borrower
THE INSTITUTIONAL LENDERS WHICH ARE PARTIES HERETO
as Lenders
and
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
SAN FRANCISCO AGENCY
as Agent for Lenders
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
DEFINITIONS................................................................. 1
Section 1.1 Definitions...................................... 1
Section 1.2 Accounting Terms and Determinations.............. 7
Section 1.3 Computation of Time Periods...................... 7
Section 1.4 Construction..................................... 7
Section 1.5 Exhibits and Schedules........................... 8
Section 1.6 No Presumption Against Any Party................. 8
Section 1.7 Independence of Provisions....................... 8
ARTICLE II
THE CREDITS................................................................. 8
Section 2.1 Borrowing........................................ 8
Section 2.2 Maturity of Loans................................ 9
Section 2.3 Notes............................................ 9
Section 2.4 Interest Rates................................... 9
Section 2.5 Fees............................................. 9
Section 2.6 Optional Prepayments............................. 9
Section 2.7 General Provisions as to Payments................ 10
Section 2.8 Funding Losses................................... 10
Section 2.9 Computation of Interest and Fees................. 10
Section 2.10 Maximum Interest Rate............................ 10
Section 2.11 Reduced Return................................... 11
Section 2.12 Requirements of Law.............................. 11
Section 2.13 Lender Withholding Certificates.................. 12
ARTICLE III
CONDITIONS PRECEDENT........................................................ 13
Section 3.1 Effectiveness.................................... 13
Section 3.2 Borrowing........................................ 13
ARTICLE IV
REPRESENTATIONS AND WARRANTIES.............................................. 14
Section 4.1 Organization..................................... 14
Section 4.2 Authorization.................................... 14
Section 4.3 Governmental Consents............................ 15
<PAGE>
Section 4.4 Validity......................................... 15
Section 4.5 Financial Condition.............................. 15
Section 4.6 Litigation....................................... 15
Section 4.7 ERISA Plans...................................... 15
Section 4.8 Disclosure....................................... 15
Section 4.9 Margin Stock..................................... 16
Section 4.10 Environmental Matters............................ 16
Section 4.11 Not an Investment Company........................ 17
Section 4.12 Margin Regulations............................... 17
Section 4.13 Events of Default................................ 17
Section 4.14 Employee Matters................................. 17
ARTICLE V
COVENANTS................................................................... 17
Section 5.1 Information...................................... 17
Section 5.2 Financial Condition.............................. 19
Section 5.3 Corporate Existence, Etc......................... 19
Section 5.4 Payment of Taxes and Claims...................... 19
Section 5.5 Maintenance of Properties; Insurance............. 20
Section 5.6 Inspection....................................... 20
Section 5.7 Compliance with Laws, Etc........................ 20
Section 5.8 Liens, Etc....................................... 20
Section 5.9 Dividends, Etc................................... 21
Section 5.10 Consolidation, Merger, or Acquisition............ 21
Section 5.11 Loans, Investments, and Secondary Liabilities.... 21
Section 5.12 Asset Sales...................................... 22
ARTICLE VI
DEFAULTS.................................................................... 23
Section 6.1 Defaults......................................... 23
Section 6.2 Notice of Default................................ 26
ARTICLE VII
AGENT AND LENDERS........................................................... 26
Section 7.1 Appointment and Authorization.................... 26
Section 7.2 Agent and Affiliates............................. 26
Section 7.3 Action by Agent.................................. 26
Section 7.4 Consultation with Experts........................ 27
Section 7.5 Liability of Agent............................... 27
Section 7.6 Indemnification.................................. 27
Section 7.7 Credit Decision.................................. 27
ii.
<PAGE>
Section 7.8 Successor Agent.................................. 27
Section 7.9 Collateral....................................... 28
Section 7.10 Agent/Borrower Relationship...................... 28
ARTICLE VIII
MISCELLANEOUS............................................................... 28
Section 8.1 Notices.......................................... 28
Section 8.2 No Waivers; Rights and Remedies Cumulative....... 29
Section 8.3 Expenses and Indemnity........................... 29
Section 8.4 Offset; Sharing of Recoveries.................... 30
Section 8.5 Amendments and Waivers........................... 31
Section 8.6 Successors and Assigns; Participations........... 32
Section 8.7 Obligations of Lenders are Several............... 34
Section 8.8 Governing Law; Jurisdiction and Venue............ 34
Section 8.9 Counterparts; Facsimile Signatures. ............ 35
Section 8.10 Confidentiality.................................. 35
Section 8.11 Entire Agreement................................. 35
SCHEDULES
Schedule 1 Schedule of Subsidiaries
Schedule 2 Schedule of Permitted Liens
EXHIBITS
Exhibit A Assignment and Acceptance Agreement
Exhibit B Compliance Certificate
Exhibit C Note
Exhibit D Non-Disclosure Agreement
iii.
<PAGE>
CREDIT AGREEMENT
This CREDIT AGREEMENT, dated as of February 7, 1997, is among
KOMAG, INCORPORATED, a Delaware corporation, as Borrower, the institutional
lenders which are parties hereto, as Lenders, and THE INDUSTRIAL BANK OF JAPAN,
LIMITED, SAN FRANCISCO AGENCY, as Agent for Lenders.
In consideration of the covenants contained herein, the
parties hereto hereby agree as follows:
I ARTICLE I
DEFINITIONS
Definitions. As used herein, the following terms have the
following meanings (the following definitions being applicable in both singular
and plural forms):
"Affiliate" means as to any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person.
"Agent" means IBJ in its capacity as agent for Lenders
hereunder, and its successors in such capacity.
"Agent's Funding Office" means the office of Agent (or account
maintained by or on behalf of Agent with a depository institution) designated as
its funding office on the signature pages of this Agreement or such other office
of Agent as Agent may from time to time hereafter designate as its funding
office upon notice to Borrower and Lenders.
"Agreement" means this Credit Agreement.
"Assignee" has the meaning set forth in Section 8.6(c).
"Assignment and Acceptance" means an agreement, substantially
in the form of Exhibit A, under which an interest of a Lender hereunder is
transferred to an Assignee pursuant to Section 8.6(c).
"Base Financials" means the consolidated balance sheet of
Borrower and the related consolidated statements of income, shareholders' equity
and cash flows for the fiscal year then ended as of December 29, 1996.
"Borrower" means Komag, Incorporated, a Delaware corporation.
1.
<PAGE>
"Borrowing Date" means the second Business Day following the
Closing Date.
"Business Day" means any day except a Saturday, Sunday, or
other day on which commercial banks in San Francisco or New York are authorized
by law to close.
"Capital Lease" means, as applied to any Person, any lease of
any property (whether real, personal or mixed) by that Person as lessee which
would, in accordance with GAAP, be required to be accounted for as a capital
lease on the balance sheet of that Person.
"Closing Date" means the date this Agreement becomes effective
pursuant to Section 3.1.
"Compliance Certificate" means a certificate in the form of
Exhibit B with such changes as Agent shall approve, together with the schedules
to be attached thereto, which schedules shall be in form satisfactory to Agent.
"Consolidated Subsidiary" means any corporation or other
Person more than 50% of the outstanding voting stock of which shall at the time
be owned by Borrower or another Consolidated Subsidiary, excluding from this
definition Asahi Komag Co., Ltd., a Japanese corporation.
"Consolidated Tangible Net Worth" means the excess of total
assets over consolidated liabilities of Borrower and its Consolidated
Subsidiaries determined on a consolidated basis, excluding, however from the
determination of total assets (i) all intangible assets, including, without
limitation, goodwill (whether representing the excess cost over book value of
assets acquired or otherwise), patents, trademarks, trade names, copyrights,
franchises, and deferred charges (including, without limitation, unamortized
debt discount and expense, organization and research and product development
costs but excluding deferred income taxes), (ii) treasury stock, (iii) cash set
apart and held in a sinking or other analogous fund established for the purpose
of redemption or other retirement of capital stock, and (iv) to the extent not
already deducted from total assets, reserves for depreciation, depletion,
obsolescence, and/or amortization of properties and all other reserves or
appropriation of retained earnings which, in accordance with GAAP, should be
established in connection with the business conducted by the relevant
corporation.
"Convertible Debt" means Debt subordinated to the Loans on
terms reasonably acceptable to the Required Lenders and convertible at the
option of Borrower to equity securities of Borrower.
"Dastek(M)" means Dastek(M) SDN BHD, a Malaysian corporation.
"Credit Documents" means this Agreement, the Notes, and any
Assignment and Acceptance.
2.
<PAGE>
"Debt" means, as applied to any Person, (i) all indebtedness
for borrowed money, (ii) that portion of obligations with respect to Capital
Leases which is property classified as a liability on a balance sheet in
conformity with GAAP, (iii) notes payable and drafts accepted representing
extensions of credit whether or not representing obligations for borrowed money,
(iv) any obligation owed for all or any part of the deferred purchase price of
property or services which purchase price is (A) due more than six months from
the date of incurrence of the obligation in respect thereof or (B) evidenced by
a note or similar written instruments, and (v) all indebtedness secured by any
Lien on any property or asset owned or held by that Person regardless of whether
the indebtedness secured thereby shall have been assumed by that Person or is
non-recourse to the credit of that Person.
"Default" means any condition or event which constitutes an
Event of Default or which with the giving of notice or lapse of time or both
would, unless cured or waived, become an Event of Default.
"Dollars" and the sign "$" mean lawful money of the United
States of America.
"Employee Benefit Plan" means any Pension Plan, any employee
welfare benefit plan or any other employee benefit plan which is described in
Section 3(3) of ERISA and which is maintained for employees of Borrower or any
ERISA Affiliate of Borrower.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time, and any successor statute.
"ERISA Affiliate" means, as applied to any Person, any trade
or business (whether or not incorporated) which is a member of a group of which
that Person is a member and which is under common control within the meaning of
Section 414(b) or (c) of the IRC, but excluding any Subsidiary or other Person
that is not a Consolidated Subsidiary.
"Event of Default" has the meaning set forth in Section 6.1.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded upwards, if necessary, to the nearest 1/100th of 1%) equal to the
weighted average of the rates of overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers as
published for such day (or if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or if such rate
is not so published for any day which is a Business Day, the average of the
quotations for such day on such transactions received by Agent from three
federal funds brokers of recognized standing selected by Agent.
"Fixed Rate" means a rate of 7.40 percent per annum.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of
3.
<PAGE>
Certified Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board or in such other statements by such other entity as
may be approved by a significant segment of the accounting profession, as may be
in effect from time to time.
"IBJ" means The Industrial Bank of Japan, Limited, San
Francisco Agency.
"Initial Lender" means IBJ.
"Initial Loan" means a single loan in the principal amount of
$75,000,000 to be made to Borrower by Initial Lender pursuant to Section 2.1.
"Interest Payment Date" means the day corresponding to the
Borrowing Date in the third month (or, if there is no such corresponding day,
then the last day of such month) of each successive three calendar month period
after the Borrowing Date.
"IRC" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor statute.
"Lender" means (a) Initial Lender and (b) each Assignee which
becomes a "Lender" for purposes hereof pursuant to Section 8.6(c).
"Lending Office" means, as to each Lender, its office located
at its address set forth on the signature pages hereof or in the case of an
Assignee, as set forth on the signature pages of the relevant Assignment and
Acceptance (or identified on the signature pages hereof or thereof as its
Lending Office) or such other office as such Lender may hereafter designate as
its Lending Office by notice to Borrower and Agent.
"Lien" means any lien, mortgage, deed of trust, pledge,
security interest, charge, or encumbrance of any kind (including any conditional
sale or other title retention agreement, any lease in the nature thereof, and
any agreement to give any security interest).
"Loan" means (a) the Initial Loan and (b) each division
(including successive divisions) of the Initial Loan by virtue of an assignment
to an Assignee pursuant to Section 8.6(c).
"Margin Regulations" means Regulations G, T, U and X of the
Board of Governors of the Federal Reserve System, as in effect from time to
time.
"Material Adverse Change" means a material adverse change in
(a) the financial condition or operations of Borrower and its Consolidated
Subsidiaries, taken as a whole, or (b) Borrower's ability to perform its
obligations under the Credit Documents, having regard for its other financial
obligations. Each determination of whether a Material Adverse Change has
occurred shall be made in good faith by the Person or Persons making such
determination
4.
<PAGE>
and shall take into account all relevant facts and circumstances existing as of
the date of determination.
"Maturity Date" means March 6, 2002.
"Multiemployer Plan" means "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA which is maintained for employees of Borrower or any
ERISA Affiliate of Borrower.
"Note" means a promissory note of Borrower, substantially in
the form of Exhibit C, payable to the order of a Lender and evidencing the
obligation of Borrower to repay the Loans made to it by such Lender. "Notes"
means all of the Notes.
"Participant" has the meaning set forth in Section 8.6(b).
"Pension Plan" means any employee plan which is subject to
Section 412 of the IRC and which is maintained for employees of Borrower or any
ERISA Affiliate of Borrower, other than a Multiemployer Plan.
"Permitted Liens" means (a) any Lien for taxes, assessments,
charges, or claims of Borrower either not yet due or being contested in good
faith by appropriate proceedings, (b) Liens arising out of judgments or awards
against Borrower with respect to which an appeal or other proceeding is being
prosecuted in good faith and with respect to which there shall have been secured
a stay of execution pending such appeal or proceedings or which is vacated or
discharged within 30 days after the termination of such stay, (c) materialmen's,
mechanics', workers', repairmen's, employee's, or other like liens arising in
the ordinary course of business for amounts either not yet due or being
contested in good faith by appropriate proceedings, (d) Liens granted by
Borrower to secure the Loans, (e) liens, deposits, or pledges made to secure
statutory obligations, workers' compensation claims, surety or appeal bonds, or
bonds for the release of attachments or for stay of execution, or to secure the
performance of bids, lenders contracts (other than for the payment of borrowed
money), leases or for purposes of like general nature in the ordinary course of
Borrower's business, (f) purchase money security interests for property
acquired, conditional sale agreements, or other title retention agreements with
respect to property acquired, provided that no such security interest or
agreement shall extend to any property other than such after-acquired property
and proceeds, (g) refunding, refinancing, or extension of the liens or security
interests permitted in the foregoing clause not exceeding the principal amount
of indebtedness so refunded, refinanced, or extended at the time of the
refunding, refinancing, or extension thereof, and applying only to the same
property theretofore subject to such lien or security interest, (h) liens
existing on the date hereof and identified in the Schedule of Permitted Liens or
incurred with any refunding, refinancing, or extension of any such indebtedness
secured by such liens, provided that such refinancing, refunding or extension
shall not increase the amount, as of the date of such refinancing, refunding, or
extension, secured by any such lien or security interest, (i) other liens
securing indebtedness, the
5.
<PAGE>
principal amount of which shall not exceed $2,000,000; (j) liens in property of
Asahi Komag Co., Ltd., a Japanese corporation; and (k) liens taken by Borrower
on its Subsidiaries.
"Person" means an individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture, governmental authority, or other
entity of whatever nature.
"Prime Rate" means on any day, the higher of (a) the rate of
interest most recently announced by The Industrial Bank of Japan, Limited at its
New York branch as its "Prime Rate" ("IBJ Prime Rate") for loans in Dollars in
the United States and (b) the Federal Funds Rate plus a margin of 50 basis
points. The IBJ Prime Rate is one of The Industrial Bank of Japan, Limited's
base rates and serves as the basis upon which effective rates of interest are
calculated for those loans making reference thereto. The IBJ Prime Rate is
evidenced by the recording thereof after its announcement in such internal
publication or publications as The Industrial Bank of Japan, Limited may
designate and may not be the lowest of The Industrial Bank of Japan, Limited
base rates. Any change in any of the interest rates chargeable hereunder
resulting from a change in IBJ Prime Rate shall become effective as of 12:01
a.m. (San Francisco time) on the Business Day on which each change in the IBJ
Prime Rate is announced by The Industrial Bank of Japan, Limited: (a) on the
Business Day on which each change in the IBJ Prime Rate is announced by The
Industrial Bank of Japan, Limited, if such change is announced prior to 11:00
a.m. (San Francisco time) on such day, and (b) on the Business Day following the
Domestic Business Day on which each change in the IBJ Prime Rate is announced if
such change is announced at or after 11:00 a.m. (San Francisco time) on such
day.
"Required Lenders" means at any time Lenders having at least
51% of the aggregate unpaid principal amount of the Loans.
"Responsible Officer" means Borrower's president and chief
financial officer.
"Schedule of Permitted Liens" means Schedule 2.
"Schedule of Subsidiaries" means Schedule 1.
"Subsidiary" means, a corporation or other Person of which at
least fifty percent (50%) of the outstanding voting stock or profit interests
shall at the time be owned by Borrower or another Subsidiary.
"Termination Event" means: (i) a "Reportable Event" described
in Section 4043 of ERISA and the regulations issued thereunder (other than a
"Reportable Event" not subject to the provision for 30-day notice to the Pension
Benefit Guaranty Corporation under such regulations), or (ii) the withdrawal of
Borrower or any of its ERISA Affiliates from a Pension Plan during a plan year
in which it was a "substantial employer" as defined in Section 4001(1)(2) or
4068(f) of ERISA, or (iii) the filing of a notice of intent to terminate a
Pension
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Plan or the treatment of a Pension Plan amendment as a termination under Section
4041 of ERISA, or (iv) the institution of proceedings to terminate a Pension
Plan by the Pension Benefit Guaranty Corporation (v) any other event or
condition which might constitute grounds under ERISA for the termination of, or
the appointment by the Pension Benefit Guaranty Corporation of a trustee to
administer, any Pension Plan, or (vi) the imposition of a lien pursuant to
Section 412(n) of the Internal Revenue Code.
"Transferee" has the meaning set forth in Section 8.6(e).
Section 1.2 Accounting Terms and Determinations. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared, in
accordance with GAAP, applied, in the case of Borrower, on a consistent basis.
When used herein, the term "financial statements" shall include the notes and
schedules thereto. Unless otherwise stated, all references to fiscal periods are
to those of Borrower.
Section 1.3 Computation of Time Periods. In this Agreement,
with respect to the computation of periods of time from a specified date to a
later specified date, the word "from" means "from and including" and the words
"to" and "until" each mean "to but excluding." Periods of days referred to in
this Agreement shall be counted in calendar days unless otherwise stated.
Section 1.4 Construction. Unless the context of this Agreement
clearly requires otherwise, references to the plural include the singular and to
the singular include the plural, references to any gender include any other
gender, the part includes the whole, the term "including" is not limiting, and
the term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." References in this Agreement to any
"determination," or any matter being "determined," by Agent, Required Lenders,
or any Lender as applicable, includes good faith estimates (in the case of
quantitative determinations), and good faith beliefs (in the case of qualitative
determinations) by the party charged with making such determination and means
that any such determination so made shall be conclusive absent manifest error.
The words "hereof," "herein," "hereby," "hereunder," and similar terms in this
Agreement refer to this Agreement as a whole and not to any particular provision
of this Agreement. Article, section, subsection, clause, exhibit and schedule
references are to this Agreement, unless otherwise specified. Any reference to
this Agreement or the other Credit Documents includes any and all permitted
alterations, amendments, changes, extensions, modifications, renewals, or
supplements thereto or thereof, as applicable.
Section 1.5 Exhibits and Schedules. All of the exhibits and
schedules attached hereto shall be deemed incorporated herein by reference.
Section 1.6 No Presumption Against Any Party. Neither this
Agreement nor any other Credit Document nor any uncertainty or ambiguity herein
or therein shall be
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construed or resolved using any presumption against any party hereto or thereto,
whether under any rule of construction or otherwise. On the contrary, this
Agreement and the other Credit Documents have been reviewed by each of the
parties and their counsel and, in the case of any ambiguity or uncertainty,
shall be construed and interpreted according to the ordinary meaning of the
words used so as to fairly accomplish the purposes and intentions of all parties
hereto.
Section 1.7 Independence of Provisions. All agreements and
covenants hereunder and under the other Credit Documents shall be given
independent effect such that if a particular action or condition is prohibited
by the terms of any such agreement or covenant, the fact that such action or
condition would be permitted within the limitations of another agreement or
covenant shall not be construed as allowing such action to be taken or condition
to exist.
ARTICLE II
THE CREDITS
Section 2.1 Borrowing. On the Borrowing Date, unless Initial
Lender reasonably determines that any applicable condition specified in Section
3.2 has not been satisfied, Initial Lender will make, and Borrower will accept,
the Initial Loan by making the amount thereof available to Borrower at the
Agent's Funding Office (or elsewhere in accordance with Borrower's instructions)
not later than 12:00 noon (California time) on the Borrowing Date.
Section 2.2 Maturity of Loans. Borrower shall repay the
principal amount of the Loans (such repayment to be applied to the Loans ratably
in proportion to their outstanding principal amounts) on the Maturity Date.
Section 2.3 Notes.
(a) The Loan of each Lender shall be evidenced by a
Note payable to the order of such Lender for the account of its Lending Office
in an amount equal to the aggregate unpaid principal amount of such Lender's
Loan.
(b) Each Lender, shall record, and prior to any
transfer by such Lender of its Note shall endorse on the schedules forming a
part thereof, if any, appropriate notations to evidence the date, amount, and
maturity of each Loan made by such Lender and the date and amount of each
payment of principal made by Borrower with respect thereto; provided that the
failure of any Lender to make any such recordation or endorsement shall not
affect the obligations of Borrower hereunder or under the Notes. Each Lender is
hereby irrevocably authorized by Borrower so to endorse such Lender's Note, and
to attach to and make a part of its Note, a continuation of any such schedule,
if any, as and when required.
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Section 2.4 Interest Rates. Each Loan shall bear interest on
the outstanding principal amount thereof at the Fixed Rate. Accrued interest
shall be payable on each Interest Payment Date and on the Maturity Date. Any
overdue principal on the Loan shall bear interest, payable on demand, for each
day until paid at a rate per annum equal to the sum of 2% plus the higher of:
(a) the Fixed Rate and (b) the Prime Rate for such day plus 0.50%. Any overdue
interest on the Loan, to the extent permitted by law, shall bear interest,
payable on demand, for each day until paid at a rate per annum equal to the sum
of 2% plus the Fixed Rate.
Section 2.5 Fees. Borrower shall pay to Agent for its own
account the agency and other fees relating to the facility under this Agreement
pursuant to the letter agreement between Borrower and Agent.
Section 2.6 Optional Prepayments. Borrower may, upon notice to
Agent given as below provided, prepay Loans in whole at any time, or from time
to time in part in amounts aggregating $1,000,000 or an integral multiple of
$500,000 in excess thereof, by paying the principal amount to be prepaid
together with accrued interest thereon to the date of prepayment; provided that
any such prepayment shall be accompanied by the funding losses of Lenders under
Section 2.8. Borrower shall give notice to Agent of each prepayment not later
than 11:00 a.m. (California time) on the third Business Day prior to the date of
prepayment of any Loans, specifying the amount to be prepaid and the date of
prepayment. Such notice shall not be revocable by Borrower. Upon receipt of such
notice, Agent shall promptly notify each Lender of the contents thereof and of
such Lender's ratable share of such prepayment.
Section 2.7 General Provisions as to Payments. Borrower shall
make each payment (which payment shall be in Dollars) of principal of, and
interest on, the Loans and of fees hereunder, not later than 11:00 a.m.
(California time) on the date when due (and any payment received after such time
on any day shall not be effective as a payment for the purpose of calculating
accrued interest and fees payable under this Agreement until the next succeeding
Business Day), in federal or other immediately available funds, to Agent at
Agent's Funding Office. Agent will promptly distribute to each Lender its
ratable share of each such payment received by Agent for the account of Lenders.
Whenever any payment of principal of, or interest on, the Loans or of fees shall
be due on a day which is not a Business Day, the date for payment thereof shall
be extended to the next succeeding Business Day. If the date for any payment of
principal is extended by operation of law or otherwise, interest thereon shall
be payable for such extended time.
Section 2.8 Funding Losses. If Borrower makes any payment
(whether voluntary, mandatory, accelerated or otherwise) of principal with
respect to any Loan, pursuant to Article II or Article VI, or otherwise, on any
day other than the Maturity Date, or if Borrower fails to borrow the Initial
Loan on the Borrowing Date, Borrower shall reimburse each Lender on demand for
any resulting loss or expense incurred by it (or by any existing or prospective
Participant in the related Loan), including any loss incurred in obtaining,
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liquidating, or employing deposits from third persons or in liquidating the
Loans obtained by such Lender in connection with its Loan; provided that such
Lender shall have delivered to Borrower a certificate as to the amount of such
loss or expense, which certificate shall be presumed correct in the absence of
manifest error.
Section 2.9 Computation of Interest and Fees. Interest and
fees shall be (a) computed on the basis of a year of 365 days, and (b) paid for
the actual number of days elapsed (including the first day but excluding the
last day).
Section 2.10 Maximum Interest Rate. Notwithstanding anything
to the contrary contained in this Agreement, Borrower shall not be obligated to
pay, and no Lender shall be entitled to charge, collect, receive, reserve, or
take interest (it being understood that interest shall be calculated as the
aggregate of all charges which constitute interest under applicable law that are
contracted for, charged, reserved, received, or paid) in excess of the maximum
non-usurious interest rate, as in effect from time to time, which may be
charged, contracted for, reserved, received, or collected by such Lender in
connection with this Agreement, the Notes and the other Credit Documents under
applicable law. For purposes of this Section, the term "applicable law" means
the internal laws of the State of California and, to the extent controlling,
laws of the United States of America, but, to the extent, contrary to the
express intent of the parties, California law is found to be inapplicable for
the purposes of this Section, then "applicable law" also means that law in
effect from time to time and applicable to this loan transaction which lawfully
permits the charging and collection of the highest permissible, lawful,
non-usurious rate of interest on such loan transaction and this Agreement.
Section 2.11 Reduced Return. If any Lender shall have
determined that any new or additional applicable law, regulation, rule, or
regulatory requirement (collectively in this Section "Requirement") regarding
capital adequacy, or any change therein, or any change in the interpretation or
administration thereof by any governmental authority, central bank, or
comparable agency charged with the interpretation of administration thereof, or
compliance by such Lender with any new or additional request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank, or comparable agency, has or would have the effect of
reducing the rate of return on such Lender's capital as a consequence of the
Commitment and obligations hereunder to a level below that which would have been
achieved but for such Requirement, change, or compliance (taking into
consideration such Lender's policies with respect to capital adequacy) by an
amount deemed by such Lender to be material (which amount shall be determined by
such Lender's reasonable allocation of the aggregate of such reductions
resulting from such events), then from time to time, within 30 Business Days
after written demand by such Lender, Borrower shall pay to such Lender such
additional amount or amounts as will compensate such Lender for such reduction.
Notwithstanding the foregoing, no additional compensation will be required from
Borrower under this Section if the reason for additional compensation was based
solely on such Lender's failure to comply with any existing or new law, treaty,
rule, or regulation or requirement. In addition, a Lender shall promptly notify
Borrower of any
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proposed request for compensation under this Section and shall provide Borrower
with reasonable support therefor. Any request by a Lender for additional
compensation shall be structured to allocate such additional costs over the term
of the credit affected thereby.
Section 2.12 Requirements of Law. In the event that any law,
regulation, or directive or any change therein or in the interpretation or
application thereof or compliance by any Lender with any request or directive
(whether or not having the force of law) from any central bank or other
governmental authority, agency or instrumentality:
(a) does or shall subject such Lender to any new or additional
tax of any kind whatsoever with respect to this Agreement, the Note, or any
Loan, or change the basis of taxation of payments to such Lender of principal,
commitment fee, non-utilization fee, interest, or any other amount payable
hereunder (except for changes in the rate of tax on the overall net income of
such Lender);
(b) does or shall impose, modify, or hold applicable any
reserve, assessment rate, special deposit, compulsory loan, or other requirement
(collectively in this Section, "Requirements") against assets held by, or
deposits or other liabilities in or for the account of, advances or loans by, or
other credit extended by, or any other acquisition of funds by, any office of
such Lender;
(c) does or shall impose on Lender any other new or additional
condition; and the result of any of the foregoing is to increase the cost to
such Lender of making, renewing or maintaining its Loans or to reduce any amount
receivable thereunder by an amount determined by such Lender, in its sole
discretion, to be material (which increase or reduction shall be determined by
such Lender's reasonable allocation of the aggregate of such cost increases or
reduced amounts receivable resulting from such events), then, in any such case,
Borrower shall pay to such Lender, within 30 Business Days of its demand, any
additional amounts necessary to compensate such Lender for such additional cost
or reduced amount receivable as determined by such Lender with respect to this
Agreement. If any Lender becomes entitled to claim any additional amounts
pursuant to this subsection, it shall notify Borrower of the event by reason of
which it has become so entitled. A statement incorporating the calculation as to
any additional amounts payable pursuant to the foregoing sentence submitted by
any Lender to Borrower shall be conclusive in the absence of manifest error.
Notwithstanding the foregoing, no additional compensation will be required from
Borrower under this Section if the reason for said additional compensation was
based solely on such Lender's failure to comply with any existing or new law,
treaty, rule, regulation, or requirement. In addition, a Lender shall promptly
notify Borrower of any proposed request for compensation under this Section and
shall provide Borrower with reasonable support therefor. Any request by a Lender
for additional compensation shall be structured to allocate such additional
costs over the term of the credit affected thereby.
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Section 2.13 Lender Withholding Certificates. Each Lender
agrees that it shall deliver to Borrower (with a copy to Agent): (i) on or
before the Closing Date either: (A) a statement that it is incorporated in the
United States of America, or (B) if it is not so incorporated, two duly
completed copies of United States Internal Revenue Service form 1001 or 4224, as
appropriate, promulgated pursuant to the IRC, indicating that such Lender is
entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes as permitted by the IRC,
(ii) from time to time, such extensions or renewals of such forms (or successor
forms) as may reasonably be requested by Borrower but only to the extent such
Lender determines that it may properly effect such extensions or renewals under
applicable tax treaties, laws, regulations, and directives and (iii) in the
event of a transfer of any Loan to a Subsidiary or Affiliate of such Lender, two
new duly completed copies of Internal Revenue Service Form 1001 or 4224 (or any
successor form), as the case may be, for such Subsidiary or Affiliate. Borrower
and Agent shall each be entitled to rely on such forms in its possession until
receipt of any revised or successor form pursuant to the preceding sentence.
ARTICLE III
CONDITIONS PRECEDENT
Section 3.1 Effectiveness. This Agreement shall become
effective on the date that each of the following conditions shall have been
satisfied (or waived in accordance with Section 8.5):
(a) Receipt by Agent of counterparts hereof signed by each of
the parties hereto (or, in the case of any party as to which an executed
counterpart shall not have been received, receipt by the Agent in form
satisfactory to it of telegraphic, telex, facsimile transmission or other
written confirmation from such party of execution of a counterpart hereof by
such party);
(b) Receipt by Agent, for the account of Initial Lender, of a
duly executed Note dated on or before the Closing Date, complying with the
provisions of Section 2.3;
(c) Receipt by Agent of a fully completed and duly executed
Compliance Certificate of Borrower using a "Determination Date" (as therein
defined) as of the fiscal quarter ending December 29, 1996; and
(d) Receipt by Agent of (i) good standing certificates from
the Secretary of State of Delaware and the Secretary of State of California
relating to Borrower and (ii) a certificate of the Secretary or Assistant
Secretary of Borrower as to the incumbency of the officers of Borrower executing
this Agreement and attaching true and correct copies of Borrower's certificate
of incorporation, bylaws and resolutions relating to the execution and
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delivery of this Agreement and the other Credit Documents, all in form and
substance satisfactory to Agent;
Agent shall promptly notify Borrower of the Closing Date, and such notice shall
be conclusive and binding on all parties hereto. All documents shall be dated as
of a date reasonably near the Closing Date unless otherwise specified or Agent
shall otherwise agree.
Section 3.2 Borrowing.
The obligation of Initial Lender to make the Initial Loan on
the Borrowing Date is subject to the performance by Borrower of all of its
obligations under this Agreement and to the satisfaction of the following
conditions:
(a) The fact that, immediately after giving effect to the
Initial Loan, no Default shall have occurred and be continuing;
(b) The fact that the representations and warranties of
Borrower contained in this Agreement shall be true and correct in all material
respects on and as of the Borrowing Date both before and after giving effect to
the Initial Loan;
(c) Receipt by Agent from Borrower of a payment in such amount
as Agent may reasonably request on account of expenses incurred by Agent in
connection with the negotiation and preparation of the Credit Documents and
related matters and for which Agent is entitled to reimbursement pursuant to
Section 8.3; and
(d) Receipt by Agent of any fees payable on the Closing Date
referenced in Section 2.5.
The acceptance by Borrower of the Initial Loan shall be deemed to be a
representation and warranty by Borrower that, on the date of such Loan, and
after giving effect thereto, the facts specified in subsections (a) and (b) of
this Section 3.2 are true.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Agent and each Lender
that:
Section 4.1 Organization. Borrower is duly organized, validly
existing, and in good standing under the laws of the state of its formation.
Borrower is also duly authorized, qualified, and licensed in all applicable
jurisdictions, and under all applicable laws, regulations, ordinances, or orders
of public authorities, to carry on its business in the locations and in the
manner presently conducted, to the extent that the failure to do so would not
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reasonably be expected to result in a Material Adverse Change. All of the
Subsidiaries and Consolidated Subsidiaries of Borrower and the percentage of
Borrower's ownership interest therein as of the date of this Agreement are
identified on the Schedule of Subsidiaries.
Section 4.2 Authorization. The execution, delivery, and
performance by Borrower of the Credit Documents, and the obtaining of the Loans
hereunder, are within Borrower's corporate powers, have been duly authorized by
all necessary corporate action and do not contravene (i) Borrower's certificate
of incorporation, by-laws or other organizational documents or (ii) any law or
regulation (including Regulations G, T, U, and X) or any contractual restriction
binding on or affecting Borrower.
Section 4.3 Governmental Consents. No authorization or
approval or other action by, and no notice to or filing with, any governmental
authority or regulatory body (except routine reports required pursuant to the
Securities Exchange Act of 1934, as amended (if such act is applicable to
Borrower) is required for the due execution, delivery, and performance by
Borrower of the Credit Documents.
Section 4.4 Validity. The Credit Documents are the binding
obligations of Borrower, enforceable in accordance with their respective terms;
except in each case as such enforceability may be limited by bankruptcy,
insolvency, reorganization, liquidation, moratorium, or other similar laws of
general application and equitable principles relating to or affecting creditors'
rights.
Section 4.5 Financial Condition. The Base Financials fairly
present the financial condition of Borrower and its Consolidated Subsidiaries as
at the date thereof and the results of the operations of Borrower and its
Consolidated Subsidiaries for the respective periods ended on such date, all in
accordance with GAAP, consistently applied. Since January 1, 1997, there has
been no material adverse change in the business, operations, properties, assets,
or condition (financial or otherwise) of Borrower and its Consolidated
Subsidiaries, taken as a whole.
Section 4.6 Litigation. Except as set forth in the Base
Financials, there is no pending or, to the best of Borrower's knowledge,
threatened, action or proceeding affecting Borrower or any of its Consolidated
Subsidiaries before any court, governmental agency, or arbitrator, which would
be reasonably likely to result in a Material Adverse Change.
Section 4.7 ERISA Plans. Borrower and each of its ERISA
Affiliates is in compliance in all material respects with any applicable
provisions of ERISA and the regulations and published interpretations thereunder
wish respect to all Employee Benefit Plans. No Termination Event has occurred or
is reasonably expected to occur with respect to any Pension Plan that would
reasonably be expected to result in a Material Adverse Change.
Section 4.8 Disclosure. No representation or warranty of
Borrower contained in this Agreement or any other document, certificate, or
written statement furnished
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to Agent or any Lender by or on behalf of Borrower for use in connection with
the transactions contemplated by this Agreement contains any untrue statement of
a material fact or omits to state a material fact (known to Borrower in the case
of any document not furnished by it) necessary in order to make the statements
contained herein or therein not misleading. To the best of Borrower's knowledge,
there is no fact known to Borrower (other than matters of a general economic
nature) which materially adversely affects the business, operations, property,
assets, or condition (financial or otherwise) of Borrower and its Consolidated
Subsidiaries, taken as a whole, which has not been disclosed herein or in such
other documents, certificates and statements furnished to Agent for use in
connection with the transactions contemplated hereby.
Section 4.9 Margin Stock. The aggregate value of all margin
stock (as defined in the Margin Regulations) directly or indirectly owned by
Borrower and its Consolidated Subsidiaries is less than 25% of the aggregate
value of Borrower's assets.
Section 4.10 Environmental Matters. Except as set forth in the
financial statements delivered on or prior to the date hereof and except for
certain claims associated with Great Western Chemical, neither Borrower nor any
Consolidated Subsidiary, nor, to the best of their knowledge, any other person,
has treated, stored, processed, discharged, spilled, or otherwise disposed of
any substance defined as hazardous or toxic by any applicable federal, state, or
local law, rule, regulation, order, or directive, or any waste or by-product
thereof, at any real property or any other facility owned, leased, or used by
Borrower or any Consolidated Subsidiary, in violation of any applicable
statutes, regulations, ordinances, or directives of any governmental authority
or court, which violations may result in liability to Borrower or any
Consolidated Subsidiary in an amount for all such violations that could
reasonably be expected to result in a Material Adverse Change; and the
unresolved violations, if any, set forth in the financial statements delivered
on or prior to the date hereof will not result in liability to Borrower or any
Consolidated Subsidiary in an amount for all such unresolved violations that
would reasonably be expected to result in a Material Adverse Change. Except as
set forth in the financial statements delivered on or prior to the date hereof,
no employee or other person has ever made a claim or demand against Borrower or
any Consolidated Subsidiary based on alleged damage to health caused by any such
hazardous or toxic substance or by any waste or by-product thereof in an amount
that would reasonably be expected to result in a Material Adverse Change; and
the unsatisfied claims, if any, or demands against Borrower or any Consolidated
Subsidiary set forth in the financial statements delivered on or prior to the
date hereof will not result in uninsured liability to Borrower or any
Consolidated Subsidiary or any of their respective officers, employees,
representatives, agents, or shareholders in an amount that could reasonably be
expected to result in a Material Adverse Change for all such unsatisfied claims
or demands. Except as set forth in the financial statements delivered on or
prior to the date hereof neither Borrower nor any Consolidated Subsidiary has
been charged by any governmental authority with improperly using, handling,
storing, discharging, or disposing of any such hazardous or toxic substance or
waste or by-product thereof or with causing or permitting any pollution of any
body of water in an amount that would reasonably be expected to result in a
Material Adverse Change; and
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the outstanding charges, if any, set forth in the financial statements delivered
on or prior to the date hereof will not result in liability to Borrower or any
Consolidated Subsidiary or any or their respective officers, employees,
representatives, agents, or shareholders in an amount that could reasonably be
expected to result in a Material Adverse Change for all such outstanding
charges.
Section 4.11 Not an Investment Company. Borrower is not an
"investment company" within the meaning of the Investment Company Act of 1940,
as amended.
Section 4.12 Margin Regulations. Borrower is not engaged in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of the Margin Regulations).
Section 4.13 Events of Default. No Default has occurred or
would result from the incurring of obligations by Borrower under this Agreement
or any other Credit Document.
Section 4.14 Employee Matters. There is no strike or work
stoppage in existence or, to the best of Borrower's knowledge, threatened
involving Borrower or its Consolidated Subsidiaries that could reasonably be
expected to have a Material Adverse Effect.
ARTICLE V
COVENANTS
Borrower agrees that, so long as any amount payable hereunder
or under any Note remains unpaid:
Section 5.1 Information. Borrower will deliver to Agent and
each Lender:
(a) As soon as available and in any event within 120 days
after the end of each fiscal year, an audited consolidated balance sheet of
Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and
the related consolidated statements of income, of cash flows, and of changes in
stockholders' equity for such fiscal year, setting forth in each case in
comparative form the figures for the previous fiscal year, accompanied by an
unqualified report and opinion therein of Ernst & Young or other public
accountants of nationally recognized standing;
(b) As soon as available and in any event within 60 days after
the end of each of the first three fiscal quarters of each fiscal year, a
consolidated balance sheet of Borrower and its Consolidated Subsidiaries as of
the end of such fiscal quarter, and the related consolidated statements of
income, cash flows, changes in stockholders' equity for
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such fiscal quarter and for the portion of the fiscal year ended at the end of
such fiscal quarter, setting forth in each case in comparative form the figures
for the corresponding fiscal quarter and the corresponding portion of the
previous fiscal year, all certified (subject to normal year-end audit
adjustments) as to fairness of presentation and consistency by a Responsible
Officer;
(c) Simultaneously with the delivery of each set of financial
statements referenced in subsections (a) and (b) of this Section 5.1, a fully
completed Compliance Certificate of a Responsible Officer, calculated with
respect to such financial statements and setting forth the other information
specified by such Compliance Certificate and including all schedules referenced
therein;
(d) Promptly upon the filing thereof, copies of all
registration statements (other than the exhibits thereto and any registration
statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and
8-K (or their equivalents) that Borrower or any of its Subsidiaries shall have
filed with the Securities and Exchange Commission;
(e) Promptly upon becoming aware of the occurrence of or
forthcoming occurrence of any (a) Termination Event, or (b) "prohibited
transaction," as such term is defined in Section 4975 of the Internal Revenue
Code or Section 406 of ERISA, in connection with any Employee Benefit Plan or
any trust created thereunder, a written notice specifying the nature thereof,
what action Borrower has taken, is taking, or proposes to take with respect
thereto, and, when known, any action taken or threatened by the Internal Revenue
Service, the Department of Labor, or the Pension Benefit Guaranty Corporation
with respect thereto;
(f) With reasonable promptness copies of (a) all notices
received by Borrower or any of its ERISA Affiliates of the Pension Benefit
Guaranty Corporation's intent to terminate any material Pension Plan or to have
a trustee appointed to administer any Pension Plan; (b) each Schedule B
(Actuarial Information) to the annual report (Form 5500 Series) filed by
Borrower or any of its ERISA Affiliates with the Internal Revenue Service with
respect to each material Pension Plan; and (c) all notices received by Borrower
or any of its ERISA Affiliates from a Multiemployer Plan sponsor concerning the
material imposition or material amount of withdrawal liability pursuant to
Section 4202 of ERISA;
(g) Forthwith upon an executive officer of Borrower learning
of the occurrence of any Default, a certificate of a Responsible Officer setting
forth the details thereof and the action that Borrower is taking or proposes to
take with respect thereto;
(h) As soon as reasonably practicable after a Responsible
Officer obtains knowledge of the commencement of, or of a threat (with respect
to which there is a reasonable possibility of assertion) of the commencement of,
an action, suit, or proceeding against Borrower or any of its Subsidiaries
before any court or arbitrator or any governmental body, agency, or official in
which there is a reasonable possibility of an adverse decision
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which would reasonably be expected to result in a Material Adverse Change, or
which in any manner questions the validity of any Credit Document or any of the
transactions contemplated hereby, information as to the nature of such pending
or threatened action, suit, or proceeding; and
(i) From time to time, such additional information regarding
the business, properties, financial position, results of operations, or
prospects of Borrower and its Subsidiaries, as Agent, at the request of any
Lender, may reasonably request.
Section 5.2 Financial Condition. Borrower will maintain a
financial condition for it and its Subsidiaries in compliance with the
following:
(a) Profitability. Borrower will not permit, on a consolidated
after-tax basis, a net loss in more than two consecutive fiscal quarters.
(b) Consolidated Tangible Net Worth. Borrower will not permit
its Consolidated Tangible Net Worth on a quarterly consolidated basis, to be
less than $500,000,000, plus (i) 80% of Borrower's cumulative consolidated net
income (without deduction for any losses), adjusted on an annual basis beginning
with Borrower's fiscal year ending December 29, 1996, plus (ii) 100% of the net
proceeds of equity investments and issues received by Borrower or its
Consolidated Subsidiaries (other than equity investments by Borrower in its
Consolidated Subsidiaries or equity investments by Borrower's Consolidated
Subsidiaries in Borrower) adjusted on a quarterly basis. For purposes hereof,
the minimum Consolidated Tangible Net Worth requirement shall not be increased
by equity issued through the exercise of employee stock options and/or employee
stock purchase plans and the definition shall be exclusive of any effect of
minority interests.
(c) Leverage. Borrower will not permit ratio of consolidated
total liabilities (excluding Convertible Debt and minority interests in
Subsidiaries) to Consolidated Tangible Net Worth at the end of any fiscal
quarter to exceed .85 to 1.00.
Section 5.3 Corporate Existence, Etc. Borrower shall at all
times preserve and keep in full force and effect Borrower's and its Consolidated
Subsidiaries' corporate existence and rights and franchises material to
Borrower's business and those of each of its Consolidated Subsidiaries; provided
that the corporate existence of any such Consolidated Subsidiary may be
terminated if such termination is in the best interest of Borrower and is not
materially disadvantageous to Lenders.
Section 5.4 Payment of Taxes and Claims. Borrower shall pay,
and cause each of its Consolidated Subsidiaries (except Dastek(M)) to pay, all
taxes, assessments, and other governmental charges imposed upon it or any of its
properties or assets or in respect of any of its franchises, business, income,
or property before any penalty or interest accrues thereon, and all claims
(including, without limitation, claims for labor, services, materials, and
supplies) for sums which have become due and payable and which by law have or
may become a lien upon any of its properties or assets, prior to the time when
any penalty or fine
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shall be incurred with respect thereto; provided that no such charge or claim
need be paid if being contested in good faith by appropriate proceedings
promptly instituted and diligently conducted and if such reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor.
Section 5.5 Maintenance of Properties. Borrower shall maintain
or cause to be maintained in good repair, working order and condition all
material properties used or useful in the business of Borrower and its
Consolidated Subsidiaries (except Dastek(M)) and from time to time will make or
cause to be made all appropriate repairs, renewals, and replacements thereof.
Borrower will maintain or cause to be maintained, with financially sound and
reputable insurers, insurance with respect to its properties and business and
the properties and business of its Consolidated Subsidiaries (except Dastek(M))
against loss or damage of the kinds customarily insured against by corporations
of established reputation engaged in the same or similar businesses and
similarly situated, of such types and in such amounts as are customarily carried
under similar circumstances by such other corporations.
Section 5.6 Inspection. Borrower shall permit any authorized
representatives designated by Agent at the request of Required Lenders to visit
and inspect any of the properties of Borrower or any of its Consolidated
Subsidiaries (except Dastek(M)), including its and their financial and
accounting records, and to make copies and take extracts therefrom, and to
discuss its and their affairs, finances, and accounts with its and their
officers and independent public accountants, all at such reasonable times during
normal business hours and under Borrower's supervision and as often as may be
reasonably requested. Any such additional information together with other
nonpublic information received hereunder shall be held in confidence by the
recipients thereof and may not be used for any purpose other than to monitor the
creditworthiness of Borrower and its Consolidated Subsidiaries (except
Dastek(M)) and shall not be disclosed or disseminated to any other Person for
any reason, and the Non-Disclosure Agreement shall apply thereto.
Section 5.7 Compliance with Laws, Etc. Borrower shall
exercise, and cause each of its Consolidated Subsidiaries to exercise, all due
diligence in order to comply with the requirements of all applicable laws,
rules, regulations, and orders of any governmental authority, including, without
limitation, all environmental laws, rules, regulations, and orders,
noncompliance with which would result in a Material Adverse Change.
Section 5.8 Liens, Etc. Borrower shall not create or suffer to
exist, or permit any of its Consolidated Subsidiaries (except Dastek(M)) to
create or suffer to exist, any Lien upon or with respect to any of its
properties, whether now owned or hereafter acquired, or assign, or permit any of
its Consolidated Subsidiaries (except Dastek(M)) to assign, any right to receive
income, in each case to secure any Debt of any Person other than (i) Liens
reflected in the Base Financials or on Schedule of Permitted Liens and (ii)
Permitted Liens.
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Section 5.9 Dividends, Etc. Borrower shall not declare or pay
any dividends, purchase or otherwise acquire for value its capital stock now or
hereafter outstanding, or make any distribution of assets to its stockholders as
such, or permit any of its Consolidated Subsidiaries (except Dastek(M)) to
purchase or otherwise acquire for value any stock of Borrower, except that
Borrower and/or its Consolidated Subsidiaries (except Dastek(M)) may (i) declare
and deliver dividends and distributions payable in its capital stock; and (ii)
in any fiscal year declare and pay cash dividends to its stockholders and
purchase or otherwise acquire shares of its own outstanding capital stock for
cash in an aggregate amount up to 30% of net income after taxes of Borrower and
its Consolidated Subsidiaries (except Dastek(M)) for the immediately preceding
fiscal year.
Section 5.10 Consolidation, Merger, or Acquisition. Regarding
Borrower and its Consolidated Subsidiaries (except Dastek(M)), liquidate or
dissolve or enter into any consolidation, merger, acquisition, material
partnership, material joint venture, syndication, or other combination without
Required Lender's prior written consent, which consent will not be unreasonably
withheld, except that (a) Borrower may consolidate with, merge into or acquire
any other corporation or entity and (b) any corporation or entity may
consolidate with or merge into Borrower; provided that, in either case, Borrower
shall be the surviving entity of such merger or consolidation, and provided
further that, in either case, immediately after the consummation or such
consolidation or merger there shall exist no condition or event which
constitutes a Default. In addition Borrower may purchase any, all or
substantially all of the assets of any other Person in connection with
acquisitions reasonably related to Borrower's existing lines of business;
provided that immediately after the effectiveness of any such acquisition, there
shall have occurred and be continuing no Default.
Section 5.11 Loans, Investments, and Secondary Liabilities.
Borrower shall not make or permit to remain outstanding, or permit any
Consolidated Subsidiary (except Dastek(M)) to make or permit to remain
outstanding, any loan or advance to, or guaranty, induce or otherwise become
contingently liable, directly or indirectly, in connection with the obligations,
stock, or dividends of, or own, purchase, or acquire any stock, obligations, or
securities of or any other interest in, or make any capital contribution to, any
other Person, except Borrower and its Consolidated Subsidiaries may:
(i) own, purchase, or acquire certificates of deposit,
time deposits and bankers' acceptances issued by Lender, commercial paper rated
Moody's P-2 or better and/or Standard & Poor's A-2 or better, obligations or
instruments issued by or guaranteed by an entity designated as Standard & Poor's
A-2 or better, or Moody's P-2 or better or the equivalent by a nationally
recognized credit agency, municipal bonds, and other governmental and corporate
debt obligations rated Standard & Poor's A or better and/or Moody's A2 or
better, direct obligations of the United States of America or its agencies, and
obligations guaranteed or insured by the United States of America, and any funds
investing in any of the foregoing;
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(ii) acquire and own stock, obligations, or securities
received in connection with debts created in the ordinary course of business
owing to Borrower or a Subsidiary;
(iii) continue to own the existing capital stock of
Borrower's Subsidiaries;
(iv) endorse negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business;
(v) make loans, advances to, or investments in a
Subsidiary or joint venture in connection with the normal operations of the
business of such Subsidiary or joint venture and allow Borrower's Subsidiaries
or any joint venture to which it is a party to make or permit to remain
outstanding advances from Borrower's Subsidiaries or such joint venture to
Borrower;
(vi) make or permit to remain outstanding loans or
advances to Borrower's Subsidiaries or any joint venture to which it is a party
or enter into or permit to remain outstanding guarantees in connection with the
obligations of Borrower's Subsidiaries or such joint venture; and
(vii) make or permit to remain outstanding (a) loans
and/or advances to Borrowers' officers, stockholders and/or employees, which, in
the aggregate, would not exceed $3,000,000 during the term of this Agreement,
(b) loans to Borrower's vendors, in the ordinary course of Borrower's business,
which, in the aggregate, do not exceed $5,000,000, (c) progress payments to
Borrower's vendors made in the ordinary course of Borrower's business, (d) (i)
loans and/or advances for the purpose of purchasing Borrower's shares of stock
pursuant to its employee stock purchase or option plans, (ii) advances for
salary, travel, and other expenses, advances against commission and other
similar advances made to officers or employees in the ordinary course of
Borrower's business, and (iii) loans and/or advances to or for the benefit of
officers, directors, or employees in connection with litigation and other
proceedings involving such persons by virtue of their status as officers,
directors, or employees, respectively, and (e) investments under deferred
compensation plans for the benefit of the employees of Borrower and its
Subsidiaries.
Section 5.12 Asset Sales. Borrower shall not convey, sell,
lease, transfer, or dispose of (individually, a "Transfer"), or permit any
Consolidated Subsidiary (except Dastek(M)) to Transfer, in one transaction or a
series of transactions all or any part of its or its Consolidated Subsidiary's
(except Dastek(M)) business, property or fixed assets outside the ordinary
course of business, whether now owned or hereafter acquired, except that
Borrower and its Consolidated Subsidiaries (except Dastek(M)) may make Transfers
of business, property or fixed assets in transactions outside the ordinary
course of business for consideration which in the aggregate does not exceed, in
any fiscal year, 20% of Consolidated
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Tangible Net Worth as at the end of the preceding fiscal year of Borrower
without the prior written consent of Required Lenders, which consent shall not
be unreasonably withheld.
ARTICLE VI
DEFAULTS
Section 6.1 Defaults. If one or more of the following events
("Events of Default") shall have occurred and be continuing:
(a) Borrower shall fail to pay the principal of any Loan when
due, any installment of interest on any Loan outstanding hereunder within 5
Business Days of the date when due or any other amount payable hereunder within
10 Business Days of the date when due; or
(b) Any representation or warranty made by Borrower herein or
by Borrower (or any of its officers) in connection with the Credit Documents
shall prove to have been incorrect in any material respect when made; or
(c) Borrower shall fail to perform or observe any term,
covenant or agreement contained in this Agreement or in any and all documents
executed in conjunction with this Agreement, which failure continues uncured for
more than 30 consecutive days. Notwithstanding the foregoing, any failure of
Borrower to perform or observe Sections 5.2, 5.3, 5.8., 5.10 or 5.12 shall
constitute an Event of Default without regard to any lapse of time or cure
period; or
(d) Borrower or any of its Consolidated Subsidiaries (except
Dastek(M)) shall, after written demand, fail to pay any principal of or premium
or interest on, any Debt in which Borrower may be obligated as either a borrower
or guarantor, the aggregate outstanding amount of which is at least $1,000,000
(excluding Debt evidenced by the Notes), when due (whether by scheduled
maturity, required prepayment, acceleration, demand, or otherwise) and such
failure shall continue after the applicable grace period, if any is specified in
the agreement or instrument relating to such Debt; or
(e) (i) Borrower or any of its Consolidated Subsidiaries
(except Dastek(M)) shall commence any case, proceeding or other action (A) under
any existing or future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization, or relief of debtors, seeking to have an
order for relief entered with respect to it, or seeking to adjudicate it
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
winding-up, liquidation, dissolution, composition, or other relief with respect
to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any substantial part of its
assets, or Borrower or any of its Consolidated Subsidiaries (except Dastek(M))
shall make a general assignment for the benefit
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of its creditors; or (ii) there shall be commenced against Borrower or any of
its Consolidated Subsidiaries (except Dastek(M)) any case, proceeding or other
action of a nature referred to in clause (i) above which (A) results in the
entry of an order for relief or any such adjudication or appointment or (B)
remains undismissed, undischarged, or unbonded for a period of 30 days; or (iii)
there shall be commenced against Borrower or any of its Consolidated
Subsidiaries (except Dastek(M)) any case, proceeding, or other action seeking
issuance of a warrant of attachment, execution, distraint, or similar process
against all or any substantial part of its assets which results in the entry of
an order for any such relief which shall not have been vacated, discharged, or
stayed or bonded pending appeal within 30 days from the entry thereof; or (iv)
Borrower or any of its Consolidated Subsidiaries (except Dastek(M)) shall take
any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), and (iii) above;
or (v) Borrower or any of its Consolidated Subsidiaries shall generally not, or
shall be unable to, or shall admit in writing its inability to, pay its debts as
they become due; or
(f) One judgment or decree shall be entered against Borrower
or any of its Consolidated Subsidiaries (except Dastek(M)) involving a liability
(not paid or 75% covered by insurance or the third party indemnity of a solvent
indemnitor) equal to or greater than $5,000,000 or one or more judgments or
decrees shall be entered against Borrower or any of its Consolidated
Subsidiaries (except Dastek(M)) involving in the aggregate a liability (not paid
or 75% covered by insurance or the third party indemnity of a solvent
indemnitor) equal to or greater than $10,000,000 and all such judgments or
decrees shall not have been vacated, discharged, or stayed or bonded pending
appeal within 30 days from the entry thereof; or
(g) (i) Borrower or any of its ERISA Affiliates fails to make
full payment when due of all material amounts which, under the provisions of any
Pension Plan or Section 412 of the IRC, Borrower or any of its ERISA Affiliates
is required to pay as contributions thereto;
(i) any material accumulated funding deficiency occurs
or exists, whether or not waived, with respect to any Pension Plan;
(ii) the excess of the actuarial present value of all
benefit liabilities under all material Pension Plans over the fair market value
of the assets of such Pension Plans (excluding on such computation Pension Plans
with assets greater than benefit liabilities) allocable to such benefit
liabilities are greater than 5% of Consolidated Tangible Net Worth;
(iii) Borrower or any of its ERISA Affiliates enters
into any transaction which has as its principal purpose the evasion of liability
under Subtitle D of Title IV of ERISA;
(iv) (A) Any material Pension Plan maintained by
Borrower or any of its ERISA Affiliates shall be terminated within the meaning
of Title IV of ERISA, or (B) a trustee shall be appointed by an appropriate
United States district court to administer
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any material Pension Plan, or (C) the Pension Benefit Guaranty Corporation (or
any successor thereto) shall institute proceedings to terminate any material
Pension Plan or to appoint a trustee to administer any Pension Plan, or (D)
Borrower or any of its ERISA Affiliates shall withdraw (under Section 4063 of
ERISA) from any material Pension Plan, if as of the date of the event listed in
subclauses (A)-(C) above or any subsequent date, either Borrower or its ERISA
Affiliates has any material liability (such liability to include, without
limitation, any material liability to the Pension Benefit Guaranty Corporation,
or any successor thereto, or to any other party under Sections 4062, 4063, or
4064 of ERISA or any other provision of law) resulting from or otherwise
associated with the events listed in subclauses (A)-(C) above;
(v) As used in this subsection 6.1(g)(vi) the term
"accumulated funding deficiency" has the meaning specified in Section 412 of the
IRC and the terms "actuarial present value" and "benefit liabilities" have the
meanings specified in Section 4001 of ERISA; or
(h) There shall be instituted against Borrower, or any of its
Consolidated Subsidiaries (except Dastek(M)), any proceeding for which
forfeiture (not paid or 75% covered by insurance or the third party indemnity of
a solvent indemnitor) of any property equal to or greater than $5,000,000 is a
potential penalty and such proceeding shall not have been vacated or discharged
within 30 days of its institution;
then, and in every such event, Agent shall, if requested by Required Lenders, by
notice to Borrower, declare the Loans (together with accrued interest thereon)
and all other amounts owing under this Agreement, the Notes and the other Credit
Documents to be, and such Loans and amounts shall thereupon become, immediately
due and payable without presentment, demand, protest, notice of acceleration,
notice of intent to accelerate, or other notice of any kind, all of which are
hereby waived by Borrower, provided that in the case of any of the Events of
Default specified in subsection (e) of this Section 6.1 with respect to
Borrower, without any notice to Borrower or any other act by Agent or Lenders,
the Loans (together with accrued interest thereon) and all other amounts payable
by Borrower hereunder shall become immediately due and payable without
presentment, demand, protest, notice of acceleration, notice of intent to
accelerate, or other notice of any kind, all of which are hereby waived by
Borrower.
Section 6.2 Notice of Default. Agent shall give notice to
Borrower under Section 6.1(a) or 6.1(c) promptly upon being requested to do so
by any Lender and shall thereupon notify all Lenders thereof.
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ARTICLE VII
AGENT AND LENDERS
Section 7.1 Appointment and Authorization. Each Lender
irrevocably appoints and authorizes Agent to take such action as agent on its
behalf and to exercise such powers under the Credit Documents as are delegated
to it by the terms thereof, together with all such powers as are reasonably
incidental thereto.
Section 7.2 Agent and Affiliates. IBJ shall have the same
rights and powers under the Credit Documents as any other Lender and may
exercise or refrain from exercising the same as though it were not Agent; and
the term "Lenders" shall include IBJ in its individual capacity. IBJ and its
Affiliates may accept deposits from, lend money to, act as agent or trustee for
other lenders to, and generally engage in any kind of banking, trust or other
business with Borrower or any of its Affiliates as if it were not Agent.
Section 7.3 Action by Agent. The obligations of Agent under
the Credit Documents are only those expressly set forth therein. Without
limiting the generality of the foregoing, (a) Agent shall not be required to
take any action with respect to any Default, except as expressly provided in the
Credit Documents, and (b) with respect to any provision of any Credit Document
which authorizes Agent to give any consent or approval, impose any requirement
or take any other discretionary action, Agent may, but is not required to, use
its own discretion in determining whether to take any such action, and (c) as to
(i) matters requiring or permitting an approval, consent, waiver, election or
other action by Required Lenders, (ii) matters as to which, notwithstanding any
delegation of authority to Agent, Agent has requested instructions from Required
Lenders, and (iii) matters not expressly provided for by the Credit Documents,
Agent shall not be required to exercise any discretion or take any action, but
shall be required to act or to refrain from acting only (and shall be fully
protected in so acting or refraining from acting) upon the instructions of
Required Lenders, and such instructions shall be binding upon all Lenders;
provided that Agent shall not be required to take any action which in the good
faith judgment of Agent would expose Agent to personal liability or is contrary
to any Credit Document or applicable law. Agent may treat each existing Lender
as the holder of the right to payment of its outstanding Loans until Agent
receives and accepts an Assignment and Acceptance signed by such Lender and its
Assignee in accordance with the provisions of this Agreement.
Section 7.4 Consultation with Experts. Agent may consult with
legal counsel (including counsel to Borrower), independent public accountants,
and other experts selected by it and shall not be liable for any action taken or
omitted to be taken by it in good faith in accordance with the advice of such
counsel, accountants, or experts.
Section 7.5 Liability of Agent. Neither Agent nor any
director, officer, agent, or employee of Agent shall be liable to any Lender for
any action taken or not taken by it in connection with the Credit Documents (a)
with the consent or at the request of
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Required Lenders or (b) in the absence of its own gross negligence or willful
misconduct. Neither Agent nor any director, officer, agent, or employee of Agent
shall be responsible for or have any duty to ascertain, inquire into, or verify:
(i) any statement, warranty, or representation made in connection with the
Credit Documents or any borrowing hereunder; (ii) the performance or observance
of any of the covenants or agreements of Borrower in the Credit Documents; (iii)
the satisfaction of any condition specified in Article III; or (iv) the
validity, effectiveness, or genuineness of any Credit Document or any other
instrument or writing furnished in connection therewith. Agent shall not incur
any liability by acting in reliance upon any notice or any consent, certificate,
statement, or other writing (which may be a bank wire, telex, or similar
writing) believed by it to be genuine or to have been given or be signed by the
proper party or parties.
Section 7.6 Indemnification. Each Lender shall, ratably in
accordance with its Loans, indemnify Agent (to the extent not reimbursed by
Borrower) against any cost, expense (including counsel fees and disbursements
and allocated costs for in-house legal services), claim, demand, action, loss,
or liability (except such as result from Agent's gross negligence or willful
misconduct) that Agent may suffer or incur, or which may be asserted against
Agent, directly or indirectly arising out of or in connection with the Credit
Documents or any action taken or omitted by Agent thereunder or incidental
thereto.
Section 7.7 Credit Decision. Each Lender acknowledges that it
has, independently and without reliance upon Agent or any other Lender, and
based on such documents and information as it has deemed appropriate, made its
own credit analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon Agent or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking any action under the Credit Documents.
Section 7.8 Successor Agent. Agent may resign at any time by
giving written notice thereof to Lenders and Borrower. Upon any such
resignation, Borrower shall have the right, with the consent of Required Lenders
(which consent shall not be unreasonably withheld), to appoint a successor
Agent. If no successor Agent shall have been so appointed by Borrower with the
consent of Required Lenders and shall have accepted such appointment within 30
days after the retiring Agent's giving of notice of resignation, then the
retiring Agent may appoint a successor Agent which shall be a commercial bank
organized or licensed under the laws of the United States of America or of any
State thereof and having a combined capital and surplus of at least
$100,000,000. Upon the acceptance of its appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights and duties of the retiring Agent, and the retiring
Agent shall be discharged from its duties and obligations under the Credit
Documents. After any retiring Agent's resignation hereunder as Agent, the
provisions of this Article VII shall inure to its benefit as to any actions
taken or omitted to be taken by it while it was Agent.
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Section 7.9 Collateral. Each of Lenders represents to Agent
and each other Lender that it in good faith is not relying upon any "margin
stock" (as defined in the Margin Regulations) as collateral in the extension or
maintenance of any Loan.
Section 7.10 Agent/Borrower Relationship. The protective
provisions set forth in Article VII relating to the Agent are intended to govern
the relationship between the Agent and the Lenders and shall not be interpreted
to decrease or increase the liability of the Agent as concerns its relationship
with Borrower.
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Notices. All notices, requests, and other
communications to any party under this Agreement shall be in writing and shall
be given to such party at its address or telex or facsimile number set forth on
the signature pages hereof (or in the case of an Assignee as set forth on the
signature pages of the relevant Assignment and Acceptance) or such other address
or telex or facsimile number as such party may hereafter specify for the purpose
by notice to Agent and Borrower. Each such notice, request or other
communication shall be effective: (a) if given by telex or facsimile, when such
telex or facsimile is transmitted to the telex or facsimile number, as
applicable, specified in this Section and, in the case of telexes, the
appropriate answer back is received and, in the case of facsimiles, the party
sending the facsimile has telephonically confirmed its receipt, (b) if given by
registered or certified mail, return receipt requested, 72 hours after such
communication is deposited in the mails with postage prepaid, addressed as
aforesaid or (c) if given by any other means, when delivered at the address
specified in this Section 8.1; provided that any communications to Agent under
Article II (including any communication required in order to ascertain the
applicable rates of interest thereunder) shall not be effective until received
by Agent. In the event of any conflict between any oral communication to Agent
and the written confirmation thereof, such oral communication shall control if
Agent has acted thereon prior to actual receipt of such written confirmation.
Section 8.2 No Waivers; Rights and Remedies Cumulative. No
failure or delay by Agent or any Lender in exercising any right, power, or
privilege under any Credit Document shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right, power, or privilege. The rights and
remedies provided in the Credit Documents shall be cumulative and not exclusive
of any rights or remedies provided by law.
Section 8.3 Expenses and Indemnity.
(a) Borrower agrees to pay, within 30 days of demand therefor
(but on demand if there shall then exist any Event of Default), all costs and
expenses (i) of Agent
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(including reasonable and documented attorneys' fees and reasonable and
documented costs of in-house counsel and staff) in connection with the
preparation, amendment, or modification of the Credit Documents, and (ii) of
Agent or any Lender in connection with the enforcement (including, without
limitation, in appellate, bankruptcy, insolvency, liquidation, reorganization,
moratorium, or other similar proceedings) or restructuring of the Credit
Documents; provided that Borrower's obligation to reimburse Agent for such
attorneys' fees in connection with the preparation of the Credit Documents shall
be limited to $15,000; provided, further, that Agent and Lenders shall use their
best efforts to utilize the same legal firm to represent them with regard to
Borrower's obligations hereunder.
(b) Whether or not the transactions contemplated hereby shall
be consummated, Borrower agrees to indemnify, pay and hold Agent and Lenders,
and the shareholders, officers, directors, employees, and agents of Agent and
Lenders, harmless from and against any and all claims, liabilities, losses,
damages, costs, and expenses (whether or not any of the foregoing Persons is a
party to any litigation), including, without limitation, reasonable attorneys'
fees and costs (including, without limitation, the reasonable estimate of the
allocated cost of in-house legal counsel and staff) and costs of investigation,
document production, attendance at a deposition, or other discovery, with
respect to or arising out of any proposed acquisition by Borrower or any of its
Consolidated Subsidiaries of any Person or any securities (including a
self-tender), this Agreement or any use of proceeds hereunder, or any claim,
demand, action or cause of action being asserted against Borrower or any of its
Consolidated Subsidiaries (collectively, the "Indemnified Liabilities"),
provided that Borrower shall have no obligation hereunder with respect to
Indemnified Liabilities arising from the gross negligence or willful misconduct
of any such Persons. If any claim is made, or any action, suit or proceeding is
brought, against any Person indemnified pursuant to this Section, the
indemnified Person shall notify Borrower of such claim or of the commencement of
such action, suit or proceeding, and Borrower will assume the defense of such
action, suit or proceeding, employing counsel selected by Borrower and
reasonably satisfactory to the indemnified Person, and pay the fees and expenses
of such counsel. This covenant shall survive termination of this Agreement and
payment of any outstanding Notes.
Section 8.4 Offset; Sharing of Recoveries.
(a) Upon the occurrence and during the continuance of any
Event of Default, each Lender, upon prior notice to Agent and all other Lenders
and only with the consent of Required Lenders, is hereby authorized at any time
and from time to time, to the fullest extent permitted by law, to set-off and
apply any and all deposits (general or special, time or demand, provision or
final) at any time held and other indebtedness at any time owing by such Lender
to or for the credit or the account of Borrower against an equivalent amount of
Loans, irrespective of whether or not such Lender shall have made any demand
under this Agreement and although such obligations may be unmatured. Each Lender
agrees promptly to notify Borrower and Agent after any such set-off and
application is made by such Lender, provided that the failure to give such
notice shall not affect the validity of such set-off and application. The rights
of each Lender under this Section 8.4(a) are in addition to other rights
28.
<PAGE>
and remedies (including, without limitation, other rights of set-off) which such
Lender may have. Borrower agrees, to the fullest extent it may effectively do so
under applicable law, that any holder of a participation in any Lender's Loans,
whether or not acquired pursuant to the foregoing arrangements, may exercise
rights of set-off or counterclaim and other rights with respect to such
participation as fully as if such holder of a participation were a direct
creditor of Borrower in the amount of such participation, and any such
participant by so exercising such rights agrees to be bound by the provisions of
Section 8.4(b).
(b) Except for a prepayment received by a Lender pursuant to
Section 8.5(b), each Lender agrees that if it shall, by exercising any right of
set-off, counterclaim, security interest, or otherwise, receive payment of a
proportion of the aggregate amount of principal and interest due with respect to
any Loans by it which is greater than the proportion received by any other
Lender in respect of the aggregate amount of principal and interest due with
respect to Loans by such other Lender, the Lender receiving such proportionately
greater payment shall purchase such participations in Loans by the other
Lenders, and such other adjustments shall be made, as may be required so that
all such payments of principal and interest with respect to Loans by Lenders
shall be shared by Lenders pro rata; provided that (i) if all or any portion of
such payment is thereafter recovered from such Lender, such purchase shall be
rescinded and the purchase price restored to the extent of such recovery, but
without interest, and (ii) nothing in this Section shall impair the right of any
Lender to exercise any right of set-off or counterclaim it may have and to apply
the amount subject to such exercise to the payment of indebtedness of Borrower
other than the Loans.
(c) From and after the first to occur of (x) any acceleration
of maturity of the Notes pursuant to Section 6.1 or (y) the Maturity Date, and
so long as any Loan remains outstanding, sums received by Agent for application
to any Loan (and whether received by voluntary payment, set-off, disposition of
collateral or otherwise) shall be applied by Agent in the following order: (i)
to costs and expenses and other amounts payable to Agent pursuant to the Credit
Documents, (ii) to interest on the Loans, (iii) to the Loans, and (iv) to the
other obligations in such order as Required Lenders and Agent shall agree.
Section 8.5 Amendments and Waivers.
(a) Any provision of the Credit Documents may be amended or
waived if, but only if, such amendment or waiver is in writing and is signed by
Borrower and Agent with the consent of Required Lenders, whereupon such
amendment or waiver shall be binding on all Lenders; provided that no such
amendment or waiver shall, unless consented to by Agent and all Lenders, (i)
reduce the principal of or rate of interest on any Loan or any fees hereunder
(other than fees payable solely to Agent in which case only the consent of Agent
shall be required), (ii) postpone the date fixed for any payment of principal of
or interest on any Loan or any fees hereunder, or (iii) change the definition of
"Required Lenders" or otherwise change the number of Lenders which shall be
required for Lenders or any of them to take any action under this Section 8.5 or
any other provision of the Credit Documents. No
29.
<PAGE>
amendment of the duties of Agent hereunder, or of the immunities, indemnities,
and protections afforded to Agent by Article VII, shall be made without the
consent of Agent.
(b) If Borrower requests a modification of the type specified
in clauses (i) through (iii) of subsection (a) above (a "Modification Request")
and any Lender (other than IBJ) or Participant refuses to agree to such
modification (a "Nonaccepting Entity"), Agent shall use good faith efforts to
secure a substitute Lender or participant acceptable to Borrower and Agent and
willing to accept such modification as a replacement for the Nonaccepting Entity
(an "Accepting Entity") and, if Agent shall be unable to secure an Accepting
Entity within 50 days from Agent's receipt from Borrower of the related
Modification Request, then Borrower may, at its option so long as no Event of
Default would result therefrom, prepay all but not less than all of the Loan or
participation interest of such Nonaccepting Entity (A) without obtaining the
consent of any Person if the principal amount of such Loan or participation
interest is less than $25,000,000 and (B) with the consent of the Required
Lenders (for the purpose of determining such Required Lenders such Loan or
participation interest of such Nonaccepting Entity shall not be included) if the
principal amount of such Loan or participation interest is greater than
$25,000,000; incident to such prepayment, Borrower shall pay to such
Nonaccepting Entity the outstanding principal amount of such Nonaccepting
Entity's Loan or participation interest, accrued interest thereon to the date of
prepayment, amounts to which such Nonaccepting Entity is entitled pursuant to
Section 2.8 by reason of such prepayment, and all the amounts then owing
hereunder by Borrower to such Nonaccepting Entity. Upon any such prepayment,
Borrower shall give Agent and Lenders immediate notice thereof.
Section 8.6 Successors and Assigns; Participations.
(a) This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns,
except (i) that Borrower may not assign or transfer any of its rights or
obligations under this Agreement or any other Credit Document without the
consent of all Lenders and (ii) no Lender may assign or transfer any of its
rights or obligations under this Agreement, except to the extent permitted by
this Section 8.6.
(b) Any Lender may at any time sell to one or more
institutional lenders (each a "Participant") proportionate participating
interests in all Loans owing to such Lender, the Note held by such Lender, and
in any other interest of such Lender hereunder; provided that no participating
interest may be sold by a Lender pursuant to this subsection (b): (w) to any
Participant that is not then a Participant or Lender without the consent of
Borrower and Agent, (which consent may not be unreasonably withheld), (x) if
after giving effect thereto, the Loan of such Lender which is held for its own
account (and not on behalf of participating interests) would be less than
$15,000,000, (y) if such participating interest is equivalent to a Loan of less
than $15,000,000, or (z) on a basis which permits the Participant to grant
subparticipations with respect to or to otherwise transfer less than all of its
participating interest to any Person. In the event of any such sale by a Lender
of a participating interest to
30.
<PAGE>
a Participant, such Lender's obligations under this Agreement and the other
Credit Documents shall remain unchanged, such Lender shall remain solely
responsible for the performance thereof, such Lender shall otherwise remain the
holder of any such Note for all purposes under this Agreement, and Borrower and
Agent shall continue to deal solely and directly with such Lender in connection
with such Lender's rights and obligations under this Agreement and the other
Credit Documents. Subject to the provisions of this Section 8.6(b), each Lender
shall be entitled to obtain (on behalf of the Participants) the benefits of
Sections 2.8, 2.11 and 2.12 with respect to all participations in its Loans
outstanding from time to time. No Lender shall grant any participation under
which the Participant shall have rights to approve (or shall require the consent
of such Participant before such Lender may approve) any amendment to or waiver
of this Agreement or the other Credit Documents or the extension of any date on
which any principal, interest or other sums payable hereunder are due, except to
the extent such amendment or waiver: (i) reduces the rate of interest on any
Loan, (ii) reduces the amount of principal payable on any Loan or (iii) extends
the Maturity Date. Not less than five Business Days after the grant of any
participating interest to a Participant, the Lender granting such interest shall
notify Agent and Borrower of the name of the Participant and of the nature and
extent of the participating interest granted to such Participant.
(c) Any Lender may at any time sell to one or more
institutional lenders (each an "Assignee") all, or a proportionate part
(equivalent to a Loan of not less than $15,000,000) of all, of its rights and
obligations under this Agreement and the Notes, and such Assignee shall assume
all such rights and obligations, pursuant to an Assignment and Acceptance
executed by such Assignee and such transferor Lender; provided that no interest
may be sold by a Lender pursuant to this subsection (c) to any Assignee that is
not then a Lender without the consent of Borrower and Agent, (which consent may
not be unreasonably withheld); and provided further that no interest less than
all of such Lender's interest may be sold by a Lender pursuant to this
subsection (c) if, after giving effect thereto, such Lender's Loan would be less
than $15,000,000. Upon (i) such execution of such Assignment and Acceptance,
(ii) delivery by the transferor Lender of an executed copy thereof, together
with notice that the payment referred to in clause (iii) below shall have been
made, to Borrower, Agent and each Lender, and (iii) payment by such Assignee to
such transferor Lender of an amount equal to the purchase price agreed between
such transferor Lender and such Assignee, such Assignee shall for all purposes
be a Lender party to this Agreement and shall have all the rights and
obligations of a Lender under this Agreement and the other Credit Documents to
the same extent as if it were an original party hereto with a Loan in the amount
set forth in such Assignment and Acceptance, and the transferor Lender shall be
released from its obligations hereunder to a corresponding extent, and no
further consent or action by Borrower, Lenders or Agent shall be required. Upon
the consummation of any transfer to an Assignee pursuant to this subsection (c)
the transferor Lender, Agent and Borrower shall make appropriate arrangements so
that, if required, new Notes are issued to such Assignee and, to the extent it
remains a Lender hereunder, such transferor Lender, and upon the issuance of
such new Note(s), such transferor Lender shall surrender the existing Note held
by it.
31.
<PAGE>
(d) Any Lender may at any time pledge or assign all or any
part of (or a proportionate participating interest in) such Lender's rights
under the Credit Documents to any Federal Reserve Bank in accordance with
applicable law.
(e) Borrower authorizes each Lender to disclose to any
Participant or Assignee (a "Transferee") and any prospective Transferee, any and
all financial information in such Lender's possession concerning Borrower which
has been delivered to such Lender by Borrower pursuant to this Agreement or
which has been delivered to such Lender by Borrower in connection with such
Lender's credit evaluation prior to entering into this Agreement, provided that
such Transferee or prospective Transferee has first agreed to be bound by the
provisions of Section 8.10 and executed the required Confidentiality Letter.
(f) If pursuant to subsection (c) of this Section 8.6, any
interest in this Agreement or any Note is transferred to any Assignee which is
organized under the laws of any jurisdiction other than the United States of
America or any State thereof, the transferor Lender shall cause such Assignee,
concurrently with the effectiveness of such transfer, (i) to represent to the
transferor Lender (for the benefit of the transferor Lender, Agent, and
Borrower) that under applicable law and treaties no taxes will be required to be
withheld by Agent, Borrower, or the transferor Lender with respect to any
payments to be made to such Assignee in respect of the Loans, (ii) to furnish to
each of the transferor Lender, Agent, and Borrower two duly completed copies of
either U.S. Internal Revenue Service Form 4224 or U.S. Internal Revenue Service
Form 1001 (wherein such Assignee claims entitlement to complete exemption from
U.S. federal withholding tax on all interest payments hereunder) and (iii) to
agree (for the benefit of the transferor Lender, Agent, and Borrower) to provide
the transferor Lender, Agent, and Borrower a new Form 4224 or Form 1001 upon the
obsolescence of any previously delivered form and comparable statements in
accordance with applicable U.S. laws and regulations and amendments duly
executed and completed by such Assignee, and to comply from time to time with
all applicable U.S. laws and regulations with regard to such withholding tax
exemption.
(g) No Transferee (including for this purpose a different
Lending Office of a Lender) shall be entitled to receive any greater payment
under Sections 2.11 and 2.12 than the transferor Lender would have been entitled
to receive with respect to the rights transferred, unless such assignment or
participation is made with the prior written consent of Borrower.
Section 8.7 Obligations of Lenders are Several. The
obligations of each Lender under this Agreement are several. Neither Agent nor
any Lender shall be liable for the failure of any other Lender to perform its
obligations under this Agreement.
Section 8.8 Governing Law; Jurisdiction and Venue.
(a) GOVERNING LAW. THIS AGREEMENT AND THE OTHER CREDIT
DOCUMENTS (EXCEPT TO THE EXTENT OTHERWISE EXPRESSLY SET
32.
<PAGE>
FORTH THEREIN) SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF CALIFORNIA AND
THE VALIDITY, CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF,
AND THE RIGHTS OF THE PARTIES HERETO AND THERETO, SHALL BE DETERMINED UNDER,
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(b) JURISDICTION AND VENUE. TO THE MAXIMUM EXTENT PERMITTED BY
LAW, THE PARTIES HERETO AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN
CONNECTION WITH THIS AGREEMENT OR THE OTHER CREDIT DOCUMENTS SHALL BE TRIED AND
LITIGATED ONLY IN THE STATE AND FEDERAL COURTS LOCATED IN THE CITY OF AND COUNTY
OF SAN FRANCISCO, STATE OF CALIFORNIA, OR, AT THE SOLE OPTION OF AGENT OR
REQUIRED LENDERS, IN ANY OTHER COURT IN WHICH AGENT OR REQUIRED LENDERS SHALL
INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS JURISDICTION OVER THE
SUBJECT MATTER AND PARTIES IN CONTROVERSY. TO THE EXTENT THEY MAY LEGALLY DO SO,
THE PARTIES HERETO HEREBY WAIVE ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE
OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS
BROUGHT IN ACCORDANCE WITH THIS SUBSECTION (b) AND STIPULATE THAT THE STATE AND
FEDERAL COURTS LOCATED IN THE CITY OF AND COUNTY OF SAN FRANCISCO, STATE OF
CALIFORNIA, SHALL HAVE IN PERSONAM JURISDICTION AND VENUE OVER EACH SUCH PARTY
FOR THE PURPOSE OF LITIGATING ANY SUCH DISPUTE, CONTROVERSY, OR PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT, OR THE OTHER CREDIT DOCUMENTS. TO
THE MAXIMUM EXTENT PERMITTED BY LAW, SERVICE OF PROCESS SUFFICIENT FOR PERSONAL
JURISDICTION IN ANY ACTION AGAINST BORROWER MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO ITS ADDRESS SPECIFIED FOR NOTICES
PURSUANT TO SECTION 8.1.
Section 8.9 Counterparts; Facsimile Signatures. This Agreement
may be signed in any number of counterparts, each of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. Delivery of an executed counterpart of the signature page to this
Agreement by facsimile shall be effective as delivery of a manually executed
counterpart of this Agreement, and any party delivering an executed counterpart
of the signature page to this Agreement by facsimile to any other party shall
thereafter also promptly deliver a manually executed counterpart of this
Agreement to such other party, but the failure to deliver such manually executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
Section 8.10 Confidentiality. Agent and each of Lenders
(including any Assignee and Participant) agree to keep confidential any
information relating to Borrower in accordance with the provisions of Borrower's
standard Confidentiality Letter in substantially
33.
<PAGE>
the form attached as Exhibit D hereto and such Person shall execute and deliver
to Borrower a copy of such Confidentiality Letter at the time it enters
(directly or indirectly) into a lending relationship with Borrower.
Section 8.11 Entire Agreement. This Agreement and the other
Credit Documents (a) integrate all the terms and conditions set forth in or
incidental to the Credit Documents, (b) supersede all oral negotiations and
prior writings with respect to the subject matter hereof, and (c) are intended
by the parties as the final expression of the agreement with respect to the
terms and conditions set forth in the Credit Documents and as the complete and
exclusive statement of the terms agreed to by the parties. In the event of any
conflict between the terms, conditions and provisions of this Agreement and any
other Credit Document, the terms, conditions and provisions of this Agreement
shall prevail.
34.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their respective authorized signatories as of
the day and year first above written.
BORROWER: KOMAG, INCORPORATED,
a Delaware corporation
By ___________________________
Title: _______________________
Address for Notices:
Attn: Treasurer
275 South Hillview Drive
Milpitas, California 95035
Telephone: (408) 957-4217
Facsimile: (408) 956-1104
35.
<PAGE>
AGENT: THE INDUSTRIAL BANK OF JAPAN,
LIMITED, SAN FRANCISCO AGENCY,
as Agent for Lenders
By ___________________________
Title: _______________________
Address for Notices:
Attn: Jeanette O'Donnell
555 California Street, Suite 3110
San Francisco, CA 94104
Telephone: (415) 693-1831
Facsimile: (415) 982-1917
Agent's Funding Office:
Bank: Bank of America NT&SA
International Deposit Services 6561
1850 Gateway Boulevard
Concord, CA 94520
Account: The Industrial Bank of Japan, Limited
Los Angeles Agency
Account No. 62906-14014
"For Credit to IBJ SFA, A/C 2601-22011"
36.
<PAGE>
SCHEDULE 2
SCHEDULE OF PERMITTED LIENS
1. Purchase money security interests in equipment; and
2. UCC filings evidencing leased equipment.
<PAGE>
SCHEDULE 1
SCHEDULE OF SUBSIDIARIES
Percentage of the
Borrower's Ownership
--------------------
1. Komag Material Technology, Inc. 80%
2. Komag Technology Partners 50%
3. Asahi Komag Co., Ltd. 0%*
4. Komag Bermuda Ltd. 100%
5. Komag Overseas Ltd. 100%
6. Komag USA (Malaysia) Sdn 0%**
7. Dastek Holding Company 60%
8. Dastek (M) SDN BHD 0%**
9. Asahi Komag (Thailand) Co., Ltd. 0%****
10. Komag (Barbados) Ltd. 100%
* The Borrower owns 50% of Komag Technology Partners, which owns 100% of
Asahi Komag Co., Ltd.
** Komag Bermuda Ltd. (97%) and Komag Overseas Ltd. (3%) own 100% of Komag
USA (Malaysia) Sdn.
*** Dastek Holding Company owns 100% of Dastek (M) SDN BHD.
**** Asahi Komag Co., Ltd. owns 100% of Asahi Komag (Thailand) Co., Ltd.
<TABLE>
EXHIBIT 11.1
KOMAG, INCORPORATED
COMPUTATION OF INCOME PER SHARE
(In thousands, except per share amounts)
<CAPTION>
Fiscal Year Ended
-----------------------------------------------------------------------------------
December 29, 1996 December 31, 1995 January 1, 1995 (1)
--------------------------- -------------------------- ------------------------
primary fully diluted primary fully diluted primary fully diluted
----------- -------------- --------- -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares of
Common Stock outstanding 51,179 51,179 47,589 47,589 44,782 44,782
Weighted average shares of
Common Stock equivalents:
Stock Options 1,953 2,089 2,316 2,284 1,212 1,592
-------- -------- -------- -------- -------- --------
Number of shares used in per
share computation 53,132 53,268 49,905 49,873 45,994 46,374
======== ======== ======== ======== ======== ========
Net income $109,974 $109,974 $106,815 $106,815 $ 58,522 $ 58,522
======== ======== ======== ======== ======== ========
Net income per share $ 2.07 $ 2.06 $ 2.14 $ 2.14 $ 1.27 $ 1.26
======== ======== ======== ======== ======== ========
<FN>
(1) The shares and earnings per share amounts have been restated to reflect
the two-for-one stock split effective December 21, 1995.
</FN>
</TABLE>
KOMAG, INCORPORATED
Exhibit 21
List of Subsidiaries
Asahi Komag Co., Ltd., a Japanese corporation
Komag USA (Malaysia) Sdn., a Malaysian corporation
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos.333-06081, 33-62453, 33-80594, 33-53432, 33-45469, 33-41945,
33-25230, 33-19851 and 33-16625) pertaining to the Komag, Incorporated Restated
1987 Stock Option Plan, Komag Material Technology, Inc. 1995 Stock Option Plan,
the Komag, Incorporated Employee Stock Purchase Plan, the Komag, Incorporated
Restated 1987 Stock Option Plan, the Dastek International Stock Option Plan and
the Dastek, Inc. 1992 Stock Option Plan and in the Registration Statement (Form
S-3 No. 33-61161) of Komag, Incorporated and in the related Prospectus of our
report dated January 16, 1997, with respect to the consolidated financial
statements and schedule of Komag, Incorporated included in this Annual Report
(Form 10-K) for the year ended December 29, 1996.
ERNST & YOUNG LLP
San Jose, California
March 7, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this annual report on Form 10-K of our report
dated February 21, 1997 on our audit of the financial statements of Asahi Komag
Co., Ltd. as of December 31, 1996 and 1995 and for the three years in the period
ended December 31, 1996.
CHUO AUDIT CORPORATION
Tokyo, Japan
March 5, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-29-1996
<CASH> 90,741
<SECURITIES> 2,500
<RECEIVABLES> 54,987
<ALLOWANCES> 3,087
<INVENTORY> 61,960
<CURRENT-ASSETS> 251,097
<PP&E> 933,059
<DEPRECIATION> 289,353
<TOTAL-ASSETS> 938,357
<CURRENT-LIABILITIES> 108,955
<BONDS> 70,000
<COMMON> 517
0
0
<OTHER-SE> 697,423
<TOTAL-LIABILITY-AND-EQUITY> 938,357
<SALES> 577,791
<TOTAL-REVENUES> 577,791
<CGS> 402,224
<TOTAL-COSTS> 402,224
<OTHER-EXPENSES> 32,107
<LOSS-PROVISION> 1,011
<INTEREST-EXPENSE> 625
<INCOME-PRETAX> 121,148
<INCOME-TAX> 20,595
<INCOME-CONTINUING> 109,974
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 109,974
<EPS-PRIMARY> 2.07
<EPS-DILUTED> 2.06
</TABLE>
