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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-15930
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SOUTHWALL TECHNOLOGIES INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-2551470
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1029 Corporation Way, Palo Alto, California 94303
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (650) 962-9111
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The approximate aggregate market value of the Common Stock held by
non-affiliates of the registrant on March 6, 2000 (based upon the closing
sales price of the Common Stock on the Nasdaq National Market System on such
date) was $88,212,860. For purposes of this disclosure, Common Stock held by
stockholders whose ownership exceeds five percent of the Common Stock
outstanding as of March 6, 2000, and Common Stock held by officers and
directors of the registrant has been excluded in that such persons may be deemed
to be "affiliates" as that term is defined in the rules and regulations
promulgated under the Securities Act of 1933, as amended. This determination is
not necessarily conclusive.
The number of shares of the registrant's Common Stock outstanding on
March 6, 2000 was 7,588,203.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement to be filed with
the Commission in connection with the Company's 2000 Annual Meeting of
Stockholders (the "Proxy Statement") are incorporated by reference in Part III
of this Form 10-K. With the exception of the portions of the Proxy Statement
expressly incorporated into this Form 10-K by reference, the Proxy Statement
shall not be deemed filed as part of this Form 10-K.
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SOUTHWALL TECHNOLOGIES INC.
2000 FORM 10-K ANNUAL REPORT
Table of Contents
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Page
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PART I
ITEM 1 BUSINESS....................................................................................1
ITEM 2. PROPERTIES..................................................................................5
ITEM 3. LEGAL PROCEEDINGS...........................................................................5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.........................................5
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS........................7
ITEM 6. SELECTED FINANCIAL DATA.....................................................................7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................11
ITEM 8. FINANCIAL STATEMENTS.......................................................................12
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................................................28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.............................................29
ITEM 11. EXECUTIVE COMPENSATION.....................................................................29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................30
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PART I
ITEM 1 BUSINESS
General
Southwall Technologies Inc. ("Southwall" or the "Company") designs,
develops, manufactures and markets sputtered thin-film coatings on wide-web,
flexible substrates for energy conservation and electronics applications. The
Company has developed and currently offers a variety of thin-film products for
the automotive glazing and electronic display markets and residential and
commercial architectural glazing. These products include transparent insulation
and solar-control films, anti-reflective films for computer monitor CRTs and
television monitors, transparent conductive films for use in touch screen
displays, and various other types of commercial films.
Markets and Products
Southwall is currently supplying products for use in two broad markets:
energy conservation and electronic displays. The Company's current commercial
products include: (1) transparent coatings for use in conjunction with
architectural and transportation glazing laminates and applied film to provide
solar control to windows, (2) anti-reflective films, both OEM and after market,
(3) its family of transparent Heat Mirror(TM) films for high performance
architectural glazing applications, and (4) other commercial thin-film products.
Energy Conservation Products
Heat Mirror(TM) - Transparent Window Insulation
The Company offers a family of Heat Mirror(TM) films with various shading
and insulating properties. Windows are primary areas of heat loss in winter and
a major source of heat gain in summer. Windows containing Heat Mirror(TM), while
generally more expensive, have approximately double the insulating capacity of
conventional double-pane windows, and transmit high levels of visible light with
desired degrees of shading. Heat Mirror(TM) films, which are sold in rolls to
window manufacturers, are suspended in the airspace between sealed double-pane
residential and commercial windows. The Company has developed and patented this
film-mounting technology, which it licenses to window fabricators. The Company
currently offers a variety of different Heat Mirror(TM) films for residential
and commercial architectural applications, including Heat Mirror(TM) with XUV
fading protection.
The Company believes that the Heat Mirror(TM) and Heat Mirror(TM) related
Superglass(R) system is the most comprehensive window glass product available
today, providing R-6 to R-10 insulation, transparent solar shading and
protection from damaging ultraviolet radiation, while also reducing noise and
condensation build-up.
Sales of the Company's Heat Mirror(TM) products have been subject to
seasonal buying patterns in the past. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Solar-Control Films for Laminated Glazing Applications
The Company's Heat Mirror XIR(R) coating solar-control film is a
transparent, sputter-coated, polyester film used in laminated safety glass for
architectural and transportation applications. The film has a patented,
transparent solar-control coating on one side and a proprietary
adhesion-promotion layer on the other side. This film is currently sold
primarily to European OEM glass companies.
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Applied Solar-Control Films
Another glazing product utilizing the Heat Mirror XIR(R) coating is
Solis/V-Kool solar-control films for the retro-fit market for both architectural
and automotive glass. The product is applied to existing windows and has a
protective hard coat over the patented, transparent solar-control coating on one
side and an adhesion layer on the other side.
Silver Reflector Films
Southwall markets these silver mirrored films to fluorescent reflector
manufacturers for its reflective features in large screen televisions, and to
other manufacturers for various applications including energy efficient
lighting, primarily for the retrofit market in North America.
Electronic Products
Anti-Reflective Film
Southwall's anti-reflective films for computer monitor CRTs minimize
reflection of ambient light, electromagnetic interference (EMI) radiation and
static. This film is currently sold primarily to Mitsubishi Electric Corporation
(MELCO) and Samsung Display Devices (Samsung) for use in their manufacturing of
CRTs.
Transparent Conductors
Southwall currently markets several transparent conductive thin-films
under the brand name ALTAIR-M(TM). Transparent conductive thin films combine
high visible light transmission with electrical conductivity and
environmental stability. They are typically used where the circuit or
conductive material must not obscure visual information behind the coating.
ALTAIR-M(TM) films are sold in roll and sheet form for incorporation into
such electronic devices as touch panels, liquid crystal displays and
electroluminescent lighting and displays. ALTAIR(TM) films are also used in
EMI shielding, infrared rejection and electrostatic discharge packaging
applications.
Manufacturing
Five large-scale sputtering production machines, of which three are
located in Palo Alto, California and two in Tempe, Arizona (one of which
began production of anti-reflective film in the fourth quarter of 1997 and
one of which began production of energy conservation products in the first
quarter of 2000), currently provide most of the Company's sputtered thin-film
coatings manufacturing capacity. One additional machine is slated for delivery
to the Tempe facility during the second quarter of 2000 and is scheduled to
commence production in early 2001. The Company also uses two small-scale
sputtering machines in Palo Alto for smaller production runs, and research
and development projects. Also located in the Tempe facility is a wet coating
and laminating machine, which is used to apply various topcoats and
adhesives to film products and for lamination of liner films.
Since June 1997 the Company has occupied a new 55,000 square foot leased
facility in Tempe, Arizona. The cost of equipment and leasehold improvements
for the facility totaled approximately $12 million. Financing of the project
and related working capital requirements was provided by a combination of
debt and equity. The Company borrowed $5 million from a lending institution
during December 1996 and an additional $10 million through Sanwa Bank in
April 1997, guaranteed by Teijan Limited of Japan, a raw material supplier to
the Company. In addition, Teijan Limited purchased 667,000 shares of the
Company's common stock at $7.50 per share, an aggregate of approximately $5
million.
The latest production machine (PM#6) began to commercially produce
limited amounts of film in Tempe in the first quarter of 2000. One additional
machine, (PM#7), is slated for delivery in the second quarter of 2000 and is
scheduled to commence production in early 2001. Additionally, the Company is
building a third manufacturing facility in Dresden, Germany, that is
scheduled to commence production in the second half of 2000.
Sources of Supply
The Company has more than one supplier for much of its raw materials and
maintains inventories and close working relationships with its suppliers to
ensure timely and reliable delivery. The substrates used in the manufacture of
Heat Mirror(TM) and anti-reflective film are currently available only from a
single source, Teijin Limited of Japan, holder of approximately 9% of the
Company's Common Stock. In each case, an alternative source of supply is being
pursued; however, there can be no assurance that alternative sources of supply
will be successfully developed. Although the Company has not experienced major
interruptions in production due to a shortage of raw materials, prolonged supply
2
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shortages would materially and adversely affect the Company's manufacturing
operations, business and financial performance.
Research and Development
Southwall's research and development activities are focused upon the
development of new proprietary products, thin-film materials science, and
deposition process optimization and automation. Company funded research and
development expenditures totaled $3.1 million, $3.9 million and $5.2 million,
6%, 8% and 10% of total net revenues during 1997, 1998 and 1999, respectively.
Marketing and Customers
The Company markets its products to OEMs in the United States, Canada,
Europe, the Middle East and Asia principally through its own direct sales force
and sales representatives. Mitsui and Marubeni Corporation are the Company's
distributors for Heat Mirror(TM) and certain electronic products in Japan.
Mitsui also has exclusive manufacturing rights for certain of the Company's
electronic products in Japan using the Company's proprietary sputtering
technology. Samsung is the Company's sales representative in Korea and China.
Approximately 35%, 32% and 23% of the Company's net revenues resulted from sales
to customers located in the United States in 1997, 1998 and 1999, respectively.
Since 1992, the Company has maintained a European office to provide
marketing, sales and field service support in Europe, primarily for the
Company's Heat Mirror(TM) product line and, since 1995, for Heat Mirror XIR(R)
film sold to automotive glass manufacturers.
In 1995, Southwall started selling its proprietary anti-reflective film
under a Supply Agreement to Sony Corporation of Japan ("Sony") for computer
monitor CRTs. During the first quarter of 1996, the Company and Sony signed
an amendment to the Supply Agreement. Under the terms of the amended
agreement, among other things, Sony agreed to increase its minimum order of
anti-reflective film beginning July 1, 1997 and extending through December
31, 2000, and Southwall agreed to install any necessary additional
manufacturing capacity by July 1, 1997. The Company's new manufacturing
facility in Tempe, from which product was first shipped during the fourth
quarter of 1997, was designed to meet the requirements of the Sony agreement.
During the second quarter of 1999, the supply agreement between the Company
and Sony was amended again. As a result, the Company received purchase orders
from Sony for a significantly reduced amount of product. As of September 30,
1999, Southwall terminated all production of film for Sony as mutually agreed
in an amendment to the supply agreement and there have been no further
shipments to Sony.
Southwall supplies Heat Mirror(TM) products to approximately 60 insulating
glass and window fabricators and distributors worldwide. The Company's
proprietary mounting technology is licensed to its customers, who must acquire
or build specialized mounting equipment for the manufacture of Heat
Mirror-equipped windows. The Company's field services organization trains
customers in the manufacture of Heat Mirror-equipped windows.
In North America, the Company also promotes its Heat Mirror(TM) product
line through approximately 30 regionally based architectural sales
representatives.
The Company sells its aftermarket anti-reflective filters through
Kensington Microwave Limited, a California based distributor with independent
direct sales organizations.
Southwall's products are sold with a limited warranty. During 1998 and
the first nine months of 1999 the Company did not experience significant
product returns and the costs of its warranty programs were not substantial.
However, in the fourth quarter of 1998 the Company discovered quality issues
with certain anti-reflective ("AR") film manufactured in Tempe under an
agreement with Sony and did not meet Sony's specifications. As a result,
certain AR film in Tempe and at Sony's plant in Japan was affected by this
problem. The Company reserved $4.0 million in the fourth quarter of 1998 to
cover the inventory in Tempe and returns from Sony.
3
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A small number of customers have accounted for a substantial portion of the
Company's revenues. The Company's seven largest customers accounted for 67% and
62% of net product sales in 1998 and 1999, respectively. One customer, Sony
Corporation of Japan, accounted for 33% and 7% of net product sales in 1998 and
1999, respectively. In 1999, three customers accounted for approximately 39% of
sales. Sekurit St. Gobain was approximately 18%, Pilkington was approximately
11% and MELCO was approximately 10%. The loss of any of these customers could
have a materially adverse effect on the Company's operating results. The Company
anticipates that customer concentration will continue for the foreseeable
future.
As of December 31, 1999, the Company's backlog was approximately $27
million. None of those orders are firm orders and are subject to
cancellation. For those reasons, these orders should not be considered future
revenues.
Competition
The thin-film coatings industry and the markets in which Southwall's
customers compete experience rapid technological change. New equipment or
process technologies that improve or change the methods of depositing films
on substrates could adversely affect Southwall's revenues and operating
results materially. Technological change in the customers' markets may also
result in obsolescence of the Company's products. Southwall's future success
will depend, in large part, on its ability to anticipate technological change
and to introduce new products.
Southwall has a number of present and potential competitors, many of which
have greater financial resources and greater selling, marketing and technical
resources than the Company. Other U.S. companies serving some of the same
markets as the Company include Material Sciences Corporation and CP Films. One
of the largest U.K. polymer film companies, Courtaulds PLC, entered the market
in the mid-1980's by acquiring certain U.S. thin-film manufacturers. The Company
also competes in certain markets with a number of Japanese companies. Southwall
believes that competition for its commercial products comes primarily from other
types of films, various chemical coatings and solar control coatings deposited
directly on glass, and heat absorbing glass, and that the principal competition
to its electronic display products is currently from non-thin-film alternatives
as well as thin-film alternatives.
The Company competes primarily on the basis of the characteristics and
quality of its products, its ability to meet individual customer specifications
and the quality and level of technical assistance furnished to customers.
Patents and Licenses
The Company relies primarily upon trade secrets and know-how to develop and
maintain its competitive position. There can be no assurance that others will
not develop and patent similar technology or that the confidentiality agreements
upon which the Company relies will be honored.
The Company has 26 patents and 8 patent applications pending in the United
States that cover materials, processes, products and production equipment. The
Company also has patents and patent applications pending in various foreign
countries covering the same technology. Expiration dates for the various patents
range from May 2001 to August 2018. Southwall considers its proprietary
technology, as well as its patent protection, to be a significant factor in its
business. There can be no assurance that any patent will be issued on pending
applications or that any patent issued will provide adequate protection for the
technology or product covered by it. In addition, other companies and
universities have obtained patents covering film configurations and processes.
The Company has obtained licenses under some of these patents and may from time
to time require licenses under additional patents. There can be no assurance
that the Company will be able to obtain such licenses, if required, upon
commercially reasonable terms or at all.
Litigation has been and may in the future be necessary from time to time to
enforce patents issued to the Company to protect trade secrets and know-how
owned by the Company or to determine the enforceability, scope or validity of
the proprietary rights of others. Any such litigation could result in
substantial costs to the Company and division of effort by the Company's
management and technical personnel.
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Employees
As of December 31, 1999, Southwall had 273 regular full-time employees, of
whom 47 were engaged in engineering, 183 in manufacturing, and 43 in selling,
general management, finance and administration. The Company is highly dependent
upon the existence and continuing services of certain key scientists, engineers
and management personnel. The loss of services of these employees could have a
materially adverse impact on the business and prospects of the Company. Many of
the Company's employees are highly skilled, and the Company faces strong
competition in recruiting and retaining such personnel.
None of the Company's employees are covered by a collective bargaining
agreement, and the Company has not experienced any work stoppages. The Company
believes that its employee relations are good.
Environmental Matters
The Company uses certain hazardous materials in its research and
manufacturing operations and has air and water emissions that require controls.
As a result, the Company is subject to stringent federal, state and local
regulations governing the storage, use and disposal of wastes. The Company has
implemented a program to monitor its past and present compliance with
environmental laws and regulations. Although the Company believes that it is
currently in material compliance with such laws and regulations, current or
future laws and regulations may require the Company to make expenditures for
compliance with chemical exposure, waste treatment or disposal regulations.
There can be no assurance that the interpretation and enforcement of
current or future environmental laws and regulations will not materially
adversely affect the operations, business or assets of the Company.
ITEM 2. PROPERTIES
Southwall's administrative, marketing, engineering and manufacturing
facilities are located in five buildings totaling approximately 119,000
square feet in Palo Alto, California and one building of approximately 55,000
square feet in Tempe, Arizona. The buildings in Palo Alto are occupied under
leases that expire from 2002 to 2005, with options to extend some of these
leases for terms expiring through 2009. The lease for the building in Tempe
expires in June 2007, with options through 2017. The Company believes that
these facilities are suitable for its manufacturing requirements at least
through 2001. However, should demand for the Company's products increase
significantly, additional facilities could be necessary. The Company believes
that such additional facilities could be available on commercially reasonable
terms in locations other than near its Palo Alto headquarters. The Company
began construction on a 60,000 square foot building in Dresden, Germany in
August, 1999. This building will contain up to three production machines. The
Company expects that the first production machine will commence commercial
production in June of 2000. The second production machine is scheduled to
commence production in the first quarter of 2001. A third machine is
anticipated but not yet scheduled.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named a defendant in a lawsuit filed on April 5,
1996 by Four Seasons in the United States District Court for the Eastern
District of New York. The lawsuit alleges certain unfair competition, tort
and contractual violations by the Company and seeks relief in an aggregate
amount in excess of $32 million. The Company believes that this lawsuit is
without merit and intends to defend against it vigorously.
The Company has also been named a defendant in a lawsuit filed on
March 9, 1998 by Richard McKernan in the Superior Court in the State of
California, County of Santa Clara. The lawsuit alleges certain strict product
liability, fraudulent concealment, negligence and unfair business practice
violations by the Company. A third amended complaint was filed on December 7,
1999, limiting the negligence claim to California class members. The Company
believes that this lawsuit is without merit and intends to defend against it
vigorously.
In addition, the Company is involved in certain other legal actions arising
in the ordinary course of business. The Company believes, however, that none of
these actions, either individually or in the aggregate, will have a material
adverse effect on the Company's business or its consolidated financial position
or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of the executive officers of the Company with their
respective ages and current positions. Family relationships do not exist among
any of the executive officers named, nor is there any arrangement or
understanding pursuant to which any person was selected as an officer.
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Thomas G. Hood 44 President, Chief Executive Officer and Director
Bill R. Finley 59 Vice President, Chief Financial Officer and Secretary
Eric Buonassisi 53 Senior Vice President, Marketing and Sales
Sicco W.T. Westra 49 Senior Vice President, Engineering and Product Development
Catherine B. Poliak 42 Vice President, Human Resources
Vahid Ghassemian 43 Senior Vice President, Operations
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Thomas G. Hood has served as the Company's President and Chief Executive
Officer since July 1998 and as a member of the Board of Directors of the Company
since March 1998. From March 1998 until July 1998, he served as Interim
President and Chief Executive Officer. From July 1996 to March 1998, he served
as Senior Vice President, General Manager, Energy Products Division. From
January 1995 to July 1996, he was Vice President General Manager, International
Operations, and from October 1991 to January 1995, he was Vice President,
Marketing and Sales.
Bill R. Finley has been Vice President, Chief Financial Officer and
Secretary since June 1998. Prior to that, from January, 1997 until June,
1998, he served as Vice President, Chief Financial Officer and Secretary of
Micronics Computers, Inc. From November, 1994 until January, 1997, he served
as Vice President, Chief Financial Officer and Secretary of Vanguard
Automation, Inc.
Eric Buonassisi has been Senior Vice President, Marketing and Sales, since
January, 2000. From March, 1997 until January, 2000, he was a partner at the
Magellan Consulting Group. From July, 1996 to March 1997, he served as
President of the Protens Consulting Group. From January, 1994 to July, 1996,
he was Chief Operating Officer for Visucom Systems, Inc.
Sicco W. T. Westra has been a Senior Vice President, Engineering and
Product Development since August 1998. Prior to that, from February, 1998
until August, 1998, he served as a Director of Global Production Management
for Applied Materials, Inc. From March, 1994 to August, 1998, he served as a
Manager of Business Development for BOC Coating Technology, Inc.
Catherine B. Poliak has been Vice President, Human Resources since
January, 1994.
Vahid Ghassemian has been Senior Vice President, Operations, since May,
1999. From January, 1999 until May, 1999, he served as the President of
NexGen Storage. From January, 1998 until December, 1998, he served as the
Senior Vice President of Operations for Kobe Precision, Inc. From 1991 until
January, 1998 he served as the Executive Vice President and Chief Operating
Officer of Akashic Memories.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been traded on the Nasdaq National
Market System under the symbol "SWTX" since the completion of the Company's
initial public offering in June 1987. Prices in the following table represent
the high and low closing sales prices for the Company's Common Stock as reported
by Nasdaq as of quarter ends in 1998 and 1999.
1998 by Quarter High Low
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1st $8.63 $6.63
2nd $7.25 $5.00
3rd $5.50 $4.37
4th $6.00 $4.00
1999 by Quarter High Low
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1st $3.77 $3.52
2nd $3.45 $3.20
3rd $4.68 $4.39
4th $4.40 $4.08
The Company has not paid cash dividends and has no present plans to do so.
There were approximately 280 stockholders of record at December 31, 1999.
ITEM 6. SELECTED FINANCIAL DATA
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Year Ended December 31,
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1995 1996 1997 1998 1999
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(In thousands, except per share data)
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Statement of Operations Data:
Revenues $ 33,501 $ 41,720 $ 50,089 $ 50,033 $ 55,331
Income (loss) from operations (1)(2) 726 2,568 2,446 (7,130) 1,848
Net income (loss) 633 2,427 2,281 (7,869) 510
Net income (loss) per share:
Basic 0.11 0.39 0.32 (1.03) 0.07
Diluted 0.10 0.35 0.29 (1.03) 0.07
Weighted average share of common stock and
common stock equivalents:
Basic 5,880 6,200 7,107 7,608 7,421
Diluted 6,218 7,034 7,799 7,608 7,528
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(1) Year 1997 includes $1.6 million of start up costs related to the new
manufacturing facility in Tempe, Arizona.
(2) Year 1998 includes $4.0 million of charges during the fourth quarter related
to quality issues of the anti-reflective film product for Sony Corporation.
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December 31,
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1995 1996 1997 1998 1999
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Balance Sheet Data:
Working capital $ 9,724 $ 15,846 $ 23,999 $ (4,256) $ 3,047
Total assets 34,105 42,509 61,469 54,019 70,123
Long-term obligations 2,890 6,591 15,539 141 21,789
Stockholders' equity 23,914 27,597 35,740 25,817 26,955
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K Report may contain, in this section and elsewhere in the
report, forward looking statements as that term is defined in the Private
Securities Litigation Reform Act of 1995, including, without limitation,
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements.
General
The Company has experienced significant fluctuations in quarterly
results of operations. Revenues have varied from quarter to quarter due, in
part, to the seasonal buying patterns for the Company's Heat Mirror(TM)
products, which typically have been strongest in the second and third
quarters, and the timing of short-term sales contracts. Sales of the
Company's energy conservation products are significantly influenced by the
residential and commercial construction industries, and reduction in
construction has generally resulted in a reduction in the sales of the
Company's Heat Mirror(TM) products.
In 1997, operating results were affected by the start up of
manufacturing operations in Tempe, Arizona. In 1998, operating results were
affected by process and machine problems resulting in quality issues
associated with the anti-reflective ("AR") film product produced for Sony
Corporation ("Sony"). In the fourth quarter of 1998 the Company discovered
quality issues with certain AR film that had been shipped to Sony and other
AR film that was still in inventory in Tempe that did not meet Sony's
specifications. Provisions of $4.0 million were recorded in the Company's
1998 fourth quarter results for estimated product returns from Sony and the
related write-off of inventory. To a lesser extent, manufacturing
inefficiencies at the Palo Alto facility during 1998 resulted in lower
product yields and higher manufacturing costs. During 1999, the Company
continued to experience ongoing production problems with the Sony
anti-reflective film and sales to Sony through the first three quarters
declined significantly. The manufacturing and sales of AR film to Sony were
discontinued in September 1999. In July, 1999, Southwall announced an
agreement with Mitsubishi Electric Corp. (MELCO) to supply a new
anti-reflective film for its CRT monitors. In November the Company announced
a similar supply agreement with Samsung Display Devices. The development and
introduction of these new products and the changing mix of products
manufactured have added to the production problems and inefficiencies
experienced by the Company. Primarily as a result of these factors, and in
view of the Company's strategy of developing additional applications for its
thin-film technology, and its ongoing practice of upgrading its manufacturing
processes, the Company may continue to experience quarterly fluctuations in
its results of operations.
The Company has not experienced a significant amount of inventory
obsolescence and believes that its inventory is generally recoverable, and
that technological change, competition, loss of customers, and reduction in
demand or other factors could result in the obsolence of the Company's
products.
The Company believes that it must continue to increase revenues and
improve manufacturing processes and yields to achieve sustained
profitability. The Company has expanded its capacity by opening a new
manufacturing facility in 1997 in Tempe and entered into a supply agreement
in 1998 with Delta-V for a new production machine. This machine began to
produce limited amounts of film commercially, in Tempe in the first quarter
of 2000. One additional machine is slated for delivery in the second quarter
of 2000 and is scheduled to commence production in early 2001. Additionally,
the Company is building a third manufacturing facility in Dresden, Germany,
which is scheduled to commence production in the second half of 2000. The
Company is continually seeking to expand existing applications, to develop
new applications and to expand international marketing and sales efforts but
there can be no assurance that the Company will be able to continue to
increase revenues.
The following table sets forth for the periods indicated the percentage
relationship to revenues of expense and income items. The table and the
subsequent discussion should be read in conjunction with the financial
statements and the notes thereto included elsewhere in this Form 10-K.
8
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Total Revenues
--------------
December 31
-----------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenues 100.0 100.0 100.0
Costs and expenses:
Cost of sales 67.2 88.4 71.9
Start-up costs -- Tempe 3.2 -- --
Research and development 6.2 7.7 9.5
Selling, general and
administrative 18.4 18.1 15.3
Total costs and expenses 95.1 114.2 96.7
Income (loss) from operations 4.9 (14.2) 3.3
Interest expense, net -- (1.4) (2.3)
Income (loss) before income tax 4.8 (15.6) 1.0
Provision for income taxes 0.3 0.1 0.1
Net income (loss) 4.6 (15.7) 0.9
</TABLE>
Recent Developments
Results of Operations
1999 Compared to 1998
The Company's net revenues were $55.3 million in 1999 compared to $50.0
million in 1998. Net sales for automotive XIR(R) film increased $5.8 million
from 1998. In addition, net sales of anti-reflective film to OEM customers
other than Sony increased by approximately $5.1 million. Offsetting these net
sales increases was a decrease of approximately $6.6 million of net sales to
Sony as a result of the factors discussed above. No sales were made to Sony
after September 30, 1999. All other products combined increased by
approximately $1.0 million primarily due to yield and throughput improvement
processes made to production machines during the year.
Cost of sales for 1999 was 72% of net revenue compared to 88% for 1998,
a decrease of 16%. This decrease was primarily due to improved yields of the
Company's products, including automotive XIR(R) and anti-reflective films.
Management expects continued efficiency improvements and lower cost of
operations for its Tempe facility during 2000. In addition, $1.6 million was
charged to cost of sales in the fourth quarter of 1998, related to the
write-off of inventory produced for Sony.
Research and development expenses, as a percentage of net revenues, were
9% for 1999, compared to 8% for 1998. Total research and development expenses
increased $1.3 million to $5.2 million in 1999. The increase was primarily
attributable to an increase in costs and expenses associated with stabilizing
and improving the quality of anti-reflective film produced on a production
machine in the Tempe facility; the costs associated with the retrofitting of
a production machine in the Palo Alto facility; and costs to assist in the
design and installation of two new production machines in Tempe and one in
Dresden, Germany, including travel to and from these locations.
9
<PAGE>
Selling, general and administrative expenses, as a percentage of net
revenues, decreased to 15% in 1999, from 18% in 1998 primarily due to a
reduction in personnel. Total selling, general and administrative expenses
decreased from $9.0 million in 1998 to $8.5 million in 1999.
Interest expense increased in 1999 over 1998 due to approximately $7.5
million of additional debt obtained at average interest rates higher than
those of prior years.
As a result of the factors discussed above, the Company reported a
pre-tax income of $0.6 million for 1999, compared to pre-tax loss of $7.8
million for 1998.
1998 Compared to 1997
The Company's net revenues were $50.0 million in 1998 compared to $50.1
million in 1997. Net sales for automotive XIR(R) film increased $8.1 million
from 1997. In addition, net sales of anti-reflective film to OEM customers
other than Sony increased by approximately $2.5 million. Offsetting these
product increases was a decrease of approximately $5.1 million of Sony
anti-reflective film including $2.3 million in the fourth quarter of 1998 due
to estimated product returns for product not meeting Sony's specifications.
All other products combined decreased by approximately $5.6 million primarily
due to capacity constraints associated with increasing automotive XIR(R)
production.
Cost of sales for 1998 was 88% of net revenues compared to 67% for 1997,
or an increase of 21%. The increase in cost of sales as a percentage of net
revenues was primarily due to anti-reflective film for Sony that did not meet
their specifications. The anti-reflective film not meeting Sony's
specifications is estimated to be $4.0 million and a provision in this amount
was recorded in the fourth quarter of 1998. This increase was partially
offset by improved yields of the Company's other products, including
automotive XIR(R) film.
Research and development expenses, as a percent of net revenues, were 8%
for 1998, compared to 6% for 1997. The absolute dollars increased to $3.9
million in 1998 from $3.1 million in 1997. The increase was primarily
attributable to an increase in personnel, from 24 employees at December 31,
1997, to 43 at December 31, 1998. The increase in personnel was necessary to
support higher new product development, primarily in film for laminated glass
products, including film for the automotive, Solis(R) and California
Series(TM) commercial and residential markets, and for new anti-reflective
film products.
Selling, general and administrative expenses, as a percent of net
revenue, decreased to 18.1% in 1998, from 18.4% in 1997 due mainly to cost
cutting measures. The absolute dollars decreased from $9.2 million in 1997 to
$9.0 million in 1998. This decrease was primarily attributable to an effort
to decrease personnel and control costs.
As a result of the factors discussed above, the Company reported a
pre-tax loss of $7.8 million for 1998, compared to pre-tax income of $2.4
million for 1997.
Liquidity and Capital Resources
Cash and cash equivalents were $4.1 million at December 31, 1998 and
$3.7 million at December 31, 1999. The decrease in cash was due to
expenditures for property and equipment partially offset by cash provided by
financing and operating activities. Major components of the $23.5 million in
capital expenditures made during 1999 included $9.8 million for a new
manufacturing facility and a production machine located in Dresden, Germany,
$7.5 million for two new production machines for the Tempe facility, $6.2
million for the conversion of an older, large-scale production machine
located in Palo Alto to produce advanced anti-reflective film products, and
other machine upgrades and programs to improve product yields. Major
components of the cash provided by financing activities include $10.5 million
of short and long-term debt, $6.6 million of equipment financing, and $4.9
million in foreign government grants offset by the retirement of a $2.7
million Convertible Subordinated Note that became due and payable on May 31,
1999. In connection with the equipment financing, $1.0 million is restricted
from use until the Company meets certain predetermined financial covenants.
In addition, the Company has provided the Lessor an irrevocable standby
letter of credit in the amount of $0.5 million to collateralize all of the
Company's obligations under the Lease Agreement.
The $4.3 million in cash provided by operating activities consisted of
depreciation and amortization of $4.9 million, $0.5 million of net
income for 1999 and $0.4 million of other increases in net working capital.
10
<PAGE>
At December 31, 1999, the Company had $3.7 million of cash and cash
equivalents. The Company also has a $7.0 million receivable financing line of
credit with a bank, which expires in June 2000. The Company is currently
negotiating with the bank to extend the line of credit for an additional year
and to obtain an increase in the line amount. As of December 31, 1999,
borrowings outstanding under that line were approximately $4.8 million, and
bore interest at 12% per annum. In July 1999, the Company also borrowed $3.0
million pursuant to a sale-leaseback arrangement and in October 1999 borrowed
an additional $3.6 million under another sale-leaseback arrangement. These
borrowings bear interest at approximately 13% per annum and are repayable
over the lease period commencing in the second quarter of 2000. The Company
also borrowed $5.8 million from two German banks during the third quarter of
1999 to provide progress payments on the Dresden, Germany project. The first
loan bears interest at 7.1% per annum for the first ten years and will be
revised to the prevailing rate at the end of the tenth year. Only interest
payments are required for the first ten years of the loan. The term of the
loan is for 20 years and the principal is repayable after the end of 10 years
in 20 equal semi-annual payments. For the second loan, the principal balance
is due in a single installment on June 30, 2009 and bears interest at rate of
5.75% per annum. The equipment financings and the government grants are each
subject to certain financial and other covenants as described in Note 4 and
Note 5 to the Financial Statements.
The Company anticipates that it will acquire approximately $17 million
of new capital equipment in 2000 that includes $12 million in progress
payments on two new production machines in Dresden, Germany for Heat Mirror
XIR-Registered Trademark- automotive film products and the completion of the
building. The Company will finance its capital expenditures in Germany
primarily with the receipt of foreign government grants of approximately $4.7
million and additional bank loans of $11.2 million. The remaining $5.0
million capital expenditures relates to a third production machine and other
capital improvement projects in its Tempe facility, and will be financed with
an increase in the bank line of credit and funds generated from operations.
The Company believes that existing cash, cash anticipated to be
generated from operations, the anticipated extended line of credit and the
availability of foreign grants and incentives, as discussed above, will be
sufficient to meet the Company's operating cash requirements through fiscal
2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations, and changes in the market values of its investments.
FINANCING RISK. The Company's exposure to market rate risk for changes
in interest rates relates primarily to the Company's term loans which are
tied to the London Interbank Offered Rate ("LIBOR") and bank line of credit
that is tied to the prime rate. Fluctuations in interest rates may adversely
impact the interest expense expected for the Company. The effect of interest
rate fluctuations on the Company in 1999 was not material.
INVESTMENT RISK. The Company invests its excess cash in certificates of
deposit and money market accounts and, by policy, limits the amount of exposure
to any one institution. Investments in both fixed rate and floating rate
interest earning instruments carries a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted due to a rise in
interest rates, while floating rate securities may produce less income than
expected if interest rates fall.
FOREIGN CURRENCY RISK. International revenues amounted to 77% of the
Company's total sales in 1999 and, by policy, the Company limits foreign
currency risk by requiring all sales to be denominated in U.S. dollars. The
Company's international business is subject to risks typical of an international
business, including, but not limited to differing economic conditions, changes
in political climate, differing tax structures, other regulations and
restrictions, and foreign exchange rate volatility. Accordingly, the Company's
future results could be materially adversely impacted by changes in these or
other factors. The effect of foreign exchange rate fluctuations on the Company
in 1999 was not material.
11
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Southwall Technologies Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Southwall Technologies Inc. and its subsidiaries (the "Company") at December
31, 1999 and 1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United
States. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements
in accordance with auditing standards generally accepted in the United
States, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
March 3, 2000
12
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED BALANCE SHEETS
(dollars and shares in thousands, except per share data)
ASSETS
December 31,
1 9 9 8 1 9 9 9
-------- --------
Current assets:
Cash and cash equivalents $4,136 $3,677
Short-term investments 7 --
Accounts receivable, net of
allowance for bad debts
of $845 and $875 12,355 11,417
Inventories, net 6,057 7,601
Other current assets 813 1,294
-------- --------
Total current assets 23,368 23,989
Property, plant and equipment, net 29,068 42,824
Other assets 1,583 3,310
-------- --------
Total assets $54,019 $70,123
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $6,307 $9,775
Accrued compensation 2,265 1,817
Other accrued liabilities 3,655 2,410
Bank line of credit -- 4,849
Current portion of long-term debt 15,397 2,091
-------- --------
Total current liabilities 27,624 20,942
Long-term debt 141 21,789
Other 437 437
-------- --------
Total liabilities 28,202 43,168
-------- --------
Commitments and Contingencies (Note 9)
Stockholders' equity:
Common stock, $0.001 par value, 20,000 shares
authorized; issued and outstanding 7,889
and 7,889 8 8
Capital in excess of par value 52,181 51,771
Less cost of treasury stock, 565 and
371 shares outstanding (2,852) (1,888)
Notes Receivable (1,020) (906)
Translation loss on subsidiary -- (40)
Accumulated deficit (22,500) (21,990)
-------- --------
Total stockholders' equity 25,817 26,955
-------- --------
Total liabilities and
stockholders' equity $54,019 $70,123
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
13
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars and shares in thousands, except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
1 9 9 7 1 9 9 8 1 9 9 9
-------- -------- --------
<S> <C> <C> <C>
Net revenues $50,089 $50,033 $55,331
-------- -------- --------
Costs and expenses:
Cost of sales 33,669 44,253 39,766
Tempe start up costs 1,641 -- --
Research and development 3,117 3,864 5,249
Selling, general and administrative 9,216 9,046 8,468
-------- -------- --------
Total costs and expenses 47,643 57,163 53,483
-------- -------- --------
Income(loss) from operations 2,446 (7,130) 1,848
Interest income(expense), net (20) (681) (1,288)
-------- -------- --------
Income(loss) before provision
for income taxes 2,426 (7,811) 560
Provision for income taxes (145) (58) (50)
-------- -------- --------
Net income(loss) $2,281 $(7,869) $510
======== ======== ========
Net income(loss) per share:
Basic $0.32 $(1.03) $0.07
Diluted $0.29 $(1.03) $0.07
Weighted average shares of common stock
and dilutive common stock equivalents:
Basic 7,107 7,608 7,421
Diluted 7,799 7,608 7,528
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
14
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Capital in
------------ Excess of Notes Accumulated Treasury
Shares Amount Par Value Receivable Deficit Stock
------ ------ --------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1996 6,917 $7 $46,673 $(596) $(16,912) $(1,575)
Shares issued through:
Interest paid with
stock 69 116
Exercise of options 52 (191) 811
Sale of stock, net 667 1 4,930
Sales to employees
under stock purchase
plan 32 154
Stock option loans, net (60)
Net income 2,281
------------------------------------------------------------------------
Balance at Dec. 31, 1997 7,636 8 51,513 (656) (14,631) (494)
Shares issued through:
Interest paid with
stock 24 162
Exercise of options 221 505 406
Sales to employees
under stock purchase
plan 32 139
Repurchase of stock (2,926)
Stock option loans, net (364)
Net loss (7,869)
-------------------------------------------------------------------------
Balance at Dec. 31, 1998 7,889 8 52,181 (1,020) (22,500) (2,852)
Shares issued through:
Interest paid with
stock (55) 148
Exercise of options (264) 607
Sales to employees
under stock
purchase plan (81) 181
Stock option loans, net 114
Issuance of stock
for bonuses (10) 28
Translation loss
on foreign subsidiary
Net income 510
-------------------------------------------------------------------------
Balance at Dec. 31, 1999 7,889 $8 $51,771 $(906) $(21,990) $(1,888)
=========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<TABLE>
<CAPTION>
Other Total
Comprehensive Stockholders' Comprehensive
Income Equity Income (Loss)
------ ------ -------------
<S> <C> <C> <C>
Balance, Dec. 31, 1996 $ $27,597 $
Shares issued through:
Interest paid with
stock 185
Exercise of options 620
Sale of stock, net 4,931
Sales to employees
under Stock Purchase
Plan 186
Stock option loans, net (60)
Net income 2,281 2,281
-------------------------------------------
Balance, Dec. 31, 1997 35,740 2,281
Shares issued through:
Interest paid with
stock 186
Exercise of options 911
Sales to employees
under Stock Purchase
Plan 139
Repurchase of stock (2,926)
Stock option loans, net (364)
Net loss (7,869) (7,869)
-------------------------------------------
Balance, Dec. 31, 1998 25,817 (7,869)
Shares issued through:
Interest paid with
stock 93
Exercise of options 343
Sales to employees
under stock
purchase plan 100
Stock option loans, net 114
Issuance of stock
for Bonuses 18
Translation loss
on Foreign subsidiary (40) (40) (40)
Net income 510 510
-------------------------------------------
Balance, Dec. 31, 1999 $ (40) $26,955 $ 470
===========================================
</TABLE>
15
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income(loss) $2,281 $(7,869) $510
Adjustments to reconcile net income(loss)
to net cash provided by
operating activities:
Depreciation and amortization 2,703 4,315 4,946
Translation loss on foreign subsidiary (40)
Decrease (increase) in accounts receivable, net (4,829) (429) 938
Decrease (increase) in inventories, net (1,712) 4,061 (1,544)
Decrease (increase) in other current and non-current assets (204) 246 (2,380)
Increase in accounts payable
and accrued liabilities 1,845 4,023 1,886
-------- -------- --------
Cash provided by operating activities 84 4,347 4,316
-------- -------- --------
Cash flows from investing activities:
Decrease in short-term investments -- -- 7
Expenditures for property, plant and equipment
and other assets (11,727) (7,190) (23,473)
-------- -------- --------
Net cash used in investing activities (11,727) (7,190) (23,466)
-------- -------- --------
Cash flows from financing activities:
Proceeds from foreign government grants -- -- 4,943
Proceeds from borrowings 15,324 -- 34,146
Principal payments on borrowings (1,322) (1,305) (20,955)
Repayment of stockholder's note receivable 234 180 298
Issuance of common stock upon exercise
of stock options, net -- 273 159
Issuance of common stock under employee
stock purchase plan -- 139 100
Issuance (purchase) of treasury stock, net 512 (2,832) --
-------- -------- --------
Net cash provided by (used in) financing
activities 14,748 (3,545) 18,691
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents 3,105 (6,388) (459)
Cash and cash equivalents, beginning of year 7,419 10,524 4,136
-------- -------- --------
Cash and cash equivalents, end of year $10,524 $4,136 $3,677
======== ======== ========
Supplemental cash flow disclosures:
Interest paid $ 620 $1,052 $1,408
Income taxes paid $ 100 $ 12 $ 50
Supplemental schedule of non-cash investing and financing activities:
Property and equipment acquired via
capital lease $ 365 $ -- $ 28
Treasury stock used for payment
of interest $ 185 $ 186 $ 93
Treasury stock used for payment of bonuses $ -- $ -- $ 18
Exercise of stock options with issuance
of stockholders notes receivable $ 220 $ 544 $ 184
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares in thousands, except per share data)
NOTE 1 - THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES:
The Company
Southwall Technologies Inc. (the "Company") is engaged in the design,
development and production of thin film coatings on flexible substrates. These
coatings selectively absorb, reflect or transmit certain types of
electromagnetic radiation for use in energy conservation and electronics
applications. The Company has developed and currently markets a variety of
thin-film products for the residential and commercial architectural glazing,
automotive glazing and electronic display markets. These products include
transparent insulation and solar-control films, anti-reflective film for
computer monitor CRTs and television screens, transparent conductive films for
use in touch screen displays, and various other commercial film products.
Principles of consolidation
The consolidated financial statements include the accounts of Southwall
Technologies Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated on consolidation.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Comprehensive income (loss)
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income," ("SFAS No.
130"). SFAS No. 130 establishes standards for reporting and display in the
financial statements of total net income and the components of all other
non-owner changes in equity, referred to as comprehensive income (loss).
Accordingly, the Company has reported translation loss from consolidation of
its foreign subsidiary in comprehensive income (loss).
Cash equivalents and short-term investments
Cash equivalents and short-term investments consist of Eurodollar
certificates of deposit, money market and mutual funds. Investments with
maturities of three months or less from the date of purchase are included in
cash equivalents.
The Company has classified its short-term investments as
"available-for-sale securities". At December 31, 1998, the difference between
cost and fair market value was insignificant and the gains/losses on sales of
securities during the year were insignificant.
Fair value disclosures of financial instruments
The Company has estimated the fair value amounts of its financial
instruments using available market information and valuation methodologies
considered to be appropriate and have determined that the book value of the
Company's debt at December 31, 1998 and 1999 approximates fair value.
Concentration of credit risk
17
<PAGE>
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash equivalents and
short-term investments and trade accounts receivable.
The Company invests in a variety of financial instruments such as
certificates of deposits and money market funds. The Company, by policy, limits
the amount of credit exposure to any one financial institution or commercial
issuer.
The Company sells its products throughout the world. The Company performs
ongoing credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. The Company maintains an allowance
for uncollectible accounts receivable based upon expected collectibility of all
accounts receivable. The write-off of uncollectible amounts has been
insignificant.
At December 31, 1998, receivables from two customers represented 25% and 20%
of the Company's accounts receivables, respectively. At December 31, 1999,
receivables from three customers represented 19%, 17% and 12% of the Company's
accounts receivable, respectively.
Revenue recognition
Revenues from product sales are recognized upon product shipment, provided
that no significant obligations remain and collectability is probable.
Provisions for estimated cost of warranty repairs and returns and allowances are
recorded at the time products are shipped.
The Company has agreements under which it receives fees for certain
rights to technology and products. License revenues associated with these
agreements are recognized when earned and collected or collection is certain
to a reasonable degree.
Research and development expenses
Research and development costs are expensed as incurred in accordance
with Statement of Financial Position Standard No. 2, "Accounting for Research
and Development Costs."
Inventories
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market. Cost includes materials, labor and manufacturing
overhead.
Property and equipment
Property and equipment are stated at cost. The Company uses the
units-of-production method for calculating depreciation on certain of its
production machines and the straight-line method for all other property and
equipment. Estimated useful lives of the assets range from five to ten years. On
its large scale production machines for which the units-of-production
depreciation method is used, the Company records minimum annual depreciation of
at least one-half of the depreciation that would have been recorded utilizing
the straight-line depreciation method over a ten-year life. Leasehold
improvements are amortized using the term of the related lease or the economic
life of the improvements, if shorter.
Additions, major renewals and betterments are included in the asset
accounts at cost. Ordinary maintenance and repairs are charged to expense as
incurred. Gains or losses from disposal are included in earnings.
Impairment of long-lived assets
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be disposed of." SFAS No. 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. No such losses
have been recognized through December 31, 1999.
Intangible assets
Patents, licenses and trademarks relating to the Company's commercial
products are stated at cost less accumulated amortization. Amortization is
computed on the straight-line basis over terms of up to 17 years. At December
31, 1997, 1998 and 1999, patents, licenses and trademarks are included in other
assets in the amount of $843, $852 and $723, net of accumulated amortization of
$930, $947 and $1,119, respectively. Amortization expense for 1997, 1998 and
1999 was $113, $176 and $172, respectively.
Stock-based compensation expense
The Company accounts for stock-based compensation to employees using the
intrinsic
18
<PAGE>
value method in accordance with Accounting Principle Board Opinion No. 25, ("APB
25"), "Accounting for Stock Issued to Employees", as permitted under the
provisions of Statement of Financial Accounting Standards No. 123, ("SFAS 123"),
"Accounting for Stock-Based Compensation". The Company also provides
additional pro forma disclosures as required under SFAS 123.
Income taxes
The Company accounts for income taxes under the liability method, which
recognizes deferred tax assets and liabilities for the expected tax consequences
of temporary differences between the tax basis of assets and liabilities and
their financial statement reported amount.
Net income(loss) per share
Basic net income(loss) per share is computed as net income(loss)
available to common stockholders divided by the weighted-average number of
common shares outstanding. Diluted net income per share is computed as net
income available to common stockholders divided by the weighted-average
number of common shares outstanding and dilutive potential common shares
outstanding, including stock options, restricted stock awards, warrants and
other convertible securities. Diluted net loss per share is computed the same
as basic net income(loss) per share since the inclusion of potential common
shares would result in an anti-dilutive (lower) loss per share amount. All
options outstanding during 1998 were excluded from the diluted net loss per
share calculations because they were anti-dilutive in view of the losses
incurred by the Company.
During the years ended December 31, 1997, 1998 and 1999 there were no
differences between the numerators used for the basic and diluted net
income(loss) per share calculations. The total amount of the differences in
the denominator in 1997 and 1999 is attributable to the effect of dilutive
common stock options.
Foreign currency translation
The Company's German subsidiary uses its local currency as its functional
currency. Assets and liabilities are translated at exchange rates in effect
at the balance sheet date and income and expense accounts at average exchange
rates during the year. Resulting translation adjustments are recorded
directly to a separate component of stockholders' equity.
Recent accounting pronouncements
19
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 was effective for all fiscal quarters beginning with the quarter
ending June 30, 1999. SFAS 133 establishes new standards of accounting and
reporting for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. In July
1999, the Financial Accounting Standards Board issued SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities. Deferral of
the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred
the effective date until the first fiscal quarter ending June 30, 2000. The
company does not currently hold derivative instruments or engage in hedging
activities.
In December 1999, the Securities and Exchange Commission issued SAB No.
101, "Revenue Recognition in Financial Statements," which provides guidance
on the recognition, presentation, and disclosure of revenue in financial
statements filed with the SEC. SAB No. 101 outlines the basic criteria that
must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. SAB 101 will be effective for fiscal
years beginning after December 15, 1999. The Company believes that the
adoption of SAB No. 101 will not have a material impact on its financial
position, results of operations or cash flow.
NOTE 2 - BALANCE SHEET DETAIL:
December 31,
------------------------------
Inventories, net: 1 9 9 8 1 9 9 9
------- -------
Work-in-process $ 2,155 $ 2,972
Raw materials 2,314 2,940
Finished goods 1,588 1,689
--------- --------
$ 6,057 $ 7,601
========= ========
Property, plant and equipment, net December 31,
-----------------------------
1 9 9 8 1 9 9 9
------- -------
Land $ -- $ 207
Buildings -- 3,405
Machinery and equipment 44,061 45,421
Leasehold improvements 3,714 3,804
Furniture and fixtures 2,915 2,984
Construction-in-process 4,987 17,961
-------- --------
55,677 73,782
Less - accumulated depreciation
and amortization (26,609) (30,958)
-------- --------
$ 29,068 $ 42,824
======== ========
Depreciation and amortization expense for the years ended December 31, 1997,
1998 and 1999 was $2,590, $4,139 and $4,349, respectively. See Note 5 to the
financial statements with respect to a government grant received to offset
construction and equipment costs for the German subsidiary.
Other accrued liabilities: December 31,
----------------------------
1 9 9 8 1 9 9 9
------- -------
Reserve for warranties and sales
returns $ 2,858 $ 1,026
Payable for purchase of land -- 276
Other 797 1,108
------ ------
$ 3,655 $ 2,410
======= =======
NOTE 3 - BANK LINE OF CREDIT
The Company has a $7 million receivable financing line of credit ("line
of credit") with a bank. The amount of borrowing is based upon 80% of the
approved accounts receivable balance, and bears a finance fee of 0.088% per
month (approximately 12% per annum) of the average daily account balance
outstanding during the settlement period. In lieu of the line of credit, the
Company granted to the bank a continuing lien upon and security interest in,
and right of set off with respect to all of the Company's right, title and
interest in all accounts receivable, inventory, monies, remittances and fixed
assets. There was $4.8 million of borrowing outstanding under this line of
credit at December 31, 1999.
NOTE 4 - LONG-TERM DEBT:
The Company's long-term debt consists of the following at December 31,
1999:
Promissory note dated December 16, 1996 $ 1,312
Promissory note dated May 6, 1997 10,000
Sale-leaseback agreement dated July 19, 1999 2,990
Sale-leaseback agreement dated October 19, 1999 3,600
Bank loan dated May 28, 1999 4,102
Bank loan dated August 14, 1999 1,699
20
<PAGE>
Other 177
--------
Total 23,880
Less current portion 2,091
--------
$ 21,789
========
The promissory note dated December 16, 1996 is payable to a leasing
company. The borrowings are collateralized by certain production equipment, bear
interest at an annual rate of 9.7037% and are subject to certain financial
covenants. The Note is payable in monthly installments plus interest for a term
of 48 months. At December 31, 1999 the Company was not in compliance with
certain of the financial covenants pertaining to this promissory note. The
Company has received a waiver from the leasing company for failure to comply
with such covenants through the remaining term of the loan. The amount is
repayable in the next 12 months and has been classified as current.
The promissory note dated May 6, 1997 is payable to a bank. The note
payments are guaranteed by Teijin Limited of Japan ("Teijin"), a stockholder and
supplier of the Company (See Note 10). The Teijin guarantee is collateralized by
certain equipment located in the Company's Tempe, Arizona manufacturing facility
and inventory to the extent necessary to provide 120% net book value coverage of
the outstanding loan balance. The interest rate on the loan is re-set
semi-annually at LIBOR plus 0.4375%, (6.1313% at December 31, 1999), and the
Company is subject to certain financial covenants. A loan guarantee service fee
is payable to Teijin semi-annually on the outstanding balance at the rate of
0.5625%. The note provides for semi-annual payments of interest only during the
first four years, followed by semi-annual installments plus interest for the
remaining three and one half year term. At December 31, 1998, the Company was
not in compliance with certain of the financial covenants, therefore, the full
principal amount was classified as a current liability. At December 31, 1999 the
Company was not in compliance with certain of the financial covenants pertaining
to this promissory note, however, the Company has received a waiver from Teijin
through December 31, 1999. During 1999 the Company negotiated new financial
covenants for the years 2000 and 2001.
During 1999, the Company entered into two equipment sale-leaseback
agreements with a leasing company ("Lessor"). Because the Company has an
option to purchase the equipment at a price to be determined between the
Company and the Lessor at the end of the lease period, the sale-leaseback
agreements have been treated as financings. One lease agreement has a lease
term of three years and the other lease agreement has an initial lease term
of two years with an option to extend it an additional year. At December 31,
1999, the Company had a total of $6,590 outstanding and due under the leases.
The leases are collateralized by the leased equipment and certain other
production equipment of the Company. The effective interest rate of both
leases is approximately 13% per annum and they are repayable over their term
commencing in May 2000. Additionally, the Company has provided the Lessor an
irrevocable standby letter of credit in the amount of $500 to collateralize
all of the Company's obligations under these agreements. The letter of credit
shall not expire before January 1, 2002. In addition, $1 million of the
amount received from the Lessor is in an escrow account and will be released
to the Company pending the Company meeting certain financial conditions at
December 31, 1999. Due to the uncertainty of compliance with these financial
conditions, the Company has classified this amount under "Other Assets."
On May 28, 1999, the Company entered into a loan agreement with a German
bank that provides for borrowings up to $6.4 million (DM 12.5 million). Under
the terms of this agreement, the funds will be used solely for capital
investment by the German subsidiary. The term of the loan is for 20 years and
the principal is repayable after the end of 10 years in 20 equal semi-annual
payments. The loan bears interest at 7.10% per annum for the first ten years,
and will be revised to the prevailing rate at the end of the tenth year.
On August 14, 1999, the Company entered into a loan agreement with a German
bank that provides for borrowings up to $1.7 million (DM 3.3 million). Under the
terms of this agreement, the funds will be used solely for capital investment by
the German subsidiary. The principle balance is due in a single installment on
June 30, 2009 and bears interest at a rate of 5.75% per annum. The interest is
payable quarterly. 50% of the loan is restricted in an escrow account for the
duration of the loan period and was, therefore, classified as a non-current
"Other Asset."
Other long-term debt consists of capitalized leases related primarily to
certain computer equipment used by the Company.
In June 1999, the Company repaid a $2,650 convertible debenture to a
related party. Interest paid on the debenture during 1999 was $93.
Principal reductions of long-term debt are scheduled as follows:
Year Amount
---- -------
21
<PAGE>
2000 $ 2,091
2001 4,546
2002 4,869
2003 4,073
2004 2,500
2005 --
Thereafter 5,801
--------
Total $ 23,880
========
The Company incurred total interest expense of $892, $1,162 and $1,408
in 1997, 1998 and 1999, respectively. Of these amounts, the Company
capitalized $464, $0 and $1,115 in 1997, 1998 and 1999, respectively as part
of the cost related to the construction of certain production machines,
equipment and facilities.
NOTE 5 - GOVERNMENT GRANT
In May 1999, the Company received the approval to receive a grant award
(the "Grant") from the State Government of Saxony in Germany (the "Grantor")
for a maximum amount of approximately $9,647 (DM 18,472).
The awarding of the Grant is subject to the following requirements:
a) The grant is earmarked to co-finance the costs of construction of a
facility to manufacture Heat Mirror XIR film for the automotive glass
industry, located at Grossroehrsdorf, Germany.
b) The construction period for the project is from March 15, 1999 to
March 14, 2002.
c) The total investment should be at least $37.6 million (DM 73,296).
d) The project must create at least 143 permanent jobs and 7
apprenticeships.
In the event that the Company fails to meet the above requirements, the
Grantor has the right to reclaim the Grant.
During the year ended December 31, 1999, the Company received approximately
$4.9 million (DM $9,600) under this Grant. The Company is scheduled to
receive the remaining balance in 2002.
NOTE 6 - INCOME TAXES
The income tax provision in 1997 resulted primarily from minimum tax
liabilities related to federal taxes and foreign withholding taxes on royalty
payments. The income tax provision in 1998 and 1999 relates primarily to
foreign withholding taxes on royalty payments. The effective income tax rate
differs from the federal statutory rate primarily as a result of the
utilization of net operating loss carryforwards in 1997 and 1999 and the
reserves established for deferred tax assets in 1998. The deferred tax assets
valuation allowance at December 31, 1997, 1998 and 1999 is attributable to
federal and state deferred tax assets. Management believes that sufficient
uncertainty exists with regard to the realizability of the tax assets such
that a full valuation allowance is necessary. These factors include the lack
of a significant history of consistent profits and the lack of carryback
capacity to realize these assets. Based on this absence of objective evidence
management is unable to asset that it is more likely than not that the
Company will generate sufficient taxable income to realize the Company's
deferred tax assets.
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1998 1999
---- ----
<S> <C> <C>
Depreciation $ (4,142) $ (3,910)
Other (300) (220)
-------- --------
Gross deferred tax liabilities (4,442) (4,130)
-------- --------
Inventory reserves 924 599
Other 3,117 3,214
Loss carryforwards 7,971 8,559
Credit carryforwards 1,109 952
-------- --------
Gross deferred tax assets 13,121 13,324
-------- --------
Deferred tax assets valuation allowance (8,679) (9,194)
-------- --------
Net deferred taxes $ -- $ --
======== ========
</TABLE>
At December 31, 1999 the Company had net federal operating loss
carryforwards of approximately $23.3 million that expire at various dates
from 2000 through 2019. The net operating loss carryforwards include
approximately $3.5 million resulting from employee exercises of non-incentive
stock options or disqualifying dispositions, the tax benefit of which. when
realized, will be accounted for as an addition to capital in excess of par
22
<PAGE>
value rather than as a reduction of the provision for income taxes. Research
and development, investment tax and foreign tax credit carryovers of
approximately $0.3 million are also available to reduce future federal and
state income taxes and expire at various dates through 2004. If certain
substantial changes in the Company's ownership occur, there would be an
annual limitation on the amount of the carryforwards that can be utilized.
23
<PAGE>
NOTE 7 - BENEFIT PLANS:
Stock Option Plans:
The Company has granted stock options under various option plans and
agreements in the past and currently under the 1997 Stock Incentive Plan and the
1998 Stock Option Plan for Employees and Consultants. The 1998 Stock Option Plan
for Employees and Consultants was adopted by the Board of Directors on August 6,
1998. The plans and agreements are administered by the Board of Directors. The
exercise price of options granted under the 1997 and 1998 plans must be at least
85% of the fair market value of the stock at the date of grant. All options
granted to date under these two plans have been at the fair market value of the
Company's stock on the date of the grant.
Options under the plans generally vest at a rate of 25% per year, are
non-transferable and generally expire over terms not exceeding ten years from
the date of grant or three months after the optionee terminates their
relationship with the Company.
During 1997, 1998 and 1999, certain employees, officers and directors of
the Company exercised stock options under the plans by issuing full recourse
notes to the Company with an annual rate of interest of generally 7%. During
1997, 1998 and 1999 outstanding notes to certain of those employees, officers
and directors were extended from terms of one year to terms of two years.
Both the principal and interest accrued on the notes are due at the end of
the term of each note. These notes aggregate $656, $1,020 and $906, at
December 31, 1997, 1998 and 1999, respectively.
As of December 31, 1999, there were 518 shares of Common Stock available
for grant under the two stock option plans.
The activity under all stock option plans, combined, was as follows:
Shares of
Common Range of Weighted-Average
Stock Exercise Price Exercise Price
----- -------------- --------------
Options outstanding at
January 1, 1997 1,664 $2.50 - $8.13 $3.88
Granted 403 $6.38 - $8.25 $6.86
Exercised (212) $2.50 - $5.63 $2.92
Canceled or expired (115) $2.50 - $7.88 $5.06
-----
December 31, 1997 1,740 $2.50 - $8.25 $4.61
Granted 537 $4.50 - $8.63 $5.49
Exercised (409) $2.50 - $5.25 $2.91
Canceled or expired (455) $2.50 - $8.25 $6.31
-----
December 31, 1998 1,413 $2.50 - $8.63 $4.89
Granted 637 $2.75 - $4.50 $3.77
Exercised (127) $2.50 - $4.38 $2.89
Cancelled or expired (262) $2.50 - $8.63 $5.15
-----
December 31, 1999 1,661 $2.50 - $8.25 $4.59
=====
24
<PAGE>
Employee Stock Purchase Plan
In April 1988, the Company adopted the Employee Stock Purchase Plan ("the
Purchase Plan") and reserved 150 shares of Common Stock for issuance thereunder.
In March 1997, the Company adopted the 1997 Employee Stock Purchase Plan ("the
1997 Plan") and reserved 100 shares of Common Stock for issuance thereunder.
Employees of the Company, subject to certain limitations, may purchase shares at
85% of the lower of the fair market value of the Common Stock at the beginning
of the six month offering period, or the last day of the purchase period. During
1997, 1998 and 1999, 33, 32 and 36 shares, respectively, were sold under the
Purchase Plan and the 1997 Plan. At December 31, 1999 there were no shares
remaining available for issuance under the 1988 Purchase Plan and 11 shares
available for issuance under the 1997 Plan.
Accounting for Stock Based Compensation
The Company has stock option plans which reserve shares of Common Stock for
issuance to employees, officers, directors and consultants. The Company applies
APB Opinion 25 and related Interpretations in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans, except for $123 related to certain transactions in 1996. The Company has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation". Had compensation cost for the Company's stock option
plans and stock purchase plans been determined based on the fair value at the
grant date for awards granted in 1997, 1998 and 1999 under those plans
consistent with the provisions of SFAS No. 123, the Company's net income(loss)
and net income(loss) per share would have been reduced to the pro forma amounts
indicated below:
1997 1998 1999
---- ---- ----
Net income(loss) - as reported ............. $ 2,281 $ (7,869) $ 510
Net income(loss) - pro forma ............... $ 1,450 $ (8,314) $ (284)
Net income(loss) per share - as reported
Basic ........................ $ 0.32 $ (1.03) $ 0.07
Diluted ...................... $ 0.29 $ (1.03) $ 0.07
Net income(loss) per share - pro forma
Basic ........................ $ 0.20 $ (1.09) $ (0.04)
Diluted ...................... $ 0.19 $ (1.09) $ (0.04)
For the stock option plans, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model for
the multiple option approach with the following weighted average assumptions
used for grants in 1997, 1998 and 1999, respectively. Expected volatility of 60%
in 1997, 58% in 1998 and 110% in 1999; risk-free interest rate of 6.4%, 4.5% and
5.4%; and expected lives from vesting date of 0.54, 1.11 and 3.23 years. The
Company has not paid dividends and assumed no dividend yield. The weighted
average fair value of stock options granted in 1997, 1998 and 1999 was $6.86,
$2.51 and $2.60 per share, respectively.
For the employee stock purchase plans, the fair value of each purchase
right is estimated at the beginning of the offering period using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used in 1997, 1998 and 1999, respectively. Expected volatility of
60%, 68%, and 139%; risk-free interest rate of 5.5%, 5.0% and 5.8%; and
expected lives of 0.5 years in each year. The Company has not paid dividends
and assumed no dividend yield. The weighted-average fair value of those
purchase rights granted in 1997, 1998 and 1999 was $2.16, $2.33 and $1.98 per
right, respectively.
25
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Prices As of 12/31/99 Contractual Life Price As of 12/31/99 Price
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.50 - $3.19 365 4.21 $2.92 147 $2.66
3.25 - 4.50 555 5.73 4.16 142 3.93
4.63 - 5.00 407 5.39 4.94 144 4.87
5.25 - 8.13 329 5.11 6.70 166 6.66
8.25 - 8.25 5 4.81 8.25 3 8.25
- ---------------------------------------------------------------------------------------------------
$2.50 - $8.25 1,661 5.19 $4.59 602 $4.62
- ---------------------------------------------------------------------------------------------------
</TABLE>
401(K) Plan
In 1998, the Company sponsored a 401(k) defined contribution plan covering
eligible employees who elect to participate. The Company is allowed to make
discretionary profit sharing and 401(k) matching contributions as defined in the
plan and as approved by the Board of Directors. The Company matches 25% of each
eligible participant's 401(k) contribution up to a maximum of 20% of the
participant's compensation, not to exceed one thousand dollars per year. The
Company's actual contribution may be reduced by certain available forfeitures,
if any, during the plan year. No discretionary or profit sharing contributions
were made for the years ending December 31, 1997, 1998 and 1999. 401(k) matching
contributions for the years ending December 31, 1997, 1998 and 1999 were $109,
$139 and $230, respectively. The Company has no intention to terminate the plan.
NOTE 8 - SEGMENT REPORTING:
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 supercedes SFAS 14, "Financial Reporting for Segments of
a Business Enterprise" replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. SFAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of SFAS 131 did not affect results of operations
or financial position or the segments reported in 1997. The Company is organized
on the basis of products and services. Each of the Company's business units
(Energy Conservation
26
<PAGE>
and Electronic Products) has been aggregated into one operating segment.
The following is a summary of net revenue by geographic area for 1997, 1998 and
1999:
1997 1998 1999
---- ---- ----
United States $ 17,593 $ 16,095 $12,469
South America -- -- 569
Pacific Rim 7,525 4,206 8,110
Japan 15,640 13,041 12,088
Europe 7,788 15,060 20,358
Canada 1,543 1,631 1,737
-------- -------- --------
Total net revenues $ 50,089 $ 50,033 $ 55,331
======== ======== ========
One customer accounted for approximately 31% of net sales in 1997, two
customers accounted for 33%, 34% and 12% of net sales in 1998, respectively,
and three customers accounted for 18%, 11% and 10% of net sales in 1999,
respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company leases certain property and equipment as well as its facilities
under noncancellable operating leases and $365 of computer equipment under a
capital lease. These leases expire at various dates through 2007.
As of December 31, 1999, the future minimum payments under noncancellable
operating and capital leases are as follows:
Capital Operating
------- ---------
2000 178 $ 3,429
2001 8 3,444
2002 8 3,476
2003 8 2,659
2004 6 2,673
Thereafter -- 996
------- -------
Future minimum lease payments $ 208 $16,677
=======
Less - amount representing interest (31)
-------
Present value of future minimum
lease payments 177
Current maturities 147
-------
Long-term lease obligations $ 30
=======
Rent expense under operating leases was approximately $1,471, $1,562 and
$1,484, in 1997, 1998 and 1999, respectively.
Contingencies
The Company has been named a defendant in a purported class action
lawsuit. Plaintiffs contend that heat mirror glass units manufactured
throughout the country are subject to clouding and discoloration. The Company
is in the process of filing demurrers and setting pleadings. In addition,
several of the Company's co-defendants have settled their portions of the
case. At this point, the Company intends to vigorously defend this lawsuit by
moving to defeat the class action certification.
In 1997, the Company was named a defendant in a lawsuit with a
manufacturer of insulated glass units wherein the plaintiff claimed that the
insulated glass manufactured with the use of coated film manufactured by the
Company was subject to various failures and deficiencies, giving rise to
warranty and other consumer claims. Plaintiff is claiming damages for past
replacement cost and future potential claims. The Company is in the process
of negotiating a settlement of these claims.
The Company has been named a defendant in a lawsuit filed on April 5,
1996 by one of its customers in the United States District Court for the
Eastern District of New York. The lawsuit alleges certain unfair competition,
tort and contractual violations by the Company and seeks relief in an
aggregate amount in excess of $32 million. In addition, the Company is
involved in a number of other legal actions arising in the ordinary course of
business.
The Company believes, that the various asserted claims and litigation in
which it is involved will not materially affect its consolidated financial
position, future operating results or cash flows.
In 1995 the Company started selling its anti-reflective film under a
Supply Agreement to Sony Corporation of Japan ("Sony"). In the fourth quarter
of 1998 the Company experienced some quality problems related to the
anti-relective film that did not meet Sony's specifications. The Company
further did not meet the minimum shipping requirements stated in the Supply
Agreement. As a result, in the fourth quarter of 1998, the Company recorded a
$4.0 million charge to cover any loss contingency, involving write-off of
inventory, sales returns and any penatlies associated with the shipment
shortfall. During the second quarter of 1999 the Company reached a settlement
with Sony, where Sony agreed to release the Company from any and all
penalties, claims, demands and liabilities that Sony has or will have against
the Company in connection with the shipment shortfall experienced in 1998. In
consideration of Sony's waiver, the Company agreed to wave its claims for
payment of the outstanding accounts receivable with Sony totalling $2.5
million brought forward from 1998. The amount was written off against the
sales return reserve booked in 1998. As of September 30, 1999, Southwall
terminated all production of anti-reflective film for Sony, as mutually
agreed under an amended Supply Agreement, and there were no further shipments
to Sony.
NOTE 10 - RELATED PARTY TRANSACTIONS
The Company has the following transactions with related parties in which
the related parties are also stockholders of the Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1998 1999
---- ----
<S> <C> <C>
Sales $ 0 $ 230
Purchase of raw materials 7,800 10,700
License fee paid 100 100
Interest paid by stock 186 93
</TABLE>
27
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information required by this Item concerning the Company's
executive officers is contained at the end of Part I in the unnumbered item
captioned "Executive Officers of the Registrant." Certain other information
required regarding the Directors of the Company is contained in the Proxy
Statement under the caption "Election of Directors" and is incorporated
herein by reference.
Certain information regarding reports required to be filed pursuant to
Section 16(a) of the Securities Exchange Act of 1934 by directors, officers
and beneficial owners of 10% or more of the Company's common stock is
contained in the Proxy Statement under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
to the sections entitled "Director Compensation", "Executive Officer
Compensation", "Severance Agreements" and "Compensation Committee Interlocks
and Insider Participation", appearing in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the section entitled "Security Ownership of Officers, Directors and Principal
Stockholders" appearing in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the section entitled "Certain Relationships and Other Transactions" appearing in
the Proxy Statement.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as part of this Form 10-K:
(a)(1) Financial Statements. The following Financial Statements of
Southwall Technologies Inc. are filed as part of this Form 10-K:
Form 10-K
Page Number
-----------
Report of Independent Accountants 12
Consolidated Balance Sheets as of
December 31, 1998 and 1999 13
Consolidated Statements of Operations
for the years ended December 31, 1997,
1998 and 1999 14
Consolidated Statements of Stockholders'
Equity for the years ended December 31,
1997, 1998 and 1999 15
Consolidated Statements of Cash Flows
for the years ended December 31, 1997,
1998 and 1999 16
Notes to Consolidated Financial Statements 17
(a)(2) Financial Statement Schedules. Schedules have been omitted because
they are not applicable or required, or the information required
to be set forth therein is included in the Financial Statements
or notes thereto.
(a)(3) Exhibits. Reference is made to the Exhibit Index on pages 32 through
35 of this Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 6th day of
March, 2000.
SOUTHWALL TECHNOLOGIES INC.
By /s/Thomas G. Hood
----------------------
Thomas G. Hood
President
30
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities
indicated, as of March 6th, 2000.
Signature Title
--------- -----
/s/J. Larry Smart Chairman of the Board of Directors
- -----------------
(J. Larry Smart)
/s/Thomas G. Hood President, Chief Executive Officer
- ----------------- and Director (Principal Executive
(Thomas G. Hood) Officer)
/s/Bill R. Finley Vice President, Chief Financial
- ----------------- Officer and Secretary (Principal
(Bill R. Finley) Financial and Accounting Officer)
/s/Bruce J. Alexander Director
- ---------------------
(Bruce J. Alexander)
/s/Yoshimichi Hase Director
- ------------------
(Yoshimichi Hase)
/s/Joseph B. Reagan Director
- -------------------
(Joseph B. Reagan)
/s/Walter C. Sedgwick Director
- ---------------------
(Walter C. Sedgwick)
31
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(1) By-laws of the Company.
10.4(1) The Company's Management Incentive Plan.
10.23(1) Agreement, dated January 31, 1984, between the Company and
Mitsui Toatsu Chemicals, Inc., as amended (with certain
confidential information deleted therefrom and filed
separately).
10.35(1) Lease Agreement for the facilities at 3941 East Bayshore
Road, dated March 20, 1979, between the Company and Straube
Associates, Inc.
10.35.1 Lease Agreement for the facilities at 3941 East Bayshore
Road, dated October 7, 1999, between the Company and Straube
Associates, Inc.
10.36(1) Lease Agreement for the facilities at 3961 East Bayshore
Road, dated March 20, 1979, between the Company and Allan F.
Brown and Robert V. Brown.
10.36.1 Amendment, dated October 12, 1999, between the Company and
Brown Investment Company to the Lease Agreement for the
facilities at 3961 East Bayshore Road, dated March 20, 1979,
between the Company and Allan F. Brown and Robert V. Brown.
10.40(1) Exclusive License Agreement, dated April 20, 1987, between
the Company and Massachusetts Institute of Technology.
10.41(1) Agreement, dated April 16, 1987, between the Company and the
BOC Group, Inc., and amending letter.
10.42(1) Form of Indemnity Agreement, dated April 21, 1987, between
the Company and each of its officers and directors.
10.52(2) Marketing and Distribution Agreement dated as of May 20,
1988, among Mitsui Toatsu Chemicals, Inc. ("Mitsui"),
Marubeni Corporation ("Marubeni") and the Company, as
amended.
10.53(2) Common Stock Purchase Agreement dated as of May 23, 1988,
among Mitsui, Marubeni and the Company.
10.58(2) Employee Stock Purchase Plan, as amended.
10.59(3) Lease Agreement for the facilities at 3969-3975 East
Bayshore Road Palo Alto, California, dated January 1, 1989,
between the Company and Bay Laurel Investment Company.
10.59.1 Amendment, effective January 1, 2000, between the Company
and Judd Properties, LLC to the Lease Agreement for the
facilities at 3969-3975 East Bayshore Road Palo Alto,
California, dated January 1, 1989, between the Company and
Bay Laurel Investment Company.
10.60(3) Lease Agreements for the facilities at 3977-3995 East
Bayshore Road Palo Alto, California, dated January 1, 1989,
between the Company and Bay Laurel Investment Company.
32
<PAGE>
10.60.1 Amendment, effective January 1, 2000, between the Company
and Judd Properties, LLC to the Lease Agreements for the
facilities at 3977-3995 East Bayshore Road Palo Alto,
California, dated January 1, 1989, between the Company and
Bay Laurel Investment Company.
10.62(3) Common Stock Sales Agreement, dated May 2, 1989, between the
Company and Monsanto Company.
10.65(3) Second Restated Registration Rights Amendment, dated May
2,1989, among the Company, Lockheed Corporation, Minnesota
Mining and Manufacturing Company, Mitsui Toatsu Chemicals,
Inc. and Marubeni Corporation, and Monsanto Company.
10.66(3) Non-exclusive License Agreement, dated March 9, 1989,
between the Company and the Massachusetts Institute of
Technology (with certain confidential information deleted).
10.69(4) Lease Agreement for the facilities at 1029 Corporation Way,
Palo Alto, California, dated April 27, 1989, between the
Company and C&J Development, as amended.
10.71(5) Lease Agreement for the facilities at 3780 Fabian Way, Palo
Alto, California, dated June 11, 1990, between the Company
and The Fabian Building.
10.72(5) License Agreement between Mitsui Toatsu Chemicals, Inc. and
the Company, dated January 30, 1991.
10.74(6) License Agreement between the Company and the Dow Chemical
Company, dated February 1, 1993.
10.77(10) Fourth Amendment, dated March 3, 1993, between the Company
and C&J Development to the Lease for the facilities at 1029
Corporate Way filed as exhibit number 10.69.
10.78(7) Amendment to property lease dated February 2, 1994 to extend
lease period on building at 3961 E. Bayshore Road, Palo
Alto, California. Original lease filed as exhibit number
10.36
10.79(7) Amendment to property lease dated April 4, 1994 to extend
lease period on building at 3941 E. Bayshore Road, Palo
Alto, California. Original lease filed as exhibit number
10.35.
10.80(8) Lease Agreement between Frank Gant, an individual, as Lessor
and Southwall Technologies Inc., a Delaware corporation, as
Lessee effective September 1, 1994.
10.81(8) Purchase Agreement among Southwall Technologies Inc.,
Southwall-Sunflex, Inc., Sunflex, L.P., and Sunflex Partners
effective October 31, 1994.
33
<PAGE>
10.84(12) Lease Agreement between Chamberlain Development, L.L.C., as
Lessor and Southwall Technologies Inc., a Delaware
corporation, as Lessee effective May 1, 1997.
10.85(12) Purchase Agreement, dated April 29, 1996, between an
equipment supplier and Southwall Technologies Inc., (with
certain confidential information deleted therefrom and filed
separately).
10.86(12) Agreement regarding separation of employment between Alfred
V. Larrenaga, an officer of the Company and Southwall
Technologies Inc., dated July 29, 1996 and amended October
29, 1996.
10.87(12) Loan and security agreement dated as of December 3, 1996,
between the Company as debtor and CIT Group/Equipment
Financing, Inc.
10.88(13) Basic Agreement dated April 9, 1997, for the sale of 667,000
shares of the Company's common stock to Teijin Limited, a
Japanese corporation, and for mutually beneficial
cooperation and collaboration between Teijin and Southwall
Technologies Inc.
10.89(13) Credit Agreement dated May 6, 1997, between Sanwa Bank,
Limited and Southwall Technologies Inc.
10.90(13) Reimbursement and Security Agreement dated May 6, 1997,
between Teijin Limited, a Japanese corporation, and
Southwall Technologies Inc.
10.91(13) Promissory Note dated May 6, 1997 obligating Southwall
Technologies Inc. To Sanwa Bank, Limited in the amount of
$10 million.
10.92(14) The Company's 1997 Stock Incentive Plan.
10.93(15) The Company's 1997 Employee Stock Purchase Plan.
21(16) List of Subsidiaries of Southwall Technologies Inc.
23.1 Consent of Independent Accountants.
27 Financial Data Schedule
99.1(9) Letter, dated June 5, 1987, from the U.S. Department of the
Air Force to the SEC Pursuant to Rule 171.
- ---------------
(1) Filed as an exhibit to the Registration Statement on Form S-1 filed with
the Commission on April 27, 1987 (Registration No. 33- 13779) (the
"Registration Statement") and incorporated herein by reference.
(2) Filed as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
June 30, 1988, filed with the Commission on August 15, 1988 and
incorporated herein by reference.
(3) Filed as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
July 2, 1989, filed with the Commission on August 16, 1989 and
incorporated herein by reference.
(4) Filed as an exhibit to the Form 10-K Annual Report 1989, filed with the
Commission on March 30, 1990 and incorporated herein by reference.
(5) Filed as an exhibit to the Form 10-K Annual Report 1990, filed with the
Commission on March 25, 1991 and incorporated herein by reference.
(6) Filed as an exhibit to the Form 10-K Annual Report 1992, filed with the
Commission on March 15, 1993 and incorporated herein by reference.
34
<PAGE>
(7) Filed as an exhibit to the Form 10-Q Quarterly Report for Quarter Ended
July 3, 1994, filed with the Commission on August 15, 1994 and
incorporated herein by reference.
(8) Filed as an exhibit to the Form 10-Q Quarterly report for Quarter Ended
October 2, 1994, filed with the Commission on November 9, 1994 and
incorporated herein by reference.
(9) Filed as Exhibit No. 28.1 to Post-Effective Amendment No. 1 to the
Registration Statement, filed with the Commission on June 9, 1987 and
incorporated herein by reference.
(10) Filed as an exhibit to the Form 10-K Annual Report 1994, filed with the
Commission on March 2, 1995 and incorporated herein by reference.
(11) Filed as an exhibit to the Form 10-K Annual Report 1995, filed with the
Commission on March 19, 1996 and incorporated herein by reference.
(12) Filed as an exhibit to the Form 10-K Annual Report 1996, filed with the
Commission on March 27, 1997 and incorporated herein by reference.
(13) Filed as an exhibit to the Form 10-Q Quarterly report for Quarter Ended
June 29, 1997, filed with the Commission on August 14, 1997 and
incorporated herein by reference.
(14) Filed as Proposal 3 included in the 1997 Proxy statement filed with the
Commission on April 14, 1997 and incorporated herein by reference.
(15) Filed as Proposal 4 included in the 1997 Proxy statement filed with the
Commission on April 14, 1997 and incorporated herein by reference.
(16) Filed as an exhibit to the Form 10-K Annual Report 1999, filed with the
Commission on March 31, 1999.
35
<PAGE>
Exhibit 10.35.1
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION FORM
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE--GROSS
(Do not use this form for Multi-Tenant Property)
1. Basic Provisions ("Basic Provisions")
1.1 Parties: This Lease ("Lease"), dated for reference purposes only,
OCTOBER 7, 1999, is made by and between STRAUBE ASSOCIATES, INC. ("Lessor") and
SOUTHWALL TECHNOLOGIES, INC. ("Lessee"), (collectively the "Parties," or
individually a "Party").
1.2 Premises: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known by the street address of 3941 East Bayshore Rd. Palo Alto, located in the
County of Santa Clara, State of California, and generally described as (describe
briefly the nature of the property) offices and light manufacturing building
consisting of approximately 10,700 sf. ("PREMISES")
1.3 Term: Five (5) years and 5 yr. option ("Original Term") commencing
January 01, 2000 ("Commencement Date") and ending December 31, 2004 ("Expiration
Date"). (See Paragraph 3 for further provisions.)
1.4 Early Possession: n/a ("Early Possession Date"). (See Paragraphs 3.2
and 3.3 for further provisions.)
1.5 Base Rent: $21,935.00 per month ("Base Rent"), payable on the First
day of each month commencing January 01, 2000 (See paragraph 4 for further
provisions.) |X| If this box is checked, there are provisions in this Lease
for the Base rent to be adjusted.
1.6 Base Rent Paid Upon Execution: $21,935.00 per month as Base Rent for
the period January 1, 2000 thru December 31, 2000 with 3% annual increases for
the remaining 4 years of the lease term.
1.7 Security Deposit: $ n/a ("Security Deposit"). (See Paragraph 5 for
further provisions.)
1.8 Permitted Use: Offices and light manufacturing (See Paragraph 6 for
further provisions.)
1.9 Insuring Party: Lessor is the "Insuring Party." $2,412.00 is the "Base
Premium." (See Paragraph 8 for further provisions.)
1.10 Real Estate Brokers: The following real estate brokers (collectively,
the "Brokers") and brokerage relationships exist in this transaction and are
consented to by the Parties (check applicable boxes):
N/A represents
|_| Lessor exclusively ("Lessor's Broker"); |_| both Lessor and Lessee, and
____________________________________________________________________ represents
|_| Lessee exclusively ("Lessee's Broker"); |_| both Lessee and Lessor. (See
Paragraph 15 for further provisions.)
1.11 Guarantor. The obligations of the Lessee under this Lease are to be
guaranteed by ___________________________________________________________
______________________("Guarantor"). (See Paragraph 37 for further provisions.)
1.12 Addenda. Attached hereto is an Addendum or Addenda consisting of
Paragraphs A through B and Exhibits OPTION TO EXTEND all of which constitute a
part of this Lease.
2. Premises.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Premises, for the term, at the rental, and upon all of the terms,
covenants and conditions set forth in this Lease. Unless otherwise provided
herein, any statement of square footage set forth in this Lease, or that may
have been used in calculating rental, is an approximation which Lessor and
Lessee agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual square footage is more or less.
2.2 Condition. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, fire sprinkler system, lighting, air conditioning, heating, and
loading doors, if any, in the Premises, other than those constructed by Lessee,
shall be in good operating condition on the Commencement Date. If a
non-compliance with said warranty exists as of the Commencement Date, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within thirty
(30) days after the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code. Lessor
warrants to Lessee that the improvements on the Premises comply with all
applicable covenants or restrictions of record and applicable building codes,
regulations and ordinances in effect on the Commencement Date. Said warranty
does not apply to the use to which Lessee will put the Premises or to any
Alterations or Utility installations (as defined in Paragraph 7.3(a)) made or to
be made by Lessee. If the Premises do not comply with said warranty, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee setting forth with specificity the nature and extent
of such non-compliance, rectify the same at Lessor's expense. If Lessee does not
give Lessor written notice of a non-compliance with this warranty within (6)
months following the Commencement Date, correction of that non-compliance shall
be the obligation of Lessee at Lessee's sole cost and expense.
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Brokers to satisfy itself with respect to the conditon of
the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, compliance with Applicable Law, as
defined in Paragraph 5.3) and the present and future suitability of the
Premises for Lessee's intended use, (b) that Lessee has made such
investigation as it deems necessary with reference to such matters and
assumes all responsibility therefor as the same relate to Lessee's occupancy
of the Premises and/or the term of this Lease, and (c) that neither Lessor,
nor any of Lessor's agents, has made any oral or written representations or
warranties with respect to the said matters other than as set forth in this
Lease.
2.5 LESSEE PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises.
In such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other terms of
this Lease, however, shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
<PAGE>
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee as agreed herein by the Early Possession
Date, if one is specified in Paragraph 1.4, or, if no Early Possession Date is
specified, by the Commencement Date, Lessor shall not be subject to any
liability therefor, nor shall such failure affect the validity of this Lease, or
the obligations of Lessee hereunder, or extend the term hereof, but in such
case, Lessee shall not, except as otherwise provided herein, be obligated to pay
rent or perform any other obligation of Lessee under the terms of this Lease
until Lessor delivers possession of the Premises to Lessee. If possession of the
Premises is not delivered to Lessee within sixty (60) days after the
Commencement Date, Lessee may, at its option, by notice in writing to Lessor
within ten (10) days thereafter, cancel this Lease, in which event the Parties
shall be discharged from all obligations hereunder; provided, however, that if
such written notice by Lessee is not received by Lessor within said ten (10) day
period, Lessee's right to cancel this Lease shall terminate and be of no further
force or effect. Except as may be otherwise provided, and regardless of when the
term actually commences, if possession is not tendered to Lessee when required
by this Lease and Lessee does not terminate this Lease, as aforesaid, the period
free of the obligation to pay Base Rent, if any, that Lessee would otherwise
have enjoyed shall run from the date of delivery of possession and continue for
a period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts, changes or omissions of
Lessee.
4. Rent.
4.1 Base Rent. Lessee shall cause payment of Base Rent and other rent or
charges, as the same may be adjusted from time to time, to be received by Lessor
in lawful money of the United States, without offset or deduction, on or before
the day on which it is due under the terms of this Lease. Base Rent and all
other rent and charges for any period during the term hereof which is for less
than one (1) full calendar month shall be prorated based upon the actual number
of days of the calendar month involved. Payment of Base Rent and other charges
shall be made to Lessor at its address stated herein or to such other persons or
at such other addresses as Lessor may from time to time designate in writing to
Lessee.
5. Security Deposit. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefor
deposit moneys with lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall; upon written request from Lessor, deposit
additional moneys with Lessor sufficient to maintain the same ratio between the
Security Deposit and the Base Rent as those amounts are specified in the Basic
Provisions. Lessor shall not be required to keep all or any part of the Security
Deposit separate from its general accounts. Lessor shall, at the expiration or
earlier termination of the term hereof and after Lessee has vacated the
Premises, return to Lessee (or, at Lessor's option, to the last assignee, if
any, of Lessee's interest herein), that portion of the Security Deposit not used
or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no
part of the Security Deposit shall be considered to be held in trust, to bear
interest or other increment for its use, or to be prepayment for any moneys to
be paid by Lessee under this Lease.
6. Use.
6.1 Use. Lessee shall use and occupy the Premises only for the purposes
set forth in Paragraph 1.8, or any other use which is comparable thereto, and
for no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that creates waste or a nuisance, or that disturbs owners and/or
occupants of, or causes damage to, neighboring premises or properties. Lessor
hereby agrees to not unreasonably withhold or delay its consent to any written
request by Lessee, Lessees assignees or subtenants, and by prospective assignees
and subtenants of the Lessee, its assignees and subtenants, for a modification
of said permitted purpose for which the premises may be used or occupied, so
long as the same will not impair the structural integrity of the improvements on
the Premises, the mechanical or electrical systems therein, or not significantly
more burdensome to the Premises and the improvements thereon, and is otherwise
permissible pursuant to this Paragraph 6. If Lessor elects to withhold such
consent, Lessor shall within five (5) business days give a written notification
of same, which notice shall include an explanation of Lessor's reasonable
objections to the change in use.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public, health, safety or welfare, the
environment or the Premises, (ii) regulated or monitored by any governmental
authority, or (iii) a basis for liability of Lessor to any governmental agency
or third party under any applicable statute or common law theory. Hazardous
Substance shall include, but not be limited to, hydrocarbons, petroleum,
gasoline, crude oil or any products, by-products or fractions thereof. Lessee
shall not engage in any activity in, on or about the Premises which constitutes
a Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Law (as defined in Paragraph
6.3). "Reportable Use" shall mean (i) the installation or use of any above or
below ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority. Reportable Use shall
also include Lessee's being responsible for the presence in, on or about the
Premises of a Hazardous Substance with respect to which any Applicable Law
requires that a notice be given to persons entering or occupying the Premises or
neighboring properties. Notwithstanding the foregoing, Lessee may, without
Lessor's prior consent, but in compliance with all Applicable Law, use any
ordinary and customary materials reasonably required to be used by Lessee in the
normal course of Lessee's business permitted on the Premises, so long as such
use is not a Reportable Use and does not expose the Premises or neighboring
properties to any meaningful risk of contamination or damage or expose Lessor to
any liability therefor. In addition, Lessor may (but without any obligation to
do so) condition its consent to the use or presence of any Hazardous Substance,
activity or storage tank by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefrom or therefor, including, but
not limited to, the installation (and removal on or before Lease expiration or
earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasements) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance, or a condition involving or resulting
from same, has come to be located in, on, under or about the Premises, other
than as previously consented to by Lessor, Lessee shall immediately give written
notice of such fact to Lessor. Lessee shall also immediately give Lessor a copy
of any statement, report, notice, registration, application, permit, business
plan, license, claim, action or proceeding given to, or received from, any
governmental authority or private party, or persons entering or occupying the
Premises, concerning the presence, spill, release, discharge of, or exposure to,
any Hazardous Substance or contamination in, on, or about the Premises,
including but not limited to all such documents as may be involved in any
Reportable Uses involving the Premises.
(c) Indemnification. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all loss of rents and/or damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, permits and
attorney's and consultant's fees arising out of or involving any Hazardous
Substance or storage tank brought onto the Premises by or for Lessee or under
Lessee's control. Lessee's obligations under this Paragraph 6 shall include, but
not be limited to, the effects of any contamination or injury to person,
property or the environment created or suffered by Lessee, and the cost of
investigation (including consultant's and attorney's fees and testing), removal,
remediation, restoration and/or abatement thereof, or of any contamination
therein involved, and shall survive the expiration or earlier termination of
this Lease. No termination, cancellation or release agreement entered into by
Lessor and Lessee shall release Lessee from its obligations under this Lease
with respect to Hazardous Substances or storage tanks, unless specifically so
agreed by Lessor in writing at the time of such agreement.
6.3 Lessee's Compliance With Law. Except as otherwise provided in this
Lease, Lessee, shall, at Lessee's sole cost and expense, fully, diligently and
in a timely manner, comply with all "APPLICABLE LAW," which term is used in this
Lease to include all laws, rules, regulations, ordinances, directives,
covenants, easements and restrictions of record, permits, the requirements of
any applicable fire insurance underwriter or rating bureau, and the
recommendations of Lessor's engineers and/or consultants, rotating in any
manner to the Premises (including but not limited to matters pertaining to
(i) industrial hygiene, (ii) environmental conditions on, in, under or about
the Premises, including soil and groundwater conditions, and (ii) the use,
generation, manufacture, production, installation, maintenance, removal,
transportation, storage, spill or release of any Hazardous Substance or
storage tank), now in effect or which may hereafter come into effect, and
whether or not collecting a change in policy from any previously existing
policy. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information,
including, but not limited to, permits, registrations, manifests,
applications, reports and certificates, enforcing Lessee's compliance with
any Applicable Law specified by Lessor, and shall immediately upon receipt,
notify Lessor in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving failure by Lessor or the Premises to comply with
any Applicable Law.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's Lender(s) (as defined in
Paragraph 8.3(a)) shall have the right to enter the Premises at any time, in
the case of an emergency, and otherwise at reasonable times, for the purpose
of inspecting the condition of the Premises and/or verifying compliance by
Lessee with this Lease and all Applicable Laws (as defined in Paragraph 6.3),
and to employ experts and/or consultants in connection therewith and/or to
advise Lessor with respect to Lessee's activities, including but not limited
to the installation, operation, use, monitoring, maintenance, or removal of
any Hazardous Substance or storage tank on or from the Premises. The costs
and expenses of any such inspections shall be paid by the party requesting
same, unless a Default or Breach of this Lease, violation of Applicable Law,
or a contamination, caused or materially contributed to by Lessee is found to
exist or be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent
violation or contamination, in any such case, Lessee shall upon request
reimburse Lessor or Lessor's Lender, as the case may be, for the costs and
expenses of such inspections.
7. MAINTENANCE; REPAIRS; UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Lessor's warranty
as to condition), 2.3 (Lessor's warranty as to compliance with covenants, etc.)
<PAGE>
7.2 (Lessor's obligations to repair), 9 (damage and destruction), and 14
(condemnation), Lessee shall, at Lessee's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair, (whether or not such portion of the Premises requiring repair, or the
means of repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use, any
prior use, the elements or the age of such portion of the Premises), including,
without limiting the generality of the foregoing, all equipment or facilities
serving the Premises, such as plumbing, heating, air conditioning, ventilating,
electrical, lighting facilities, boilers, fired or unfired pressure vessels,
fire sprinkler and/or standpipe and hose or other automatic fire extinguishing
system, including fire alarm and/or smoke detection systems and equipment, fire
hydrants, fixtures, walls (interior and exterior), ceilings, floors, windows,
doors, plate glass, skylights, landscaping, driveways, parking lots, fences,
retaining walls, signs, sidewalks and parkways located in, on, about, or
adjacent to the Premises, but excluding foundations, the exterior roof and the
structural aspects of the Premises. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises, the elements surrounding same, or neighboring
properties, that was caused or materially contributed to by Lessee, or
pertaining to or involving any Hazardous Substance and/or storage tank brought
onto the Premises by or for Lessee or under its control. Lessee, in keeping the
Premises in good order, condition and repair, shall exercise and perform good
maintenance practices. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain contracts, with copies to Lessor, in customary form and substance for,
and with contractors specializing and experienced in, the inspection,
maintenance and service of the following equipment and improvements, if any,
located on the Premises: (i) heating, air conditioning and ventilation
equipment, (ii) boiler, fired or unfired pressure vessels, (iii) fire sprinkler
and/or standpipe and hose or other automatic fire extinguishing systems,
including fire alarm and/or smoke detection, (iv) landscaping and irrigation
systems, (v) roof covering and drain maintenance and (vi) asphalt and parking
lot maintenance.
7.2 Lessor's Obligations. Upon receipt of written notice of the need for
such repairs and subject to Paragraph 13.5, Lessor shall, at Lessor's expense,
keep the foundations, exterior roof and structural aspects of the Premises in
good order, condition and repair, Lessor shall not, however, be obligated to
paint the exterior surface of the exterior walls or to maintain the windows,
doors or plate glass or the interior surface of exterior walls. Lessor shall
not, in any event, have any obligation to make any repairs until Lessor receives
written notice of the need for such repairs. It is the intention of the Parties
that the terms of this Lease govern the respective obligations of the Parties as
to maintenance and repair of the Premises. Lessee and Lessor expressly waive the
benefit of any statute now or hereafter in effect to the extent it is
inconsistent with the terms of this Lease with respect to, or which affords
Lessee the right to make repairs at the expense of Lessor or to terminate this
Lease by reason of, any needed repairs.
7.3 Utility Installations; Trade Fixtures; Alterations.
(a) Definitions; Consent Required. The term "Utility Installations"
is used in this Lease to refer to all carpeting, window coverings, air lines,
power panels, electrical distribution, security, fire protection systems,
communication systems, lighting fixtures, heating, ventilating, and air
conditioning equipment, plumbing, and fencing in, on or about the Premises. The
term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be
removed without doing material damage to the Premises. The term "Alterations"
shall mean any modification of the improvements on the Premises from that which
are provided by Lessor under the terms of this Lease, other than Utility
Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned
Alterations And/or Utility Installations" are defined as Alterations and/or
Utility Installations made by lessee that are not yet owned by Lessor as defined
in Paragraph 7.4(a). Lessee shall not make any Alterations or Utility
Installations in, on, under or about the Premises without Lessor's prior written
consent. Lessee may, however, make non-structural Utility Installations to the
interior of the Premises (excluding the roof), as long as they are not visible
from the outside, do not involve puncturing, relocating or removing the roof or
any existing walls, and the cumulative cost thereof during the term of this
Lease as extended does not exceed $25,000. See Addenda Paragraph 54.
(b) Consent. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with proposed detailed plans. All consents
given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific
consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable
permits required by governmental authorities, (ii) the furnishing of copies of
such permits together with a copy of the plans and specifications for the
Alteration or Utility Installation to Lessor prior to commencement of the work
thereon, and (iii) the compliance by Lessee with all conditions of said permits
in a prompt and expeditious manner. Any Alterations or Utility Installations by
Lessee during the term of this Lease shall be done in a good and workmanlike
manner, with good and sufficient materials, and in compliance with all
Applicable Law. Lessee shall promptly upon completion thereof furnish Lessor
with as-built plans and specifications therefor. Lessor may (but without
obligation to do so) condition its consent to any requested Alteration or
Utility Installation that costs $10,000 or more upon Lessee's providing Lessor
with a lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation and/or upon Lessee's
posting an additional Security Deposit with Lessor under Paragraph 36 hereof.
(c) Indemnification. Lessee shall pay, when due, all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanics' or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on or about the Premises, and Lessor shall have the
right to post notices of non-responsibility in or on the Premises as provided by
law. If Lessee shall, in good faith, contest the validity of any such lien,
claim or demand, then Lessee shall, at its sole expense defend and protect
itself, Lessor and the Premises against the same and shall pay and satisfy any
such adverse judgment that may be rendered thereon before the enforcement
thereof against the Lessor or the Premises. If Lessor shall require, Lessee
shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to one and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim. In addition,
Lessor may require Lessee to pay Lessor's attorney's fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 Ownership; Removal; Surrender; and Restoration.
(a) Ownership. Subject to Lessor's right to require their removal or
become the owner thereof as hereinafter provided in this Paragraph 7.4, all
Alterations and Utility Additions made to the Premises by Lessee shall be the
property of and owned by Lessee, but considered a part of the Premises. Lessor
may, at any time and at its option, elect in writing to Lessee to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per subparagraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
earlier termination of this Lease, become the property of Lessor and remain upon
and be surrendered by Lessee with the Premises.
(b) Removal. Unless otherwise agreed in writing, Lessor may require
that any or all Lessee Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Lessee Owned Alterations or
Utility Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises by
the end of the last day of the Lease term or any earlier termination date, with
all of the improvements, parts and surfaces thereof clean and free of debris and
in good operating order, condition and state of repair, ordinary wear and tear
excepted. "Ordinary wear and tear" shall not include any damage or deterioration
that would have been prevented by good maintenance practice or by Lessee
performing all of its obligations under this Lease. Except as otherwise agreed
or specified in writing by Lessor, the Premises, as surrendered, shall include
the Utility Installations. The obligation of Lessee shall include the repair of
any damage occasioned by the installation, maintenance or removal of Lessee's
Trade Fixtures, furnishings, equipment, and Alterations and/or Utility
Installations, as well as the removal of any storage tank installed by or for
Lessee, and the removal, replacement, or remediation of any soil, material or
ground water contaminated by Lessee, all as may then be required by Applicable
Law and/or good service practice. Lessee's Trade Fixtures shall remain the
property of Lessee and shall be removed by Lessee subject to its obligation to
repair and restore the Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) Lessee shall pay to Lessor any insurance cost increase
("Insurance Cost Increase") occurring during the term of this Lease.
"Insurance Cost Increase" is defined as any increase in the actual cost of
the insurance required under Paragraphs 8.2(b), 8.3(a) and 8.3(b). ("Required
Insurance"), over and above the Base Premium, as hereinafter defined,
calculated on an annual basis. "Insurance Cost Increase" shall exclude, but
not be limited to, increases resulting from the nature of Lessee's occupancy,
any act or omission of Lessee, requirements of the holder of a mortgage or
deed of trust covering the Premises, increased valuation of the Premises,
and/or a premium rate increase. If the parties insert a dollar amount in
Paragraph 1.9, such amount shall be considered the "Base Premium." In lieu
thereof, if the Premises have been previously occupied, the "Base Premium"
shall be the annual premium applicable to the most recent occupancy. If the
Premises have never been occupied, the "Base Premium" shall be the lowest
annual premium reasonably obtainable for the Required Insurance as of the
commencement of the Original Term, assuming the most nominal use possible of
the Premises. In no event, however, shall Lessee be responsible for any
portion of the premium cost attributable to liability insurance coverage in
excess of $1,000,000 procured under Paragraph 8.2(b) (Liability Insurance
Carried By Lessor).
(b) Lessee shall pay any such Insurance Cost Increase to Lessor within
thirty (30) days after receipt by Lessee of a copy of the premium statement
or other reasonable evidence of the amount due. If the insurance policies
maintained hereunder cover other property besides the Premises, Lessor shall
also deliver to Lessee a statement of the amount of such Insurance Cost
Increase attributable only to the Premises showing in reasonable detail the
manner in which such amount was computed. Premiums for policy periods
commencing prior to or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement or expiration of the
Lease term.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during the
term of this Lease a Commercial General Liability policy of insurance
protecting Lessee and Lessor (as an additional insured) against claims for
bodily injury, personal injury and property damage based upon, involving or
arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such Insurance shall be on an occurrence
basis providing single event coverage in an amount not less than $1,000,000
per occurrence with an "Additional Insured-Managers or Lessors of Premises."
<PAGE>
Endorsement and contain the "Amendment of the Pollution Exclusion" for damage
caused by heat, smoke or fumes from a hostile fire. The policy shall not contain
any intra-insured exclusions as between insured persons or organizations, but
shall include coverage for liability assumed under this Lease as an "insured
contract" for the performance of Lessee's indemnity obligations under this
Lease. The limits of said insurance required by this Lease or as carried by
Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of
any obligation hereunder. All insurance to be carried by Lessee shall be primary
to and not contributory with any similar insurance carried by Lessor, whose
insurance shall be considered excess insurance only.
(b) Carried by Lessor. In the event Lessor is the Insuring Party.
Lessor shall also maintain liability insurance described in Paragraph 8.2(a),
above, in addition to, and not in lieu of, the insurance required to be
maintained by Lessee. Lessee shall not be named as an additional insured
therein.
8.3 Property Insurance -- Building, Improvements and Rental Value.
(a) Building and Improvements. The Insuring Party shall obtain and
keep in force during the term of this Lease a policy or policies in the name of
Lessor, with loss payable to Lessor and to the holders of any mortgages, deeds
of trust or ground leases on the Premises ("Lender(s)"), insuring loss or damage
to the Premises. The amount of such insurance shall be equal to the full
replacement cost of the Premises, as the same shall exist from time to time, or
the amount required by Lenders, but in no event more than the commercially
reasonable and available insurable value thereof if, by reason of the unique
nature or age of the improvements involved, such latter amount is less than full
replacement cost. Lessee Owned Alterations and Utility Installations shall be
insured by Lessee under Paragraph 8.4. If the coverage is available and
commercially appropriate, such policy or policies shall insure against all risks
of direct physical loss or damage (except the perils of flood and/or earthquake
unless required by a Lender), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Premises required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered cause of loss, but not including plate glass insurance.
Said policy or policies shall also contain an agreed valuation provision in lieu
of any coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumors for the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall, in addition, obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and Lender(s), insuring the loss of the full rental
and other charges payable by Lessee to Lessor under this Lease for one (1) year
(including all real estate taxes, insurance costs, and any scheduled rental
increases). Said insurance shall provide that in the event the Lease is
terminated by reason of an insured loss, the period of indemnity for such
coverage shall be extended beyond the date of the completion of repairs or
replacement of the Premises, to provide for one full year's loss of rental
revenues from the date of any such loss. Said insurance shall contain an agreed
valuation provision in lieu of any coinsurance clause, and the amount of
coverage shall be adjusted annually to reflect the projected rental income,
property taxes, insurance premium costs and other expenses, if any, otherwise
payable by Lessee, for the next twelve (12) month period.
(c) Adjacent Premises. If the Premises are part of a larger
building, or if the Premises are part of a group of buildings owned by Lessor
which are adjacent to the Premises, the Lessee shall pay for any increase in the
premiums for the property insurance of such building or buildings if said
increase is caused by Lessee's acts, omissions, use or occupancy of the
Premises.
(d) Tenant's Improvements. Since Lessor is the Insuring Party, the
Lessor shall not be required to insure Lessee Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph
8.5, Lessee at its cost shall either by separate policy or, at Lessor's option,
by endorsement to a policy already carried, maintain insurance coverage on all
of Lessee's personal property, Lessee Owned Alterations and Utility
Installations in, on, or about the Premises similar in coverage to that carried
by the Insuring Party under Paragraph 8.3. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for the
replacement of personal property or the restoration of Lessee Owned Alterations
and Utility Installations. Lessee shall be the Insuring Party with respect to
the insurance required by this Paragraph 8.4 and shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender having a lien
on the Premises, as set forth in the most current issue of "Best's Insurance
Guide." Lessee shall not do or permit to be done anything which shall invalidate
the insurance policies referred to in this Paragraph 8. Lessee shall cause to be
delivered to Lessor certified copies of, or certificates evidencing the
existence and amounts of, the insurance, and with the additional insureds,
required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or
subject to modification except after thirty (30) days prior written notice to
Lessor. Lessee shall at least (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "Insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon
demand.
8.6 Waiver of Subrogation. Without affecting any other rights or remedies,
Lessee and Lessor ("Waiving Party") each hereby release and relieve the other,
and waive their entire right to recover damages (whether in contract or in tort)
against the other, for loss of or damage to the Waiving Party's property arising
out of or incident to the perils required to be insured against under Paragraph
8. The effect of such releases and waivers of the right to recover damages shall
not be limited by the amount of insurance carried or required, or by any
deductibles applicable thereto.
8.7 Indemnity. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgments, penalties, permits, attorney's and consultant's fees,
expenses and/or liabilities arising out of, involving, or in dealing with, the
occupancy of the Premises by Lessee, the conduct of Lessee's business, any act,
omission or neglect of Lessee, its agents, contractors, employees or invitees,
and out of any Default or Breach by Lessee in the performance in a timely manner
of any obligation on Lessee's part to be performed under this Lease. The
foregoing shall include, but not be limited to, the defense or pursuit of any
claim or any action or proceeding involved therein, and whether or not (in the
case of claims made against Lessor) litigated and/or reduced to judgment, and
whether well founded or not. In case any action or proceeding be brought against
Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel reasonably satisfactory to
Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not
have first paid any such claim in order to be so indemnified.
8.8 Exemption of Lessor From Liability. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee, Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lighting fixtures, or from any other
cause, whether the said injury or damage results from conditions arising upon
the Premises or upon other portions of the building of which the Premises are a
part, or from other sources or places, and regardless of whether the cause of
such damage or injury or the means of repairing the same is accessible or not.
Lessor shall not be liable for any damages arising from any act or neglect of
any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of
this Lease, Lessor shall under no circumstances be liable for injury to Lessee's
business or for any loss of income or profit therefrom.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility Installations, the repair cost of which damage or destruction is less
than 50% of the then Replacement Cost of the Premises immediately prior to such
damage or destruction, excluding from such calculation the value of the land and
Lessee Owned Alterations and Utility Installations.
(b) "Premises Total Destruction" shall mean damage or destruction to
the Premises, other than Lessee Owned Alterations and Utility Installations the
repair cost of which damage or destruction is 50% or more of the then
Replacement Cost of the Premises immediately prior to such damage or
destruction, excluding from such calculation the value of the land and Lessee
Owned Alterations and Utility Installations.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations, which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible
amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris,
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(c) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a) in, on or under the
Premises.
9.2 PARTIAL DAMAGE--INSURED LOSS. If a Premises Partial Damage that is
an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such
damage (but not Lessee's Trade Features or Lessee Owned Alterations and
Utility Installations) as such as reasonably possible and this Lease shall
continue in full force and effect. Notwithstanding the foregoing, if the
required insurance was not in force or the insurance proceeds are not
sufficient to effect such repair, the Insuring Party shall promptly
contribute the shortage in proceeds as and when required to complete said
repairs. In the event, however, the shortage in proceeds was due to the fact
that, by reason of the unique nature of the improvements, full replacement
cost insurance coverage was not commercially reasonable and available, Lessor
shall have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides
Lessor with the funds to cover same, or adequate assurance thereof, within
ten (10) days following receipt of written notice of such shortage and
request therefor, if Lessor receives said funds or adequate assurance thereof
within said ten (10) day period, the party responsible for making the repairs
shall complete them as soon as reasonably possible and this Lease shall
remain in full force and effect. If Lessor does not receive such funds or
assurance within said period, Lessor may nevertheless elect by written notice
to Lessee within ten (10) days thereafter to make such restoration and repair
as is commercially reasonable with Lessor paying any shortage in proceeds, in
which case this Lease shall remain in full force and effect. If in such case
Lessor does not so elect, then this Lease shall terminate sixty (60) days
following the occurrence of the damage or destruction. Unless otherwise
agreed, Lessee shall in no event have any right to reimbursement from Lessor
for any funds contributed by Lessee to repair
<PAGE>
any such damage or destruction. Premises Partial Damage due to flood or
earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2,
notwithstanding that there may be some insurance coverage, but the net proceeds
of any such insurance shall be made available for the repairs if made by either
party.
9.3 Partial Damage -- Uninsured Loss. If a Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option, either: (i) repair
such damage as soon as reasonably possible at Lessor's expense, in which event
this Lease shall continue in full force and effect, or (ii) give written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage of Lessor's desire to terminate this Lease as of the
date sixty (60) days following the giving of such notice. In the event Lessor
elects to give such notice of Lessor's intention to terminate this Lease, Lessee
shall have the right within ten (10) days after the receipt of such notice to
give written notice to Lessor of Lessee's commitment to pay for the repair of
such damage totally at Lessee's expense and without reimbursement from Lessor.
Lessee shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days following Lessee's said commitment. In such
event this Lease shall continue in full force and effect, and Lessor shall
proceed to make such repairs as soon as reasonably possible and the required
funds are available. If Lessee does not give such notice and provide the funds
or assurance thereof within the times specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.4 Total Destruction. Notwithstanding any other provision hereof, if a
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an Insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 8.6.
9.5 Damage Near End of Term. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may, at
Lessor's option, terminate this Lease effective sixty (60) days following the
date of occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30) days after the date of occurrence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease or to purchase the Premises, then Lessee may preserve this
Lease by, within twenty (20) days following the occurrence of the damage, or
before the expiration of the time provided in such option for its exercise,
whichever is earlier ("Exercise Period"), (i) exercising such option and (ii)
providing Lessor with any shortage in insurance proceeds (or adequate assurance
thereof) needed to make the repairs. If Lessee duly exercises such option during
said Exercise Period and provides Lessor with funds (or adequate assurance
thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's
expense repair such damage as soon as reasonably possible and this Lease shall
continue in full force and effect. If Lessee fails to exercise such option and
provide such funds or assurance during said Exercise Period, then Lessor may at
Lessor's option terminate this Lease as of the expiration of said sixty (60) day
period following the occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within ten (10) days after the expiration
of the Exercise Period, notwithstanding any term or provision in the grant of
option to the contrary.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of damage described in Paragraph 9.2 (Partial
Damage -- Insured), whether or not Lessor or Lessee repairs or restores the
Premises, the Base Rent, Real Property Taxes, insurance premiums, and other
charges, if any, payable by Lessee hereunder for the period during which such
damage, its repair or the restoration continues (not to exceed the period for
which rental value insurance is required under Paragraph 8.3(b), shall be abated
in proportion to the degree to which Lessee's use of the Premises is impaired.
Except for abatement of Base Rent, Real Property Taxes, insurance premiums, and
other charges, if any, as aforesaid, all other obligations of Lessee hereunder
shall be performed by Lessee, and Lessee shall have no claim against Lessor for
any damage suffered by reason of any such repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue, Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after receipt of such notice, this Lease shall
continue in full force and effect. "Commence" as used in this Paragraph shall
mean either the unconditional authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever first
occurs.
9.7 Hazardous Substance Conditions. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable Law
and this Lease shall continue in full force and effect, but subject to Lessor's
rights under Paragraph 13), Lessor may at Lessor's option either (i) investigate
and remediate such Hazardous Substance Condition, if required, as soon as
reasonably possible at Lessor's expense, in which event this Lease shall
continue in full force and effect, or (ii) if the estimated cost to investigate
and remediate such condition exceeds twelve (12) times the then monthly Base
Rent or $100,000, whichever is greater, give written notice to Lessee within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of such
Hazardous Substance Condition of Lessor's desire to terminate this Lease as of
the date sixty (60) days following the giving of such notice. In the event
Lessor elects to give such notice of Lessor's intention to terminate this Lease,
Lessee shall have the right within ten (10) days after the receipt of such
notice to give written notice to Lessor of Lessee's commitment to pay for the
investigation and remediation of such Hazardous Substance Condition totally at
Lessee's expense and without reimbursement from Lessor except to the extent of
an amount equal to twelve (12) times the then monthly Base Rent or $100,000,
whichever is greater. Lessee shall provide Lessor with the funds required of
Lessee or satisfactory assurance thereof within thirty (30) days following
Lessee's said commitment. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such investigation and remediation
as soon as reasonably possible and the required funds are available. If Lessee
does not give such notice and provide the required funds or assurance thereof
within the times specified above, this Lease shall terminate as of the date
specified in Lessor's notice of termination. If a Hazardous Substance Condition
occurs for which Lessee is not legally responsible, there shall be abatement of
Lessee's obligations under this Lease to the same extent as provided in
Paragraph 9.6(a) for a period of not to exceed twelve (12) months.
9.8 Termination -- Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit
as has not been, or is not then required to be, used by Lessor under the terms
of this Lease.
9.9 Waive Statutes. Lessor and Lessee agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present or future statute to the extent inconsistent herewith.
10. Real Property Taxes. (1999-2000=$2933.76)
10.1 (a) Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Premises; provided, however, that
Lessee shall pay, in addition to rent, the amount, if any, by which Real
Property Taxes applicable to the Premises increase over the fiscal tax year
during which the Commencement Date occurs ("Tax Increase"). Subject to Paragraph
10.1(b), payment of any such Tax Increase shall be made by Lessee within thirty
(30) days after receipt of Lessor's written statement setting forth the amount
due and the computation thereof. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes to be
paid by Lessee shall cover any period of time prior to or after the expiration
or earlier termination of the term hereof, Lessee's share of such taxes shall be
equitably prorated to cover only the period of time within the tax fiscal year
this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment
after such proration.
(b) Advance Payment. In order to insure payment when due and
before delinquency of any or all Real Property Taxes, Lessor reserves the
right, at Lessor's option, to estimate the current Real Property Taxes
applicable to the Premises, and to require such current year's Tax Increase
to be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount
equal to the amount due, at least twenty (20) days prior to the applicable
delinquency date, or (ii) monthly in advance with the payment of the Base
Rent. If Lessor elects to require payment monthly in advance, the monthly
payment shall be that equal monthly amount which, over the number of months
remaining before the month in which the applicable tax installment would
become delinquent (and without interest thereon), would provide a fund large
enough to fully discharge before delinquency the estimated Tax Increase to be
paid. When the actual amount of the applicable Tax Increase is known, the
amount of such equal monthly advance payment shall be adjusted as required to
provide the fund needed to pay the applicable Tax Increase before
delinquency. If the amounts paid to Lessor by Lessee under the provisions of
this Paragraph are insufficient to discharge the obligations of Lessee to pay
such Tax Increase as the same becomes due, Lessee shall pay to Lessor, upon
Lessor's demand, such additional sums as are necessary to pay such
obligation. All moneys paid to Lessor under this Paragraph may be
intermingled with other moneys of Lessor and shall not bear interest. In the
event of a Breach by Lessee in the performance of the obligations of Lessee
under this Lease, then any balance of funds paid to Lessor under the
provisions of this Paragraph may, subject to proration as provided in
Paragraph 10.1(a), at the option of Lessor, be treated as an additional
Security Deposit under Paragraph 5.
(c) ADDITIONAL IMPROVEMENTS. Notwithstanding Paragraph 10.1(a) hereof,
Lessee shall pay to Lessor upon demand therefor the entirety of any increase
in Real Property Taxes assessed by reason of Alterations or Utility
Installations placed upon the Premises by Lessee or at Lessee's request.
10.2 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Premises by any authority
having the direct or indirect power to tax, including any city, state or
federal government, or any school, agricultural, sanitary, fire, street,
drainage or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Premises or in the real property of which
the Premises are a part, Lessor's right to rent or other income therefrom,
and/or Lessor's business of leasing the Premises. The term "REAL PROPERTY
TAXES" shall also include any tax, fee, levy, assessment or charge, or any
increase therein, imposed by reason of events occurring, or changes in
applicable law taking effect, during the term of this Lease, including but
not limited to a change in the ownership of the Premises or in the
improvements thereon, the execution of this Lease, or any modification,
amendment or transfer thereof and whether or not contemplated by the Parties.
<PAGE>
10.3 Joint Assessment. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property Taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
10.4 Personal Property Taxes. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee Owned Alterations, Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or elsewhere. When possible, Lessee shall
cause its Trade Fixtures, furnishings, equipment and all other personal property
to be assessed and billed separately from the real property of Lessor. If any of
Lessee's said personal property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee within ten (10) days
after receipt of a written statement setting forth the taxes applicable to
Lessee's property or, at Lessor's option, as provided in Paragraph 10.1(b).
11. Utilities. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered with other premises.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively,
"assignment") or sublet all or any part of Lessee's interest in this Lease or in
the Premises without Lessor's prior written consent given under and subject to
the terms of Paragraph 36.
(b) A change in the control of Lessee shall constitute an assignment
requiring Lessor's consent. The transfer, on a cumulative basis of twenty-five
percent (25%) or more of the voting control of Lessee shall constitute a change
in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction, or
series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of the execution
by Lessor of this Lease or at the time of the most recent assignment to which
Lessor has consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this Lease
without Lessor's specific prior written consent shall, at Lessor's option, be a
Default curable after notice per Paragraph 13.1(c), or a noncurable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a noncurable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days written notice ("Lessor's Notice"), increase the monthly Base Rent to
fair market rental value or one hundred ten percent (110%) of the Base Rent then
in effect, whichever is greater. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and market value
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
(without the Lease being considered an encumbrance or any deduction for
depreciation or obsolescence, and considering the Premises at its highest and
best use and in good condition), or one hundred ten percent (110%) of the price
previously in effect, whichever is greater, (ii) any index-oriented rental or
price adjustment formulas contained in this Lease shall be adjusted to require
that the base index be determined with reference to the index applicable to the
time of such adjustment, and (iii) any fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased in the same ratio as the new
market rental bears to the Base Rent in effect immediately prior to the market
value adjustment.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor
shall be limited to compensatory damages and injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not: (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent or performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants, or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall not
constitute a consent to any subsequent assignment or subletting by Lessee or to
any subsequent or successive assignment or subletting by the sublessee. However,
Lessor may consent to subsequent sublettings and assignments of the sublease or
any amendments or modifications thereto without notifying Lessee or anyone else
liable on the Lease or sublease and without obtaining their consent, and such
action shall not relieve such persons from liability under this Lease or
sublease.
(d) In the event of any Default or Breach of Lessee's obligations
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
any one else responsible for the performance of the Lessee's obligations under
this Lease, including the sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor or Lessee.
(e) Each request for consent to an assignment or subletting shall be
in writing, accompanied by information relevant to Lessor's determination as to
the financial and operational responsibility and appropriateness of the proposed
assignee or sublessee, including but not limited to the intended use and/or
required modification of the Premises, if any, together with a non-refundable
deposit of $1,000 or ten percent (10%) of the current monthly Base Rent,
whichever is greater, as reasonable consideration for Lessor's considering and
processing the request for consent. Lessee agrees to provide Lessor with such
other or additional information and/or documentation as may be reasonably
requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by reason
of accepting such assignment, or entering into such sublease, be deemed, for the
benefit of Lessor, to have assumed and agreed to conform and comply with each
and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
(g) The occurrence of a transaction described in Paragraph 12.1(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased to an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
amount required to establish such Security Deposit a condition to Lessor's
consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment
or subletting, may require that the amount and adjustment structure of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment structure for property similar to the Premises as then constituted.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph
(13.1) shall occur in the performance of Lessee's obligations under this
Lease, Lessee may, except as otherwise provided in this Lease, receive,
collect and enjoy the rents accruing under such sublease. Lessor shall not,
by reason of this or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed liable
to the sublessee for any failure of Lessee to perform and comply with any of
Lessor's obligations to such sublessee under such sublease. Lessee hereby
irrevocably authorizes and directs any such sublessee, upon receipt of a
written notice from Lessor stating that a Breach exists in the performance of
Lessee's obligations under this Lease, to pay to Lessor the rents and other
charges due and to become due under the sublease. Sublessee shall rely upon
any such statement and request from Lessor and shall pay such rents and other
charges to Lessor without any obligation or right to inquire as to whether
such Breach exists and notwithstanding any notice from or claim from Leasee
to the contrary. Lessee shall have no right or claim against said sublessee
or, until the Breach has been cured, against Lessor, for any such rents and
other charges so paid by said sublessee to Lessor.
(b) in the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any
obligation to do so, may require any sublessee to attorn to Lessor, in which
event Lessor shall undertake the obligations of the sublessor under such
sublease from the time of the exercise of said option to the expiration of
such sublease; provided, however, Lessor shall not be liable for any prepaid
rents or security deposit paid by such sublessee to such sublessor or for any
other prior Defaults or Breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor herein.
(d) No sublessee shall further assign or sublet all or any part of the
Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of
Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the subleasee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default,
<PAGE>
and that Lessor may include the cost of such services and costs in said notice
as rent due and payable to cure said Default. A "Default" is defined as a
failure by the Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
is defined as the occurrence of any one or more of the following Defaults, and,
where a grace period for cure after notice is specified herein, the failure by
Lessee to cure such Default prior to the expiration of the applicable grace
period, shall entitle Lessor to pursue the remedies set forth in Paragraphs
13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Base Rent or any other monetary payment
required to be made by Lessee hereunder, whether to Lessor or to a third party,
as and when due, the failure by Lessee to provide Lessor with reasonable
evidence of insurance or surety bond required under this Lease, or the failure
of Lessee to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) days following written notice thereof by or on behalf of Lessor to Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with applicable law per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the recission of an unauthorized assignment or
subletting per Paragraph 12.1(b), (iv) a Tenancy Statement per Paragraphs 16 or
37, (v) the subordination or non-subordination of this Lease per Paragraph 30,
(vi) the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this Lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
that are to be observed, complied with or performed by Lessee, other than those
described in subparagraphs (a), (b) or (c) above, where such Default continues
for a period of thirty (30) days after written notice thereof by or on behalf of
Lessor to Lessee; provided, however, that if the nature of Lessee's Default is
such that more than thirty (30) days are reasonably required for its cure, then
it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) The making by
lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this subparagraph (e) is contrary to any applicable
law, such provision shall be of no force or effect, and not affect the validity
of the remaining provisions.
(f) The discovery by Lessor that any financial statement given to
Lessor by Lessee or any Guarantor of Lessee's obligations hereunder was
materially false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a guarantor, (ii) the termination of a guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a guarantor's refusal to honor the guaranty, or (v) a
guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurance or security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the guarantors that existed at the time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) business days after
written notice to Lessee (or in case of an emergency, without notice), Lessor
may at its option (but without obligation to do so), perform such duty or
obligation on Lessee's behalf, including but not limited to the obtaining of
reasonably required bonds, insurance policies, or governmental licenses, permits
or approvals. The costs and expenses of any such performance by Lessor shall be
due and payable by Lessee to Lessor upon invoice therefor. If any check given to
Lessor by Lessee shall not be honored by the bank upon which it is drawn,
Lessor, at its option, may require all future payments to be made under this
Lease by Lessee to be made only by cashier's check. In the event of a Breach of
this Lease by Lessee, as defined in Paragraph 13.1, with or without further
notice or demand, and without limiting Lessor in the exercise of any right or
remedy which Lessor may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recovery from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of the leasing commission paid by Lessor applicable to the unexpired
term of this Lease. The worth at the time of award of the amount referred to in
provision (iii) of the prior sentence shall be computed by discounting such
amount at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Default or Breach of this Lease shall not waive Lessor's
right to recover damages under this Paragraph. If termination of this Lease is
obtained through the provisional remedy of unlawful detainer, Lessor shall have
the right to recover in such proceeding the unpaid rent and damages as are
recoverable therein, or Lessor may reserve therein the right to recover all or
any part thereof in a separate suit for such rent and/or damages. If a notice
and grace period required under subparagraphs 13.1(b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by subparagraphs 13.1(b), (c) or (d). In such
case, the applicable grace period under subparagraphs 13.1(b), (c) or (d) and
under the unlawful detainer statute shall run concurrently after the one such
statutory notice, and the failure of Lessee to cure the Default within the
greater of the two such grace periods shall constitute both an unlawful detainer
and a Breach of this Lease entitling Lessor to the remedies provided for in this
Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in effect
(in California under California Civil Code Section 1951.4) after Lessee's Breach
and abandonment and recover the rent as it becomes due, provided Lessee has the
right to sublet or assign, subject only to reasonable limitations. See
Paragraphs 12 and 36 for the limitations on assignment and subletting which
limitations Lessee and Lessor agree are reasonable. Acts of maintenance or
preservation, efforts to relet the Premises, or the appointment of a receiver to
protect the Lessor's interest under the Lease, shall not constitute a
termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions," shall be
deemed conditioned upon Lessee's full and faithful performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach of this Lease by Lessee, as defined in Paragraph 13.1, any such
inducement Provision shall automatically be deemed deleted from
this Lease and of no further force or effect, and any rent, other charge,
bonus, inducement or consideration theretofore abated, given or paid by
Lessor under such an inducement Provision shall be immediately due and
payable by Lessee to Lessor, and recoverable by Lessor as additional rent due
under this Lease, notwithstanding any subsequent cure of said Breach by
Lessee. The acceptance by Lessor of rent or the cure of the Breach which
initiated the operation of this Paragraph shall not be deemed a waiver by
Lessor of the provisions of this Paragraph unless specifically so stated in
writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor 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,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or trust deed covering the
Premises. Accordingly, if any installment of rent or any other sum due from
Lessee shall not be received by Lessor or Lessor's designee within five (5)
days after such amount shall be due, then, without any requirement for notice
to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%)
of such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with
respect to such overdue amount, nor prevent Lessor from exercising any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt
by Lessor, and by the holders of any ground lease, mortgage or deed of trust
covering the Premises whose name and address shall have been furnished Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of lessor has not been performed provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after
such notice are reasonably required for its performance, then Lessor shall
not be in breach of this Lease if performance is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
<PAGE>
14. Condemnation. If the Premises or any portion thereof are taken under the
power of eminent domain or sold the threat of the exercise of said power (all of
which are herein called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of the floor area of the
Premises, or more than twenty-five percent (25%) of the land area not occupied
by any building, is taken by condemnation, Lessee may, at Lessee's option, to be
exercised in writing within ten (10) days after Lessor shall have given Lessee
written notice of such taking (or in the absence of such notice, within ten (10)
days after the condemning authority shall have taken possession) terminate this
Lease as of the date the condemning authority takes such possession. If Lessee
does not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in the same proportion as the
rentable floor area of the Premises taken bears to the total rentable floor area
of the building located on the Premises. No reduction of Base Rent shall occur
if the only portion of the Premises taken is land on which there is no building.
Any award for the taking of all or any part of the Premises under the power of
eminent domain or any payment made under threat of the exercise of such power
shall be the property of Lessor, whether such award shall be made as
compensation for diminution in value of the leasehold or for the taking of the
fee, or as severance damages; provided, however, that Lessee shall be entitled
to any compensation separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above the legal and other expenses
incurred by Lessor in the condemnation matter, repair any damage to the Premises
caused by such condemnation, except to the extent that Lessee has been
reimbursed therefor by the condemning authority. Lessee shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. Broker's Fee.
15.1 The Brokers named in Paragraph 1.10 are the procuring causes of this
Lease.
15.2 Upon execution of this Lease by both Parties, Lessor shall pay to
said Brokers jointly, or in such separate shares as they may mutually designate
in writing, a fee as set forth in a separate written agreement between Lessor
and said Brokers (or in the event there is no separate written agreement between
Lessor and said Brokers, the sum of $_____________) for brokerage services
rendered by said Brokers to Lessor in this transaction.
15.3 Unless Lessor and Brokers have otherwise agreed in writing, Lessor
further agrees that: (a) if Lessee exercises any Option (as defined in Paragraph
39.1) or any Option subsequently granted which is substantially similar to an
Option granted to Lessee in this Lease, or (b) if Lessee acquires any rights to
the Premises or other premises described in this Lease which are substantially
similar to what Lessee would have acquired had an Option herein granted to
Lessee been exercised, or (c) if Lessee remains in possession of the Premises,
with the consent of Lessor, after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions. Lessor shall pay
said Brokers a fee in accordance with the schedule of said Brokers in effect at
the time of the execution of this Lease.
15.4 Any buyer or transferee of Lessor's interest in this Lease, whether
such transfer is by agreement or by operation of law, shall be deemed to have
assumed Lessor's obligation under this Paragraph 15. Each Broker shall be a
third party beneficiary of the provisions of this Paragraph 15 to the extent of
its interest in any commission arising from this Lease and may enforce that
right directly against Lessor and its successors.
15.5 Lessee and Lessor each represent and warrant to the other that it has
had no dealings with any person, firm, broker or finder (other than the Brokers,
if any named in Paragraph 1.10) in connection with the negotiation of this Lease
and/or the consummation of the transaction contemplated hereby, and that no
broker or other person, firm or entity other than said named Brokers is entitled
to any commission or finder's fee in connection with said transaction. Lessee
and Lessor do each hereby agree to indemnify, protect, defend and hold the other
harmless from and against liability for compensation or charges which may be
claimed by any such unnamed broker, finder or other similar party by reason of
any dealings or actions of the indemnifying Party, including any costs,
expenses, attorneys' fees reasonably incurred with respect thereto.
15.6 Lessor and Lessee hereby consent to and approve all agency
relationships, including any dual agencies, indicated in Paragraph 1.10.
16. Tenancy Statement.
16.1 Each Party (as "Responding Party") shall within ten (10) days after
written notice from the other Party (the "Requesting Party") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "Tenancy Statement" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
16.2 If Lessor desires to finance, refinance, or sell the Premises, any
part thereof, or the building of which the Premises are a part, Lessee and all
Guarantors of Lessee's performance hereunder shall deliver to any potential
lender or purchaser designated by Lessor such financial statements of Lessee and
such Guarantors as may be reasonably required by such lender or purchaser,
including but not limited to Lessee's financial statements for the past three
(3) years. All such financial statements shall be received by Lessor and such
lender or purchaser in confidence and shall be used only for the purposes herein
set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or
owners at the time in question of the fee title to the Premises, or if this is a
sublease, of the Lessee's interest in the prior lease. In the event of a
transfer of Lessor's title or interest in the Premises or in this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor at the time of such transfer or assignment.
Except as provided in Paragraph 15, upon such transfer or assignment and
delivery of the Security Deposit, as aforesaid, the prior Lessor shall be
relieved of all liability with respect to the obligations and/or covenants under
this Lease thereafter to be performed by the Lessor. Subject to the foregoing,
the obligations and/or covenants in this Lease to be performed by the Lessor
shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. Interest On Past-Due Obligations. Any monetary payment due Lessor hereunder,
other than late charges, not received by Lessor within thirty (30) days
following the date on which it was due, shall bear interest from the
thirty-first (31st) day after it was due at the rate of 12% per annum, but not
exceeding the maximum rate allowed by law, in addition to the late charge
provided for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. No Prior or Other Agreements; Broker Disclaimer. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party.
23. Notices.
23.1 All notices required or permitted by this Lease shall be in
writing and may be delivered in person (by hand or by messenger or courier
service) or may be sent by regular, certified mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall
be deemed sufficiently given if served in a manner specified in this
Paragraph 23. The addresses noted adjacent to a Party's signature on this
Lease shall be that Party's address for delivery or mailing of notice
purposes. Either Party may be written notice to the other specify a different
address for notice purposes, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for the purpose
of mailing or delivering notices to Lessee. A copy of notices required or
permitted to be given to Lessee hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by written notice to Lessee.
23.2 Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card or if no delivery date is shown, the postmark thereon. If sent by
regular mail the notice shall be deemed given forty-eight (48) hours after
the notice is addressed as required herein and mailed with postage
prepaid. Notices delivered by United States Express Mail or overnight courier
that guarantees next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the United States Postal Service or
courier. If any notice is transmitted by facsimile transmission or similar
means, the same shall be deemed served or delivered upon telephone
confirmation of receipt of the transmission thereof, provided a copy is also
delivered via delivery or mail. If notice is received on a Sunday or legal
holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. Regardless of Lessor's knowledge of a Default or Breach at the time
of accepting rent, the acceptance of rent by Lessor shall not be a waiver of
any preceding Default or Breach by Lessee of any provision hereof, other
than the failure of Lessee to pay the particular rent so accepted. Any
payment given Lessor by Lessee may be accepted by Lessor on account of moneys
or damages due Lessor, notwithstanding any qualifying statements or
conditions made by Lessee in connection therewith, which such statements
and/or conditions shall be of no force or effect whatsoever unless
specifically agreed to in writing by Lessor at or before the time of deposit
of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees or taxes applicable thereto.
<PAGE>
26. No Right To Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the parties,
their personal representatives, successors and assigns and be governed by the
laws of the State in which the Premises are located. Any litigation between the
Parties hereto concerning this Lease shall be initiated in the county in which
the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "Security Device"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof, Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default and
allow such Lender thirty (30) days following receipt of such notice for the cure
of said default before invoking any remedies Lessee may have by reason thereof.
If any Lender shall elect to have this Lease and/or any Option granted hereby
superior to the lien of its Security Device and shall give written notice
thereof to Lessee, this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 Attornment. Subject to the non-disturbance provisions of Paragraph
30.3, Lessee agrees to attorn to a Lendor or any other party who acquires
ownership of the Premises by reason of a foreclosure of a Security Device, and
that in the event of such foreclosure, such new owner shall not: (i) be liable
for any act or omission of any prior lessor or with respect to events occurring
prior to acquisition of ownership, (ii) be subject to any offsets or defenses
which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one (1) month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into by
Lessor after the execution of this Lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30 shall
be effective without the execution of any further documents; provided, however,
that, upon written request from Lessor or a Lender in connection with a sale,
financing or refinancing of the Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. Attorney's Fees. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) or Broker in any such proceeding, action, or appeal thereon,
shall be entitled to reasonable attorney's fees. Such fees may be awarded in the
same suit or recovered in a separate suit, whether or not such action or
proceeding is pursued to decision or judgment. The term, "Prevailing Party"
shall include, without limitation, a Party or Broker who substantially obtains
or defeats the relief sought, as the case may be, whether by compromise,
settlement, judgment, or the abandonment by the other Party or Broker of its
claim or defense. The attorney's fee award shall not be computed in accordance
with any court fee schedule, but shall be such as to fully reimburse all
attorney's fees reasonably incurred. Lessor shall be entitled to attorney's
fees, costs and expenses incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal action
is subsequently commenced in connection with such Default or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall
have the right to enter the Premises at any time, in the case of an emergency,
and otherwise at reasonable times for the purpose of showing the same to
prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the building of which
they are a part, as Lessor may reasonably deem necessary. Lessor may at any time
place on or about the Premises or building any ordinary "For Sale" signs and
Lessor may at any time during the last one hundred twenty (120) days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Lessor shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the Premises, except that Lessee
may, with Lessor's prior written consent, install (but not on the roof) such
signs as are reasonably required to advertise Lessee's own business. The
installation of any sign on the Premises by or for Lessee shall be subject to
the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations,
Trade Fixtures and Alterations). Unless otherwise expressly agreed herein,
Lessor reserves all rights to the use of the roof and the right to install, and
all revenues from the installation of, such advertising signs on the Premises,
including the roof, as do not unreasonably interfere with the conduct of
Lessee's business.
35. Termination; Merger. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' or other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment, a subletting or the presence or use of a
Hazardous Substance, practice or storage tank, shall be paid by Lessee to Lessor
upon receipt of an invoice and supporting documentation therefor. Subject to
Paragraph 12.2(e) (applicable to assignment or subletting), Lessor may, as a
condition to considering any such request by Lessee, require that Lessee deposit
with Lessor an amount of money (in addition to the Security Deposit held under
Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will
incur in considering and responding to Lessee's request. Except as otherwise
provided, any unused portion of said deposit shall be refunded to Lessee without
interest. Lessor's consent to any act, assignment of this Lease or subletting of
the Premises by Lessee shall not constitute an acknowledgement that no Default
or Breach by Lessee of this Lease exists, nor shall such consent be deemed a
waiver of any then existing Default or Breach, except as may be otherwise
specifically stated in writing by Lessor at the time of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the imposition by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 If there are to be any Guarantors of this Lease per Paragraph
1.11, the form of the guaranty to be executed by each such Guarantor shall be
in the form most recently published by the American Industrial Real Estate
Association, and each said Guarantor shall have the same obligations as
Lessee under this Lease, including but not limited to the obligation to
provide the Tenancy Statement and information called for by Paragraph 16.
37.2 It shall constitute a Default of the Lessee under this Lease if
any such Guarantor falls or refuses, upon reasonable request by Lessor to
give: (a) evidence of the due execution of the guaranty called for by this
Lease, including the authority of the Guarantor (and of the party signing on
Guarantor's behalf) to obligate such Guarantor on said guaranty, and
including in the case of a corporate Guarantor, a certified copy of a
resolution of its board of directors authorizing the making of such guaranty,
together with a certificate of incumbency showing the signature of the
persons authorized to sign on its behalf, (b) current financial statements of
Guarantor as may from time to time be requested by Lessor, (c) a Tenancy
Statement, or (d) written confirmation that the guaranty is still in effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the observance and performance of all of the covenants, conditions and
provisions on Lessee's part to be observed and performed under this Lease,
Lessee shall have quiet possession of the Premises for the entire term hereof
subject to all of the provisions of this Lease.
39. OPTIONS.
39.1 DEFINITION. As used in this Paragraph 39 the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property
of Lessor; (b) the right of first refusal to lease the Premises or the right
of first offer to lease the Premises or the right of first refusal to lease
other property of Lessor or the right of first offer to lease other property
of Lessor; (c) the right to purchase the Premises, or the right of first
refusal to purchase the Premises, or the right of first offer to purchase the
Premises, or the right to purchase other property of Lessor, or the right of
first refusal to purchase other property of Lessor, or the right of first
offer to purchase other property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to Lessee
in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee
<PAGE>
is in full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any Multiple Options
to extend or renew this Lease, a later Option cannot be exercised unless the
prior Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i) during
the period commencing with the giving of any notice of Default under Paragraph
13.1 and continuing until the noticed Default is cured, or (ii) during the
period of time any monetary obligation due Lessor from Lessee is unpaid (without
regard to whether notice thereof is given Lessee), or (iii) during the time
Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to
Lessee three (3) or more notices of Default under Paragraph 13.1, whether or not
the Defaults are cured, during the twelve (12) month period immediately
preceding the exercise of the Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of any Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of Default under Paragraph 13.1 during any
twelve (12) month period, whether or not the Defaults are cured, or (iii) if
Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are part of a group of buildings
controlled by Lessor, Lessee agrees that it will abide by, keep and observe all
reasonable rules and regulations which Lessor may make from time to time for the
management, safety, care, and cleanliness of the grounds, the parking and
unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of such other buildings and their
invitees, and that Lessee will pay its fair share of common expenses incurred in
connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time, to
grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment and there shall survive the right on the part of
said Party to institute suit for recovery of such sum. If it shall be adjudged
that there was no legal obligation on the part of said Party to pay such sum or
any part thereof, said Party shall be entitled to recover such sum or so much
thereof as it was not legally required to pay under the provisions of this
Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease on its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by Lessor or Lessor's agent and submission
of same to Lessee shall not be deemed an offer to lease to Lessee. This Lease is
not intended to be binding until executed by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional, insurance company, or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such Multiple Parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO
EVALUATE THE CONDITION OF THE PROPERTY AS TO THE POSSIBLE PRESENCE OF
ASBESTOS, STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKER(S) OR THEIR AGENTS OR EMPLOYEES AS THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE
ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE. IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN
CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED
SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at Mtn. View, CA Executed at Palo Alto, CA
------------------------- --------------------------
on 21 October 1999 on 21 October 1999
----------------------------------- -----------------------------------
by LESSOR: by LESSEE:
STRAUBE ASSOCIATES, INC. Southwell Technologies, Inc.
- ------------------------------------- --------------------------------------
<PAGE>
[LOGO]
OPTION(S) TO EXTEND
ADDENDUM TO STANDARD LEASE
Dated OCTOBER 7, 1999
-------------------------------------------------
By and Between (Lessor) STRAUBE ASSOCIATES, INC.
-------------------------------
(Lessee) SOUTHWALL TECHNOLOGIES, INC.
-------------------------------
Address of Premises: 3941 E. Bayshore Rd., Palo Alto, CA 94303
----------------------------------
Paragraph_______
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 1 additional 60 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which
is prior to the date that the option period would commence (if exercised) by at
least 4 and not more than 6 months, a written notice of the exercise of the
options(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only be exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option.
(iii) All of the terms and conditions of this Lease except where
specifically modified by this option shall apply.
(v) The monthly rent for each month of the option period shall be
calculated as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
|_| I. Cost of Living Adjustment(s) (COL)
a. On (Fill in COL Date(s): ______________________________________________
____________________________________________________________________________ the
monthly rent payable under paragraph 1.5 ("Base Rent") of the attached lease
shall be adjusted by the change, if any, from the Base Month specified below, in
the Consumer Price Index of the Bureau of Labor Statistics of the U.S.
Department of Labor for (select one): |_| CPI W (Urban Wage Earners and Clerical
Workers) or |_| CPI U (All Urban Consumers), for (Fill in Urban Area):
_____________________________________________________________________, All Items
(1982-1984 = 100), herein referred to as "CPI".
b. The monthly rent payable in accordance with paragraph AI(a) of this
Addendum shall be calculated as follows: the Base Rent set forth in paragraph
1.5 of the attached Lease, shall be multiplied by a fraction the numerator of
which shall be the C.P.I. of the calendar month 2 (two) months prior to the
month(s) specified in paragraph AI(a) above during which the adjustment is to
take effect, and the denominator of which shall be the C.P.I. of the calendar
month which is two (2) months prior to (select one): |_| the first month of the
term of this Lease as set forth in paragraph 1.3 ("Base Month") or |_| (Fill in
Other "Base Month"): ___________________. The sum so calculated shall constitute
the new monthly rent hereunder, but in no event, shall any such new monthly rent
be less than the rent payable for the month immediately preceding the rent
adjustment.
c. In the event the compilation and/or publication of the C.P.I. shall be
transferred to any other governmental department or bureau or agency or shall be
discontinued, then the index most nearly the same as the C.P.I. shall be used to
make such calculation. In the event that the Lessor and Lessee cannot agree on
such alternative index, then the matter shall be submitted for decision to the
American Arbitration Association in accordance with the then rules of said
Association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitration shall be paid equally by the Lessor and
Lessee.
[COPY ILLEGIBLE]
/X/ II. MARKET RENTAL VALUE ADJUSTMENT(S) (MRV)
(a) On (Fill in MRV Adjustment Date(s): September 2004_______________
____________________________________________________________________________
the monthly rent payable under paragraph 1.5 ("Base Rent") of the attached
Lease shall be adjusted to the "Market Rental Value" of the property as
follows:
1) Four months prior to the Market Rental Value (MRV)
Adjustment Date(s) described above, Lessor and Lessee shall meet to establish
an agreed upon new MRV for the specified term. If agreement cannot be
reached, then:
<PAGE>
i) Lessor and Lessee shall immediately appoint a mutually
acceptable appraiser or broker to establish the new MRV within the next 30
days. Any associated costs will be split equally between the parties, or
ii) Both Lessor and Lessee shall each immediately select and pay the
appraiser or broker of their choice to establish a MRV within the next 30 days.
If, for any reason, either one of the appraisals is not completed within the
next 30 days, as stipulated, then the appraisal that is completed at that time
shall automatically become the new MRV. If both appraisals are completed and the
two appraisers/brokers cannot agree on a reasonable average MRV then they shall
immediately select a third mutually acceptable appraiser/broker to establish a
third MRV within the next 30 days. The average of the two appraisals closest in
value shall then become the new MRV. The costs of the third appraisal will be
split equally between parties.
2) In any event, the new MRV shall not be less than the rent payable
for the month immediately preceding the date for rent adjustment.
(b) Upon the establishment of each New Market Rental Value as described in
paragraph AII:
1) the monthly rental sum so calculated for each term as specified
in paragraph AII(a) will become the new "Base Rent" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
AI(a) above and
2) the first month of each Market Rental Value term as specified in
paragraph AII(a) shall become the new "Base Month" for the purpose of
calculating any further Cost of Living Adjustments as specified in paragraph
AI(b).
|_| III. Fixed Rental Adjustment(s) (FRA)
The monthly rent payable under paragraph 1.5 ("Base Rent") of the attached Lease
shall be increased to the following amounts on the dates set forth below:
On (Fill in FRA Adjustment Data(s)): The New Base Rental shall be:
January 01, 2001 $ 22,593.00
------------------------------------ --------------------------
January 01, 2002 $ 23,271.00
------------------------------------ --------------------------
January 01, 2003 $ 23,969.00
------------------------------------ --------------------------
January 01, 2004 $ 24,688.00
------------------------------------ --------------------------
B. NOTICE: Unless specified otherwise herein, notice of any escalations other
than Fixed Rental Adjustments shall be made as specified in paragraph 23 of the
attached Lease.
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in
accordance with paragraph 15 of the attached Lease.
<PAGE>
Exhibit 10.36.1
BROWN INVESTMENT COMPANY
3197 PARK BOULEVARD
PALO ALTO, CALIFORNIA 94306
October 12, 1999
Mr. Bill R. Finley
Vice President & Chief Financial Officer
Southwall Corporation
1029 Corporation Way
Palo Alto, CA 94303
Dear Bill:
We hereby propose to modify our lease with Southwall Technologies, dated March
20, 1979, of the building at 3961 E. Bayshore Road, Palo Alto, California under
the following terms and conditions:
1. The lease period shall be extended until December 31, 2005.
2. The rent for the first 12 months of the extension period shall be
$21,250.00 per month on a triple net basis.
3. The rent shall be adjusted upward at the beginning of each calendar year
in the amount of $425.00 per month cumulatively.
4. All other terms and conditions shall remain the same including previous
applicable modifications.
Please sign below that you have accepted this lease modification. Thank you for
your consideration.
Sincerely,
Brown Investment Company Southwall Technologies
/s/ Allan F. Brown /s/ Bill R. Finley
--------------------------
Allan F. Brown Bill R. Finley
Managing General Partner Vice-President & CFO
AFB:jr
<PAGE>
Exhibit 10.59.1
FIRST AMENDMENT TO LEASE DATED JANUARY 1, 1989
(3969-3975 E. Bayshore Road -- Building 1)
This First Amendment to Lease dated January 1, 1989 between Judd
Properties, LLC, a California limited liability company (as assignee of Bay
Laurel Investment Company, a California general partnership) and Southwall
Technologies, Inc., a Delaware corporation (hereinafter called respectively
Lessor and Lessee) for the premises commonly known as 3969-3975 E. Bayshore
Road, Palo Alto, California (Building 1), shall be effective as of the 1st day
of January, 2000.
Recitals
A. Lessee has exercised its First Option to Extend under Section 25 of the
lease, and Lessor and Lessee by this amendment desire to establish the Fair
Market Rental Value as required by Section 25.
B. Lessor and Lessee desire to change the lease from what is commonly
known as "triple net" to what is commonly known as "modified gross."
C. The lease is hereby amended as set forth below.
Agreement
1. The base monthly rent for the first (1st) year of the First Extended
Term per Section 25 of the lease ("Fair Market Rental Value") shall be Seventy
Thousand Four Hundred Dollars ($70,400.00).
2. As additional rent, Lessee shall pay to Lessor Lessee's "pro rata
share" (as defined in Section 37 of the lease) of Lessor's "direct expenses" (as
defined in Section 38 of the lease) in accordance with the following provisions:
a. Lessor's annual direct expenses shall be estimated by Lessor from
time to time and Lessee, throughout the term of the lease, shall pay to Lessor,
each month, an amount equal to 1/12 of Lessee's pro rata share of Lessor's
estimated annual direct expenses. Lessor shall deliver to Lessee within one
hundred twenty (120) days after the expiration of each calendar year a
reasonably detailed statement showing Lessor's actual direct expenses incurred
during the preceding calendar year. If Lessee's payments under this Section 2
during the preceding calendar year exceed Lessee's pro rata share as indicated
on said statement, Lessor shall pay to Lessee an amount equal to any excess
payment within ten (10) days after delivery by Lessor to Lessee of said
statement, subject to any offsets Lessor might otherwise have. If Lessee's
payments under this
<PAGE>
Section 2 during said preceding calendar year were less than Lessee's pro rata
share as indicated on said statement, Lessee shall pay to Lessor the amount of
the deficiency within ten (10) days after delivery by Lessor to Lessee of said
statement.
b. These monthly payments of additional rent shall be due on the
same day as the base rent is due, which is the first day of each month, and
payment shall be in the form of a single check of an amount equal to the base
rent plus the additional rent.
c. Exhibit A attached hereto, and incorporated by this reference,
reflects Lessee's pro rata share of Lessor's estimated annual direct expenses
for the calendar year 2000.
d. As of the commencement of the First Extended Term of the lease,
Lessee's monthly rent for direct expenses under this Section 2 shall be Two
Thousand Two Hundred Forty Dollars ($2,240.00), bringing the total monthly rent
due under Sections 1 and 2 hereof to Seventy Two Thousand Six Hundred Forty
Dollars ($72,640.00).
3. A portion of the additional rent paid pursuant to Section 2 of this
amendment shall be in lieu of Lessee's obligation to reimburse Lessor for
insurance costs under Section 11(b) of the lease. All other provisions of
Section 11(b) shall remain binding on the parties.
4. A portion of the additional rent paid pursuant to Section 2 of this
amendment shall be in lieu of Lessee's obligation to reimburse Lessor for real
estate taxes, or in the alternative, to pay them directly, under Section 32 of
the lease. All other provisions of Section 32 shall remain binding on the
parties.
LESSOR: LESSEE:
JUDD PROPERTIES, LLC, a SOUTHWALL TECHNOLOGIES, INC.
California limited liability a Delaware corporation
company
By /s/ F. Clay Judd By /s/ Billy R. Finley
-------------------------- --------------------------
Its President Its Vice President and CFO
<PAGE>
EXHIBIT A
3969-3975 E. Bayshore Road, Palo Alto, California 94303
Estimated Annual Direct Expenses
For The Calendar Year 2000
Southwall's
Total Estimated Southwall's Estimated
Annual Expense Pro rata Share Annual Expense
-------------- -------------- --------------
Real Estate Taxes $6,716.00 100% $6,716.00
Property Insurance $2,575.00 100% $2,575.00
Earthquake Insurance $9,428.00 100% $9,428.00
Ground Maintenance $1,300.00 28.1% $4,384.00
Tree Trimming, Spraying $1,000.00 100% $1,000.00
Paving $2,000.00 100% $2,000.00
Fire Meter $ 90.00 100% $ 90.00
---------
Total Estimated Direct Expenses for Calendar Year 2000 $26,193.00
$26,l93.00 -- 32,000 sq. ft. = $.82 cents
$.82 cents -- 12 months = $.07 cents per sq. ft. per month
$.07 cents per sq. ft. per month x 32,000 sq. ft. = $2,240.00 per month
<PAGE>
Exhibit 10.60.1
FIRST AMENDMENT TO LEASE DATED JANUARY 1, 1989
(3969-3975 E. Bayshore Road -- Building 1)
This First Amendment to Lease dated January 1, 1989 between Judd
Properties, LLC, a California limited liability company (as assignee of Bay
Laurel Investment Company, a California general partnership) and Southwall
Technologies, Inc., a Delaware corporation (hereinafter called respectively
Lessor and Lessee) for the premises commonly known as 3969-3975 E. Bayshore
Road, Palo Alto, California (Building 1), shall be effective as of the 1st day
of January, 2000.
Recitals
A. Lessee has exercised its First Option to Extend under Section 25 of the
lease, and Lessor and Lessee by this amendment desire to establish the Fair
Market Rental Value as required by Section 25.
B. Lessor and Lessee desire to change the lease from what is commonly
known as "triple net" to what is commonly known as "modified gross."
C. The lease is hereby amended as set forth below.
Agreement
1. The base monthly rent for the first (1st) year of the First Extended
Term per Section 25 of the lease ("Fair Market Rental Value") shall be Seventy
Thousand Four Hundred Dollars ($70,400.00).
2. As additional rent, Lessee shall pay to Lessor Lessee's "pro rata
share" (as defined in Section 37 of the lease) of Lessor's "direct expenses" (as
defined in Section 38 of the lease) in accordance with the following provisions:
a. Lessor's annual direct expenses shall be estimated by Lessor from
time to time and Lessee, throughout the term of the lease, shall pay to Lessor,
each month, an amount equal to 1/12 of Lessee's pro rata share of Lessor's
estimated annual direct expenses. Lessor shall deliver to Lessee within one
hundred twenty (120) days after the expiration of each calendar year a
reasonably detailed statement showing Lessor's actual direct expenses incurred
during the preceding calendar year. If Lessee's payments under this Section 2
during the preceding calendar year exceed Lessee's pro rata share as indicated
on said statement, Lessor shall pay to Lessee an amount equal to any excess
payment within ten (10) days after delivery by Lessor to Lessee of said
statement, subject to any offsets Lessor might otherwise have. If Lessee's
payments under this
<PAGE>
Section 2 during said preceding calendar year were less than Lessee's pro rata
share as indicated on said statement, Lessee shall pay to Lessor the amount of
the deficiency within ten (10) days after delivery by Lessor to Lessee of said
statement.
b. These monthly payments of additional rent shall be due on the
same day as the base rent is due, which is the first day of each month, and
payment shall be in the form of a single check of an amount equal to the base
rent plus the additional rent.
c. Exhibit A attached hereto, and incorporated by this reference,
reflects Lessee's pro rata share of Lessor's estimated annual direct expenses
for the calendar year 2000.
d. As of the commencement of the First Extended Term of the lease,
Lessee's monthly rent for direct expenses under this Section 2 shall be Two
Thousand Two Hundred Forty Dollars ($2,240.00), bringing the total monthly rent
due under Sections 1 and 2 hereof to Seventy Two Thousand Six Hundred Forty
Dollars ($72,640.00).
3. A portion of the additional rent paid pursuant to Section 2 of this
amendment shall be in lieu of Lessee's obligation to reimburse Lessor for
insurance costs under Section 11(b) of the lease. All other provisions of
Section 11(b) shall remain binding on the parties.
4. A portion of the additional rent paid pursuant to Section 2 of this
amendment shall be in lieu of Lessee's obligation to reimburse Lessor for real
estate taxes, or in the alternative, to pay them directly, under Section 32 of
the lease. All other provisions of Section 32 shall remain binding on the
parties.
LESSOR: LESSEE:
JUDD PROPERTIES, LLC, a SOUTHWALL TECHNOLOGIES, INC.
California limited liability a Delaware corporation
company
By /s/ F. Clay Judd By /s/ Billy R. Finley
-------------------------- --------------------------
Its President Its Vice President and CFO
<PAGE>
EXHIBIT A
3969-3975 E. Bayshore Road, Palo Alto, California 94303
Estimated Annual Direct Expenses
For The Calendar Year 2000
Southwall's
Total Estimated Southwall's Estimated
Annual Expense Pro rata Share Annual Expense
-------------- -------------- --------------
Real Estate Taxes $6,716.00 100% $6,716.00
Property Insurance $2,575.00 100% $2,575.00
Earthquake Insurance $9,428.00 100% $9,428.00
Ground Maintenance $1,300.00 28.1% $4,384.00
Tree Trimming, Spraying $1,000.00 100% $1,000.00
Paving $2,000.00 100% $2,000.00
Fire Meter $ 90.00 100% $ 90.00
---------
Total Estimated Direct Expenses for Calendar Year 2000 $26,193.00
$26,l93.00 -- 32,000 sq. ft. = $.82 cents
$.82 cents -- 12 months = $.07 cents per sq. ft. per month
$.07 cents per sq. ft. per month x 32,000 sq. ft. = $2,240.00 per month
<PAGE>
SOUTHWALL TECHNOLOGIES INC.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements of Southwall Technologies Inc. on Form S-8 Nos. 33-28599 (filed on
May 9, 1989), 33-37247 (filed on October 11, 1990), 33-42753 (filed on
September 16, 1991), 33-51758 (filed on September 8, 1992), 33-82138 (filed
on July 28, 1994), 333-34287 (filed August 25, 1997), 333-66277 (filed on
October 28, 1998) and 333-79359 (filed on May 26, 1999) of our report dated
March 3, 2000 appearing on page 12 of this Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
April 5, 2000
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,677
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<RECEIVABLES> 12,292
<ALLOWANCES> 875
<INVENTORY> 7,601
<CURRENT-ASSETS> 23,989
<PP&E> 73,782
<DEPRECIATION> 30,958
<TOTAL-ASSETS> 70,123
<CURRENT-LIABILITIES> 20,942
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0
0
<COMMON> 48,977
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<TOTAL-LIABILITY-AND-EQUITY> 70,123
<SALES> 55,331
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<CGS> 39,766
<TOTAL-COSTS> 53,483
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