<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NO. 0-25298
------------------------
OAK TECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0161486
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
139 KIFER COURT
SUNNYVALE, CALIFORNIA 94086
(Address of principal executive offices, including zip code)
(408) 737-0888
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of March 31, 2000, there were outstanding 52,110,911 shares of the
Registrant's Common Stock, par value $0.001 per share.
- --------------------------------------------------------------------------------
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<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
and June 30, 1999......................................... 3
Condensed Consolidated Statements of Operations for the
Three Months and
Nine Months Ended March 31, 2000 and 1999................. 4
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended March 31, 2000 and 1999...................... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 30
PART II--OTHER INFORMATION
Item 1. Legal Proceedings........................................... 32
Item 2. Changes in Securities....................................... 35
Item 3. Defaults upon Senior Securities............................. 35
Item 4. Submission of Matters to a Vote of Security Holders......... 35
Item 5. Other Information........................................... 36
Item 6. Exhibits and Reports on Form 8-K............................ 36
SIGNATURES........................................................... 37
Exhibit Index........................................................ 38
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 39,228 $ 19,500
Short-term investments.................................... 95,803 113,703
Accounts receivable, net of allowance for doubtful
accounts of $443 and $555, respectively................. 14,919 8,251
Inventories, net.......................................... 9,710 1,819
Current portion of foundry deposits....................... 3,620 9,061
Prepaid expenses and other current assets................. 8,416 11,121
-------- --------
Total current assets.................................... 171,696 163,455
Property and equipment, net................................. 19,930 22,039
Foundry deposits............................................ -- 7,760
Intangible assets, net...................................... 47,110 7,569
Other assets................................................ 5,348 3,017
-------- --------
Total assets............................................ $244,084 $203,840
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt....... $ 19 $ 25
Accounts payable.......................................... 11,847 3,648
Accrued expenses.......................................... 14,893 8,467
Deferred revenue.......................................... 4,281 379
-------- --------
Total current liabilities............................... 31,040 12,519
Long-term debt.............................................. -- 5
Deferred income taxes....................................... 1,438 1,438
Other long-term liabilities................................. 258 457
-------- --------
Total liabilities....................................... 32,736 14,419
-------- --------
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares
authorized; None issued and outstanding as of March 31,
2000 and June 30, 1999.................................. -- --
Common stock, $0.001 par value; 130,000,000 shares
authorized as of March 31, 2000 and 60,000,000 shares
authorized as of June 30, 1999; 54,493,391 shares issued
and 52,110,911 shares outstanding as of March 31, 2000
and 42,916,721 shares issued and 40,915,241 outstanding
as of June 30, 1999..................................... 52 41
Additional paid-in capital................................ 215,566 164,784
Treasury stock............................................ (11,254) (9,437)
Retained earnings......................................... 6,200 34,033
Accumulated other comprehensive income.................... 784 --
-------- --------
Total stockholders' equity.............................. 211,348 $189,421
-------- --------
Total liabilities and stockholders' equity.............. $244,084 $203,840
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues......................................... $ 28,502 $ 15,965 $ 49,674 $ 57,793
Cost of revenues..................................... 12,567 8,590 24,249 30,615
-------- -------- -------- --------
Gross profit..................................... 15,935 7,375 25,425 27,178
Research and development expenses.................... 12,260 11,208 36,138 34,233
Selling, general and administrative expenses......... 8,824 8,630 25,041 26,817
Amortization of intangibles.......................... 3,588 1,328 7,363 3,614
Restructuring........................................ 1,420 -- 1,420 --
Acquired in-process technology....................... 10,158 -- 10,383 7,161
-------- -------- -------- --------
Operating loss................................... (20,315) (13,791) (54,920) (44,647)
Gain on sale of business unit........................ 22,378 -- 22,378 --
Other nonoperating income, net....................... 954 839 5,081 4,326
-------- -------- -------- --------
Gain (loss) before income taxes.................. 3,017 (12,952) (27,461) (40,321)
Income taxes (benefit)............................... 372 (1,907) 372 (5,404)
-------- -------- -------- --------
Net income (loss)................................ $ 2,645 $(11,045) $(27,833) $(34,917)
======== ======== ======== ========
Net income (loss) per share
Basic.............................................. $ 0.05 $ (0.27) $ (0.63) $ (0.86)
======== ======== ======== ========
Diluted............................................ $ 0.04 $ (0.27) $ (0.63) $ (0.86)
======== ======== ======== ========
Shares used in computing net income (loss) per share
Basic.............................................. 49,850 40,768 43,958 40,791
======== ======== ======== ========
Diluted............................................ 59,573 40,768 43,958 40,791
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(27,833) $(34,917)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 12,233 8,693
Gain on sale of business.............................. (22,378) --
Acquired in-process technology.......................... 10,383 7,161
Loss on disposal of property and equipment.............. 1,381 --
Deferred income taxes................................... -- 383
Equity loss from affiliates............................. 365
Changes in operating assets and liabilities:
Accounts receivable................................... (1,872) 3,176
Inventories........................................... (7,891) 5,858
Foundry deposits...................................... 9,061 943
Prepaid expenses and other current assets............. 2,213 1,914
Accounts payable, accrued expenses and deferred
revenue............................................. 11,660 (878)
Other assets.......................................... 1,249 (194)
-------- --------
Net cash used in operating activities............... (11,429) (7,861)
-------- --------
Cash flows from investing activities:
Purchases of short-term investments..................... (97,170) (47,642)
Proceeds from matured short-term investments............ 135,854 43,206
Additions to property and equipment..................... (3,723) (4,787)
Acquisition of Xionics, net of cash acquired............ (9,453) --
Equity investment in Earjam............................. (3,045) --
Acquisition of ViewPoint, Inc., net of cash acquired.... -- (9,467)
Acquisition of XLI Inc. common stock.................... -- (3,675)
Proceeds from sale of business unit..................... 4,900 --
Payment of certain XLI Inc. liabilities at acquisition
date.................................................. -- (2,094)
-------- --------
Net cash provided by (used in) investing
activities........................................ 27,363 (24,459)
-------- --------
Cash flows from financing activities:
Issuance of debt........................................ -- 3,675
Repayment of debt....................................... (11) (3,997)
Issuances of common stock, net.......................... 5,622 1,136
Treasury stock acquisitions............................. (1,817) (2,720)
-------- --------
Net cash provided by (used in) financing
activities........................................ 3,794 (1,906)
-------- --------
Net decrease in cash and cash equivalents................... 19,728 (34,226)
Cash and cash equivalents, beginning of period.............. 19,500 59,803
-------- --------
Cash and cash equivalents, end of period.................... $ 39,228 $ 25,577
======== ========
Supplemental information:
Cash paid (refunded) during the period:
Interest................................................ $ 13 $ 48
======== ========
Income taxes............................................ $ (3,726) $ (8,033)
======== ========
Issuance of common stock and stock options assumed for
businesses acquired................................... $ 45,171 $ --
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PREPARATION
The accompanying unaudited consolidated financial statements of Oak
Technology, Inc. and Subsidiaries ("Oak" or "The Company") have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (the "Commission"). In the opinion of management, the
consolidated financial statements reflect all adjustments considered necessary
for a fair presentation of the consolidated financial position, operating
results and cash flows for those periods presented. The results of operations
for the interim periods presented are not necessarily indicative of the results
that may be expected for the full fiscal year or in any future period. This
quarterly report on Form 10-Q should be read in conjunction with the audited
consolidated financial statements and notes thereto for the year ended June 30,
1999, included in the Oak Technology, Inc. (the "Company") 1999 Annual Report on
Form 10-K/A previously filed with the Commission.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which will be effective for the Company's fiscal year 2001. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement also requires that changes in the
derivative's fair value be recognized in earnings unless specific hedge
accounting criteria are met. The Company is currently assessing the impact of
this new statement on its consolidated financial position, liquidity, and
results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements, as amended by SAB 101A, which provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue
and provides guidance for disclosures related to revenue recognition policies.
The Company does not expect the adoption of SAB 101 to have a material effect on
its consolidated financial position or results of operations.
2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
At March 31, 2000, in addition to the Company's normal composition of
short-term interest bearing investments the Company was also holding 293,794
common shares of Conexant Systems, Inc. (NASDAQ:CNXT) at a book value and
approximate fair value of $20 million or $68.05 per share. These shares were
received as unregistered stock in consideration for the sale of the Company's
broadband business in January 2000 and were not registered and
available-for-sale until early March 2000.
6
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market
and consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
--------- --------
<S> <C> <C>
Purchased parts and work in process....................... $5,342 $ 124
Finished goods............................................ 4,368 1,695
------ ------
$9,710 $1,819
====== ======
</TABLE>
4. NET INCOME (LOSS) PER SHARE
Basic and diluted net loss per share have been computed using the weighted
average number of shares of common stock and dilutive common equivalent shares
from stock options and warrants outstanding in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share." The following
table provides a reconciliation of the components of the basic and diluted loss
per share computations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss)..................................... $ 2,645 $(11,045) $(27,833) $(34,917)
======= ======== ======== ========
Weighted average common shares outstanding used for
basic earnings (loss) per share..................... 49,850 40,768 43,958 40,791
Effect of dilutive common stock options............... 9,723 -- -- --
------- -------- -------- --------
Weighted average common shares outstanding used for
diluted earnings (loss) per share................... 59,573 40,768 43,958 40,791
------- -------- -------- --------
Basic earnings (loss) per share....................... $ 0.05 $ (0.27) $ (0.63) $ (0.86)
======= ======== ======== ========
Diluted earnings (loss) per share..................... $ 0.04 $ (0.27) $ (0.63) $ (0.86)
======= ======== ======== ========
</TABLE>
For the three months ended March 31, 2000 approximately 55,000 potentially
dilutive common shares were not included in the calculation of net income per
share, as they are considered antidilutive. For the three months ended
March 31, 1999 approximately 284,000 potentially dilutive common shares were not
included in the calculation of net diluted loss per share, as they are
considered antidilutive. For the nine months ended March 31, 2000 and 1999
approximately 8,055,000 and 185,000 of potentially dilutive common shares,
respectively, were not included in the calculation of net diluted loss per
share, as they are considered antidilutive.
5. STOCKHOLDERS' EQUITY
On July 28, 1999, the Company announced that its Board of Directors approved
a stock repurchase plan authorizing the purchase of up to four million shares of
the Company's common stock. Repurchases
7
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
will be made from time to time in open market or privately negotiated
transactions over one year, unless further extended by the Board. From July 28,
1999 to March 31, 2000, the Company repurchased 381,000 shares of the 4 million
shares authorized at a cost of approximately $1.8 million.
On January 11, 2000, the shareholders of the Company approved an increase of
70 million shares to the authorized number of shares of common stock bringing
the total authorized from 60 million to 130 million shares.
6. ACQUISITIONS & DIVESTITURES
On January 11, 2000, the shareholders of both the Company and Xionics
Document Technologies, Inc. (Xionics) approved a definitive acquisition
agreement. Xionics designs, develops and markets innovative software and silicon
solutions for printing, scanning, copying, processing and transmitting digital
documents to computer peripheral devices that perform document imaging
functions. Such devices include printers, copiers, scanners and multifunction
peripherals that perform a combination of these imaging functions.
Under the terms of the acquisition agreement, Oak issued approximately
9.5 million shares of its common stock and paid approximately $34.7 million in
cash to acquire all of the common stock of Xionics. The Company recorded a
special charge of approximately $9.9 million against earnings in the third
fiscal quarter of 2000 in order to write off the cost of in-process research and
development acquired in the merger. The amount allocated to the in-process
research and development charge was determined through an established valuation
technique used in the high technology industry. The amount allocated to in-
process research and development was expensed upon acquisition, as technological
feasibility had not been established and no alternative uses exist. In addition
to the $9.9 million charge taken, approximately $45.9 million (representing the
fair value of net intangible assets acquired in the merger) has been recorded as
intangible assets on the Company's balance sheet and is being amortized over
three to five years. The transaction has been accounted for under the purchase
method of accounting, and accordingly, the financial statements include the
results of operations of Xionics form the date of acquisition.
The amounts and components of the purchase price and the allocation of the
purchase price to assets purchased are as follows:
<TABLE>
<CAPTION>
<S> <C>
Cash........................................................ $34,715
Common stock................................................ 36,793
Fair value of Xionics stock options assumed................. 8,380
-------
Total purchase price...................................... $79,888
-------
Fair value of net tangible assets of Xionics................ $24,051
Intangible assets and goodwill.............................. 45,979
Purchase of in-process research and development............. 9,858
-------
Total net tangible and intangible assets acquired......... $79,888
-------
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of the Oak and Xionics as if the acquisition had
occurred as of the beginning of fiscal 2000 and 1999, after giving effect to
certain adjustments, including amortization of intangibles. The unaudited pro
forma
8
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. ACQUISITIONS & DIVESTITURES (CONTINUED)
financial information does not necessarily reflect the results of operations
that would have occurred had the combined companies constituted a single entity
during such periods, and is not necessarily indicative of results which may be
obtained in the future.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
In thousands except for per share data:
Pro forma revenues...................................... $ 67,939 $ 80,684
Pro forma net loss...................................... (30,098) (41,261)
Pro forma basic and diluted (loss) per share............ $ (0.58) $ (0.81)
======== ========
</TABLE>
In the third quarter of fiscal 2000, the Company recorded a special charge
of $1.4 million primarily due to the planned abandonment of existing Imaging
group facilities in favor of a location where the combined companies can be
located. The company has negotiated a lease for office space in Woburn,
Massachusetts where it plans to combine the Imaging business unit in
August 2000.
On January 19, 2000, the Company announced the sale of its broadband
business group located in the United Kingdom and associated Intellectual
Property in the United States to Conexant Systems, Inc. Under the terms of the
agreement, Oak received $24.9 million in cash and stock from Conexant. The
Company realized a gain of $22.4 million during the third fiscal quarter of 2000
from the sale.
During the second quarter of fiscal 2000 the Company made an equity
investment in a start-up venture, Earjam.com, with a first payment of
approximately $1.0 million for a minority equity position. The Company recorded
a special charge of $0.2 million against earnings in the second fiscal quarter
of 2000 to write-off the amount of the investment allocated to in-process
research and development. The Company made an additional $2.0 million payment in
Earjam.com during the third quarter of fiscal 2000 and recorded an additional
special charge of $0.3 million in the third fiscal quarter of 2000 to write-off
the remaining amount of the investment allocated to in-process research and
development. The amounts allocated to the in-process research and development
charges during the second and third quarters of fiscal 2000 were determined
through an established valuation technique used in the high technology industry.
The amount allocated to in-process research and development was expensed upon
acquisition, because technological feasibility had not been established and no
alternative uses exist. The investment has been accounted for under the equity
method of accounting.
Under the terms of a merger agreement with Xerographic Laser Images
Corporation ("XLI") dated August 11, 1999, the Company may be obligated to pay
up to an additional $10.3 million if revenues from products utilizing XLI's
technologies are in excess of a base amount of $3.7 million for each year of a
3 year period ending December 31, 2000. To date, revenues have not exceeded the
base amount and, accordingly, no additional payments to XLI have been made or
accrued for.
7. CONTINGENCIES
The Company and various of its current and former officers and Directors are
parties to a consolidated class action lawsuit filed on behalf of all persons
who purchased or acquired the Company's common
9
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
7. CONTINGENCIES (CONTINUED)
stock (excluding the defendants and parties related to them) for the period
July 27, 1995 through May 22, 1996. This state court proceeding, designated IN
RE OAK TECHNOLOGY SECURITIES LITIGATION, Master File No. CV758510 is pending in
Santa Clara County Superior Court in Santa Clara, California. The lawsuit
originally named as defendants several of the Company's venture capital fund
investors, two of its investment bankers and two securities analysts. The
plaintiffs originally alleged violations of California securities laws and
statutory deceit provisions as well as breaches of fiduciary duty and abuse of
control. The plaintiffs seek unspecified monetary damages. After several rounds
of demurrers, the only remaining claim is the California Corporations Code
Sections 25400/25500 cause of action against the Company, four officers and the
Company's investment bankers and securities analysts. On July 16, 1998, the
state court provisionally certified a national class of all persons who
purchased the Company's stock during the class period. The class was
provisionally certified with the order held in abeyance pending resolution of
the question of whether a nationwide class may bring a California Corporations
Code Sections 25400/25500 claim. This issue was resolved in favor of allowing
such nationwide class actions by the California Supreme Court, Case
No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION
appeal by the California Supreme Court. The defendants and certain third parties
have produced documents and a number of depositions have been taken, including
the depositions of those officers of the Company who were officers during the
class period. Discovery will be concluded on June 5, 2000. This action is set
for trial on July 3, 2000. Based on its current information, the Company
believes this suit to be without merit and will defend its position vigorously.
Although it is reasonably possible the Company may incur a loss upon conclusion
of these claims, an estimate of any loss or range of loss cannot be made. No
provision for any liability that may result upon adjudication has been made in
the Company's Consolidated Financial Statements.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK
TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit, which
asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the above described class
actions. The plaintiffs are seeking monetary damages, equitable relief and an
accounting for the defendants' sales of shares of the Company's common stock.
Based on its current information, the Company believes suits to be without merit
and will defend its position vigorously. Although it is reasonably possible the
Company may incur a loss upon conclusion of these claims, an estimate of any
loss or range of loss cannot be made. No provision for any liability that may
result upon adjudication has been made in the Company's Consolidated Financial
Statements.
The Company is party to various other legal proceedings, including a number
of patent-related matters. In the opinion of management these other legal
proceedings are not likely to have a material adverse effect, if any, on the
Company's consolidated financial position or overall results of operations. In
connection with these matters, however, the Company has incurred, and expects to
continue to incur, legal and other expenses.
If any of the above pending actions are decided adversely to the Company, it
would likely have a material adverse affect on the Company's financial condition
and results of operations.
10
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SEGMENT INFORMATION
SFAS No. 131 establishes standards for the reporting by public business
enterprises of information about operating segments, products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way that management organizes the
operating segments within the Company for making operational decisions and
assessments of financial performance. The Company's chief operating
decision-maker is considered to be the chief executive officer (CEO).
For the first two quarters of fiscal year 2000, Oak Technology had three
reportable segments offering different product lines to each of its target
markets: Optical Storage, Consumer and Imaging. With the sale of the broadband
business to Conexant in early January 2000, the Company has two remaining
reportable segments: Optical Storage and Imaging. The Company evaluates
operating segment performance based on net revenues and direct operating
expenses of these segments. The accounting policies of the operating segments
are the same as those described in the summary of accounting policies. Imaging
segment information reported for the three months ended March 31, 2000 includes
the effects of the Xionics acquisition completed on January 11, 2000. The
Company does not allocate assets to its individual operating segments. No
reportable segments have been aggregated.
Information about reported segment income or loss is as follows for the
three and nine months ended March 31, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Revenues:
Optical Storage...................................... $12,205 $ 9,865 $ 15,846 $ 39,993
Imaging.............................................. 16,297 5,000 29,564 15,400
Consumer............................................. -- 1,100 4,264 2,400
------- ------- -------- --------
$28,502 $15,965 $ 49,674 $ 57,793
======= ======= ======== ========
Cost of Goods Sold and Direct Operating Expenses:
Optical Storage...................................... $13,532 $10,543 $ 26,038 $ 36,503
Imaging.............................................. 14,515 5,538 25,267 15,776
Consumer............................................. -- 4,494 10,065 14,542
------- ------- -------- --------
$28,047 $20,575 $ 61,370 $ 66,821
======= ======= ======== ========
Contribution Margin:
Optical Storage...................................... $(1,327) $ (678) $(10,192) $ 3,490
Imaging.............................................. 1,782 (538) 4,297 (376)
Consumer............................................. -- (3,394) (5,801) (12,142)
------- ------- -------- --------
$ 455 $(4,610) $(11,696) $ (9,028)
======= ======= ======== ========
</TABLE>
11
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
8. SEGMENT INFORMATION (CONTINUED)
A reconciliation of the totals reported for the operating segments to the
applicable line items in the consolidated condensed financial statements for the
three and nine months ended March 31, 2000, is as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Contribution margin from operating segments.......... $ 455 $ (4,610) $(11,696) $ (9,028)
Indirect operating expenses........................ 5,604 7,853 24,058 24,844
Amortization of intangibles........................ 3,888 1,328 7,888 3,614
Restructuring...................................... 1,420 -- 1,420 --
Acquired in-process research and development....... 9,858 -- 9,858 7,161
Total operating income (loss)........................ (20,315) (13,791) (54,920) (44,647)
-------- -------- -------- --------
Gain on sale of business........................... 22,378 -- 22,378 --
Other income....................................... 954 839 5,081 4,326
-------- -------- -------- --------
Income (loss) before taxes........................... $ 3,017 $(12,952) $(27,461) $(40,321)
======== ======== ======== ========
</TABLE>
Indirect operating expenses includes all costs and expenses not specifically
charged to the operating segments in the financial information reviewed by the
Company's chief decision making officer. These include various overhead and
indirect sales expenses as well as corporate marketing and general and
administrative expenses.
The Company maintains significant operations in the United States, Taiwan
and Japan. Activities in the United States consist of corporate administration,
product research and development, logistics and worldwide sales and marketing
management. Foreign operations consist of regional sales and marketing and
administration.
The distribution of net revenues for the three and nine months ended
March 31, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue from unaffiliated customers originating from:
United States......................................... $ 8,525 $ 1,317 $13,520 $ 7,046
Japan................................................. 6,937 8,135 15,830 30,831
Korea................................................. 10,584 1,639 14,120 4,260
Taiwan................................................ 30 303 338 1,768
Other Asia............................................ 728 2,085 3,095 5,906
Europe................................................ 1,698 2,486 2,771 7,982
------- ------- ------- -------
$28,502 $15,965 $49,674 $57,793
======= ======= ======= =======
</TABLE>
12
<PAGE>
OAK TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. COMPREHENSIVE INCOME
The following table presents the calculation of comprehensive income as
required by SFAS 130. The components of comprehensive income, net of tax, are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss):..................................... $2,645 $(11,045) $(27,833) $(34,917)
Other comprehensive income (loss):
Change in unrealized gain (loss) on investments,
net.............................................. 944 (235) 784 (13)
------ -------- -------- --------
Total comprehensive income (loss)...................... $3,589 $(11,280) $(27,049) $(34,930)
====== ======== ======== ========
</TABLE>
10. SUBSEQUENT EVENTS
On April 24, 2000 the Company signed an Asset Purchase Agreement by and
between Oak, TCD Labs and the shareholders of TCD Labs. Under the agreement, the
Company paid $1.5 million for the net assets of TCD and may be liable for an
additional $1.5 million in contingent payments for the achievement of specific
milestones, as well as a percentage of the direct contribution margins, both of
which may be earned over the next three years.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL FINANCIAL INFORMATION CONTAINED HEREIN, THE
MATTERS DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
"FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED (THE "EXCHANGE ACT"). SUCH STATEMENTS INCLUDE DECLARATIONS REGARDING
THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS MANAGEMENT.
PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY SUCH FORWARD-LOOKING STATEMENTS ARE
NOT GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE A NUMBER OF RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
SET FORTH IN THIS ITEM 2, THOSE DESCRIBED ELSEWHERE IN THIS QUARTERLY REPORT AND
THOSE DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K/A FOR THE YEAR ENDED
JUNE 30, 1999, OTHER QUARTERLY REPORTS ON FORM 10-Q, FORM S-4, AND OTHER REPORTS
FILED UNDER THE EXCHANGE ACT.
GENERAL
The Company designs, develops and markets high performance embedded software
and integrated semiconductor solutions to original equipment manufacturers
worldwide that serve the optical storage and digital imaging markets. The
Company's products consist primarily of embedded software, integrated circuits
and supporting software and firmware to provide a complete solution for
customers, thereby enabling them to deliver cost effective, powerful systems to
end users for home and business use. The Company's mission is to be a leading
solutions provider for the storage and distribution of digital content.
The Company contracts with independent foundries to manufacture all of its
semiconductor products, enabling the Company to focus on its design strengths,
minimize fixed costs and capital expenditures and gain access to advanced
manufacturing facilities. The Company's foundries generally are not obligated to
supply products to the Company for any specific period, in any specific quantity
or at a specific price.
Excluding the gain of approximately $22.4 million from the sale of the
Company's broadband business group, the Company would have recorded its ninth
consecutive quarterly loss. Low revenues and continued losses are primarily due
to a product transition in the Company's optical storage business, which
historically has accounted for approximately 80% of the Company's revenues.
Volume shipments of its next generation CD-RW controllers are expected to
increase as the Company's OEM customers achieve production volumes. However, the
Company cannot predict the product's ultimate level of customer acceptance, or
if any, the impact of that acceptance on future operating results.
The Company's quarterly and annual operating results have been, and will
continue to be, affected by a wide variety of factors that could have a material
adverse effect on revenues and profitability during any particular period,
including competitive pressures on selling prices, availability and cost of
foundry capacity and raw materials, fluctuations in yield, loss of any strategic
relationships, the Company's ability to introduce new products in accordance
with OEM design requirements and design cycles, new product introductions by the
Company's competitors and market acceptance of product sold by both the Company
and its customers. To date, Oak has not experienced any material delays in its
wafer deliveries from its primary manufacturers. However, with the current
shortage of foundry capacity, which is expected throughout calendar 2000, there
can be no assurance that delays will not occur in the future.
In addition, the Company's operating results are subject to fluctuations in
the markets for its customers' products, particularly the consumer electronics
and personal computer markets, which have been extremely volatile in the past.
The Company has devoted a substantial portion of its research and development
efforts in recent quarters to developing chips used in Digital Video Disk
("DVD") systems, CD-RW drivers and inkjet multi-function peripherals. The
Company's DVD, CD-RW, and digital imaging products are subject to the new
product risks described in the preceding paragraph, including in particular the
Company's ability to timely introduce these products and the market's acceptance
of them, which could have a materially adverse effect on its operating results.
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<PAGE>
RESULTS OF OPERATIONS
NET REVENUES. Net revenues increased 79% to $28.5 million for the three
months ended March 31, 2000 from $16.0 million in the comparable period of
fiscal 1999. This was primarily the result of the additional revenues provided
by Xionics operations after its acquisition in January, 2000, and to a lesser
extent from an increase in shipments of the Company's newly introduced OTI9790
8X CD-RW controller. For the nine month period ended March 31, 2000, net
revenues decreased 14% to $49.7 million from $57.8 million in the comparable
period of fiscal 1999 due to overall product transitions in the optical storage
business as partially offset by the acquisition of the Xionics operations and
the recent success of the OTI9790 8X CD-RW controller.
Net revenues in the Optical Storage business segment were $12.2 million for
the third quarter of fiscal 2000, representing an 11% increase from the
segment's net revenues of $11.0 million reported in the third quarter of fiscal
1999. This increase is due to shipments of the Company's OTI9790 8X CD-RW
controller during the quarter. Optical Storage business segment revenues were
$20.1 million for the first nine months of fiscal 2000, representing a 53%
decrease from the segment's net revenues of $42.5 million reported in the
comparable period of fiscal 1999. This decrease is primarily the result of the
maturation of the CD-ROM market coupled with a loss of market share in Taiwan
and previous development delays in the Company's next-generation CD-RW
controller.
Net revenues for the Imaging business segment were $16.3 million for the
three months ended March 31, 2000, representing a 226% increase over the
$5.0 million reported in the third quarter of fiscal 1999. For the first nine
months of fiscal 2000, Imaging business segment revenues were $29.6 million,
representing a 92% increase from the segment's net revenues of $15.4 million
reported in the comparable period of fiscal 1999. These increases were primarily
due to the acquisition of Xionics Document Technologies, Inc, during the current
quarter and to a lesser extent increased revenues from the segment's traditional
compression codec and resolution enhancement products during first three and
nine months of fiscal 2000.
GROSS MARGIN. Cost of revenues includes the cost of wafer fabrication;
assembly and testing performed by third-party vendors; direct and indirect costs
associated with the procurement; scheduling and quality assurance functions
performed by the Company, and software development costs. The Company's gross
margin increased to 55.9% in the three months ended March 31, 2000, compared to
46.2% during the comparable period in the prior year. For the first nine months
of fiscal 2000 gross margin increased to 51.2% from 47.0% during the same period
of the prior year. These increases were primarily due to the inclusion of
Xionics software revenues with higher average gross margins than the Company's
traditional product gross margins.
Gross margin for the Optical Storage business segment was 40% for the third
quarter of fiscal 2000 and for the comparable quarter of the prior year and 31%
for the first nine months of fiscal 2000 compared to 42% for the first nine
months of the prior year. This decrease is primarily due to a shift in product
mix to lower margin products during fiscal 2000.
Gross margin for the Imaging business segment was 68% for the third quarter
of fiscal year 2000, compared to 59% reported in the third quarter of fiscal
1999 and 65% for the first nine months of fiscal 2000 compared to 61% for the
first nine months of the prior year. These increases were primarily due to the
inclusion of Xionics software revenues with higher average gross margins than
other imaging product gross margins.
The Company's overall gross margin is subject to change due to various
factors, including, among others, competitive product pricing, yields, wafer
costs, assembly and test costs and product mix. The Company expects that ASPs
for its existing products may continue to decline over time and that ASPs for
each new product may decline significantly over the life of the product. Wafer
Costs from the foundries may also increase over time and there is no assurance
that the Company will be able to pass these potential cost increases, if any, on
to the Company's OEM customers. In addition, given the extremely competitive
15
<PAGE>
nature of the optical storage market, the Company believes that gross margins
for new products in this market may be somewhat lower than historical levels.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development costs are
expensed as incurred. Research and development expenses of $12.3 million for the
three months ended March 31, 2000 increased $1.0 million, or 9.4%, from
$11.2 million in the comparable period of the previous fiscal year. This
increase was primarily due to the acquisition of Xionics Document
Technologies, Inc. during the quarter. For the first nine months of fiscal 2000,
research and development expenses of $36.1 million increased $1.9 million, from
$34.2 million in the comparable period of the previous fiscal year. The increase
was primarily due to charges totaling $1.2 million related to the write-off of
intangible assets due to the divestiture of the Company's consumer group,
$0.7 million related to the purchase of licensed technology used for research
and development, and write-offs of obsolete capital equipment of $0.5 million
during the second quarter of fiscal 2000. The Company will continue to invest
substantial resources in research and development of new products in the
Company's target markets: Optical Storage and Imaging.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (S,G&A) expenses increased by 2.2% to $8.8 million for the three
months ended March 31, 2000 from $8.6 million in the comparable period of the
prior year. This increase is primarily due to the acquisition of Xionics
Document Technologies during the quarter. For the first nine months of fiscal
2000, selling, general and administrative expenses decreased by 6.7% to
$25.0 million from $26.8 million during the comparable period of the prior year.
This decrease is primarily due to lower consulting and legal fees during fiscal
2000. S,G&A expenses increased significantly as a percentage of net revenues for
the current fiscal periods over the comparable periods in the prior year due
primarily to a significant decrease in the Company's net revenues in the
comparison periods.
ACQUIRED IN-PROCESS TECHNOLOGY. During the third quarter of fiscal 2000 the
Company charged $9.9 million and $0.3 million to operations to record the amount
of the Xionics and Earjam.com purchase price allocated to in-process research
and development, respectively. For the nine months ended March 31, 2000, the
Company charged $9.9 million and $0.5 million to acquired in-process technology
related to the acquisition of Xionics Technologies, Inc. and to the equity
investment in Earjam.com, respectively. The amounts charged were determined
through an established valuation technique used in the high technology industry.
The amount allocated to in-process research and development was expensed upon
acquisition, as technological feasibility had not been established and no
alternative uses exist.
During the first quarter of fiscal 1999, the Company acquired ViewPoint and
XLI. Of the combined purchase prices of the two companies, $7.2 million was
allocated to IPR&D and was charged to operations ($4.8 million related to
ViewPoint, $2.4 million related to XLI). Substantially all of the remainder of
the purchase price of each of the two companies (aside from allocations to
tangible assets totaling $0.9 million) has been allocated to purchased
technology and other intangible assets (totaling $8.8 million) recorded on the
Company's balance sheet, and will be amortized to operations on a straight-line
basis over three years. During the second and third quarters of fiscal 2000, the
Company made an equity investment in Earjam.com--an Internet based company to
facilitate the downloading of music from the Internet. Of the $3.0 million
investment in Earjam, $0.5 million was allocated to IPR&D and was charged to
operations. The remaining investment of approximately $2.5 million is accounted
for under the equity method of accounting.
RESTRUCTURING. During the third quarter of fiscal 2000 the Company accrued
$1.4 million as restructuring charges. Approximately $1.2 million was accrued
for the planned abandonment of its leased facility in Andover, Massachusetts.
The Company negotiated a new lease for 82,000 square feet of office space in
Woburn, Massachusetts and plans to combine its Imaging group at that new
location in August 2000. Approximately $0.2 million was accrued for employee
severance. The Company expects to pay for these charges during fiscal 2001.
16
<PAGE>
NONOPERATING INCOME. During the third quarter of fiscal 2000, the Company
sold its broadband business unit located in the United Kingdom for
$24.9 million in cash and stock and recorded a nonoperating gain of
$22.4 million related to the sale.
OTHER NONOPERATING INCOME. During the third quarter of fiscal 2000, other
nonoperating income increased to $1.0 million from $0.8 million during third
quarter of fiscal 1999. For the first nine months of fiscal 2000, other
nonoperating income increased to $5.1 million from $4.3 million in the
comparable period of the prior year. This increase is primarily due to increased
interest income from higher average short-term investments and higher interest
rates combined with foreign currency translation gains (related primarily to the
strengthening of the Japanese Yen) recognized during the periods.
INCOME TAXES. Management believes that sufficient future taxable income may
not be generated in order to realize all the Company's deferred tax assets.
Accordingly, during fiscal 1999 a full valuation allowance against deferred tax
assets was established. Given this, no income tax benefit was recognized with
respect to operating losses for the first nine months of fiscal 2000. The
Company recorded an income tax provision for foreign income tax withholding of
$0.4 million during the third quarter of fiscal 2000.
FACTORS THAT MAY AFFECT FUTURE RESULTS
EXPECTED BENEFITS OF THE MERGER WITH XIONICS DOCUMENT TECHNOLOGIES, INC. MAY
NOT BE ACHIEVED.
In order to realize the benefits of the merger, the Company will have to
effectively integrate the operations and management acquired in the merger,
together with technical research and development, sales and marketing, business
development efforts and also retain key personnel in this process. The
successful execution of these events will involve considerable risk and may not
be successful. If the Company is not successful in accomplishing this
integration, then the objectives of the merger, including improved operating
results will not be realized. A key benefit of the merger is perceived to be the
Company's opportunity to transition from being an integrated circuits provider
to a complete solutions provider for the growing digital office market, and
thereby, gain a larger share of the products outsourced by the Company's
original equipment manufacturer, or OEM, customers. The Company believes that it
will have the resources and technology necessary to be a leading supplier to the
digital office market and will offer one of this industry's most integrated and
flexible platforms. However, if the integration is not successful or is
unexpectedly delayed or more expensive than contemplated, the Company will not
realize these benefits to the fullest extent possible.
If the benefits of the merger to Company stockholders do not exceed the
costs associated with the merger, which costs include integration costs and the
dilution to the Company's stockholders resulting from the issuance of shares in
connection with the merger, then the financial results of the Company, including
earnings per share, could be adversely affected.
The market price of the Company's common stock could decline as a result of
the merger if:
- The integration is unsuccessful or proves to be more expensive or
time-consuming than expected;
- The Company does not achieve the perceived benefits of the merger as
rapidly or to the extent anticipated by third party and other financial
analysts; or
- The effect of the merger on the Company's financial results are not
consistent with the expectations of third party and other financial
analysts.
THE COMPANY'S FUTURE FINANCIAL RESULTS WILL BE ADVERSELY IMPACTED BY THE
COSTS OF THE MERGER AND MAY BE FURTHER ADVERSELY IMPACTED BY THE ACCOUNTING
TREATMENT OF THE MERGER.
The Company took a special charge of approximately $9.9 million against
earnings in the third fiscal quarter of 2000 in order to write off the cost of
in-process research and development acquired in the merger. The Securities and
Exchange Commission has recently begun disapproving large in-process
17
<PAGE>
research and development write-offs. If the write-off is not as the Company
expects, a larger portion of the purchase price paid in the merger will have to
be allocated to the assets on the Company's balance sheet and amortized over a
period of time. This in turn will have an adverse effect on the Company's
earnings per share throughout the amortization period, as a small amount of the
asset booked will be treated as an expense each quarter. In addition to the
$9.9 million charge taken, approximately $45.9 million (representing the fair
value of net intangible assets acquired in the merger) will be recorded on the
Company's balance sheet and amortized over three to five years.
THE COMPANY HAS EXPERIENCED AND EXPECTS TO CONTINUE TO EXPERIENCE
SIGNIFICANT PERIOD-TO-PERIOD FLUCTUATIONS IN ITS REVENUES AND OPERATING RESULTS,
WHICH MAY RESULT IN VOLATILITY IN THE PRICE OF ITS STOCK
The Company's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Accordingly, you should not rely on period-to-period
comparisons as an indication of future performance. In addition, these
variations may cause the Company's stock price to fluctuate. If quarterly
results fail to meet public expectations, the price of the Company's stock may
decline.
The Company's revenues and operating results are affected by a wide variety
of factors, including factors that generally affect everyone in its industry and
factors that are more specific to its business and product lines. The principal
risk the Company faces in its business and one which has had, and is expected to
continue to have, a significant effect on its revenues and operating results, is
its dependence on the optical storage market. Other factors specific to its
business and product lines include the following:
- the Company's ability to diversify its product offerings and the markets
for its products;
- The current market for its products;
- The loss or gain of important customers;
- The timing of significant orders and order cancellations or reschedulings;
- Pricing policy changes by the Company and its competitors and suppliers;
- The potential for significant inventory exposure;
- The timing of the development and introduction of new products or enhanced
versions of existing products;
- Market acceptance of new products;
- Increased competition in product lines;
- Barriers to entry into new product lines;
- The competitiveness of the Company's customers; and
- The inability to obtain foundry capacity
The Company is in the process of diversifying its business so that its
product offerings include not only integrated circuits, but also embedded
software and platform solutions. However, a significant portion of the Company's
revenue will continue to come from its semiconductor product offerings. The
semiconductor industry historically has been characterized by rapid
technological change and product obsolescence, cyclical market patterns and
seasonal customer demand, significant price erosion, periods of over-capacity
and under-capacity, periods of production shortages, variations in manufacturing
costs, including raw materials, and yields, and significant expenditures for
capital equipment and product development. In addition, the industry has
experienced significant economic downturns at various times, characterized by
diminished product demand and accelerated erosion of product prices. Any
downturns in the industry may cause the Company's business, financial condition
and results of operations to suffer.
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<PAGE>
The Company has experienced in the past and may in the future experience
substantial period-to-period fluctuations in operating results due to these
general semiconductor industry conditions. The downturns in the industry often
occur in connection with, or in anticipation of, maturing product cycles (of
both the semiconductor companies and their customers) and declines in general
economic conditions. These downturns have been characterized by abrupt
fluctuations in product demand, production over-capacity and subsequent
accelerated erosion of average selling prices, and in some cases have lasted for
more than a year. Even if customers' aggregate demand were not to decline, the
availability of additional capacity can adversely impact pricing levels, which
can also depress revenue levels.
In addition, the Company's quarterly operating results could be materially
adversely affected by legal expenses incurred in connection with, or any
judgment or settlement in, the Company's ongoing stockholder legal proceedings.
See "The Company is a Defendant in Several Lawsuits."
THE COMPANY HAS A RECENT HISTORY OF OPERATING LOSSES AND MAY NOT BECOME OR
REMAIN PROFITABLE
Although the Company experienced periods of profitability following its
reincorporation in Delaware in October 1994 in connection with its initial
public offering (the Company was first incorporated in California in 1987), the
Company has at times sustained significant losses since the initial public
offering and may not become profitable in the future. While the Company had net
income of $5.9 million in fiscal 1998, its current loss trend began in calendar
year 1998, resulting in an operating loss of $9.1 million for fiscal 1998 and an
operating loss of $61.9 million for fiscal 1999 (in each case before adjustments
for non-operating income or loss, or income tax expense or benefit). The
Company's operating losses generally have been due to its dependence on its
optical storage business, which historically has accounted for approximately 80%
of its business. In fiscal 1998, the Company failed to timely and/or adequately
develop its integrated CD-ROM controller product and second generation CD-RW
product. Consequently, for fiscal 1999, the Company was dependent on mature
CD-ROM products and its first generation CD-RW product for its revenue. These
mature products continued to decline in both unit sales volume and average sales
price in each successive quarter. In the third quarter of fiscal 2000, the
Company achieved volume production with its next generation CD-RW product.
However, given certain evolving dynamics in the CD-RW market, including the rate
of adoption of this technology, competition and selling prices, the Company
cannot accurately predict the product's impact on operating results nor can any
assurance be given that revenue from this product will enable the Company to
return to profitability.
The Company expects that the average selling prices (ASP's) for its optical
storage products will continue to decline over time and that ASPs for each new
optical storage product will decline significantly over the life of the product.
In addition, given the extremely competitive nature of the optical storage
market, the Company believes that gross margins for new products in its optical
storage market will be lower than historical levels. However, the Company
believes that with the additional planned software and solution product
offerings from the Company's Optical and Imaging Groups, gross margins in
general will increase in the future.
If the Company incurs additional losses or fails to achieve profitability in
the future, this will significantly harm its business and may affect the trading
price of its common stock.
THE COMPANY'S FINANCIAL PERFORMANCE IS HIGHLY DEPENDENT ON THE TIMELY AND
SUCCESSFUL INTRODUCTION OF NEW PRODUCTS
The markets for the Company's products are characterized by evolving
industry standards, rapid technological change and product obsolescence. The
Company's financial performance is highly dependent upon timely and successful
execution of next generation and new products, including those from acquired
businesses, particularly in light of the Company's past failure to timely
develop new products for the optical storage market in fiscal 1998 and 1999. The
failure to timely and successfully introduce next generation and new products
that achieve market acceptance in the future could seriously damage the
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<PAGE>
Company's business, financial condition and results of operations. Specifically,
the Company's performance is highly dependent upon the successful development
and timely introduction of its next generation CD-RW controller, combination DVD
and CD-RW controller, MPEG-2 decoder for the DVD player market, and embedded
imaging processing solutions for the digital office market, in particular,
embedded digital color copier technology and image processing chips for
multifunction peripherals.
In the optical storage market, particularly DVD, a variety of standards and
formats are being proposed, making it difficult to develop product to market
requirements, and making it even more difficult for the market to develop.
Product delay's in the Company's Optical Storage Group have resulted primarily
from difficulties in allocating engineering personnel among competing projects,
engineering resource limitations, and unanticipated engineering complexity.
Although recently, the Company timely introduced its next generation CD-RW
product and refocused its Optical Storage Group on a defined product roadmap,
there can be no assurance that these or other factors will not contribute to
future delays. In the digital office market in which the Company's recent
acquired business competed with software products and the Company with
integrated circuits, the Company will need to address a variety of other factors
related to that market with respect to new product development. Product delays
in the past in both the Company's Imaging Group and its recently acquired
business have resulted from numerous factors such as changing OEM customer
product specifications, difficulties in allocating engineering personnel among
competing projects, other resource limitations, difficulties with independent
contractors, changing market or competitive requirements and unanticipated
engineering complexity. There can be no assurance that these or other factors
will not contribute to future delays; that OEM customers will tolerate those
delays; or that delayed office devices, once introduced, will meet with market
acceptance or success. Among other technological changes, embedded PDF and color
capability are rapidly emerging as market requirements for printers and other
imaging devices. Some of the Company's competitors have the capacity to supply
these solutions, and some of their solutions are well-received in the
marketplace. The Company faces the challenges of developing products that will
require greater color and image complexity capability including web-based
documents, and to work with higher performing devices in networked environments.
Any significant inability to meet these challenges with the development of
products that can effectively compete in the OEM software and solutions market
could cause future results of operations to differ materially from current
expectations.
Due to the design complexity of the Company's products, especially with the
increased levels of integration that are required, the Company has previously
experienced delays in completing development and introduction of new products
for the optical storage and the digital office markets. In addition, in light of
the short product life cycles associated in the markets related to acquired
businesses, any delay or unanticipated difficulty associated with new product
development or introduction could result in a material adverse effect on the
Company's business, results of operations and financial condition.
No assurance can be given that the Company will successfully identify new
product opportunities and develop and bring new products to market in a timely
manner or that its products will be selected for design into the products of its
targeted customers. Also, there can be no assurance that the products of the
Company's customers will be successfully introduced into the market. If the
Company fails in its new product development efforts or its products fail to
achieve market acceptance, its revenues will decline and its business, financial
condition and results of operations will be severely damaged.
THE COMPANY'S FUTURE REVENUES ARE HIGHLY DEPENDENT ON SALES OF ITS CD-RW
CONTROLLER PRODUCT
The Company's future revenue generation is highly dependent on its recently
introduced and next generation CD-RW product as well as its combination DVD and
CD-RW product. The Company is no longer developing any CD-ROM controllers, but
since the early part of fiscal 1999 has been instead focusing its development
efforts on controllers for CD-RW and DVD drives. If the Company's recently
introduced CD-RW product fails to achieve market acceptance, it will need other
sources of revenue to offset the previous discontinuation of sales of its CD-ROM
controllers. In fiscal 1999, revenue generated
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from the Company's optical storage CD-ROM and CD-R/RW businesses declined 73%
and 36%, respectively, compared to the previous year, primarily due to delays in
the development of the next-generation integrated CD-ROM device and CD-RW
product. Similarly, in fiscal 1998, revenue generated from the Company's optical
storage CD-ROM business declined 25% from the prior year primarily due to delays
in the next-generation single chip and integrated CD-ROM device.
Although the Company was a leading supplier of CD-RW controllers, due to
product delays in its second generation CD-RW product, the Company lost its
leadership in this market. While the Company is currently in production with its
next generation CD-RW product with a few customers, no assurance can be given
this product or its successor will be competitive in the marketplace or carried
into production by targeted customers. In addition, even if this product proves
to be competitive and is accepted by targeted customers, there is no assurance
that the Company's customers will be successful.
The Company also faces increased competition in the emerging CD-RW and DVD
markets in both the PC and consumer segments. In addition, the current trend
toward integrating increased functionality on the CD-RW or DVD controller
potentially adds to the development and manufacturing costs of producing the
controller. The Company's revenues and gross margins from its optical storage
controller products will be dependent on the Company's ability to introduce
integrated products for the CD-RW and DVD markets in a commercially competitive
manner.
The decrease in the overall level of sales of, and prices for, the Company's
CD-ROM and older generation CD-RW controller product due to introductions of
newer products by competitors, the decline in demand for CD-ROM controller
products generally, product obsolescence and delays in the Company's integrated
CD-ROM controller product and its next generation CD-RW product, have had a
material adverse effect on the Company's business, financial condition and
results of operations, and will continue to have that effect if the Company
fails to successfully introduce new and next generation products to the optical
storage market.
The Company also anticipates that the royalty streams derived from OEMs'
shipments of office equipment containing the Company's products, and the sale of
related products and services to manufacturers of office equipment will account
for a significant portion of its revenue for the foreseeable future, although
not as significant as CD-RW for the remainder of fiscal 2000 and possibly fiscal
2001. In order to assure that the Company will derive future royalty streams
from the shipment of OEM devices, the Company and its OEMs are required to
develop and release in a regular and timely manner new office products with
increased speed, enhanced output resolutions, reduced memory requirements,
multiple functions, and network connectivity. The Company's OEMs are under
tremendous pressure to continually shorten the development cycles of these
products, leading to increased complexity and cost of development to the Company
and its OEMs. The Company's success will depend on, among other things: the rate
at which OEMS serving the digital office market outsource their technology
needs, market acceptance of the Company's technology and products and the office
devices of the Company's OEMs; the ability of the Company and its OEMs to meet
industry changes and market demands in a timely manner; achievement of new
design wins by the Company; successful implementation of the Company's
technology and products in new office devices being developed by its OEMs; and
successful marketing of those devices by the OEMs. Revenues from the office
equipment market will depend heavily on the Company's ability to integrate its
recent acquired business, Xionics Document Technologies, successfully in order
to develop complete product solutions and compete more effectively and
successfully against other suppliers and outsourcers as well as its own OEM
customers and other manufacturers.
THE COMPANY'S FUTURE REVENUES RELATED TO ITS IMAGING GROUP ARE HIGHLY
DEPENDENT ON ITS RELATIONSHIP WITH HEWLETT-PACKARD
Historically, contracts and licenses with Hewlett-Packard generated a
significant portion (66% in fiscal 1999) of the revenues related to the digital
office equipment business of Xionics Document Technologies, the company acquired
in the third quarter of fiscal 2000. In addition, the Company's Imaging Group
has
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sold integrated circuits to Hewlett-Packard in the past. For the first nine
months of fiscal 2000, sales of integrated circuits to Hewlett-Packard
represented 16% of Oak's Imaging Group's revenue. It is anticipated that revenue
from Hewlett-Packard will constitute a significant portion of the Company's
overall revenues going forward. Therefore, any significant disruption or
deterioration of its relationship with Hewlett-Packard would have a material
adverse effect on the Company's business, results of operations and financial
condition. The Company has met all of its obligations necessary to secure the
right to receive ongoing payments from Hewlett-Packard various agreements with
Hewlett- Packard, and is also current in performing its obligations under these
various agreements. However, there can be no assurance that the Company will
continue to meet all such obligations in the future. Hewlett- Packard has the
right to terminate each of its agreements with the Company if the Company
materially breaches its obligations under that agreement and does not cure such
breach within 30 days. In addition, competitors of the Company, including
without limitation Adobe Systems Inc., Peerless Systems Corporation, Electronics
for Imaging, Inc. and Texas Instruments are continuously engaged in efforts to
expand their business relationship with Hewlett-Packard at the Company's
expense, and are likely to continue those efforts in the future. There can be no
assurance that one or more of the Company's competitors will not be successful
in competing with the Company for some or all of Hewlett-Packard's business.
Further, although Hewlett-Packard has shown a strong tendency to outsource
embedded systems software and development for its office products over the past
several years, there can be no assurance that this trend will continue or that
Hewlett-Packard's internal development groups will not compete successfully for
some or all of this outsourced business in the future. Finally, any adverse
change in Hewlett-Packard's business, results of operations or financial
condition could in turn have a material adverse effect on the Company's
business, results of operations and financial condition.
THE COMPANY'S MARKETS ARE INTENSELY COMPETITIVE AND EXPERIENCE RAPID
TECHNOLOGICAL CHANGE
The markets in which the Company competes are intensely competitive and are
characterized by rapid technological change, declining average unit sales prices
and rapid product obsolescence. If the Company cannot successfully respond to
the technological advances of others or if its new products or product
enhancements do not achieve market acceptance, the Company's business, operating
results and financial condition could be seriously harmed. The Company expects
competition to increase in the future from existing competitors and from other
companies that may enter the Company's existing or future markets with solutions
that may be less costly or provide higher performance or additional features.
The Company's principal competitors in the optical storage market are MediaTek,
Toshiba and Ricoh; its principal competitors in the digital office market are
Adobe Systems, Inc., Peerless Systems Corporation, Electronics for
Imaging, Inc., and in-house, captive suppliers, and the Company expects
increased competition from the merchant market in the future. Many of these
existing competitors as well as those customers expected to compete in the
future have substantially greater financial, manufacturing, technical,
marketing, distribution and other resources, broader product lines and longer
standing relationships with customers than the Company. In addition, much of the
Companies success is dependent on the success of its OEM customers. The
Company's OEM customers in both the optical storage, and digital office markets
compete fiercely with one another for market share in a market characterized by
rapid development cycles, short product life cycles and ever-increasing consumer
demand for greater performance and functionality at reduced prices.
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The markets for most of the applications for the Company's products,
especially in the optical storage market, are characterized by intense price
competition. As the markets for these products mature and competition increases,
as has been the trend for the optical storage, the Company anticipates that
average sales prices on products will decline. If the Company is unable to
reduce costs sufficiently to offset declines in average sales prices or is
unable to successfully introduce new higher performance products with higher
average sales prices, operating results will be materially adversely affected.
The future growth of the digital office market is highly dependent on OEMs'
continuing to outsource an increasing portion of their product development work.
While the trend toward outsourcing on the part of the Company's OEM customers
has accelerated in recent years, any reversal of this trend could have a
material adverse effect on the Company's business, financial condition, and
results of operations. Similarly, significant market trends leading to changes
in the way the Company's competitors do business may enable them to compete more
effectively against the Company than they have in the past. For example, in
response to market demand, Adobe Systems, Inc. has recently begun licensing the
source code of its PostScript page description language interpreters to certain
development partners, including competitors of the Company. These changes, if
they enable competitors to compete more effectively for business from the
Company's customers, could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, changes
in strategy by the Company's competitors, for example price reductions, new
product introductions or new marketing/distribution methods, could make it more
difficult for the Company to compete effectively, cause reduced market demand
for the Company's products and/or render the Company's products obsolete.
There can be no assurance that the Company or its OEM customers will be able
to compete successfully against current or future competitors, or that
competitive pressures faced by it and its customers will not result in reduced
revenues and profit margins and otherwise seriously harm its business, financial
condition and results of operations.
THE COMPANY MAY BE UNABLE TO PROTECT ITS INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS, WHICH MAY AFFECT ITS ABILITY TO COMPETE
The Company's ability to compete is affected by its ability to protect its
proprietary information. The Company considers its technology to be proprietary
and relies on a combination of patents, trademarks, copyrights, trade secret
laws, confidentiality procedures and licensing arrangements to protect its
intellectual property rights. However, these measures afford only limited
protection. The Company's competitors may be able to effectively design around
the Company's patents. There can be no assurance that any of the Company's
patents will not be challenged, invalidated or circumvented, or that the rights
granted under those patents will provide competitive advantages to the Company.
Moreover, while the Company holds or has applied for patents relating to the
design of its products, some of its products are based in part on standards, for
which it does not hold patents or other intellectual property rights. In
addition, the laws of certain foreign countries in which the Company's products
are or may be manufactured or sold, including various countries in Asia, may not
protect the Company's products or intellectual property rights to the same
extent as do the laws of the United States and thus make the possibility of
piracy of the Company's technology and products more likely. There can be no
assurance that the steps taken by the Company to protect its proprietary
information will be adequate to prevent misappropriation of its technology or
that the Company's competitors will not independently develop technologies that
are substantially equivalent or superior to the Company's technology. Moreover,
the Company intends to seek additional international and United States patents
on its technology. There can be no assurance that additional patents will issue
from any of the Company's pending applications or applications in preparation,
or be issued in all countries where the Company's products can be sold, or that
any claims allowed from pending applications or applications in preparation will
be of sufficient scope or strength to provide meaningful protection or any
commercial advantage to the Company.
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The Company also generally enters into confidentiality agreements with its
employees and consultants and confidentiality and license agreements with its
customers and potential customers, and limits access to and distribution of the
source and object code of its software and other proprietary information. With
respect to its page description language software and drivers for the digital
office market and in limited circumstances with respect to firmware and drivers
for its optical storage products, the Company grants licenses that give its
customers access to and restricted use of the source code of the Company's
software which increases the likelihood of misappropriation or misuse of the
Company's technology. Accordingly, despite the Company's precautions, it may be
possible for unauthorized third parties to copy certain portions of the
Company's technology or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the steps the Company takes will
be adequate to prevent misappropriation of its technology or to provide an
adequate remedy in the event of a breach or misappropriation by others.
Furthermore, the Company may initiate claims or litigation against third
parties for infringement of the Company's proprietary rights or to establish the
validity of its proprietary rights and in the past has incurred significant
legal expenses in connection with claims of this type it has initiated. Any
litigation by or against the Company could result in significant expense to the
Company and divert the efforts of its technical and management personnel,
whether or not that litigation results in a favorable determination for the
Company. In the event of an adverse result in any litigation, the Company could
be required to pay substantial damages, cease the manufacture, use and sale of
infringing products, expend significant resources to develop non-infringing
technology, discontinue the use of certain processes or obtain licenses to the
infringing technology. There can be no assurance that the Company would be
successful in developing new technology or that those licenses would be
available on reasonable terms, or at all, and any development or license could
require the Company's expenditures of substantial time and other resources.
THE COMPANY MAY BE UNABLE TO OBTAIN THIRD PARTY INTELLECTUAL PROPERTY RIGHTS
AND/OR MAY BE LIABLE FOR SIGNIFICANT DAMAGES
Certain technology used in the Company's products is licensed from third
parties, and in connection with these licenses, the Company is required to
fulfill confidentiality obligations and, in some cases, pay royalties. Some of
the Company's products, require various types of copy protection software that
the Company must license from third parties. Should the Company lose its rights
to, or be unable to obtain the necessary copy protection software, the Company
would be unable to sell and market certain of its products. The Company's
agreements with third parties often have no specified term and may be terminated
by either party in the event of breach by the other. The Company's business
could be adversely affected by the loss for any reason of these third-party
agreements. Given the trend to include increasing levels of functionality on a
chip, in the future it may be necessary or desirable for the Company to seek
additional licenses to intellectual property rights held by third parties or
purchase products manufactured and/or sold by third parties with respect to some
or all of its product offerings. There can be no assurance that those licenses
or purchases will be available on terms acceptable to the Company, if at all.
The inability of the Company to enter into those license arrangements on
acceptable terms or to maintain its current licenses on acceptable terms could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, the semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights, which has resulted in
significant, often protracted and expensive litigation. The Company or its
foundries may, from time to time, be notified of claims that the Company may be
infringing patents or other intellectual property rights owned by third parties.
If it is necessary or desirable, the Company may seek licenses under those
patents or other intellectual property rights. However, there can be no
assurance that licenses will be offered or that the terms of any offered
licenses will be acceptable to the Company. The failure to obtain a license from
a third party for technology used by the Company could cause the Company to
incur substantial liabilities and suspend the manufacture of products or the use
by the Company's foundries of processes requiring the technology.
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The Company has historically indemnified its customers for certain costs and
damages of patent infringement in circumstances where the Company's product is
the factor creating the customer's infringement exposure. This practice
generally excludes coverage in circumstances where infringement arises out of
the combination of the Company's products with products of others or where
infringement arises based on modifications made by the customer to the Company's
products. This indemnification practice, however, could have a material adverse
effect on the results of operations.
Although patent disputes in the semiconductor industry have often been
settled through cross-licensing arrangements, the Company may not be able in any
or every instance, to settle an alleged patent infringement claim through a
cross-licensing arrangement. The Company has a more limited patent portfolio
than many of its competitors. If a successful claim is made against the Company
or its customers and a license is not made available to the Company on
commercially reasonable terms or the Company is required to pay substantial
damages or awards, the Company's business, financial condition and results of
operations would be materially adversely affected.
THE COMPANY DEPENDS ON THIRD PARTY FOUNDRIES AND VENDORS TO MANUFACTURE
PRODUCTS
The Company contracts with independent foundries to manufacture a majority
of its products and with independent vendors to assemble and test these
products. The Company's failure to adequately manage its relationships with
these foundries and vendors could negatively impact its ability to manufacture
and sell its products and its results of operations.
The Company relies on its foundries to allocate to the Company a portion of
their foundry capacity sufficient to meet its needs to produce products of
acceptable quality and with acceptable manufacturing yield and to deliver
products to the Company in a timely manner. These foundries fabricate products
for other companies and some manufacture products of their own design. If these
foundries fail or are unable to satisfy the Company's product, quality and other
requirements, the Company's business, financial condition and results of
operation could suffer.
The Company also relies on third-party subcontractors to assemble and test
its products. The failure of any of these subcontractors to meet the Company's
production requirements could cause the Company's business, financial condition
and operating results to suffer.
The Company's reliance on independent manufacturers and third party assembly
and testing vendors involves a number of additional risks, including:
- The loss of any foundry as a supplier;
- Inability to expand foundry capacity in a period of increased demand for
the Company's products;
- Inability to obtain timely and adequate deliveries from current or future
suppliers;
- Delays in shipments of the Company's products;
- Disruption of operations at any of the Company's manufacturing facilities;
- Product defects and the difficulty of detecting and remedying product
defects;
- The unavailability of, or interruption in access to, certain process
technologies; and
- Reduced control over delivery schedules, quality assurance and costs.
As the Company generally does not use multiple services of supply for its
products, the consequences of these factors occurring is magnified.
During the third calendar quarter of 1999, Taiwan, the location of the
Company's primary wafer manufacturer, Taiwan Semiconductor Manufacturing
Company, experienced a severe earthquake. To date, the Company has not
experienced any material delays of its wafer deliveries from its primary
manufacturer. However, there is a current shortage of foundry capacity that is
expected to last at least through
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calendar 2000. Although the Company believes it has sufficient capacity to meet
its needs through calendar 2000, the Company has no firm commitments in place,
and therefore, there is no assurance that the Company will be able to secure
capacity for its manufacturing needs and/or not experience delays in the future.
THE COMPANY'S FAILURE TO ACCURATELY FORECAST DEMAND FOR ITS PRODUCTS COULD
NEGATIVELY IMPACT ITS RESULTS OF OPERATIONS
Under its foundry agreements, the Company is required to place
non-cancelable orders and purchase its products on an approximately three-month
rolling basis. The Company's customers, on the other hand, generally place
purchase orders with the Company less than four weeks prior to delivery that may
be rescheduled or under certain circumstances may be cancelled, without
significant penalty. This limits the Company's ability to react to fluctuations
in demand for its products. If the Company overestimates the product necessary
to fill orders, or fails to foresee a technology change that could render a
product obsolete, it will build excess inventories which could harm its gross
margins and operating results. If the Company underestimates the product
necessary to fill orders, it may not be able to obtain an adequate supply of
products which could harm its revenues. The Company has experienced inventory
write-offs of its optical storage products in the past primarily due to
unforeseen and rapid changes in its customers' demand, in particular speed
changes, and consequently experienced rapid product obsolescence.
Product supply and demand fluctuations common to the semiconductor industry
are historically characterized by periods of manufacturing capacity shortages
immediately followed by periods of overcapacity, which are caused by the
addition of manufacturing capacity in large increments. The industry has moved
from a period of capacity shortages in 1995 to what has been a period of excess
capacity for approximately the last twelve months, and has now returned to a
capacity shortage situation. No assurance can be given that the Company can or
will achieve timely, cost-effective access to that capacity when needed.
THE COMPANY DERIVES A LARGE PORTION OF ITS REVENUES FROM INTERNATIONAL
SALES, DEPENDS ON FOREIGN SUBCONTRACTORS AND IS SUBJECT TO THE RISKS OF DOING
BUSINESS IN FOREIGN COUNTRIES
A large portion of the Company's revenues are derived from international
sales. International sales, principally to Japan, Korea, Singapore and Europe,
accounted for approximately 73% and 88% of the Company's net revenues for the
first nine months of fiscal 2000 and 1999, respectively. The Company also
depends on foreign subcontractors for the manufacture of its products. Most of
the Company's foreign sales and purchases are negotiated in US dollars, although
invoicing is often done in local currency. As a result, the Company may be
subject to the risks of currency fluctuations in the foreign countries in which
it does business.
The Company also is subject to other risks of conducting business outside of
the United States. These risks include:
- Unexpected changes in, or impositions of, foreign legislative or
regulatory requirements;
- Delays resulting from difficulty in obtaining export licenses for certain
technology;
- Tariffs, quotas and other trade barriers and restrictions;
- Longer payment cycles;
- Greater difficulty in collecting accounts receivable;
- Potentially adverse taxes and adverse tax consequences;
- The burdens of complying with a variety of foreign laws;
- Political, social and economic instability;
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- Potential hostilities;
- Changes in diplomatic and trade relationships; and
- Fluctuations in foreign currencies
The Company's significant investment in foundry capacity in Taiwan is a
prime example of its exposure to these types of risks. Due to this investment,
the Company is subject to the risk of political instability in Taiwan, including
the potential for conflict between Taiwan and the People's Republic of China. In
addition, the fact that China is the primary market for the Company's consumer
DVD products is another example. Any political or economic instability in China
could significantly reduce the demand for these products.
Recently Taiwan experienced a severe earthquake. The Company did not incur
any significant damage to its own facilities located in Taipei; however, its
primary wafer manufacturer, Taiwan Semiconductor Manufacturing Company,
experienced a disruption in operations for several weeks. To date, the Company
has not experienced any material delays of its wafer deliveries from its primary
manufacturer.
In addition, the Company has several significant OEM customers in Japan,
South Korea, and other parts of Asia. Although the adverse economic
circumstances recently prevailing in Japan and elsewhere in Asia have begun to
show signs of abating, they could still affect these customers' willingness or
ability to do business with the Company in the future or their success in
developing and launching in particular office devices containing the Company's
products.
While these factors or the impact of these factors are difficult to
forecast, any one or more of these factors could adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.
THE COMPANY DEPENDS ON A LIMITED NUMBER OF CUSTOMERS FOR A SUBSTANTIAL
PORTION OF ITS REVENUES, AND A LOSS OF, OR A SIGNIFICANT REDUCTION IN PURCHASES
BY, CURRENT MAJOR CUSTOMERS WOULD SIGNIFICANTLY REDUCE ITS REVENUES
The Company has derived a substantial portion of its net revenues from a
limited number of customers and expects this concentration to continue. For the
first nine months of fiscal 2000, sales to the Company's top ten customers
accounted for approximately 69% of the Company's net revenues. In addition, the
Company has experienced significant changes from year to year in the composition
of its major customer base and the Company believes this pattern of significant
change may continue. Customers generally purchase the Company's products
pursuant to short-term purchase orders, and the Company has no long term
purchase agreements with any of its customers. The loss of, or significant
reduction in purchases by, current major customers of the Company would
significantly reduce its revenues.
THE COMPANY IS A DEFENDANT IN SEVERAL LAWSUITS
The Company and various of its current and former officers and directors are
parties to a consolidated class action lawsuit filed on behalf of all persons
who purchased or acquired the Company's common stock for the period from
July 27, 1995 to May 22, 1996, alleging state securities law and other
violations. Additionally, various of the Company's current and former officers
and directors are defendants in three consolidated derivative actions which
allege a breach of fiduciary duty and a claim under California securities laws.
Based on its current information, the Company believes the class action and
derivative suits to be without merit and will defend its position vigorously.
Although it is reasonably possible the Company may incur losses upon resolution
of these claims, an estimate of loss or range of loss cannot be made. No
provision for any liability that may result upon adjudication has been made in
the Company's financial statements. The Company is also a party to various other
legal proceedings, including a number of patent-related matters. In the opinion
of management, these patent related legal proceedings will not result in any
material liability to the Company. In connection with these lawsuits, however,
management time has been,
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and will continue to be, expended and the Company has incurred, and expects to
continue to incur, substantial legal and other expenses.
THE COMPANY MUST CONTINUE TO MAKE SIGNIFICANT CAPITAL INVESTMENTS, AND THE
INABILITY TO RAISE THE ADDITIONAL CAPITAL NECESSARY TO FUND THESE INVESTMENTS ON
ACCEPTABLE TERMS COULD SERIOUSLY HARM THE COMPANY'S BUSINESS
In order to remain competitive, the Company must continue to make
investments in new facilities and capital equipment, and significant amounts of
capital additions could be required in subsequent years. Additionally, in order
to obtain an adequate supply of wafers, especially wafers manufactured using
advanced process techniques, the Company has entered into and will continue to
consider various possible transactions, including various "take or pay"
contracts that commit the Company to purchase specified quantities of wafers
over extended periods. Manufacturing arrangements such as these may require
substantial capital investment, which may require the Company to seek additional
financing. The Company believes that existing liquid resources and funds
generated from operations, if any, combined with its ability to borrow funds
will be adequate to meet its operating and capital requirements and obligations
into the foreseeable future. The Company believes that the level of a Company's
financial resources is an important factor in its industry. Accordingly, the
Company may from time to time seek additional equity or debt financing. There
can be no assurance that those funds will be available on terms acceptable to
the Company when needed. Any future equity financing will also lead to dilution
to existing shareholders.
THE COMPANY MAY MAKE FUTURE ACQUISITIONS OR ENTER INTO JOINT VENTURES THAT
MAY NOT BE SUCCESSFUL
In the future, the Company may acquire additional businesses, products and
technologies, or enter into joint venture arrangements, that could complement or
expand its business. Acquisitions involve numerous risks including:
- Difficulties in integration of the operations, technologies, and products
of the acquired companies;
- Diverting management's attention from normal daily operations of the
business;
- Entering markets in which there is limited direct prior experience and
where competitors have stronger market positions;
- Coordination of sales, marketing and research and development; and
- Potential loss of key employees.
- The maintenance of corporate culture, controls, procedures and policies
In addition, investments in emerging technology present risks of loss of
value of one or more of the investments due to failure of the technology to gain
the predicted market acceptance. Also, any future acquisitions could require the
Company to issue dilutive equity securities, incur debt or contingent
liabilities, amortize goodwill and other intangibles, or write-off in-process
research and development and other acquisition-related expenses. Further, the
Company may not be able to integrate acquired businesses, products or
technologies with its existing operations. If the Company is unable to fully
integrate an acquired business, product or technology, it may not receive the
intended benefits of that acquisition.
THE COMPANY WILL DEPEND ON KEY PERSONNEL TO MANAGE ITS BUSINESS, AND THE
LOSS OF ANY KEY PERSONNEL COULD SERIOUSLY HARM ITS BUSINESS
The Company's future performance depends, to a significant degree, on the
retention and contribution of members of the Company's senior management as well
as other key personnel including highly skilled engineering and technical
employees. Specifically, it is important for the Company to retain the services
of Young K. Sohn, the Company's current president and chief executive officer.
The Company is in the process of recruiting technical and operational personnel.
Competition for these people is intense because of this limited number of
candidates and the growth of high-tech companies, and there can be no
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assurance that the Company will be able to attract and retain qualified
replacements or additional technical or operational personnel. Moreover, none of
the key technical or senior management personnel of the recently acquired
Xionics Document Technologies are bound by long-term employment arrangements.
There is no assurance that the Company will be able to find suitable
replacements for any senior management personnel who may leave the Company.
PROVISIONS IN THE COMPANY'S CHARTER DOCUMENTS AND RIGHTS PLAN COULD MAKE IT
MORE DIFFICULT TO ACQUIRE THE COMPANY AND MAY REDUCE THE MARKET PRICE OF THE
COMPANY'S STOCK
The Company's board of directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the stockholders. The rights of the holders of
common stock, may be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock may have the effect of delaying, deferring or
preventing a change of control of the Company without further action by the
stockholders and may adversely affect the voting and other rights of the holders
of common stock. The Company has no present plans to issue shares of preferred
stock. Further, certain provisions of the Company's charter documents, including
provisions eliminating the ability of stockholders to take action by written
consent and limiting the ability of stockholders to raise matters at a meeting
of stockholders without giving advance notice, may have the effect of delaying
or preventing changes in control or management of the Company, which could have
an adverse effect on the market price of the stock. In addition, the Company's
charter documents do not permit cumulative voting and provide that its board of
directors will be divided into three classes, each of which serves for a
staggered three-year term, which may also make it more difficult for a
third-party to gain control of the board of directors.
In addition, 400,000 shares of the Company's preferred stock are designated
as series A junior participating preferred stock under a rights plan, commonly
referred to as a "poison pill". Under certain circumstances involving a proposed
change-in-control of the Company, the rights related to the series A junior
participating preferred stock may be triggered, the effect of which may delay or
prevent a third party from gaining control of or acquiring the Company.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its cash requirements from
cash generated from operations, the sale of equity securities, bank lines of
credit and long-term and short-term debt. The Company's principal sources of
liquidity as of March 31, 2000 consisted of approximately $135.0 million in
cash, cash equivalents and short-term investments. The Company also has
approximately $8.7 million in lines of letters of credit with Taiwanese
financial institutions, all of which was available at March 31, 2000. The
Company had outstanding commitments to purchase capital equipment of
approximately $1.5 million at March 31, 2000. Additionally, the Company
repurchased 381,000 shares of its common stock during the nine months ended
March 31, 2000, for a total of approximately $1.8 million.
During the first nine months of fiscal 2000, cash and cash equivalents
increased by $19.7 million compared to a $34.2 million decrease for the first
nine months of fiscal 1999. The primary sources contributing to the improvement
are described below.
Cash used in operating activities was $11.4 million in the first nine months
of fiscal 2000, compared to $7.9 million used in the comparable period of fiscal
1999. Although operating cash was negatively affected by a net loss in the first
nine months of fiscal 2000, it was positively impacted by an increase in working
capital. The increase in working capital was attributable to increases in
receivables and inventories which were more than offset by increases in accounts
payable and accrued expenses, and decreases in foundry deposits, prepaid
expenses and other assets.
29
<PAGE>
The Company's investing activities generated $27.4 million of cash for the
first nine months of fiscal 2000, compared to the use of $24.4 million of cash
in the comparable period of fiscal 1999. Proceeds from matured short-term
investments and cash received from the sale of the broadband business group to
Conexant were the primary sources of cash from investing activities for fiscal
2000 and were partially offset by purchases of short-term investments, the
purchase of Xionics and Earjam.com and additions to property and equipment. This
compares to cash used in investing activities in the comparable period of fiscal
1999, primarily attributed to the Company's investment in Viewpoint and XLI,
additions to property and equipment and purchases of short-term investments.
The Company's financing activities provided $3.8 million of cash in the
first nine months of fiscal 2000, compared to a use of $1.9 million by financing
activities in the comparable period of fiscal 1999. Cash provided by financing
activities for the first nine months of fiscal 2000 included the issuance of
common stock partially offset by treasury stock acquisitions. In the first nine
months of fiscal 1999 the Company's repayment of debt and treasury stock
acquisitions were partially offset by the issuance of debt and issuances of
common stock.
The Company believes that its existing cash, cash equivalents, short-term
investments and credit facilities will be sufficient to provide adequate working
capital and to fund operations over the next twelve months. If, however, during
the next twelve to eighteen month period the Company fails to increase its
revenue or is unable to reduce its expenses below its revenues, then the Company
may be in a position where it will need to seek additional financing. However,
there can be no assurance that the Company will not be required to seek other
financing sooner or that such financing, if required, will be available on terms
satisfactory to the Company. The Company may also utilize cash to acquire or
invest in complementary businesses or products or to obtain the right to use
complementary technologies. From time to time, in the ordinary course of
business, the Company evaluates potential acquisitions of such businesses,
products or technologies. However, the Company has no present understandings,
commitments or agreements with respect to any material acquisition of other
businesses, products or technologies, other than those disclosed above or in our
Form 10K/A for the previous fiscal year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Most of the Company's foreign sales are negotiated in US dollars; however,
invoicing is often done in local currency. As a result, the Company may be
subject to the risks of currency fluctuations. Assets and liabilities
denominated in non-functional currencies are remeasured into the functional
currency on a monthly basis and the resulting gain or loss is recorded within
non-operating income in the statement of operations. Many of the Company's
non-functional currency receivables and payables are hedged through managing net
asset positions, product pricing and other means. The Company's strategy is to
minimize its non-functional currency net assets or net liabilities in its
foreign subsidiaries. The Company's policy is not to speculate in financial
instruments for profit on the exchange rate price fluctuations, trade in
currencies for which there are not underlying exposures, or enter into trades
for any currency to intentionally increase the underlying exposure. As of
March 31, 2000 and June 30, 1999, the Company had foreign currency exchange
contracts to exchange Yen for US Dollars for approximately $1,650,000 and
$1,030,000, respectively. The Company uses financial instruments, including
local currency debt arrangements, to offset the gains or losses of the financial
instruments against gains or losses on the underlying operations cash flows or
investments. If foreign currency rates fluctuate by 10% from rates at March 31,
2000 and June 30, 1999, the effect on the company's consolidated financial
statements would not be material. However, there can be no assurance that there
will not be a material impact in the future.
The Company's cash equivalents and short-term investments ("investments")
are normally exposed to financial market risk due to fluctuation in interest
rates, which may affect its interest income and the fair values of its
investments. The Company normally manages the exposure to financial market risk
by performing ongoing evaluation of its investment portfolio and investing in
short-term investment grade corporate securities and U.S. government and other
agencies' obligations maturing within the next
30
<PAGE>
24 months. In addition, the Company typically does not use investments for
trading or other speculative purposes. Due to the short maturities of its
investments, the carrying value approximates the fair value. If market rates
were to increase immediately and uniformly by 10% from levels as of March 31,
2000 and 1999, the decline in the fair value of the portfolio would not be
material. Further, the Company has the ability to hold its fixed income
investments until maturity and, therefore, the Company would not expect to
recognize such an adverse impact in income or cash flows. Due to the divestiture
of the Broadband business, at March 31, 2000 the Company was in the unusual
position of also holding an investment of 293,794 shares of Conexant
Systems Inc. Common Stock at an approximate book and fair value of $ 68.05 per
share. This is a highly volatile equity security with market valuations in the
range of $ 41 to $ 132 since mid January 2000. The original shares were not
registered and available for sale until early March 2000 and the company intends
to convert these shares into cash over time as the market permits.
31
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and various of its current and former officers and Directors are
parties to a consolidated class action lawsuit filed on behalf of all persons
who purchased or acquired the Company's common stock (excluding the defendants
and parties related to them) for the period July 27, 1995 through May 22, 1996.
This state court proceeding, designated IN RE OAK TECHNOLOGY SECURITIES
LITIGATION, Master File No. CV758510 is pending in Santa Clara County Superior
Court in Santa Clara, California. The lawsuit originally named as defendants
several of the Company's venture capital fund investors, two of its investment
bankers and two securities analysts. The plaintiffs alleged violations of
California securities laws and statutory deceit provisions as well as breaches
of fiduciary duty and abuse of control. The plaintiffs seek unspecified monetary
damages. After several rounds of demurrers, the only remaining claim is the
California Corporations Code Sections 25400/25500 cause of action against the
Company, four officers and the Company's investment bankers and securities
analysts. On July 16, 1998, the state court provisionally certified a national
class of all persons who purchased the Company's stock during the class period.
The class was provisionally certified with the order held in abeyance pending
resolution of the question of whether a nationwide class may bring a California
Corporations Code Sections 25400/25500 claim. This issue was resolved in favor
of allowing such nationwide class actions by the California Supreme Court, Case
No. 5058723, on January 4, 1999, in the DIAMOND MULTIMEDIA SECURITIES LITIGATION
appeal by the California Supreme Court. The defendants and certain third parties
have produced documents and a number of depositions have been taken, including
the depositions of those officers of the Company who were officers during the
class period. Discovery will be concluded on June 5, 2000. This action is set
for trial on July 3, 2000. Based on its current information, the Company
believes this suit to be without merit and will defend its position vigorously.
Although it is reasonably possible the Company may incur a loss upon conclusion
of these claims, an estimate of any loss or range of loss cannot be made. No
provision for any liability that may result upon adjudication has been made in
the Company's Consolidated Financial Statements.
Additionally, various of the Company's current and former officers and
Directors are defendants in three consolidated derivative actions pending in
Santa Clara County Superior Court in Santa Clara, California, entitled IN RE OAK
TECHNOLOGY DERIVATIVE ACTION, Master File No. CV758510. This lawsuit, which
asserts a claim for breach of fiduciary duty and a claim under California
securities law based upon the officers' and Directors' trading in securities of
the Company, has been stayed pending resolution of the above described class
actions The plaintiffs are seeking monetary damages, equitable relief and an
accounting for the defendants' sales of shares of the Company's common stock.
Based on its current information, the Company believes the suits to be without
merit and will defend its position vigorously. Although it is reasonably
possible the Company may incur a loss upon conclusion of these claims, an
estimate of any loss or range of loss cannot be made. No provision for any
liability that may result upon adjudication has been made in the Company's
Consolidated Financial Statements.
If any of the above pending actions are decided adversely to the Company, it
would likely have a material adverse affect on the Company's financial condition
and results of operations.
On July 21, 1997, the Company filed a complaint with the ITC based on the
Company's belief that certain Asian companies were violating U.S. trade laws by
the unlicensed importing or selling of certain CD-ROM controllers that infringed
one or more of the Company's United States patents. The complaint seeks a ban on
the importation into the United States of any infringing CD-ROM controller or
product containing such infringing CD-ROM controller. A formal investigative
proceeding was instituted by the ITC (Investigation No. 337-TA-401) on
August 19, 1997, naming as respondents: Winbond Electronics Corporation
(Winbond); Winbond Electronics North America Corporation; Wearnes Technology
(Private) Ltd.; Wearnes Electronics Malaysia Sendirian Berhad; and Wearnes
Peripheal International (Pte.).
32
<PAGE>
On March 16, 1998, the Company and Winbond entered into a settlement
agreement pursuant to which Winbond obtained a nonexclusive, royalty-bearing
license to the Company's U.S. patents No.'s 5,535,327 and 5,581,715 and the
Company obtained a nonexclusive, royalty-free license to several Winbond
patents. The settlement agreement provided that the parties would jointly seek
termination and dismissal of investigation No. 337-TA-401 as to Winbond and its
four affiliated companies: Winbond Electronics North America Corporation;
Wearnes Technology (Private) Ltd.; Wearnes Electronics Malaysia Sendirian
Berhad; and Wearnes Peripheal International (Pte.). On April 15, 1998,
Investigation No. 337-TA-401 was ordered terminated as to all parties.
As originally filed with the ITC, the Company's complaint also identified as
proposed respondents: United Microelectronics Corporation (UMC); Lite-On Group;
Lite-On Technology Corp.; Behavior Tech Computer Corp. and Behavior Tech
Computer (USA) Corp. Prior to the ITC's institution of the formal investigation
proceeding, the Company and UMC entered into a settlement agreement, effective
July 31, 1997, pursuant to which UMC agreed to cease and desist the manufacture
and/or importation into the United States of its specified CD-ROM controllers,
except under certain limited conditions which expired on January 31, 1998. The
settlement agreement additionally provided for the withdrawal of the Company's
ITC complaint against UMC and the above-named Lite-On and Behavior Tech
companies. In September 1997, October 1997, February 1998 and April 1998, the
Company received $2.6 million, $4.7 million, $0.7 million and $2.6 million,
respectively, pursuant to this settlement. Proceeds from the settlement were
recorded as miscellaneous income and included in nonoperating income for the
periods ended September 30, 1997, December 31, 1997, March 31, 1998 and
June 30, 1998, respectively.
On October 27, 1997, the Company filed a complaint in the United States
District Court, Northern District of California against UMC for breach of
contract, breach of the covenant of good faith and fair dealing and fraud based
on UMC's breach of the settlement agreement arising out of the ITC action, Case
No. C-97-20959. Together with the filing of the complaint, the Company filed a
motion for a preliminary injunction against UMC, seeking to enjoin UMC from
selling the CD-ROM controllers that were the subject of the ITC action and
related settlement agreement, through or to a UMC-affiliated, Taiwanese entity
called MediaTek. On February 23, 1998, the federal court judge denied the
Company's request for a preliminary injunction based on the court's findings
that there was no evidence that UMC was presently engaged in the manufacture of
CD-ROM controllers or other products covered by the settlement agreement. On
December 24, 1997, UMC answered the Company's complaint and counterclaimed
asserting causes of action for recission, restitution, fraudulent concealment,
mistake, lack of mutuality, interference and declaratory judgment of
non-infringement, invalidity and unenforceability of the Oak patent that was the
subject of the original ITC action filed against UMC. The Company believes these
counterclaims to be without merit and will vigorously defend its patent. Both
the Company and UMC seek compensatory and punitive damages. In addition, the
Company seeks permanent injunctive relief. On June 11, 1998, this case was
consolidated for all purposes with a related case brought against the Company by
MediaTek (described below) under Case No. C-97-20959. On the same date, pursuant
to UMC's request, the federal court judge ordered the consolidated action stayed
under 28 U.S.C. Section 1659, based on the judge's conclusion that the civil
action involves the same issues involved in Investigation No. 337-TA-409 before
the International Trade Commission, initiated by Oak (described below). The stay
was to be lifted upon final resolution of Investigation No. 337-TA-409; however,
the judge has ordered that the consolidated action continue stayed pending the
resolution of the parties appeal of the ITC ruling to the Federal Circuit Court
of Appeals. (described below.)
In a related action to the lawsuit that was commenced by the Company against
UMC (described above), on December 19, 1997, MediaTek, a UMC affiliated,
Taiwanese entity, filed a complaint in the United States District Court,
Northern District of California, against the Company for declaratory judgment of
non-infringement, invalidity and unenforceability of the Oak patent that was the
subject of the original ITC action against UMC, and intentional interference
with prospective economic advantage, Case No. C-97-21126. MediaTek seeks
compensatory damages of not less than $10 million and punitive
33
<PAGE>
damages. The Company filed its answer on January 8, 1998, denying all the
allegations. The Company believes the suit to be without merit and will
vigorously defend its patent. On June 11, 1998, this case was consolidated for
all purposes with a related case brought by the Company against UMC (described
above) under Case No. C-97-20959. On the same date, pursuant to UMC's request,
the federal court judge ordered the consolidated action stayed under 28 U.S.C.
Section1659, based on the judge's conclusion that the civil action involves the
same issues involved in Investigation No. 337-TA-409 before the International
Trade Commission, initiated by Oak (described below). The stay was to be lifted
upon final resolution of Investigation No. 337-TA-409; however, the judge has
ordered that the consolidated action continue stayed pending the resolution of
the parties appeal of the ITC ruling to the Federal Circuit Court of Appeals.
(described below.)
On April 7, 1998, the Company filed a new complaint with the ITC alleging
that five Asian companies are violating U.S. trade laws by the unlicensed
importing or selling of CD-ROM drive controllers that infringe a United States
patent owned by the Company. The Company's complaint is asserted against United
Microelectronics Corp., MediaTek, Inc., Lite-On Group, Lite-On Technology Corp.
and AOpen, Inc. In its complaint, the Company requests the ITC to investigate
the five above-named companies and to enter an order barring imports into the
United States of their allegedly infringing products and products containing
them, including CD-ROM drives and personal computers. A formal investigative
proceeding was instituted by the ITC (Investigation No. 337-TA-409) on May 8,
1998 naming as respondents United Microelectronics Corp., MediaTek, Inc.,
Lite-On Technology Corp. and AOpen, Inc. The following respondents, all
Taiwanese drive manufacturers, were later added to the proceeding pursuant to an
Initial Determination by the Administrative Law Judge (ALJ) supervising the
Investigation following a motion brought by the Company on August 6, 1998 to add
these respondents: Actima Technology Corp., ASUSTek Computer, Inc., Behavior
Tech Computer Corp., Delta Electronics, Inc. Momitsu Multi Media Technologies,
Pan-International Industrial Corp. and Ultima Electronics Corp. On August 28,
1998, the ALJ entered an Initial Determination that the investigation be
terminated as to respondent UMC. On September 4, 1998, the Company filed a
petition with the Commission for review of the Initial Determination. On
October 7, 1998, the Commission reversed the Initial Determination of the ALJ as
the Commission determined that the Company's complaint against UMC does state an
unfair trade practices claim under Section 337 of the Tariff Act. On
December 23, 1998, the ALJ issued another Initial Determination terminating the
investigation as to respondent UMC for a second time. On December 31, 1998, the
Company filed a petition with the Commission for review of the Initial
Determination. On February 3, 1999, the Commission reversed the Initial
Determination of the ALJ for a second time on the grounds that the Company's
complaint against UMC does state an unfair trade practices claim under
Section 337 of the Tariff Act. On May 10, 1999, the ALJ issued another Initial
Determination terminating the investigation as to respondent UMC for a third
time, finding that UMC's activities were licensed. On May 17, 1999, the Company
filed a petition with the Commission for review of the Initial Determination and
on June 28, 1999, the Commission determined to review the Initial Determination.
Trial before the ALJ as to all respondents except UMC commenced on
January 11, 1999 and concluded on January 28, 1999. On May 14, 1999, the ALJ
entered an Initial Determination that no unfair trade practices were committed
by Mediatek under Section 337 of the Tariff Act. On May 24, 1999, the Company
filed a petition requesting the Commission to review the Initial Determination
and on June 28, 1999 the Commission determined to review it. On September 27,
1999, the Commission affirmed the ALJ's finding that there were no unfair trade
practices committed by MediaTek under Section 337 of the Tariff Act as the
Commission determined that there was no infringement of the Company's US Patent
No. 5,581,715. On this same date, the Commission also reversed the ALJ's
findings that the Company's patent was invalid and unenforceable and held that
the Company's US Patent No. 5,581,715 was valid and enforceable. The Commission
took no position on the ALJ's Initial Determination terminating UMC from the
investigation.
34
<PAGE>
On February 24, 2000, the Company appealed the Commission's ruling that no
unfair trade practices were committed by MediaTek under Section 337 of the
Tariff Act to the Federal Circuit Court of Appeals. No decision is expected to
be rendered by the Federal Circuit of Appeals for twelve to eighteen months from
the time of appeal. In connection with this proceeding, the Company will
continue to incur legal fees and other expenses.
If any of the above pending actions with respect to UMC and MediaTek are
decided adversely to the Company, it would likely have a material adverse affect
on the Company's financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1. (a) The Company's Annual Meeting was held on January 11, 2000.
(b) The following Directors were elected at the meeting:
<TABLE>
<CAPTION>
PERCENTAGE OF
FOR VOTES RECEIVED
---------- --------------
<S> <C> <C>
Ta-Lin Hsu, Ph.D.................................... 37,501,607 92%
Albert Y.C. Yu, Ph.D................................ 37,506,034 92%
</TABLE>
The following Directors remained on the Board of Directors subsequent to the
meeting:
Richard B. Black
David D. Tsang
Ta-Lin Hsu
Albert Y.C. Yu
Timothy Tomlinson
Young K. Sohn
Peter J. Simone became a member of the Board of Directors on January 11,
2000 pursuant to the terms of the merger agreement between the Company and
Xionics Document Technologies, Inc.
(c) Other matters voted on at the meeting were the following:
To approve the issuance of shares of common stock of Oak, par value
$0.001 per share, pursuant to a merger agreement by and among Oak, Xionics
Document Technologies, Inc. and Vermont Acquisition Corp., a wholly owned
subsidiary of Oak, under which Xionics will become a wholly owned subsidiary
of Oak:
<TABLE>
<S> <C>
For............................. 23,833,612
Against......................... 128,058
Abstain......................... 107,068
</TABLE>
35
<PAGE>
To approve an amendment to Oak's restated certificate of incorporation
to authorize an additional 70,000,000 shares of common stock, par value
$0.001 per share:
<TABLE>
<S> <C>
For............................. 23,492,849
Against......................... 448,809
Abstain......................... 127,080
</TABLE>
To ratify the appointment of KPMG LLP as independent accountants:
<TABLE>
<S> <C>
For............................. 34,497,178
Against......................... 54,862
Abstain......................... 88,069
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
- ------- -------------
<S> <C>
Exhibit 10.35 Lease Agreement dated March 16, 2000 between 10 Presidential
Way Associates, LLC c/o Norblom Management Company, Inc.
and the Company (lease agreement for 10 Presidential Way,
Woburn, Massachusetts)
Exhibit 10.36 Bill of Sale and Assignment Agreement between Conexant
Systems, Inc. and Oak Technolgy, Inc. dated January 19,
2000
Exhibit 27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company filed two reports on Form 8-K during the quarter ended
March 31, 2000. Information regarding the items reported on is as
follows:
<TABLE>
<CAPTION>
DATE ITEM REPORTED ON
- ---- ----------------
<S> <C>
January 21, 2000 The Company announced the completion of the acquisition of
Xionics Document Technologies, Inc.
March 03, 2000 The Company announced the appointment of John S. Edmunds to
the position of Vice President of Finance and Chief
Financial Officer
</TABLE>
36
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
OAK TECHNOLOGY, INC.
(Registrant)
Date: May 12, 2000
/s/ JOHN S. EDMUNDS
--------------------------------------------
John S. Edmunds,
VICE-PRESIDENT FINANCE
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
</TABLE>
37
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
Exhibit 10.35 Lease Agreement dated March 16, 2000 between 10 Presidential
Way Associates, LLC c/o Norblom Management Company, Inc. and
the Company (lease agreement for 10 Presidential Way,
Woburn, Massachusetts)
Exhibit 10.36 Bill of Sale and Assignment Agreement between Conexant
Systems, Inc. and Oak Technolgy, Inc. dated January 19, 2000
Exhibit 27.01 Financial Data Schedule
</TABLE>
38
<PAGE>
EXHIBIT 10.35
10 PRESIDENTIAL WAY
L E A S E
ARTICLE 1
REFERENCE DATA
1.1 SUBJECT REFERRED TO
Each reference in this Lease to any of the following subjects shall be
construed to incorporate the data stated for that subject in this
Section 1.1.
DATE OF THIS LEASE: March 16, 2000
BUILDING: The three-level building situated on
the parcel of land known and
numbered as 10 Presidential Way,
Woburn, Massachusetts, as more
particularly described in Exhibit
A-1 attached to this Lease (the
Building and such parcel of land
hereinafter being collectively
referred to as the "Property").
RENTABLE FLOOR AREA
OF THE BUILDING: 163,176 rentable square feet of
floor area.
PREMISES: The entire second (2nd) and third
(3rd) floors of the Building,
substantially as shown on Exhibit A
attached hereto.
RENTABLE FLOOR
AREA OF PREMISES: Approximately 81,938 rentable
square feet, consisting of
approximately 73,049 rentable square
feet on the second (2nd) floor of
the Building and approximately 8,889
rentable square feet on the third
(3rd) floor of the Building.
LANDLORD: 10 Presidential Way Associates, LLC,
a Delaware limited liability company
ORIGINAL NOTICE
ADDRESS OF LANDLORD: c/o Nordblom Management Company, Inc.
31 Third Avenue
Burlington, Massachusetts 01803
TENANT: Oak Technology, Inc., a Delaware
corporation
ORIGINAL NOTICE
ADDRESS OF TENANT: 139 Kifer Court
Sunnyvale, California 94086
Attn: Chief Financial Officer
EXPIRATION DATE: The last day of the seventh (7th)
lease year (as hereinafter defined)
COMMENCEMENT DATE: See Section 2.2.
ADJUSTMENT DATE: The date which is 90 days from the
Commencement Date.
DELIVERY DATE: August 1, 2000
1
<PAGE>
ANNUAL FIXED RENT RATE: $1,753,176.00 from the Commencement
Date until the day before the
Adjustment Date;
$1,966,512.00 from the Adjustment
Date through the end of the 5th lease
year; and $2,294,264.00 thereafter.
MONTHLY FIXED RENT RATE: $146,098.00 from the Commencement
Date until the day before the
Adjustment Date;
$163,876.00 from the Adjustment Date
through the end of the 5th lease
year; and $191,188.67 thereafter.
ALLOWANCE: $1,720,698.00
FINAL PLANS DATE: May 12, 2000
LETTER OF CREDIT
AMOUNT: $1,966,512.00
BASE OPERATING COSTS: $734,292.00
BASE TAXES: $244,764.00
TENANT'S PERCENTAGE: The ratio of the Rentable Floor
Area of the Premises to the
Rentable Floor Area of the
Building, which shall initially be
deemed to be 50.21%.
PERMITTED USES: General offices and uses ancillary
thereto.
PUBLIC LIABILITY INSURANCE LIMITS:
Comprehensive General Liability: $2,000,000 per occurrence
$5,000,000 general aggregate
2
<PAGE>
1.2 EXHIBITS.
The Exhibits listed below in this section are incorporated in this
Lease by reference and are to be construed as a part of this Lease.
EXHIBIT A Floor Plans of Premises
EXHIBIT A-1 Description of Property
EXHIBIT B Commencement Date Notification
EXHIBIT C Base Building Work Specifications
EXHIBIT D Work Change Order
EXHIBIT E Rules and Regulations
EXHIBIT F Form Tenant Estoppel Certificate
EXHIBIT G Form of Letter of Credit
1.3 TABLE OF ARTICLES AND SECTIONS.
<TABLE>
<S> <C>
ARTICLE 1 -- REFERENCE DATA
1.1 Subjects Referred To.................................................1
1.2 Exhibits.............................................................1
1.3 Table of Articles and Sections.......................................2
ARTICLE 2 -- PREMISES AND TERM
2.1 Premises.............................................................3
2.2 Term.................................................................3
2.3 Extension Options....................................................4
ARTICLE 3-- IMPROVEMENTS
3.1 Performance of Work and Approval of Landlord's Work..................4
3.2 Plans and Specifications.............................................5
3.3 Acceptance of the Premises...........................................5
3.4 Pre-Commencement Entry by Tenant.....................................5
ARTICLE 4 -- RENT
4.1 The Fixed Rent.......................................................6
4.2 Additional Rent......................................................6
4.2.1 Real Estate Taxes...........................................6
4.2.2 Personal Property Taxes.....................................6
4.2.3 Operating Costs.............................................6
4.2.4 Insurance...................................................7
4.2.5 Utilities...................................................8
4.3 Late Payment of Rent.................................................8
4.4 Letter of Credit.....................................................8
4.4.1 Amount of Letter of Credit..................................8
4.4.2 Renewal of Letter of Credit.................................8
4.4.3 Draws to Cure Defaults......................................8
4.4.4 Draws to Pay Damages........................................8
4.4.5 Draws for Failure to Deliver Substitute Letter of Credit....8
4.4.6 Transferability.............................................9
4.4.7 Return of Letter of Credit at End of Term...................9
ARTICLE 5 -- LANDLORD'S COVENANTS
5.1 Affirmative Covenants................................................9
5.1.1 Heat and Air Conditioning...................................9
5.1.2 Electricity.................................................9
5.1.3 Cleaning; Water.............................................9
5.1.4 Elevator; Fire Alarm........................................9
5.1.5 Repairs.....................................................9
5.1.6 Landscaping.................................................9
5.1.7 Landlord's Insurance........................................9
5.2 Interruption.........................................................9
5.3 Outside Services.....................................................9
5.4 Landlord's Representations...........................................9
5.5 On-Site Amenities....................................................9
3
<PAGE>
ARTICLE 6 -- TENANT'S ADDITIONAL COVENANTS
6.1 Affirmative Covenants...............................................10
6.1.1 Perform Obligations........................................10
6.1.2 Use........................................................10
6.1.3 Repair and Maintenance.....................................10
6.1.4 Compliance with Law........................................10
6.1.5 Indemnification............................................10
6.1.6 Landlord's Right to Enter..................................10
6.1.7 Personal Property at Tenant's Risk.........................10
6.1.8 Payment of Landlord's Cost of Enforcement..................10
6.1.9 Yield Up...................................................10
6.1.10 Rules and Regulations......................................11
6.1.11 Estoppel Certificate.......................................11
6.2 Negative Covenants..................................................11
6.2.1 Assignment and Subletting..................................11
6.2.2 Nuisance...................................................11
6.2.3 Hazardous Wastes and Materials.............................12
6.2.4 Floor Load; Heavy Equipment................................12
6.2.5 Installation, Alterations or Additions.....................12
6.2.6 Abandonment................................................12
6.2.7 Signs......................................................12
6.2.8 Parking and Storage........................................12
ARTICLE 7 -- CASUALTY OR TAKING
7.1 Termination.........................................................12
7.2 Restoration.........................................................12
7.3 Award...............................................................13
ARTICLE 8 -- DEFAULTS
8.1 Events of Default...................................................13
8.2 Remedies............................................................13
8.3 Remedies Cumulative.................................................13
8.4 Landlord's Right to Cure Defaults...................................13
8.5 Effect of Waivers of Default........................................13
8.6 No Waiver, etc......................................................13
8.7 No Accord and Satisfaction..........................................13
ARTICLE 9 -- RIGHTS OF MORTGAGE HOLDERS
9.1 Rights of Mortgage Holders..........................................14
9.2 Lease Superior or Subordinate to Mortgages..........................14
ARTICLE 10 -- MISCELLANEOUS PROVISIONS
10.1 Notices From One Party to the Other.................................14
10.2 Quiet Enjoyment.....................................................14
10.3 Lease Not to be Recorded............................................14
10.4 Limitation of Landlord's Liability..................................14
10.5 Acts of God.........................................................14
10.6 Landlord's Default..................................................14
10.7 Brokerage...........................................................14
10.8 Applicable Law and Construction.....................................15
10.9 Right of First Offer................................................15
</TABLE>
ARTICLE 2
PREMISES AND TERM
2.1 PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord, subject to and with the benefit of the terms, covenants,
conditions and provisions of this Lease, the Premises, excluding the
roof, exterior faces of exterior walls, the common
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stairways, stairwells, elevators and elevator shafts, and pipes,
ducts, conduits, wires, and appurtenant fixtures serving exclusively
or in common with the Premises, other parts of the Building, and if
Tenant's space includes less than entire rentable area of any floor,
excluding the central core area of such floor.
Tenant shall have, as appurtenant to the Premises, rights to use, in
common with Landlord and other tenants of the Building, subject to
reasonable rules of general applicability to tenants of the Building
from time to time made by Landlord in accordance with Section 6.1.10 of
this Lease: (a) the lobbies, hallways, stairways and elevators
necessary for access to the Premises, (b) if the Premises includes less
than the entire rentable area of any floor, the restrooms on such
floor, (c) any common cafeteria and/or fitness center that may be now
or hereafter constructed on the Property, (d) the common walkways and
driveways necessary for access to the Building and the parking areas on
the Property, (e) the parking areas on the Property and any other
parking areas serving the Building,, and (f) all wires, cables, pipes,
poles, mains, conduits, ducts, trenches and other fixtures, facilities
and equipment necessary or convenient to provide electricity,
telephone, cable, gas, water, sewer and other utility and
telecommunications services to the Premises (collectively, the "Common
Facilities"). Tenant shall also have the right to use up to 3.7 parking
spaces located at the Property for each 1,000 rentable square feet of
the Rentable Floor Area of the Premises at no additional cost to
Tenant. Landlord shall not grant to all tenants in the aggregate the
right to use more parking spaces than available at the Property.
Landlord reserves the right from time to time, without unreasonable
interference with Tenant's use of the Premises: (a) to install, use,
maintain, repair, replace and relocate for service to the Premises and
other parts of the Building, or either, pipes, ducts, conduits, wires
and appurtenant fixtures, above dropped ceilings in the Premises or in
core areas of the Building, (b) to alter or relocate any other common
facility, (c) to make any repairs and replacements to the Premises
which Landlord may deem necessary, and (d) in connection with any
excavation made upon adjacent land of Landlord or others, at reasonable
times and upon reasonable prior notice (except in an emergency), to
enter upon the Premises to do such work as the person causing such
excavation deems necessary to preserve the wall of the Building from
injury or damage and to support the same.
2.2 TERM. TO HAVE AND TO HOLD for a term (the "original term") beginning on
the Commencement Date, which shall be the earlier of (a) the date on
which the Base Building Work and the TIW has been substantially
completed and Landlord has delivered the Premises to Tenant in a broom
clean condition and free of all tenants and occupants or (b) the
opening by Tenant of its business in the Premises, and ending on the
Expiration Date, unless sooner terminated as hereinafter provided. The
term "substantially completed" as used herein shall mean that (i) the
Base Building Work and TIW has been completed with the exception of the
hydraulic service elevator specified in Exhibit C and minor items which
can be fully completed after Tenant takes possession of the Premises
without material interference with Tenant's use of the Premises and
other items which because of the season or weather or the nature of the
item are not practicable to do at the time, provided that none of said
items is necessary to make the Premises tenantable for the Permitted
Uses (collectively, "Punch List Items"), and (ii) a temporary
certificate of occupancy has been issued which permits Tenant to occupy
the Premises for the Permitted Uses; provided, however, if at the time
clause (i) of this Section 2.2 has been satisfied Landlord cannot
obtain a temporary certificate of occupancy because of a Tenant Delay
(hereinafter defined), then, notwithstanding Landlord's inability to
obtain the temporary certificate of occupancy, the Commencement Date
shall be deemed to have occurred and the Base Building Work and the TIW
shall be deemed to be "substantially completed" on the date that such
work would have been substantially completed but for such Tenant Delay,
but Landlord shall not be relieved from the obligation to actually
complete Landlord's Work. Landlord shall promptly notify Tenant of any
potential Tenant Delay of which Landlord becomes aware. If the
Landlord's Work is deemed substantially completed pursuant to the
foregoing (and the Commencement Date shall have occurred by reason
thereof), but the Landlord's Work is not in fact substantially
completed, Tenant shall not (except with Landlord's consent which shall
not be unreasonably withheld or delayed) be entitled to take possession
of the Premises for the Permitted Uses until the Landlord's Work is in
fact substantially completed, except in such case as Tenant can legally
occupy the Premises while Tenant waits for a long lead time item to be
delivered and installed. For the purposes hereof, "Tenant Delay" shall
be defined as any material delay in the completion of Landlord's Work
actually caused by (i) special work or long lead-time items for which
Landlord identifies a specified period of Tenant Delay at the time of
its approval of the Final Plans (provided, however, that Landlord shall
identify no component of the TIW as special work or long lead-time
items, or charge Tenant for any expediting or overtime costs, if such
components are consistent with the tenant standard finishes at 10
Second Avenue, Burlington, Massachusetts), or change orders made by
Tenant under Section 3.1 hereof for which Landlord identifies a
specified period of Tenant Delay at the time of its approval (and
Tenant does not withdraw or alter such special work, long lead-time
item or change order which avoids such delay), (ii) the delay of Tenant
in submitting the Final Plans by the Final Plans Date, approving the
Cost Proposal within the time period specified below, or supplying,
submitting or approving any other plans, specifications or estimates or
giving authorizations or supplying information reasonably required by
Landlord or its contractors within the specific time periods set forth
in this Lease, or in any instance where no specific time period is
specified herein, within such reasonable period of time as shall be
typically required for the expeditious prosecution of the work to be
performed by Landlord, (iii) any contractors employed by Tenant
including, without limitation, entities furnishing communications, data
processing or other service or equipment directly to Tenant (and not
under Landlord's contractor(s)), or (iv) any failure to comply with
this Article 3 or any material interference with the performance of
Landlord's Work by Tenant or any of its agents, employees, engineers or
contractors.
When the dates of the beginning and end of the term have been
determined, such dates shall be evidenced by a document, in the form
attached hereto as Exhibit B, which Landlord shall complete and deliver
to Tenant, and which shall be deemed conclusive unless Tenant shall
notify Landlord of any disagreement therewith within ten (10) days of
receipt. Landlord shall complete the Punch List Items within 30 days
after the Commencement Date, except for items which because of the
season or weather or the nature of the item are not practicable to do
at the time, which items Landlord shall complete as soon as reasonably
practicable and with diligence and continuity. If the Commencement Date
occurs before the issuance of a permanent certificate of occupancy for
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the Premises, Landlord shall obtain a permanent certificate of
occupancy for the Premises as soon as reasonably practicable after the
Commencement Date.
The term "lease year" as used herein shall mean a period of twelve (12)
consecutive full calendar months. The first lease year shall begin on
the Commencement Date if the Commencement Date is the first day of a
calendar month; if not, then the first lease year shall commence upon
the first day of the calendar month next following the Commencement
Date. Each succeeding lease year shall commence upon the anniversary
date of the first lease year, and upon the anniversary date of each
succeeding lease year.
2.3 EXTENSION OPTIONS. Provided that as of the date of the notice specified
below, Tenant is not in default in the payment or performance of its
obligations under this Lease after receiving any notice required under
this Lease and beyond any applicable grace periods, and has not
previously been in monetary default of its obligations under this Lease
beyond any applicable grace period during the two (2) years prior to
the date of such notice, Tenant shall have the right to extend the term
of this Lease for one or both of two additional periods of five (5)
years each, each such period to begin immediately upon the expiration
of the then current term (the "Extended Term" or the "Extended Terms").
All of the terms, covenants and provisions of this Lease shall apply to
each such Extended Term except that (i) Base Operating Costs and Base
Taxes shall be adjusted to reflect a current base year for Operating
Costs and Taxes, and (ii) the Annual Fixed Rent Rate for each such
Extended Term shall be the market rate at the commencement of each of
the Extended Terms. The "market rate" shall be the annual fair market
rental rate during the Extended Term, for leases, on terms and
conditions (other than Fixed Rent but including any such adjusted Base
Operating Costs and Base Taxes) comparable to this Lease, for a term of
five years, for space of similar size to the Premises (but not in no
event less than 10,000 square feet) and of an age, quality, condition,
amenities and location comparable to the Premises and the Building in
the Woburn market area. If Tenant shall elect to exercise either or
both of the aforesaid options, it shall do so by giving Landlord notice
in writing of its intention to do so not later than 12 months prior to
the expiration of the then current term, as the case may be. If Tenant
gives such notice, the extension of this Lease shall be automatically
effected without the execution of any additional documents. The
original term and the Extended Terms are hereinafter collectively
called the "term".
Within fifteen (15) days following receipt of such notice by Tenant,
Landlord shall give notice to Tenant setting forth Landlord's
determination of the market rate for the Extended Term in question.
Within fifteen (15) days following receipt of Landlord's notice Tenant
shall either propose its determination of the market rate by giving
notice thereof to Landlord or shall accept Landlord's determination.
Failure on the part of Tenant to give such notice of its determination
shall bind Tenant to Landlord's determination. If Tenant proposes its
determination of the market rate, then Landlord and Tenant shall meet
for the purpose of reaching agreement. If the parties have been unable
to reach agreement within fifteen (15) days following Tenant's notice
to Landlord of its determination, then Tenant's exercise shall be
deemed revoked and its exercise of the aforesaid option shall be
rendered ineffective unless, within fifteen (15) days thereafter,
Tenant shall call for arbitration by written notice to Landlord.
If the Tenant calls for arbitration, then the market rate shall be
submitted to arbitration as follows: The market rate shall be
determined by impartial arbitrators, one to be chosen and paid for by
the Landlord, one to be chosen and paid for by Tenant, and a third to
be selected, if necessary, as below provided. The unanimous written
decision of the two first chosen, without selection and participation
of a third arbitrator, or otherwise, the written decision of a majority
of three arbitrators chosen and selected as aforesaid, shall be
conclusive and binding upon Landlord and Tenant. Landlord and Tenant
shall each notify the other of its chosen arbitrator within ten (10)
days following the call for arbitration and, unless such two
arbitrators shall have reached a unanimous decision within thirty (30)
days after their designation, they shall so notify the then President
of the Boston Bar Association and request him to select an impartial
third arbitrator. All such arbitrators shall be brokers or appraisers
with at least ten years of experience in appraising or valuing
properties of the general location, type and character as the Property
who is either a Senior Real Property Appraiser of the Society of Real
Estate Appraisers or a member of the Appraisal Institute (or any
successor organization). Such third arbitrator and the first two chosen
shall hear the parties and their evidence and render their decision
within thirty (30) days following the appointment of the third
arbitrator and notify Landlord and Tenant thereof. Landlord and Tenant
shall share equally the expense of the third arbitrator (if any). If
the dispute between the parties as to a market rate has not been
resolved before the commencement of the Extended Term, then Tenant
shall pay Fixed Rent under the Lease based upon the rate then in effect
at the expiration of the then current term until either the agreement
of the parties as to the market rate or the decision of the
arbitrators, as the case may be, at which time Tenant shall pay any
underpayment of Fixed Rent to Landlord, or Landlord shall refund any
overpayment of Fixed Rent to Tenant.
In any event, the Annual Fixed Rent Rate for the Extended Terms shall
not be less than the Annual Fixed Rent Rate in effect immediately prior
to each such Extended Term.
ARTICLE 3
IMPROVEMENTS
3.1 PERFORMANCE OF WORK AND APPROVAL OF LANDLORD'S WORK. Landlord shall
cause to be performed and completed the alterations, improvements,
renovations, installations and other base building work (the "Base
Building Work") described in the specifications attached hereto as
Exhibit C (the "Base Building Work Specifications") at Landlord's
expense. Additionally, Landlord shall cause to be performed and
completed the alterations, improvements, renovations, installations and
other work desired by Tenant to prepare the Premises for Tenant's use
and occupancy (the "TIW") in accordance with the Final Plans (as
hereinafter defined).
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The Final Plans, which are not prepared as of the date hereof,
shall be prepared in accordance with Section 3.2 below. (The
Base Building Work and the TIW are sometimes collectively referred
to herein as the "Landlord's Work"). All such Landlord's Work shall be
done in a good and workmanlike manner, in accordance with the Base
Building Plans and the Final Plans, employing good materials and so as
to conform to all applicable federal, state and local building laws,
including those relating to the removal of architectural barriers for
disabled persons. Tenant agrees that Landlord may make any minor
changes in Landlord's Work ("minor changes" meaning changes that are
customary to the trades to accommodate field conditions or substitute
materials of equal or better qualities in order to meet availability
schedules) which may become reasonably necessary or advisable, other
than substantial changes, without approval of Tenant, provided written
notice is promptly given to Tenant; and Landlord may make substantial
changes in Landlord's Work necessitated by building code requirements,
unavailability of materials and the like, with the written approval of
Tenant, which shall not be unreasonably withheld or delayed. Landlord
shall submit promptly the Final Plans and the building permit
application to the Town of Woburn and shall prosecute such application
and the issuance of all building permits for the Landlord's Work and
all certificates of use and occupancy for the Premises. Landlord shall
use diligence to cause Landlord's Work to be substantially completed by
the Delivery Date, subject to the provisions of Section 10.5 hereof and
any Tenant Delay. Landlord agrees that Tenant may make changes in such
work with the approval of Landlord, which Landlord shall not
unreasonably withhold, delay or condition, and the execution by
Landlord and Tenant of a Work Change Order in the form attached hereto
as Exhibit D. The TIW is specialized for Tenant's use and therefore
shall be deemed to be Tenant's property during the term hereof. Tenant
acknowledges that the hydraulic service elevator described in Exhibit C
as part of the Base Building Work may not be installed by the
Commencement Date. If Landlord has not installed the service elevator
on or before the Commencement Date, Landlord shall use diligence to
complete such installation no later than forty-five (45) days after the
Commencement Date. During such time that the service elevator is not
operational, Tenant shall be permitted to use the passenger elevator
for all purposes, including moving palettes of paper. Landlord shall be
responsible for paying the reasonable incremental moving costs incurred
by Tenant as a result of the lack of a service elevator.
3.2 PLANS AND SPECIFICATIONS. Tenant shall be solely responsible for the
preparation and submission to Landlord of the architectural,
electrical, mechanical and plumbing construction design drawings,
construction plans and specifications required to permit, construct and
complete the TIW (called "TIW Plans") and all and all other information
required by Landlord and the General Contractor necessary to perform
the TIW. The TIW Plans shall be subject to the approval of Landlord's
architect and engineers and shall comply with their requirements to
avoid aesthetic or other conflicts with the design and function of the
Building. If requested by Tenant, Landlord's architect will prepare the
TIW Plans necessary for the TIW at Tenant's cost. Whether or not the
TIW Plans are prepared with the help (in whole or in part) of
Landlord's architect, Tenant agrees to remain solely responsible for
the preparation and submission of the TIW Plans and all costs related
thereto. Tenant has assured itself by direct communication with the
architect and engineers (Landlord's or its own, as the case may be)
that the Final Plans can be delivered to Landlord on or before the
Final Plans Date, provided that Tenant promptly furnishes complete
information concerning its requirements to said architect and engineers
as and when requested by them and Landlord responds with its approval
or disapproval of the TIW Plans and any revisions to the TIW Plans
within the periods specified in this Section 3.2; and Tenant covenants
and agrees to cause said Final Plans to be delivered to Landlord on or
before Final Plans Date and to devote such time as may be necessary in
consultation with said architect and engineers to enable them to
complete and submit the TIW Plans before the Final Plans Date. Time is
of the essence in respect of the preparation and submission of plans by
Tenant and Landlord's response to each submission of the TIW Plans or
the revised TIW Plans by Tenant.
The TIW Plans shall require Landlord's approval, which shall not be
unreasonably withheld, delayed or conditioned. Landlord shall give
Tenant notice, in reasonable detail, of any reasonable objections or
concerns Landlord may have with respect to any TIW Plans or revised TIW
Plans within 7 business days after Landlord's receipt of TIW Plans or
revisions, and if Landlord does not give such notice within the
aforesaid 7-business day period, Landlord shall be deemed to have
approved the TIW Plans in question. Landlord shall not be deemed
unreasonable for withholding approval of plans which (i) involve or
might affect any structural element or exterior element of the Building
or any portion thereof, or (ii) might, in Landlord's reasonable
opinion, materially adversely affect the value of the Building or any
portion thereof, or (iii) might materially adversely affect the proper
functioning of the Building systems. If Landlord reasonably and timely
objects to the TIW Plans, or any portion thereof, Tenant shall cause
the TIW Plans to be revised in a manner sufficient to remedy Landlord's
reasonable objections and respond to Landlord's reasonable concerns and
redelivered to Landlord as soon as reasonably possible after Tenant's
receipt of Landlord's notice of objection (Tenant hereby agreeing to
use best efforts to respond within five (5) business days). The
aforesaid process shall be repeated until the plans are approved by
Landlord. The final TIW Plans approved by Landlord shall be called the
"Final Plans." Tenant shall use diligence to submit revised TIW Plans
and both parties shall cooperate to diligently complete the Final Plans
by the Final Plans Date.
Landlord shall cause the TIW to be completed, in accordance with this
Lease, by Erland Construction (the "General Contractor") and by
subcontractors selected and engaged by Landlord and the General
Contractor. Landlord shall cause the General Contractor to obtain
competitive bids for the TIW from at least three subcontractors for
each major trade of work involved in the TIW. Tenant shall have the
right to specify one subcontractor reasonably acceptable to Landlord to
participate in such competitive bidding for each such trade. One of the
three subcontractors shall employ non-union labor, unless no such
subcontractor is available to perform any particular trade. Landlord
shall cause the General Contractor to accept the lowest qualified bid
submitted for each such trade unless such bid fails to conform to the
Final Plans or the requirements of this Lease. Within 10 business days
after the date of the delivery of Final Plans to Landlord, Landlord
shall provide to Tenant a written summary (the "Cost Proposal") of the
cost of the TIW, based on the Final Plans. The Cost Proposal (and any
revisions thereto) shall include such reasonable supporting
documentation as Tenant shall reasonably require to confirm the
accuracy of the calculation of Tenant's Share (as hereinafter defined)
and compliance with the terms of this Lease. Tenant shall give written
notice to Landlord of any disapproval of the Cost Proposal, together
with reasons for such disapproval, within five business days after
receiving the Cost Proposal from Landlord. Tenant shall not
unreasonably withhold
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or condition its approval of the Cost Proposal. If Tenant fails to
deliver such notice of disapproval to Landlord within such
five-business-day period, Tenant shall be deemed to have approved the
Cost Proposal. If Tenant reasonably disapproves the Cost Proposal
within such five-business-day period, Tenant shall revise the Final
Plans within such 5-day period, subject to Landlord's approval, which
shall not be unreasonably withheld, delayed or conditioned. Within 5
business days after Tenant's submitting of the revised Final Plans,
Landlord shall submit a revised Cost Proposal to Tenant based on the
revised Final Plans and shall then be released to commence the TIW.
Tenant and Landlord agree to hold weekly project meetings with the
architect and contractor commencing fourteen (14) days after the date
this Lease is executed.
In calculating the costs of Landlord's Work for the purpose of
determining Tenant's Share (the "Contract Price"), such costs shall
include only the sum of (i) fees and expenses paid to architects and
engineers in connection with the preparation and revision of the Final
Plans, (ii) the total of all bids from subcontractors accepted by the
General Contractor in accordance with this Lease (the "Hard Costs"),
(iii) a charge for the General Contractor's general conditions
(equitably allocated to the TIW) not to exceed ten (10%) percent of the
Hard Costs (the "General Conditions") and a fee equal to 5% of the sum
of the Hard Costs PLUS the General Conditions, and (iv) a fee payable
to Nordblom Development Company on account of the management of
Landlord's Work equal to 3% of the sum of the Hard Costs, PLUS the
General Conditions, PLUS the General Contractor's fee. Landlord shall
complete Landlord's Work at its sole expense, subject to reimbursement
by Tenant of the amount ("Tenant's Share") by which the Contract Price,
as specified in the Cost Proposal (subject to increases or decreases
under the next paragraph), exceeds the Allowance.
If, after the Cost Proposal has been approved by Landlord and Tenant,
Tenant requests any changes or substitutions to the Final Plans, all
such changes shall be subject to Landlord's prior written approval,
which shall not be unreasonably withheld, delayed or conditioned.
Before implementing any such change or substitution, Landlord shall
prepare and deliver to Tenant, for Tenant's approval, a change order,
on the form attached to this Lease as Exhibit D, setting forth any
increase or decrease in the Contract Price resulting from such change.
If Tenant fails to approve such change order within five business days
after receiving it from Landlord, Tenant shall be deemed to have
withdrawn its request. If Tenant approves such change order, Landlord
shall make the requested change or substitution to Landlord's Work and
shall revise the Cost Proposal if necessary. Landlord shall cause its
General Contractor to retain until ninety (90) days after the
substantial completion of the Leasehold Improvements complete and
accurate financial records with respect to all costs and expenses
incurred in connection with the performance of the Landlord's Work, and
Tenant shall have the right to inspect such records during normal
business hours for the purpose of verifying such costs.
Tenant shall pay to Landlord 50% of Tenant's Share, determined in
accordance with the final Cost Proposal approved by Landlord and Tenant
(the "First Payment"), within ten business days after receiving such
Cost Proposal. On the Commencement Date, Tenant shall pay to Landlord a
sum equal to 90% of Tenant's Share, determined in accordance with such
Cost Proposal, as increased or decreased by any change orders, less the
amount of the First Payment. Any contrary provision of this Lease
notwithstanding, until completion of all Punch List Items, Tenant shall
have the right to retain a sum equal to ten percent of Tenant's Share.
Tenant shall pay Landlord such retained sum within 30 days after the
completion of all Punch List Items.
3.3 ACCEPTANCE OF THE PREMISES. Tenant or its representatives may, at
reasonable times, enter upon the Premises during the progress of the
Landlord's Work to inspect the progress thereof and to determine if the
Landlord's Work is being performed in accordance with the requirements
of this Lease. Tenant shall promptly give to Landlord notices of any
alleged failure by Landlord to comply with those requirements. Except
for latent or structural defects which reasonably could not have been
discovered in the course of a diligent inspection of Landlord's Work
(including without limitation any defects that Tenant could not
reasonably discover due to seasonal conditions) and of which Tenant
shall give Landlord notice within one (1) year from the Commencement
Date, any incomplete Punch List Items and all incomplete or defective
items of Landlord's Work of which Tenant gives Landlord notice within
90 days after the Commencement Date, Tenant shall be deemed to have
approved all aspects of Landlord's Work as of the end of such 90-day
period.
3.4 PRE-COMMENCEMENT ENTRY BY TENANT. With Landlord's prior consent, which
shall not be unreasonably withheld, Tenant shall have the right to
enter the Premises, during normal business hours and without payment of
rent, but otherwise subject to all of the terms and conditions of this
Lease, to perform such work or decoration as is to be performed by, or
under the direction or control of Tenant, which work may include,
without limitation, installation of Tenant's telephone and
telecommunications system and equipment, cubicles and moveable
partitions, so long as such work does not interfere with the
performance of Landlord's Work. Notwithstanding the foregoing, no
earlier than fourteen (14) days prior to the Commencement Date, Tenant
shall be permitted access to the Premises to commence installation of
its cubicles and moveable partitions as aforesaid. At such time,
Landlord shall have sufficiently completed installation of carpet in
portions of the Premises to allow Tenant to commence the installation
of its cubicles and partitions, and shall thereafter diligently
complete the installation of said carpet in the remainder of the
Premises in order to permit Tenant to diligently complete the
installation of its cubicles and partitions.
ARTICLE 4
RENT
4.1 THE FIXED RENT. Commencing on the Commencement Date, Tenant covenants
and agrees to pay rent ("Fixed Rent") to Landlord at the Original
Address of Landlord or at such other place or to such other person or
entity as Landlord may by notice in writing to Tenant from time to time
direct, at the Annual Fixed Rent Rate, in equal installments at the
Monthly Fixed Rent Rate (which is 1/12th of the Annual Fixed Rent
Rate), in advance, on the first day of each calendar month included in
the term; and for any
8
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portion of a calendar month following the Commencement Date, at the
rate of 1/30 of the installment of Monthly Fixed Rent applicable
during the first lease year for each day of such calendar month
included in the term payable in advance on the Commencement Date.
If Landlord shall give notice to Tenant that all rent and other
payments due hereunder are to be made to Landlord by electronic funds
transfers, so called, or by similar means, Tenant shall, to the extent
Tenant has capabilities and means in place, make all such payments as
shall be due after receipt of said notice by means of said electronic
funds transfers (or such similar means as designated by Landlord).
4.2 ADDITIONAL RENT. Tenant covenants and agrees to pay insurance costs,
utility charges, personal property taxes and its pro rata share of
increases in operating costs with respect to the Premises as provided
in this Section 4.2 as follows:
4.2.1 REAL ESTATE TAXES. If Taxes (as hereinafter defined) for any
fiscal tax year (hereinafter called, a "Tax Year") during the
term shall exceed Base Taxes, Tenant shall reimburse Landlord,
as additional rent, for Tenant's Percentage of such excess
(such amount hereinafter referred to as "Tax Excess"). Tenant
shall remit to Landlord, on the first day of each calendar
month, estimated payments on account of Tax Excess, in equal
installments sufficient in the aggregate to provide Landlord,
by the time payments on account of Taxes are due and payable
to any governmental authority responsible for collection of
such payments, a sum equal to the Tax Excess, as reasonably
estimated by Landlord from time to time on the basis of the
most recent tax data available, payable by Tenant on account
of such payments. If the total of such monthly remittances for
any Tax Year is greater than the actual Tax Excess for such
Tax Year, Landlord shall promptly pay to Tenant, or credit
against the next accruing payments to be made by Tenant
pursuant to this subsection 4.2.1, the difference; if the
total of such remittances is less than the actual Tax Excess
for such Tax Year, Tenant shall pay the difference to Landlord
at least ten (10) days prior to the date or dates within such
Tax Year that any Taxes become due and payable to the
governmental authority (but in any event no earlier than ten
(10) days following a written notice to Tenant, which notice
shall set forth the manner of computation of Tax Excess).
Landlord shall, upon request of Tenant, from time to time,
provide Tenant with copies of real estate tax bills with
respect to which Tenant is required to pay Tax Excess.
If, after Tenant shall have made reimbursement to Landlord
pursuant to this subsection 4.2.1, Landlord shall receive a
refund of any portion of Taxes paid by Tenant with respect to
any Tax Year during the term hereof as a result of an
abatement of such Taxes by legal proceedings, settlement or
otherwise (without Landlord having any obligation to undertake
any such proceedings), Landlord shall promptly pay to Tenant,
or credit against the next accruing payments to be made by
Tenant pursuant to this subsection 4.2.1, the Tenant's
Percentage of the refund (less the proportional, pro rata
expenses, including attorneys' fees and appraisers' fees,
incurred in connection with obtaining any such refund), as
relates to Tax Excess paid by Tenant to Landlord with respect
to any Tax Year for which such refund is obtained.
In the event this Lease shall commence, or shall end (by
reason of expiration of the term or earlier termination
pursuant to the provisions hereof), on any date other than the
first or last day of the Tax Year, or should the Tax Year or
period of assessment of real estate taxes be changed or be
more or less than one (1) year, as the case may be, then the
amount of Tax Excess which may be payable by Tenant as
provided in this subsection 4.2.1 shall be appropriately
apportioned and adjusted.
The term "Taxes" shall mean all taxes, assessments,
betterments and other charges and impositions (including, but
not limited to, fire protection service fees and similar
charges) levied, assessed or imposed at any time during the
term by any governmental authority upon or against the
Property, or taxes in lieu thereof, and additional types of
taxes to supplement real estate taxes due to legal limits
imposed thereon. If, at any time during the term of this
Lease, any tax or excise on rents or other taxes, however
described, are levied or assessed against Landlord with
respect to the rent reserved hereunder, either wholly or
partially in substitution for, or in addition to, real estate
taxes assessed or levied on the Property, such tax or excise
on rents shall be included in Taxes; however, Taxes shall not
include franchise, estate, inheritance, succession, capital
levy, excise, transfer, income or excess profits taxes
assessed on Landlord. Taxes shall include any estimated
payment made by Landlord on account of a fiscal tax period for
which the actual and final amount of taxes for such period has
not been determined by the governmental authority as of the
date of any such estimated payment.
4.2.2 PERSONAL PROPERTY TAXES. Tenant shall pay all taxes charged,
assessed or imposed upon the personal property of Tenant in or
upon the Premises.
4.2.3 OPERATING COSTS. If, during the term hereof, Operating Costs
(as hereinafter defined) incurred by Landlord in any calendar
year shall exceed Base Operating Costs, Tenant shall reimburse
Landlord, as additional rent, for Tenant's Percentage of any
such excess (such amount being hereinafter referred to as the
"Operating Costs Excess"). Tenant shall remit to Landlord, on
the first day of each calendar month, estimated payments on
account of Operating Costs Excess, such equal monthly amounts
to be sufficient to provide Landlord, by the end of the
calendar year, a sum equal to the Operating Costs Excess for
such calendar year, as reasonably estimated by Landlord from
time to time. If, at the expiration of the year in respect of
which monthly installments of Operating Costs Excess shall
have been made as aforesaid, the total of such monthly
remittances is greater than the actual Operating Costs Excess
for such year, Landlord shall promptly pay to Tenant, or
credit against the next accruing payments to be made by Tenant
pursuant to this subsection 4.2.3, the difference; if the
total of such remittances is less than the Operating Costs
Excess for such
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year, Tenant shall pay the difference to Landlord
within twenty (20) days from the date Landlord shall
furnish to Tenant an itemized statement of the Operating Costs
Excess, which statement Landlord shall provide to Tenant
within a reasonable period of time following the end of any
calendar year (but in no event later than 12 months following
the end of such calendar year), prepared, allocated and
computed in accordance with generally accepted accounting
principles, such statement setting forth in reasonable detail
the basis for the computation of any increase in Operating
Costs for such year. Tenant shall have the right, upon
reasonable notice and during business hours, to examine, at
Landlord's office, within six (6) months following receipt of
a statement, Landlord's books and records respecting such
statement. If such examination discloses any errors,
appropriate adjustments shall be made. Any reimbursement for
Operating Costs due and payable by Tenant with respect to
periods of less than twelve (12) months shall be equitably
prorated.
The term "Operating Costs" shall mean all costs and expenses
incurred by Landlord for the operation, cleaning, maintenance,
repair and upkeep of the Property, including, without
limitation, all costs of maintaining and repairing the
Property (including snow removal, landscaping and grounds
maintenance, parking lot operation and maintenance, cleaning
of any common dining area for the cafeteria, cleaning,
maintenance and repair of a fitness facility, security,
operation and repair of heating and air-conditioning
equipment, elevators, lighting and any other Building
equipment or systems) and of all repairs and replacements
(other than repairs or replacements or other items for which
Landlord has a right to receive reimbursement from
contractors, other tenants of the Building or from others)
necessary to keep the Property in good working order, repair,
appearance and condition; all costs, including material and
equipment costs, for cleaning and janitorial services to the
Building (including window cleaning of the Building); all
costs of cafeteria subsidy programs, if any, not to exceed
$4,000 per month for the entire Building; all costs of any
reasonable insurance carried by Landlord relating to the
Property; all costs related to provision of heat (including
oil, electric, steam and/or gas), air-conditioning, and water
(including sewer charges) and other utilities to the Building
(exclusive of reimbursement to Landlord for any of same
received as a result of direct billing to any tenant of the
Building); payments under all service contracts relating to
the foregoing; all compensation, fringe benefits, payroll
taxes and workmen's compensation insurance premiums related
thereto with respect to any employees of Landlord or its
affiliates engaged in security and maintenance of the
Property; attorneys' fees and disbursements (exclusive of any
such fees and disbursements incurred in tax abatement
proceedings or the preparation of leases, in procuring
tenants, or in disputes with tenants) and auditing and other
professional fees and expenses relating to the operation of
the Property; and a management fee comparable to fees charged
by other landlords of comparable buildings in the vicinity of
the Building.
Notwithstanding any other provision of this Lease, Operating
Costs shall not include the following: (a) the cost of repairs
or replacements (i) resulting from casualty losses or eminent
domain takings (other than the amount of any reasonable
deductible) or (ii) correcting defects in design or
construction of the Building; (b) costs incurred due to
violation by Landlord or its agents, employees or contractors
of the terms and conditions of any lease or any applicable
law, code or regulation; (c) depreciation or amortization of
the Building or any part thereof; (d) replacement or
contingency reserves; (e) ground lease rents or payments of
principal, interests or other charges in connection with any
other debt or equity obligations; (f) legal, other
professional fees and internal administrative expenses
relating to disputes or negotiations with tenants, leasing,
financing or other services not related to the normal
operation, maintenance, cleaning, repair and protection of the
Property; (g) brokerage fees and commissions and other
expenses incurred in connection with efforts to lease portions
of the Property; (h) the cost of special services rendered for
to Building tenants which are directly chargeable to such
tenants; (i) expenses incurred for the sole benefit of a
particular tenant; (j) Landlord's and Landlord agents' general
overhead not directly related to the operation or maintenance
of the Premises; (k) costs of alterations, additions,
installations and improvements made in connection with the
preparation of any portion of the Property for occupancy by a
new or existing tenant; (l) costs of expanding the rentable
area of the Building; (m) capital expenditures other than
those included in Operating Costs under the next paragraph of
this Section 4.2.3; (n) any expenses with respect to which
Landlord is entitled to reimbursement from insurance proceeds
or from a third party; (o) costs of investigating, testing,
evaluating or remediating hazardous materials on the Property
or the compliance of the Property with laws and regulations
governing or regulating hazardous materials, except to the
extent any such costs arise out of a breach of Tenant's
covenants specified in subsection 6.2.3, (p) costs of
complying with laws in effect prior to the Commencement Date,
including without limitation the Americans with Disabilities
Act of 1990, as amended; (q) sculptures, paintings and other
works of art; and (r) all expenses related to any cafeteria,
other than expenses of cleaning any common dining area and a
subsidy not exceeding $4,000 in any calendar year, and
compensation paid to employees or other persons in connection
with other commercial concessions operated by Landlord.
If during the term of this Lease, Landlord shall incur any
Operating Expenses that are properly characterized as any
capital expenditures according to generally acceptable
accounting practices, Operating Costs for each calendar year
in which and after such capital expenditure is made shall
include only the annual charge-off of such capital
expenditure. Such annual charge-off shall be determined by (i)
dividing the original cost of the capital expenditure by the
number of years of useful life of the item procured by such
capital expenditure, which useful life shall be reasonably
determined by Landlord in accordance with generally accepted
accounting principles and good building management practices
in effect at the time of acquisition of the capital item; and
(ii) adding to such quotient an interest factor computed on
the unamortized balance of such capital expenditure based upon
an interest rate reasonably determined by Landlord as being
the interest rate then being charged for long-term mortgages
by institutional lenders on like properties within the
locality in which the Building is located.)
If during any portion of any year for which Operating Costs
are being computed, the Building was not fully occupied by
tenants or if Landlord was not supplying all tenants with the
services being supplied hereunder, the variable components of
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Operating Costs incurred shall be reasonably extrapolated by
Landlord to the estimated Operating Costs that would have been
incurred if the Building were fully occupied by tenants and
such services were being supplied to all tenants, and such
extrapolated amount shall, for the purposes of this Section
4.2.3, be deemed to be the Operating Costs for such year.
4.2.4 INSURANCE. Tenant shall, at its expense, take out and maintain
throughout the term the following insurance:
4.2.4.1 Comprehensive liability insurance covering Tenant and
naming Landlord and Landlord's managing agent and any
mortgagee of which Tenant has been given notice as
additional insureds and indemnifying the parties so
named against all claims and demands for death or any
injury to person or damage to property which may be
claimed to have occurred on the Premises (or the
Property, insofar as used by customers, employees,
servants or invitees of the Tenant), in amounts which
shall, at the beginning of the term, be at least
equal to the limits set forth in Section 1.1, and,
which, from time to time during the term, shall be
for such higher limits, if any, as are customarily
carried in the area in which the Premises are located
on property similar to the Premises and used for
similar purposes; and workmen's compensation
insurance with statutory limits covering all of
Tenant's employees working on the Premises.
4.2.4.2 Fire insurance with the usual extended coverage
endorsements covering all Tenants' furniture,
furnishings, trade fixtures, and equipment.
4.2.4.3 All such policies shall be obtained from responsible
companies qualified to do business and in good
standing in Massachusetts, which companies and the
amount of insurance allocated thereto shall be
subject to Landlord's reasonable approval. Tenant
agrees to furnish Landlord with certificates
evidencing all such insurance prior to the beginning
of the term hereof and evidencing renewal thereof at
least thirty (30) days prior to the expiration of any
such policy. Each such policy shall be non-cancelable
with respect to the interest of Landlord without at
least ten (10) days' prior written notice thereto. In
the event provision for any such insurance is to be
by a blanket insurance policy, the policy shall
allocate a specific and sufficient amount of coverage
to the Premises.
4.2.4.4 All insurance which is carried by either Landlord or
Tenant with respect to the Building, Premises or to
furniture, furnishings, fixtures, or equipment
therein or alterations or improvements thereto,
whether or not required, shall include provisions
which either designate the other party as one of the
insured or deny to the insurer acquisition by
subrogation of rights of recovery against the other
party to the extent such rights have been waived by
the insured party prior to occurrence of loss or
injury, insofar as, and to the extent that, such
provisions may be effective without making it
impossible to obtain insurance coverage from
responsible companies qualified to do business in the
state in which the Premises are located (even though
extra premium may result therefrom). In the event
that extra premium is payable by either party as a
result of this provision, the other party shall
reimburse the party paying such premium the amount of
such extra premium. If at the request of one party,
this non-subrogation provision is waived, then the
obligation of reimbursement shall cease for such
period of time as such waiver shall be effective, but
nothing contained in this subsection shall derogate
from or otherwise affect releases elsewhere herein
contained of either party for claims. Each party
shall be entitled to have certificates of any
policies containing such provisions. Each party
hereby waives all rights of recovery against the
other for loss or injury against which the waiving
party is protected by insurance containing said
provisions or is required under this Lease to be so
protected, reserving, however, any rights with
respect to any excess of loss or injury over the
amount recovered by such insurance.
4.2.5 UTILITIES. Tenant shall pay to Landlord, as
additional rent, all charges for electricity supplied
by Landlord to the Premises and separately check
metered (which shall include electricity for lights,
outlets and VAV boxes serving the Premises
exclusively) without any mark-up by Landlord, and
charges for telephone and other utilities or services
not supplied by Landlord pursuant to Subsections
5.1.1, 5.1.2, and 5.1.3 directly to the providers of
such utilities or services, whether designated as a
charge, tax, assessment, fee or otherwise, all such
charges to be paid as the same from time to time
become due. It is expressly understood and agreed by
Tenant that Tenant shall be solely responsible for
procuring the installation of all telephone services
to the Premises. For any period in which Tenant is
responsible for paying electrical charges, Landlord
shall furnish Tenant with a statement specifically
stating the number of kilowatt hours consumed by
Tenant for the period in question. Tenant shall have
the right, upon reasonable notice and during business
hours, to examine, at Landlord's office, within six
(6) months following the end of the calendar year in
question, Landlord's books and records relating to
the apportionment of electrical charges. Tenant shall
also have the right, from time to time and upon
reasonable notice to Landlord, to have access to the
electric meter servicing the Premises for the purpose
of confirming Tenant's level of consumption of
electricity. Except as otherwise provided in Article
5, it is understood and agreed that Tenant shall make
its own arrangements for the installation or
provision of all such utilities and that Landlord
shall be under no obligation to furnish any utilities
to the Premises and shall not be liable for any
interruption or failure in the supply of any such
utilities to the Premises.
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4.3 LATE PAYMENT OF RENT. If any installment of rent is paid after the date
the same was due, and if on a prior occasion in the twelve (12) month
period prior to the date such installment was due an installment of
rent was paid after the same was due, then Tenant shall pay Landlord a
late payment fee equal to five (5%) percent of the overdue payment.
4.4 LETTER OF CREDIT. The performance of Tenant's obligations under this
Lease shall be secured by a letter of credit throughout the term hereof
in accordance with and subject to the following terms and conditions:
4.4.1 AMOUNT OF LETTER OF CREDIT. (a) Concurrently with Tenant's
execution and delivery of this Lease, Tenant shall deliver to
Landlord an irrevocable standby letter of credit (the
"Original Letter of Credit") which shall be (i) in the form of
Exhibit G attached to this Lease (the "Form LC"), (ii) issued
by a bank reasonably satisfactory to Landlord upon which
presentment may be made in Boston, Massachusetts, (iii) in the
amount equal to the Letter of Credit Amount, and (iv) for a
term of at least 1 year, subject to the provisions of Section
4.4.2 below. The Original Letter of Credit, any Additional
Letters(s) of Credit and Substitute Letter(s) of Credit are
referred to herein as the "Letter of Credit."
(b) Tenant shall be entitled to reduce the Letter of Credit
Amount up to 2 times during the term, provided the following
conditions are satisfied at the time of each such reduction:
(x) At such time that Tenant has had a net income of
at least $3,000,000.00 during any 12-month period,
Tenant shall be permitted to reduce the Letter of
Credit Amount to an amount equal to the sum of nine
(9) TIMES the Monthly Fixed Rent Rate in effect at
the time of the reduction, provided that Tenant
delivers to Landlord a statement which has been
reviewed by auditors reporting such net income, and
provided, further, that Tenant has not received from
Landlord notice of a default under this Lease, which
default is continuing at the time of the reduction,
and provided further that at the time of the
reduction Tenant's cash and/or cash equivalents
exceed $20,000,000.00.
(y) In addition, if Tenant has had a net income of at
least $3,000,000.00 during a 12-month period
subsequent to the 12-month period on which the first
reduction was based, Tenant shall be permitted to
further reduce the Letter of Credit Amount to an
amount equal to the sum of six (6) TIMES the Monthly
Fixed Rent Rate in effect at the time of the
reduction, provided Tenant delivers to Landlord with
a statement which has been reviewed by auditors
reporting such net income, and provided further that
Tenant has not received from Landlord notice of a
default under this Lease, which default is continuing
at the time of the reduction, and provided, further,
that at the time of the reduction Tenant's cash
and/or cash equivalents exceed $20,000,000.00.
Tenant shall not be entitled to any other reductions in the
Letter of Credit Amount during the term of this Lease.
4.4.2 RENEWAL OF LETTER OF CREDIT. Each Letter of Credit shall be
automatically renewable in accordance with the second to last
paragraph of the Form LC; provided however, that Tenant shall
be required to deliver to Landlord a new letter of credit (a
"Substitute Letter of Credit") satisfying the requirements for
the Original Letter of Credit under Section 4.4.1 on or before
the date 30 days prior to the expiration of the term of the
Letter of Credit then in effect, if the issuer of such Letter
of Credit gives notice of its election not to renew such
Letter of Credit for any additional period pursuant thereto.
Should any Letter of Credit contain a final expiration date,
in addition to a current expiration date, such final
expiration date shall be no earlier than 45 days following the
Expiration Date of this Lease.
4.4.3 DRAWS TO CURE DEFAULTS. If Tenant shall fail to pay when due
any Fixed Rent, Additional Rent or other charges payable under
this Lease or shall fail to perform any of its obligations
under this Lease, and if any such failure continues after any
notice required under this Lease is given and the expiration
of all applicable cure periods, then Landlord shall have the
right, at any time thereafter to draw down from the Letter of
Credit the amount necessary to cure such default. In the event
of any such draw by the Landlord, Tenant shall, within 30 days
of written demand therefor, deliver to Landlord an additional
Letter of Credit ("Additional Letter of Credit") satisfying
the requirements for the Original Letter of Credit, except
that the amount of such Additional Letter of Credit shall be
the amount of such draw.
4.4.4 DRAWS TO PAY DAMAGES. In addition, if (i) this Lease shall
have been terminated as a result of Tenant's default under
this Lease beyond the expiration of the applicable cure
period, and/or (ii) this Lease shall have been rejected in a
bankruptcy or other creditor-debtor proceeding, then Landlord
shall have the right at any time thereafter to draw down from
the Letter of Credit an amount sufficient to pay any and all
damages payable by Tenant on account of such termination or
rejection, as the case may be, pursuant to Article 8 hereof.
In the event of bankruptcy or other creditor-debtor proceeding
against Tenant, all proceeds of the Letter of Credit shall be
deemed to be applied first to the payment of rent and other
charges due Landlord for all periods prior to the filing of
such proceedings.
4.4.5 DRAWS FOR FAILURE TO DELIVER SUBSTITUTE LETTER OF CREDIT. If
Tenant fails timely to deliver to Landlord a Substitute Letter
of Credit, then Landlord shall have the right, at any time
thereafter, without giving any further notice to Tenant, to
draw down the Letter of Credit and to hold the proceeds
thereof ("Security Proceeds") in a separate interest-bearing
bank account identified as holding Tenant's funds, which
proceeds may be withdrawn and applied by Landlord under the
same circumstances and for the same purposes as if the
Security Proceeds were a Letter of Credit. Upon any such
application of Security Proceeds by Landlord, Tenant shall,
within 30 days of written demand therefor, deliver to
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Landlord an Additional Letter of Credit in the amount of
Security Proceeds so applied. Notwithstanding the foregoing,
at any time that Landlord is holding Security Proceeds as
aforesaid, Tenant may replace the Security Proceeds with a
Substitute Letter of Credit in the full amount of the
Security Proceeds. Landlord shall promptly refund such
Security Proceeds to Tenant upon receipt of the Substitute
Letter of Credit.
4.4.6 TRANSFERABILITY. Landlord shall be entitled to transfer its
beneficial interest under the Letter of Credit or any Security
Proceeds in connection with a transfer of Landlord's interest
in the Property, and the Letter of Credit shall specifically
state that it is transferable by Landlord, its successors and
assigns. Upon any transfer of Landlord's interest in the
Property, Landlord shall simultaneously transfer its interest
under the Letter of Credit and/or Security Proceeds to the
transferee of the Property. All costs and expenses incurred by
Landlord to effect such transfer shall be paid by Tenant upon
demand therefor.
4.4.7 RETURN OF LETTER OF CREDIT AT END OF TERM. Within 45 days
after the expiration of the term, to the extent Landlord has
not previously drawn upon any Letter of Credit or Security
Proceeds held by Landlord, Landlord shall return the same to
Tenant provided that there is not at such time any continuing
default of any of Tenant's obligations under this Lease.
ARTICLE 5
LANDLORD'S COVENANTS
5.1 AFFIRMATIVE COVENANTS. Landlord covenants with Tenant:
5.1.1 HEAT AND AIR-CONDITIONING. To furnish to the Premises heat and
air-conditioning (reserving the right, at any time, to change
energy or heat sources) sufficient to maintain the Premises at
comfortable temperatures (subject to all federal, state, and
local regulations relating to the provision of heat), during
the hours of 8:00 a.m. to 6:00 p.m. on Mondays through Fridays
and 8:00 a.m. to 1:00 p.m. on Saturdays, except for the
following holidays on which the Building is normally closed:
New Year's Day, Washington's Birthday, Patriot's Day, Memorial
Day, Independence Day, Labor Day, Columbus Day, Veteran's Day,
Thanksgiving, Christmas and Martin Luther King Day. If Tenant
requires heat and air-conditioning other than on the days that
the Building is normally open or during hours other than
listed above, Landlord shall furnish the same upon Tenant's
reasonable advance request therefor and Tenant shall pay
Landlord, as additional rent, Landlord's charges for such
after-hours heat or air-conditioning.
5.1.2 ELECTRICITY. To furnish to the Premises, separately metered
and at the direct expense of Tenant as hereinabove provided,
reasonable electricity for Tenant's Permitted Uses. If Tenant
shall require electricity in excess of reasonable quantities
for Tenant's Permitted Uses and if (i) in Landlord's
reasonable judgment, Landlord's facilities are inadequate for
such excess requirements, or (ii) such excess use shall result
in an additional burden on the Building utilities systems and
additional cost to Landlord on account thereof, as the case
may be, (a) Tenant shall, upon demand, reimburse Landlord for
such additional cost, as aforesaid, or (b) Landlord, upon
Tenant's written request, and at the sole cost and expense of
Tenant, will furnish and install such additional wire,
conduits, feeders, switchboards and appurtenances as
reasonably may be required to supply such additional
requirements of Tenant (if electricity therefor is then
available to Landlord), provided that the same shall be
permitted by applicable laws and insurance regulations and
shall not cause permanent damage or injury to the Building or
cause or create a dangerous or hazardous condition or entail
excessive or unreasonable alterations or repairs.
5.1.3 CLEANING; WATER. To provide cleaning to the Premises and
common areas of the Building in accordance with cleaning and
janitorial standards generally prevailing throughout the term
hereof in comparable office buildings within the municipality
in which the Building is located; and to furnish water for
ordinary cleaning, lavatory and toilet facilities.
5.1.4 ELEVATOR; FIRE ALARM. To furnish passenger elevator service
(if any) from the lobby to the Premises and to provide a
freight elevator for use by all tenants during normal Building
hours; and to maintain fire alarm systems within the Building.
5.1.5 REPAIRS. Except as otherwise expressly provided herein, to
perform such maintenance, repairs and replacements to the
roof, exterior walls, floor slabs and other structural
components of the Building, and to the Common Facilities and
the plumbing, electrical, mechanical, emergency, heating,
ventilating and air-conditioning and other systems and
equipment of the Building as may be necessary to keep them in
good repair and condition and in compliance with all
applicable laws, rules and regulations (exclusive of equipment
installed by Tenant and except for those repairs required to
be made by Tenant pursuant to Section 6.1.3 hereof and repairs
or replacements occasioned by any act or negligence of Tenant,
its servants, agents, customers, contractors, employees,
invitees, or licensees).
5.1.6 LANDSCAPING. To provide landscaping, snow removal and grounds
maintenance services to the Property consistent with those
services provided by landlords of comparable office buildings
in the area.
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5.1.7 LANDLORD'S INSURANCE. To take out and maintain throughout the
term (i) all-risk casualty insurance in an amount equal to
100% of the replacement cost of the Building and the
improvements on the Property, and (ii) comprehensive general
liability insurance with respect to the Property in
commercially reasonable amounts, but in no event less than the
amounts specified in Section 1.1 of this Lease.
5.2 INTERRUPTION. Landlord shall be under no responsibility or
liability for failure or interruption of any of the
above-described services, repairs or replacements caused by
breakage, accident, strikes, repairs, inability to obtain
supplies, labor or materials, or for any other causes beyond
the control of the Landlord, and in no event for any indirect
or consequential damages to Tenant; and failure or omission on
the part of the Landlord to furnish any of same for any of the
reasons set forth in this paragraph shall not be construed as
an eviction of Tenant, actual or constructive, nor entitle
Tenant to an abatement of rent, nor render the Landlord liable
in damages, nor release Tenant from prompt fulfillment of any
of its covenants under this Lease. However, in each instance
of interruption or failure, Landlord shall use diligence to
eliminate the cause thereof.
5.3 OUTSIDE SERVICES. In the event Tenant wishes to provide outside
services for the Premises over and above those services to be provided
by Landlord as set forth herein, Tenant shall first obtain the prior
written approval of Landlord (which approval shall not be unreasonably
withheld or delayed) for the installation and/or utilization of such
services ("Outside services" shall include, but shall not be limited
to, cleaning services, television, so-called "canned music" services,
security services, catering services and the like.) In the event
Landlord approves the installation and/or utilization of such services,
such installation and utilization shall be at Tenant's sole cost, risk
and expense.
5.4 LANDLORD'S REPRESENTATIONS. Landlord hereby represents and warrants to
Tenant that (i) it has good title to the Premises and common areas of
the Building and the Property in fee simple with no encumbrances
thereon that would interfere with Tenant's rights hereunder; (ii) it
has full right and authority to execute this Lease; (iii) this Lease
does not conflict with any other agreement to which Landlord is bound;
(iv) the Building and the Property are zoned to allow Tenant's use of
the Premises for offices; and (v) the heating, ventilating and
air-conditioning systems and the mechanical, electrical and plumbing,
and all other Building systems are, as of the date of this Lease, in
good working order and condition.
5.5 ON-SITE AMENITIES. Landlord shall provide fitness and shower facilities
for Tenant's use during the normal Building hours specified above, and
by card access for after hours use, and shall cause to be operated on
the Property an on-site cafeteria in accordance with the terms and
provisions of an operating agreement entered into between Landlord and
the provider of such cafeteria services, it being expressly understood
that said provider shall have the sole right to determine the hours of
operation of the cafeteria pursuant to the terms of the aforesaid
operating agreement. Tenant agrees to participate in any subsidy
programs for the cafeteria that may be established from time to time.
Tenant shall be obligated to pay the Tenant's Percentage of any such
subsidy program, which shall be included as part of Operating Costs for
the Building and which shall not to exceed $4,000.00 per month for the
entire Building. In the event that a cafeteria is not operating on or
before the Commencement Date, Landlord will arrange for a temporary
food service, such as a catering truck or a temporary in-house
facility, for Tenant's use until such time that the full service
cafeteria is operating. Landlord agrees to complete the amenities
center no later than one hundred twenty (120) days after the
Commencement Date.
ARTICLE 6
TENANT'S ADDITIONAL COVENANTS
6.1 AFFIRMATIVE COVENANTS. Tenant covenants at all times during the term
and for such further time (prior or subsequent thereto) as Tenant
occupies the Premises or any part thereof:
6.1.1 PERFORM OBLIGATIONS. To perform promptly all of the
obligations of Tenant set forth in this Lease; and to pay when
due the Fixed Rent and Additional Rent and all charges, rates
and other sums which by the terms of this Lease are to be paid
by Tenant.
6.1.2 USE. To use the Premises only for the Permitted Uses, and from
time to time to procure all licenses and permits necessary
therefor, at Tenant's sole expense. With respect to any
licenses or permits for which Tenant may apply relating to
Tenant's use of the Premises, pursuant to this subsection
6.1.2 or any other provision hereof, Tenant shall furnish
Landlord copies of applications therefor on or before their
submission to the governmental authority.
6.1.3 REPAIR AND MAINTENANCE. To maintain the Premises in neat order
and condition and to perform all routine and ordinary repairs
to the Premises and to any plumbing, heating, electrical,
ventilating and air-conditioning systems located within the
Premises and installed by Tenant such as are necessary to keep
them in good working order, appearance and condition, as the
case may require, reasonable use and wear thereof and damage
by fire or by other casualty only excepted; to keep all glass
in windows and doors of the Premises (except glass in the
exterior walls of the Building) whole and in good condition
with glass of the same quality as that injured or broken; and
to make as and when needed as a result of misuse by, or
neglect or improper conduct of Tenant or Tenant's servants,
employees, agents, invitees or licensees or otherwise, all
repairs necessary, which repairs and replacements shall be in
quality and class equal to the original work. (Landlord, upon
default of Tenant beyond the expiration of the applicable
notice and cure periods
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hereunder (except in an emergency), may elect, at the expense
of Tenant, to perform all such cleaning and maintenance and
to make any such repairs or to repair any damage or injury to
the Building or the Premises caused by moving property of
Tenant in or out of the Building, or by installation or
removal of furniture or other property, or by misuse by, or
neglect, or improper conduct of, Tenant or Tenant's servants,
employees, agents, contractors, customers, patrons, invitees,
or licensees.)
6.1.4 COMPLIANCE WITH LAW. To make all repairs, alterations,
additions or replacements to the Premises required by any law
or ordinance or any order or regulation of any public
authority provided the same are triggered solely by virtue of
Tenant's unique and specific use of the Premises; to keep the
Premises equipped with all safety appliances so required; and
to comply with the orders and regulations of all governmental
authorities with respect to zoning, building, fire, health and
other codes, regulations, ordinances or laws applicable to
Tenant's unique and specific use of the Premises, except that
Tenant may defer compliance so long as the validity of any
such law, ordinance, order or regulations shall be contested
by Tenant in good faith and by appropriate legal proceedings,
if Tenant first gives Landlord appropriate assurance or
security against any loss, cost or expense on account thereof.
6.1.5 INDEMNIFICATION. To save harmless, exonerate and indemnify
Landlord, its agents (including, without limitation,
Landlord's managing agent) and employees (such agents and
employees being referred to collectively as the "Landlord
Related Parties") from and against any and all claims,
liabilities or penalties asserted by or on behalf of any
person, firm, corporation or public authority on account of
injury, death, damage or loss to person or property in or upon
the Premises and the Property arising out of the use or
occupancy of the Premises by Tenant or by any person claiming
by, through or under Tenant (including, without limitation,
all patrons, employees and customers of Tenant), or arising
out of the installation, operation and/or repair of Tenant's
rooftop antenna, or arising out of any delivery to or service
supplied to the Premises, or on account of or based upon
anything whatsoever done on the Premises, except if the same
was caused by the negligence, fault or misconduct of Landlord
or the Landlord Related Parties. In respect of all of the
foregoing, Tenant shall indemnify Landlord and the Landlord
Related Parties from and against all costs, expenses
(including reasonable attorneys' fees), and liabilities
incurred in or in connection with any such claim, action or
proceeding brought thereon; and, in case of any action or
proceeding brought against Landlord or the Landlord Related
Parties by reason of any such claim, Tenant, upon notice from
Landlord and at Tenant's expense, shall resist or defend such
action or proceeding and employ counsel therefor reasonably
satisfactory to Landlord.
6.1.6 LANDLORD'S RIGHT TO ENTER. To permit Landlord and its agents
to enter into and examine the Premises at reasonable times and
with reasonable prior notice (except in an emergency) and to
show the Premises, and to make repairs to the Premises, and,
during the last six (6) months prior to the expiration of this
Lease, to keep affixed in suitable places notices of
availability of the Premises.
6.1.7 PERSONAL PROPERTY AT TENANT'S RISK. All of the furnishings,
fixtures, equipment, effects and personal property of every
kind, nature and description of Tenant and of all persons
claiming by, through or under Tenant which, during the
continuance of this Lease or any occupancy of the Premises by
Tenant or anyone claiming under Tenant, may be on the
Premises, shall be at the sole risk and hazard of Tenant and
if the whole or any part thereof shall be destroyed or damaged
by fire, water or otherwise, or by the leakage or bursting of
water pipes, steam pipes, or other pipes, by theft or from any
other cause, no part of said loss or damage is to be charged
to or to be borne by Landlord, except that Landlord shall in
no event be indemnified or held harmless or exonerated from
any liability to Tenant or to any other person, for any
injury, loss, damage or liability to the extent prohibited by
law, or to the extent caused by Landlord's negligence or
misconduct.
6.1.8 PAYMENT OF LANDLORD'S COST OF ENFORCEMENT. To pay on demand
Landlord's expenses, including reasonable attorneys' fees,
incurred in successfully enforcing any obligation of Tenant
under this Lease or in curing any default by Tenant under this
Lease as provided in Section 8.4. Landlord shall pay Tenant on
demand Tenant's expenses, including reasonable attorney's
fees, incurred in successfully enforcing any obligation of
Landlord hereunder.
6.1.9 YIELD UP. At the expiration of the term or earlier termination
of this Lease: to surrender all keys to the Premises; to
remove all of its trade fixtures and personal property in the
Premises; and to deliver to Landlord architectural plans
showing the Premises at yield up (which may be the initial
plans if Tenant has made no installations after the
Commencement Date); to remove such installations made by it as
Landlord may request (including computer and
telecommunications wiring and cabling, unless such wiring and
cabling is left in a useable condition, and all Tenant's signs
wherever located; to repair all damage caused by such removal
and to yield up the Premises (including all installations and
improvements made by Tenant except for trade fixtures and such
of said installations or improvements as Landlord shall
request Tenant to remove), broom-clean and in the same good
order and repair in which Tenant is obliged to keep and
maintain the Premises by the provisions of this Lease,
reasonable wear and tear and damage by casualty excepted.
Tenant, at the time of making any installation, may request in
writing Landlord's written permission to leave such
installation in the Premises at the expiration or earlier
termination of this Lease. Landlord shall, within ten (10)
days after receipt of Tenant's request, notify Tenant in
writing as to whether such installation may or may not remain
in the Premises at the expiration or earlier termination of
this Lease. If Landlord so notifies Tenant that such
installation may remain in the Premises at the expiration or
earlier termination of this Lease, Landlord shall thereafter
not be permitted to request or require that such installation
be removed, disassembled or otherwise modified at the
expiration or earlier termination of the Lease, or otherwise.
Any property not removed in accordance with the provisions of
this subsection shall be deemed abandoned and, if Landlord so
elects, deemed to be Landlord's property,
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and may be retained or removed and disposed of by Landlord
in such manner as Landlord shall determine and Tenant shall
pay Landlord the entire cost and expense incurred by it in
effecting such removal and disposition and in making any
incidental repairs and replacements to the Premises and for
use and occupancy during the period after the expiration of
the term and prior to its performance of its obligations
under this subsection 6.1.9. Tenant shall further indemnify
Landlord against all loss, cost and damage resulting from
Tenant's failure and delay in surrendering the Premises as
above provided beyond thirty (30) days after the expiration
of the term.
If the Tenant remains in the Premises beyond the expiration or
earlier termination of this Lease, such holding over shall be
without right and shall not be deemed to create any tenancy,
but the Tenant shall be a tenant at sufferance only at a daily
rate of rent equal to two (2) times the rent and other charges
in effect under this Lease as of the day prior to the date of
expiration of this Lease.
6.1.10 RULES AND REGULATIONS. To comply with the Rules and
Regulations set forth in Exhibit E, and with all reasonable
Rules and Regulations of general applicability to all tenants
of the Building hereafter made by Landlord, of which Tenant
has been given notice provided the same do not derogate from
Tenant's rights hereunder and further provided that Landlord
applies the same uniformly to all other tenants of the
Building. Landlord shall not be liable to Tenant for the
failure of other tenants of the Building to conform to such
Rules and Regulations.
6.1.11 ESTOPPEL CERTIFICATE. Upon not less than fifteen (15) days'
prior written request by Landlord, to execute, acknowledge and
deliver to Landlord a statement in writing, in the form
attached hereto as Exhibit F, certifying all or any of the
following: that this Lease is unmodified and in full force and
effect and that Tenant has no defenses, offsets or
counterclaims against its obligations to pay the Fixed Rent
and Additional Rent and any other charges and to perform its
other covenants under this Lease (or, if there have been any
modifications, that the Lease is in full force and effect as
modified and stating the modifications and, if there are any
defenses, offsets or counterclaims, setting them forth in
reasonable detail), and the dates to which the Fixed Rent and
Additional Rent and other charges have been paid, whether or
not, to the best of Tenant's knowledge, Landlord is in default
in performance of any of the terms of this Lease, and such
further factual information with respect to the Lease or the
Premises as Landlord may reasonably request. Any such
statement delivered pursuant to this subsection 6.1.11 may be
relied upon by any prospective purchaser or mortgagee of the
Premises, or any prospective assignee of such mortgage. Tenant
shall also deliver to Landlord such publicly-known financial
information as may be reasonably required by Landlord to be
provided to any mortgagee or prospective purchaser of the
Premises. Landlord agrees to execute, acknowledge and deliver
to Tenant, upon not less than fifteen (15) days' prior written
request by Tenant, a similar written statement certifying any
or all of the items specified hereinabove.
6.2 NEGATIVE COVENANTS. Tenant covenants at all times during the term and
such further time (prior or subsequent thereto) as Tenant occupies the
Premises or any part thereof:
6.2.1 ASSIGNMENT AND SUBLETTING. Not to assign, transfer, mortgage
or pledge this Lease or to sublease (which term shall be
deemed to include the granting of concessions and licenses and
the like) all or any part of the Premises or suffer or permit
this Lease or the leasehold estate hereby created or any other
rights arising under this Lease to be assigned, transferred or
encumbered, in whole or in part, whether voluntarily,
involuntarily or by operation of law, or permit the occupancy
of the Premises by anyone other than Tenant without the prior
written consent of Landlord. In the event Tenant desires to
assign this Lease or sublet any portion or all of the
Premises, Tenant shall notify Landlord in writing of Tenant's
intent to so assign this Lease or sublet the Premises and the
proposed effective date of such subletting or assignment, and
shall request in such notification that Landlord consent
thereto. Landlord may terminate this Lease in the case of a
proposed assignment, or suspend the application of this Lease
for the period and with respect to the space involved in the
case of a proposed subletting (in which case the Annual Fixed
Rent Rate, Monthly Fixed Rent Rate and Tenant's Percentage
shall be reduced in proportion to the reduction of the
Rentable Floor Area of Premises due to the removal of the
sublet premises) by giving written notice of termination or
suspension to Tenant, with such termination or suspension to
be effective as of the effective date of such assignment or
subletting. If Landlord does not so terminate or suspend,
Landlord's consent shall not be unreasonably withheld to an
assignment or to a subletting, provided that the assignee or
subtenant shall use the Premises only for the Permitted Uses.
Tenant shall, as Additional Rent, reimburse Landlord promptly
for Landlord's reasonable legal expenses incurred in
connection with any request by Tenant for such consent. If
Landlord consents thereto, no such subletting or assignment
shall in any way impair the continuing primary liability of
Tenant hereunder, and no consent to any subletting or
assignment in a particular instance shall be deemed to be a
waiver of the obligation to obtain the Landlord's written
approval in the case of any other subletting or assignment.
With respect to any assignment or subletting during the
original term or any Extended Term of this Lease, such
assignment shall not include the rights granted to Tenant
under Section 2.3 hereinabove to extend the term, and such
sublease shall be for a term expiring no later than the
Expiration Date. Notwithstanding anything to the contrary
contained herein, Landlord shall have no right during the
original term to terminate this Lease in the case of a
proposed subletting of 15,000 square feet of Premises or less,
so long as such subletting is not for the balance of the
original term.
If for any assignment or sublease consented to by Landlord
hereunder Tenant receives rent or other consideration
attributable to Tenant's interest under this Lease so assigned
or subleased, either initially or over the term of the
assignment or sublease, in excess of the rent called for
hereunder, or in case of sublease of part, in excess of such
rent fairly allocable to the part, after appropriate
adjustments to assure that all other payments called for
hereunder are appropriately taken into account and after
deduction for reasonable expenses of Tenant in connection with
the
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assignment or sublease, including without limitation
brokerage commissions, alterations and improvements to the
Premises in connection with any such sublease amortized on a
straight-line basis over the term of the sublease in question,
and reasonable attorneys' fees, to pay to Landlord as
additional rent fifty (50%) percent of any such excess arising
from each such payment of rent or other consideration received
by Tenant promptly after its receipt.
Any other provision of this Lease notwithstanding, Tenant
shall have the right, without Landlord's prior consent,
without any right of Landlord to terminate this Lease and
without any obligation to pay any such excess rent or other
consideration to Landlord, to assign this Lease and to
sublease all or any portion of the Premises to any person or
business organization controlling, controlled by, or under
common control with Tenant (an "Affiliate"), or in connection
with the consolidation or merger of or into Tenant or the sale
of all or substantially all of Tenant's assets to another
entity (a "Permitted Transferee"), provided, however, in the
case of an assignment or sublease to an Affiliate, Tenant
remains primarily liable hereunder, and provided, further, in
respect of an assignment or sublease to a Permitted
Transferee, (i) the resulting entity has a net worth equal to
or greater than the net worth of Tenant immediately prior to
such transfer, (ii) provided further that proof reasonably
satisfactory to Landlord of such net worth is delivered to
Landlord within thirty (30) days after such transfer, and
(iii) such entity agrees in a written instrument to assume all
of the obligations of Tenant hereunder.
6.2.2 NUISANCE. Not to injure, deface or otherwise harm the
Premises; nor commit any nuisance; nor permit in the Premises
any vending machine (except such as is used for the sale of
merchandise to employees of Tenant) or inflammable fluids or
chemicals (except such as are customarily used in connection
with standard office equipment); nor permit any cooking to
such extent as requires special exhaust venting; nor permit
the emission of any objectionable noise or odor; nor make,
allow or suffer any waste; nor make any use of the Premises
which is improper, offensive or contrary to any law or
ordinance or which will invalidate any of Landlord's
insurance; nor conduct any auction, fire, "going out of
business" or bankruptcy sales.
6.2.3 HAZARDOUS WASTES AND MATERIALS. Not to dispose of any
hazardous wastes, hazardous materials or oil on the Premises
or the Property, or into any of the plumbing, sewage, or
drainage systems thereon (other than customary quantities of
ordinary office and cleaning supplies, which Tenant may
dispose of in accordance with all applicable laws), and to
indemnify and save Landlord harmless from all claims,
liability, loss or damage arising on account of the use or
disposal of hazardous wastes, hazardous materials or oil by
Tenant and its agents, including, without limitation,
liability under any federal, state, or local laws,
requirements and regulations, or damage to any of the
aforesaid systems. Tenant shall comply with all governmental
reporting requirements with respect to hazardous wastes,
hazardous materials and oil, and shall deliver to Landlord
copies of all reports filed with governmental authorities.
6.2.4 FLOOR LOAD; HEAVY EQUIPMENT. Not to place a load upon any
floor of the Premises exceeding the floor load per square foot
area which such floor was designed to carry and which is
allowed by law. Landlord reserves the right to prescribe the
weight and position of all heavy business machines and
equipment, including safes, which shall be placed so as to
distribute the weight. Business machines and mechanical
equipment which cause vibration or noise shall be placed and
maintained by Tenant at Tenant's expense in settings
sufficient to absorb and prevent vibration, noise and
annoyance. Tenant shall not move any safe, heavy machinery,
heavy equipment, freight or fixtures into or out of the
Premises except in such manner and at such time as Landlord
shall in each instance authorize.
6.2.5 INSTALLATION, ALTERATIONS OR ADDITIONS. Not to make any
installations, alterations or additions in, to or on the
Premises nor to permit the making of any holes (other than by
small nails and screws for hanging pictures and the like) in
the walls, partitions, ceilings or floors nor the installation
or modification of any locks or security devices without on
each occasion obtaining the prior written consent of Landlord,
and then only pursuant to plans and specifications approved by
Landlord in advance in each instance (which consent and
approval, in the case of nonstructural interior installations
or alterations that do not impair the structural integrity of
the Building, reduce its value, or involve penetrations of the
roof or exterior walls, shall not be unreasonably withheld,
and which shall not be required for work costing in the
aggregate in any one instance not more than $5,000, provided,
in each instance Tenant shall furnish Landlord with as built
plans upon completion of such work); Tenant shall pay promptly
when due the entire cost of any work to the premises
undertaken by Tenant so that the Premises shall at all times
be free of liens for labor and materials, and at Landlord's
request Tenant shall furnish to Landlord a bond or other
security acceptable to Landlord assuring that any work
commenced by Tenant will be completed in accordance with the
plans and specifications theretofore approved by Landlord and
assuring that the Premises will remain free of any mechanics'
lien or other encumbrance arising out of such work. In any
event, Tenant shall forthwith bond against or discharge any
mechanics' liens or other encumbrances that may arise out of
such work. Tenant shall procure all necessary licenses and
permits at Tenant's sole expense before undertaking such work
and if necessary Landlord shall cooperate with Tenant in such
effort. All such work shall be done in a good and workmanlike
manner employing materials of good quality and so as to
conform with all applicable zoning, building, fire, health and
other codes, regulations, ordinances and laws. Tenant shall
save Landlord harmless and indemnified from all injury, loss,
claims or damage to any person or property occasioned by or
growing out of such work. Without waiver of any of the
foregoing provisions of this Section 6.2.5 relating to the
performance of work and approval of plans, Tenant shall be
permitted, at its sole expense, to install one antenna on the
roof of the Building. The size and location of the antenna
must be approved by Landlord, which approval shall not be
unreasonably withheld, delayed or conditioned.
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Not to grant a security interest in, or to lease, any fixtures
being installed in the Premises (including demountable
partitions) without first obtaining an agreement, for the
benefit of Landlord, from the secured party or lessor that
such property will be removed within ten (10) business days
after notice from Landlord of the expiration or earlier
termination of this Lease and that a failure to so remove will
subject such property to the provisions of subsection 6.1.9 of
the Lease. Landlord hereby waives any lien rights which it may
otherwise have with respect to Tenant's personal property and
agrees that such property shall be exempt from execution,
foreclosure, sale, levy, attachment, or distress for any rent
due or to become due.
6.2.6 ABANDONMENT. Not to abandon the Premises during the term.
6.2.7 SIGNS. Not without Landlord's prior written approval (which
shall not be unreasonably withheld or delayed) to paint or
place any signs or place any curtains, blinds, shades,
awnings, aerials, or the like, visible from outside the
Premises. Tenant may place an identification sign on the east
facade of the Building at Tenant's expense, in conformance
with Landlord's sign policy and subject to Landlord's prior
approval (which shall not be unreasonably withheld or
delayed). Such sign shall be maintained in good repair by
Tenant and shall conform to all applicable requirements of
public authorities. Landlord agrees that any other tenant
signage on the Building shall not be larger than Tenant's
sign. If any tenant signage is provided on a pylon sign, then
Tenant will be allowed equal space on such pylon for its
identification signage.
6.2.8 PARKING AND STORAGE. Not to permit any storage of materials
outside of the Premises; nor to permit the use of the parking
areas for either temporary or permanent storage of trucks; nor
permit the use of the Premises for any use for which heavy
trucking would be customary.
ARTICLE 7
CASUALTY OR TAKING
7.1 TERMINATION. In the event that the Premises or the Building, or any
material part thereof, shall be taken by any public authority or for
any public use, or shall be substantially destroyed or damaged by fire
or casualty to such a degree that repairs of such destruction or damage
shall, in Landlord's reasonable opinion, take more than one hundred
eighty (180) days, or by the action of any public authority, then this
Lease may be terminated at the election of Landlord. If any portion of
the Premises shall be so taken or if any such taking materially and
adversely restricts Tenant's access to the Premises or materially
reduces the number of parking spaces on the Property available for
Tenant's use, this Lease may be terminated at the election of Tenant.
Such election, which may be made notwithstanding the fact that
Landlord's entire interest may have been divested, shall be made by the
giving of notice by either Landlord or Tenant to the other within sixty
(60) days after the date of the taking or casualty. In the event that
the Premises are destroyed or damaged by fire or casualty, and, in the
reasonable opinion of an independent architect or engineer selected by
Landlord, cannot be repaired or restored within one hundred eighty
(180) days from the date repair or restoration work would commence,
then this Lease may be terminated at the election of Landlord or
Tenant, which election shall be made by the giving of notice to the
other party within thirty (30) days after the date the opinion of the
architect or engineer is made available to the parties. Landlord shall
endeavor to cause such opinion to be delivered to Tenant within thirty
(30) days after any such fire or casualty.
7.2 RESTORATION. If neither Landlord nor Tenant elect to so terminate, this
Lease shall continue in force and a just proportion of the rent
reserved, according to the nature and extent of the damages sustained
by the Premises, shall be suspended or abated from the date of such
taking of casualty until the Premises, or what may remain thereof,
shall be put by Landlord in proper condition for use, which Landlord
covenants to do with reasonable diligence to the extent permitted by
the net proceeds of insurance recovered or damages awarded for such
taking, destruction or damage and subject to zoning and building laws
or ordinances then in existence. "Net proceeds of insurance recovered
or damages awarded" refers to the gross amount of such insurance or
damages less the reasonable expenses of Landlord incurred in connection
with the collection of the same, including without limitation, fees and
expenses for legal and appraisal services. If Landlord shall not have
restored the Premises within one hundred eighty (180) days from the
taking or casualty, Tenant shall have the right to terminate this Lease
by giving notice of such termination to Landlord, effective at the
expiration of thirty (30) days from the giving of such notice; provided
however, that such termination will be rendered ineffective if, prior
to the expiration of said 30-day period, Landlord shall have completed
such restoration.
7.3 AWARD. Irrespective of the form in which recovery may be had by law,
all rights to damages or compensation shall belong to Landlord in all
cases, except for awards made to Tenant for its personal property,
fixtures and moving expenses. Except for such awards Tenant hereby
grants to Landlord all of Tenant's rights to such damages and covenants
to deliver such further assignments thereof as Landlord may from time
to time request.
ARTICLE 8
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DEFAULTS
8.1 EVENTS OF DEFAULT. (a) If Tenant shall default in the performance of
any of its obligations to pay the Fixed Rent or Additional Rent
hereunder, or fail to maintain the insurance specified in subsection
4.2.4, and if such default or failure shall continue for ten (10) days
after written notice from Landlord designating such default or if
within thirty (30) days after written notice from Landlord to Tenant
specifying any other default or defaults Tenant has not commenced
diligently to correct the default or defaults so specified or has not
thereafter diligently pursued such correction to completion, or (b) if
any assignment shall be made by Tenant or any guarantor of Tenant for
the benefit of creditors, or (c) if Tenant's leasehold interest shall
be taken on execution, or (d) if a lien or other involuntary
encumbrance is filed against Tenant's leasehold interest or Tenant's
other property, including said leasehold interest, and is not
discharged within thirty (30) days thereafter, or (e) if a petition is
filed by Tenant or any guarantor of Tenant for liquidation, or for
reorganization or an arrangement under any provision of any bankruptcy
law or code as then in force and effect and such petition is not
dismissed within (30) days thereafter, or (f) if an involuntary
petition under any of the provisions of any bankruptcy law or code is
filed against Tenant or any guarantor of Tenant and such involuntary
petition is not dismissed within sixty (60) days thereafter, then, and
in any of such cases, Landlord and the agents and servants of Landlord
lawfully may, in addition to and not in derogation of any remedies for
any preceding breach of covenant, immediately or at any time thereafter
without demand or notice and with process of law enter into and upon
the Premises or any part thereof in the name of the whole or mail a
notice of termination addressed to Tenant, and repossess the same as of
landlord's former estate and expel Tenant and those claiming through or
under Tenant and remove its and their effects without being deemed
guilty of any manner of trespass and without prejudice to any remedies
which might otherwise be used for arrears of rent or prior breach of
covenants, and upon such entry or mailing as aforesaid this Lease shall
terminate, Tenant hereby waiving all statutory rights to the Premises
(including without limitation rights of redemption, if any, to the
extent such rights may be lawfully waived) and Landlord, without notice
to Tenant, may store Tenant's effects, and those of any person claiming
through or under Tenant, at the expense and risk of Tenant, and, if
Landlord so elects, may sell such effects at public auction or private
sale and apply the net proceeds to the payment of all sums due to
Landlord from Tenant, if any, and pay over the balance, if any, to
Tenant.
8.2 REMEDIES. In the event that this Lease is terminated under any of the
provisions contained in Section 8.1 or shall be otherwise terminated
for breach of any obligation of Tenant, Tenant covenants to pay
punctually to Landlord all the sums and to perform all the obligations
which Tenant covenants in this Lease to pay and to perform in the same
manner and to the same extent and at the same time as if this Lease had
not been terminated. In calculating the amounts to be paid by Tenant
pursuant to the preceding sentence, Tenant shall be credited with the
net proceeds of any rent obtained by Landlord by reletting the
Premises, after deducting all Landlord's expense in connection with
such reletting, including, without limitation, all repossession costs,
brokerage commissions, fees for legal services and reasonably necessary
expenses of preparing the Premises for such reletting, it being agreed
by Tenant that Landlord may (i) relet the Premises or any part or parts
thereof, for a term or terms which may at Landlord's option be equal to
or less than or exceed the period which would otherwise have
constituted the balance of the term and may grant such concessions and
free rent as Landlord in its sole judgment considers advisable or
necessary to relet the same and (ii) make such alterations, repairs and
decorations in the Premises as Landlord in its sole judgment considers
advisable or necessary to relet the same, and no action of Landlord in
accordance with the foregoing or failure to relet or to collect rent
under reletting shall operate or be construed to release or reduce
Tenant's liability as aforesaid. However, Landlord shall use its
reasonable efforts to mitigate its damages hereunder. In lieu of full
recovery by Landlord of the sums payable under the foregoing provisions
of this Section 8.2 (except for the amount of any rent of any kind
accrued and unpaid at the time of termination), Landlord may by written
notice to Tenant, elect to recover, and Tenant shall thereupon pay
forthwith to Landlord, as compensation, an amount equal to the
discounted value (calculated using a discount factor equal to the then
Prime Rate as published in the Wall Street Journal), the excess of the
total rent reserved for the residue of the term over the rental value
of the Premises for said residue of the term. In calculating the rent
reserved there shall be included, in addition to the Fixed Rent and
Additional Rent, the value of all other considerations agreed to be
paid or performed by Tenant for said residue.
In lieu of any other damages or indemnity and in lieu of full recovery
by Landlord of all sums payable under all the foregoing provisions of
this Section 8.2, Landlord may by written notice to Tenant, at any time
after this Lease is terminated under any of the provisions contained in
Section 8.1 or is otherwise terminated for breach of any obligation of
Tenant and before such full recovery, elect to recover, and Tenant
shall thereupon pay, as liquidated damages, an amount equal to the
aggregate of the Fixed Rent and Additional Rent accrued in the twelve
(12) months ended next prior to such termination plus the amount of
rent of any kind accrued and unpaid at the time of termination and less
the amount of any recovery by Landlord under the foregoing provisions
of this Section 8.2 up to the time of payment of such liquidated
damages. Nothing contained in this Lease shall, however, limit or
prejudice the right of Landlord to prove for and obtain in proceedings
for bankruptcy or insolvency by reason of the termination of this
Lease, an amount equal to the maximum allowed by any statute or rule of
law in effect at the time when, and governing the proceedings in which,
the damages are to be proved, whether or not the amount be greater
than, equal to, or less than the amount of the loss or damages referred
to above.
8.3 REMEDIES CUMULATIVE. Except as otherwise provided herein, any and all
rights and remedies which Landlord may have under this Lease, and at
law and equity, shall be cumulative and shall not be deemed
inconsistent with each other, and any two or more of all such rights
and remedies may be exercised at the same time insofar as permitted by
law.
8.4 LANDLORD'S RIGHT TO CURE DEFAULTS. Landlord may, but shall not be
obligated to, cure, at any time in emergency situations and after the
expiration of all applicable notice and grace periods hereunder in all
other cases, any default by Tenant under this Lease; and whenever
Landlord so elects, all costs and expenses incurred by Landlord,
including reasonable attorneys' fees, in curing a default
19
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shall be paid, as Additional Rent, by Tenant to Landlord on demand,
together with lawful interest thereon from the date of payment by
Landlord to the date of payment by Tenant.
8.5 EFFECT OF WAIVERS OF DEFAULT. Any consent or permission by Landlord to
any act or omission which otherwise would be a breach of any covenant
or condition herein, shall not in any way be held or construed (unless
expressly so declared) to operate so as to impair the continuing
obligation of any covenant or condition herein, or otherwise, except as
to the specific instance, operate to permit similar acts or omissions.
8.6 NO WAIVER, ETC. The failure of either Landlord or Tenant to seek
redress for violation of, or to insist upon the strict performance of,
any covenant or condition of this Lease by the other party shall not be
deemed a waiver of such violation nor prevent a subsequent act, which
would have originally constituted a violation, from having all the
force and effect of an original violation. The receipt by Landlord of
rent with knowledge of the breach of any covenant of this Lease shall
not be deemed to have been a waiver of such breach by Landlord. No
consent or waiver, express or implied, by either party to or of any
breach of any agreement or duty shall be construed as a waiver or
consent to or of any other breach of the same or any other agreement or
duty.
8.7 NO ACCORD AND SATISFACTION. No acceptance by Landlord of a lesser sum
than the Fixed Rent, Additional Rent or any other charge then due shall
be deemed to be other than on account of the earliest installment of
such rent or charge due, nor shall any endorsement or statement on any
check or any letter accompanying any check or payment as rent or other
charge be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover
the balance of such installment or pursue any other remedy in this
Lease provided.
ARTICLE 9
RIGHTS OF MORTGAGE HOLDERS
9.1 RIGHTS OF MORTGAGE HOLDERS. The word "mortgage" as used herein includes
mortgages, deeds of trust or other similar instruments evidencing other
voluntary liens or encumbrances, and modifications, consolidations,
extensions, renewals, replacements and substitutes thereof. The word
"holder" shall mean a mortgagee, and any subsequent holder or holders
of a mortgage. Until the holder of a mortgage shall enter and take
possession of the Property for the purpose of foreclosure, such holder
shall have only such rights of Landlord as are necessary to preserve
the integrity of this Lease as security. Upon entry and taking
possession of the Property for the purpose of foreclosure, such holder
shall have all the rights of Landlord. No such holder of a mortgage
shall be liable either as mortgagee or as assignee, to perform, or be
liable in damages for failure to perform, any of the obligations of
Landlord unless and until such holder shall enter and take possession
of the Property for the purpose of foreclosure. Upon entry for the
purpose of foreclosure, such holder shall be liable to perform all of
the obligations of Landlord, subject to and with the benefit of the
provisions of Section 10.4, provided that a discontinuance of any
foreclosure proceeding shall be deemed a conveyance under said
provisions to the owner of the equity of the Property.
9.2 LEASE SUPERIOR OR SUBORDINATE TO MORTGAGES. It is agreed that the
rights and interest of Tenant under this Lease shall be (i) subject or
subordinate to any present or future mortgage or mortgages and to any
and all advances to be made thereunder, and to the interest of the
holder thereof in the Premises or any property of which the Premises
are a part if Landlord shall elect by notice to Tenant to subject or
subordinate the rights and interest of Tenant under this Lease to such
mortgage or (ii) prior to any present or future mortgage or mortgages,
if Landlord shall elect, by notice to Tenant, to give the rights and
interest of Tenant under this Lease priority to such mortgage; in the
event of either of such elections and upon notification by Landlord to
that effect, the rights and interest of Tenant under this Lease should
be deemed to be subordinate to, or have priority over, as the case may
be, said mortgage or mortgages, irrespective of the time of execution
or time of recording of any such mortgage or mortgages; provided,
however, that no such subordination shall be effective unless Tenant
has received an agreement (a "Non-Disturbance Agreement"), in
recordable form, from each holder of any such mortgage and/or the
lessor under any ground lease or superior lease under which Landlord
derives its interest in the Premises that, in the event of that such
holder or lessor (or their successor or assignees, including any
purchaser at a foreclosure sale or the grantee under any deed in lieu
of foreclosure) succeeds to Landlord's title to the Premises or
interest under this Lease, such holder or lessor shall recognize
Tenant's rights, not disturb Tenant's occupancy, and assume Landlord's
obligations, under this Lease. Any Mortgage to which this Lease shall
be subordinated may contain such terms, provisions and conditions as
the holder deems usual or customary. Landlord agrees to obtain a
so-called non-disturbance agreement for Tenant's benefit from its
present lender on such lender's usual and customary form within sixty
(60) days after the Date of this Lease.
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ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 NOTICES FROM ONE PARTY TO THE OTHER. All notices required or permitted
hereunder shall be in writing and addressed, if to the Tenant, at the
Original Notice Address of Tenant, with a copy to Testa, Hurwitz &
Thibeault, LLP, 125 High Street, Boston, Massachusetts 02118,
Attention: Real Estate Department, or such other address as Tenant
shall have last designated by notice in writing to Landlord and, if to
Landlord, at the Original Notice Address of Landlord or such other
address as Landlord shall have last designated by notice in writing to
Tenant. Any notice shall be deemed duly given three business days after
being mailed to such address postage prepaid, by registered or
certified mail, return receipt requested, or when delivered to such
address by nationally recognized overnight courier service or by hand.
10.2 QUIET ENJOYMENT. Landlord agrees that upon Tenant's paying the rent and
performing and observing the agreements, conditions and other
provisions on its part to be performed and observed, Tenant shall and
may peaceably and quietly have, hold and enjoy the Premises during the
term hereof without any manner of hindrance or molestation from
Landlord or anyone claiming under Landlord, subject, however, to the
terms of this Lease.
10.3 LEASE NOT TO BE RECORDED. Tenant agrees that it will not record this
Lease. Both parties shall, upon the request of either, execute and
deliver a notice or short form of this Lease in such form, if any, as
may be permitted by applicable statute.
10.4 LIMITATION OF LANDLORD'S LIABILITY. The term "Landlord" as used in this
Lease, so far as covenants or obligations to be performed by Landlord
are concerned, shall be limited to mean and include only the owner or
owners at the time in question of the Property, and in the event of any
transfer or transfers of title to said property, the Landlord (and in
case of any subsequent transfers or conveyances, the then grantor)
shall be concurrently freed and relieved from and after the date of
such transfer or conveyance, without any further instrument or
agreement of all liability as respects the performance of any covenants
or obligations on the part of the Landlord contained in this Lease
thereafter to be performed, it being intended hereby that the covenants
and obligations contained in this Lease on the part of Landlord, shall,
subject as aforesaid, be binding on the Landlord, its successors and
assigns, only during and in respect of their respective successive
periods of ownership of said leasehold interest or fee, as the case may
be. Tenant, its successors and assigns, shall not assert nor seek to
enforce any claim for breach of this Lease against any of Landlord's
assets other than Landlord's interest in the Property and in the rents,
issues and profits thereof and any proceeds of insurance related to the
Property, and Tenant agrees to look solely to such interest for the
satisfaction of any liability or claim against Landlord under this
Lease, it being specifically agreed that in no event whatsoever shall
Landlord (which term shall include, without limitation, any general or
limited partner, trustees, beneficiaries, officers, directors, or
stockholders of Landlord) ever be personally liable for any such
liability.
10.5 ACTS OF GOD. In any case where either party hereto is required to do
any act, delays caused by or resulting from Acts of God, war, civil
commotion, fire, flood or other casualty, labor difficulties, shortages
of labor, materials or equipment, government regulations, unusually
severe weather, or other causes beyond such party's reasonable control
shall not be counted in determining the time during which work shall be
completed, whether such time be designated by a fixed date, a fixed
time or a "reasonable time," and such time shall be deemed to be
extended by the period of such delay.
10.6 LANDLORD'S DEFAULT. Landlord shall not be deemed to be in default in
the performance of any of its obligations hereunder unless it shall
fail to perform such obligations and such failure shall continue for a
period of thirty (30) days or such additional time as is reasonably
required to correct any such default after written notice has been
given by Tenant to Landlord specifying the nature of Landlord's alleged
default. Landlord shall not be liable in any event for incidental or
consequential damages to Tenant by reason of Landlord's default,
whether or not notice is given.
10.7 BROKERAGE. Tenant warrants and represents that it has dealt with no
broker in connection with the consummation of this Lease, other than
McCall & Almy, CB Richard Ellis and Nordblom Company, and in the event
of any brokerage claims, other than by Nordblom Company or McCall &
Almy, or CB Richard Ellis, against Landlord predicated upon prior
dealings with Tenant, Tenant agrees to defend the same and indemnify
and hold Landlord harmless against any such claim. Landlord warrants
and represents that it has dealt with no broker in connection with the
consummation of this Lease, other than McCall & Almy, CB Richard Ellis
and Nordblom Company, and in the event of any brokerage claims, other
than by Nordblom Company, McCall & Almy, or CB Richard Ellis, against
Tenant predicated upon prior dealings with Landlord, Landlord agrees to
defend the same and indemnify and hold Tenant harmless against any such
claim.
10.8 APPLICABLE LAW AND CONSTRUCTION. This Lease shall be governed by and
construed in accordance with the laws of the Commonwealth of
Massachusetts and, if any provisions of this Lease shall to any extent
be invalid, the remainder of this Lease shall not be affected thereby.
There are no oral or written agreements between Landlord and Tenant
affecting this Lease. This Lease may be amended, and the provisions
hereof may be waived or modified, only by instruments in writing
executed by Landlord and Tenant. The titles of the several Articles and
Sections contained herein are for convenience only and shall not be
considered in construing this Lease. Unless repugnant to the context,
the words "Landlord" and "Tenant" appearing in this Lease shall be
construed to mean those named above and their respective heirs,
executors, administrators, successors and assigns, and those claiming
through or under them respectively. If there be more than one tenant,
the obligations imposed by this Lease upon Tenant shall be joint and
several.
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10.9 RIGHT OF FIRST OFFER. If additional space (the "RFO Space") on the
first floor of the Building becomes available at any time during the
original term of this Lease, prior to marketing such space, other than
to the then tenant thereof, Landlord shall first offer to Tenant the
opportunity to lease such space by written notice to Tenant, provided
that the initial Tenant named herein, or an Affiliate or a Permitted
Transferee occupies the Premises and is not in default beyond any
applicable grace period at such time and has not previously been in
monetary default of its obligations under this Lease beyond any
applicable grace period during the two (2) years prior to the date on
which Landlord offers the RFO Space to Tenant. The offering terms shall
be the same as Landlord would offer to the general market, except that
(i) the term in respect of the RFO Space shall be for seven (7) years,
and (ii) the Annual Fixed Rent Rate in respect of the RFO Space shall
be the market rate, which shall be determined in the manner set forth
in Section 2.3 of this Lease and which shall not be less than the
Annual Fixed Rent Rate in effect for the original Premises prior to the
commencement date for the RFO Space.
Tenant shall have twenty (20) days from its receipt of such offer to
accept or reject such offer. If Tenant rejects such offer, Landlord
will then be free to offer such space to the general market. If Tenant
accepts such offer, Tenant shall either accept Landlord's designation
of the market rate for the RFO Space or propose its designation of the
market rate by giving notice thereof to Landlord concurrently with
Tenant's notice of acceptance of the offer for the RFO Space. If Tenant
proposes its designation of the market rate, then Landlord and Tenant
shall attempt to agree upon a market rate. If the parties are unable to
reach agreement within thirty (30) days following Tenant's designation,
then the market rate shall be submitted to arbitration by either party
in the manner set forth in the 3rd paragraph of Section 2.3 of the
Lease. For the purposes of this Section 10.9, all references in Section
2.3 to the "Extended Term" shall be deemed to mean the term in respect
of the RFO Space, or the extension of the term for the original
Premises, as the case may be.
Once the parties have agreed on the Annual Fixed Rent Rate for the RFO
Space, Landlord and Tenant shall both negotiate in good faith an
amendment to this Lease with respect to such space, acceptable to both
parties, which amendment shall include, among other things, a provision
whereby the original term of this Lease is extended by the number of
years necessary to make the original term coterminous with the term for
the RFO Space. The Annual Fixed Rent Rate for the original Premises
during any such extension of the term of this Lease shall be the market
rate for such original Premises, which shall be determined in the
manner set forth in said Section 2.3 as if such extension were for an
Extended Term. It is expressly understood and agreed that the second
paragraph of said Section 2.3 shall have no force or effect nor
applicability to the RFO Space and any extension of the term for the
original Premises.
WITNESS the execution hereof under seal on the day and year first above
written:
Landlord:
10 PRESIDENTIAL WAY ASSOCIATES, LLC
By: Nordic Holdings II LLC, its sole Manager
By: /s/ PETER C. NORDBLOM
------------------------------------------
Peter C. Nordblom, its manager
By: /s/ OGDEN HUNNEWELL
------------------------------------------
Ogden Hunnewell, its manager
Tenant:
OAK TECHNOLOGY, INC.
By: /s/ JOHN S. EDMUNDS
------------------------------------------
John S. Edmunds, Vice President Finance and CFO
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EXHIBIT 10.36
================================================================================
BILL OF SALE AND ASSIGNMENT AGREEMENT
by and between
CONEXANT SYSTEMS, INC.
and
OAK TECHNOLOGY, INC.
-------------------------------
Dated as of January 19, 2000
-------------------------------
================================================================================
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
ARTICLE I DEFINITIONS .............................................................5
ARTICLE II PURCHASE AND SALE OF SHARES AND ASSETS.................................13
Section 2.1. Purchase and Sale of Shares and Assets............................13
ARTICLE III PURCHASE PRICE .......................................................13
Section 3.1. Purchase Price ...................................................13
Section 3.2. Allocation of Cash Consideration..................................14
ARTICLE IV DELIVERIES AND TRANSFER TAXES..........................................15
Section 4.1. Deliveries of Seller..............................................15
Section 4.2. Deliveries of Buyer ..............................................16
Section 4.3. Transfer Taxes ...................................................16
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER................................16
Section 5.1. Organization .....................................................16
Section 5.2. Authority ........................................................17
Section 5.3. No Breach ........................................................17
Section 5.4. Capitalization ...................................................18
Section 5.5. Title to Stock ...................................................18
Section 5.6. Equity Interests .................................................18
Section 5.7. Liabilities ......................................................18
Section 5.8. Taxes ............................................................19
Section 5.9. Intellectual Property Matters.....................................21
Section 5.10. Assets and Properties............................................23
Section 5.11. Contracts .......................................................24
Section 5.12. Litigation ......................................................27
Section 5.13. Environmental Matters............................................27
Section 5.14. Governmental Approvals...........................................28
Section 5.15. Compliance With Applicable Law...................................28
Section 5.16. Licenses ........................................................29
Section 5.17. Employee Matters ................................................29
Section 5.18. Absence of Material Adverse Effect and Certain Events............31
Section 5.19. Sufficiency of Assets............................................34
Section 5.20. Financial Information............................................34
Section 5.21. Insurance .......................................................35
Section 5.22. Bank Accounts; Powers of Attorney................................35
Section 5.23. No Material Misstatement or Omission.............................35
Section 5.24. No Brokers ......................................................36
Section 5.25. Investment Intent ...............................................36
Section 5.26. Independent Investigation........................................36
Section 5.27. Knowledgeable Investor...........................................36
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER................................37
Section 6.1. Organization .....................................................37
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Section 6.2. Authority; Binding Obligation.....................................37
Section 6.3. No Breach ........................................................38
Section 6.4. Governmental Approvals............................................38
Section 6.5. No Brokers .......................................................38
Section 6.6. Investment Intent ................................................38
Section 6.7. Buyer Stock ......................................................38
Section 6.8. Buyer SEC Documents ..............................................38
ARTICLE VII COVENANTS ............................................................39
Section 7.1. Covenants of Seller ..............................................39
Section 7.2. Interim Use of Seller's Trademarks,
Trade Names and Corporate Symbols.....................42
Section 7.3. Insurance ........................................................43
Section 7.4. Public Announcements..............................................44
Section 7.5. Further Assurances ...............................................44
Section 7.6. Confidential Information..........................................44
Section 7.7. Certain Liabilities of the Company................................46
ARTICLE VIII EMPLOYMENT MATTERS ..................................................46
Section 8.1. Continuation of Employment........................................46
Section 8.2. Retention Payments ...............................................47
Section 8.3. Welfare Plans ....................................................47
ARTICLE IX TRANSITION MATTERS ....................................................47
Section 9.1. Transition Matters ...............................................47
ARTICLE X REGISTRATION RIGHTS ....................................................48
Section 10.1. Registration Rights..............................................48
ARTICLE XI SURVIVAL ..............................................................48
Section 11.1. Survival ........................................................48
ARTICLE XII INDEMNIFICATION ......................................................49
Section 12.1. Indemnification by Seller........................................49
Section 12.2. Indemnification by Buyer.........................................50
Section 12.3. Procedures for Indemnification...................................51
Section 12.4. Certain Rights and Limitations...................................53
Section 12.5. Termination of Indemnification Obligations.......................53
ARTICLE XIII TAX MATTERS .........................................................54
Section 13.1. Preparation and Filing of Tax Returns............................54
Section 13.2. Payment of Taxes ................................................54
Section 13.3. Tax Sharing Agreements...........................................54
Section 13.4. Refunds .........................................................55
Section 13.5. Tax Cooperation .................................................55
Section 13.6. Tax Indemnification..............................................55
Section 13.7. Timing Adjustments ..............................................56
Section 13.8. Tax Contests ....................................................56
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ARTICLE XIV RESTRICTIVE COVENANT ..................................................57
Section 14.1. Non-compete .....................................................57
Section 14.2. Remedies ........................................................58
Section 14.3. Severability ....................................................58
Section 14.4. Non-exclusivity .................................................58
ARTICLE XV GENERAL PROVISIONS ....................................................58
Section 15.1. Assignment ......................................................58
Section 15.2. Parties in Interest..............................................59
Section 15.3. Amendment .......................................................59
Section 15.4. Waiver; Remedies ................................................59
Section 15.5. Effect of Investigation..........................................59
Section 15.6. Fees and Expenses ...............................................59
Section 15.7. Notices .........................................................59
Section 15.8. Captions; Currency ..............................................60
Section 15.9. Entire Agreement ................................................61
Section 15.10. Severability ...................................................61
Section 15.11. Dispute Resolution..............................................61
Section 15.12. Schedules; Disclosure...........................................62
Section 15.13. Governing Law ..................................................62
Section 15.14. Counterparts ...................................................62
Section 15.15. Specific Performance............................................62
Section 15.16. Construction; Interpretation....................................63
</TABLE>
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SCHEDULES
Schedule 1.1 - Certain Assumed Liabilities
Schedule 1.2 - Excluded Intellectual Property
Schedule 5.1 - Foreign Qualifications
Schedule 5.3 - Breach
Schedule 5.8(a) - Tax Returns
Schedule 5.8(j) - Tax Correspondence
Schedule 5.8(o) - Tax Audit Matters
Schedule 5.9(a) - Certain Intellectual Property
Schedule 5.9(b) - Commitments Relating to Intellectual Property
Schedule 5.9(c) - Intellectual Property Matters
Schedule 5.10(a) - Certain Assets
Schedule 5.10(c) - Leased Premises
Schedule 5.10(f) - Leased Premises Matters
Schedule 5.11(a) - Contracts
Schedule 5.11(b) - Certain Payments
Schedule 5.11(c) - Contract Matters
Schedule 5.11(d) - Change of Control Provisions
Schedule 5.12(a) - Litigation
Schedule 5.13 - Environmental Matters
Schedule 5.14 - Seller and Company Governmental Approvals
Schedule 5.15(a) - Compliance With Laws
Schedule 5.16 - Licenses
Schedule 5.17(a) - Employee Matters
Schedule 5.17(b) - Plans
Schedule 5.17(c) - Employee Agreements
Schedule 5.17(d) - Employee Information
Schedule 5.18(a) - Material Adverse Effect
Schedule 5.18(b) - Material Events
Schedule 5.20(a) - Financial Information
Schedule 5.21(a) - Insurance Policies
Schedule 5.22 - Bank Accounts and Powers of Attorney
Schedule 6.4 - Buyer Governmental Approvals
Schedule 7.1(j) - CAD Licenses
Schedule 8.1(a) - Continued Employees
Schedule 8.1(b) - Special Bonus Payments
Schedule 9.1 - Transition Matters
Schedule 10.1 - Registration Rights
iv
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BILL OF SALE AND ASSIGNMENT AGREEMENT
BILL OF SALE AND ASSIGNMENT AGREEMENT, dated as of January 19,
2000, by and between CONEXANT SYSTEMS, INC., a Delaware corporation ("BUYER"),
and OAK TECHNOLOGY, INC., a Delaware corporation ("SELLER").
W I T N E S S E T H :
WHEREAS, Seller is the record and beneficial owner of all the
issued and outstanding shares of capital stock of Oak Technology Ltd., a
corporation incorporated under the laws of England and Wales (registration
number 3510958) (the "COMPANY"), consisting of two ordinary shares, L1 par
value (The "SHARES");
WHEREAS, Buyer desires to purchase from Seller, and Seller
desires to sell to Buyer, the Shares and the Business Intellectual Property (as
defined below) upon the terms and subject to the conditions set forth herein;
and
WHEREAS, Seller and Buyer intend that the sale of the Shares
pursuant to this Agreement is intended to qualify as a tax free reorganization
under Section 368(a) of the Code;
NOW, THEREFORE, in consideration of the premises and of the
mutual representations, warranties, covenants and agreements hereinafter
contained, the parties agree as follows:
ARTICLE I
DEFINITIONS
For purposes of this Agreement, the following terms shall have
the following meanings (such meanings to be equally applicable to both the
singular and the plural forms of the terms defined):
"ACTION" means any legal, administrative, governmental or
regulatory proceeding or other action, suit, proceeding, claim, arbitration,
mediation, alternative dispute resolution procedure, inquiry or investigation by
or before any arbitrator, mediator, court or other Governmental Entity.
"ACTUAL U.K. STAMP TAX AMOUNT" shall have the meaning set
forth in Section 4.3.
"AFFILIATE" means, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such Person. For purposes of the immediately preceding sentence, the term
"control" (including, with correlative meanings, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to any
Person, means the possession, directly or indirectly, of the
5
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power to direct or cause the direction of the management and policies of such
Person, whether through ownership of voting securities, by contract or
otherwise.
"AGREEMENT" means this Bill of Sale and Assignment Agreement,
as the same may be amended, modified or supplemented from time to time in
accordance with its terms.
"ALLOCATION SCHEDULE" shall have the meaning set forth in
Section 3.2.
"ASSUMED LIABILITIES" means those Liabilities of the Company
(i) to perform obligations required to be performed after the date hereof under
those provisions of Commitments of the Company set forth on Schedule 5.9(b),
Schedule 5.11(a) or Schedule 5.17(c) (which shall not include any accounts or
other amounts payable existing as of the date hereof) and (ii) set forth on
Schedule 1.1 (up to the amounts set forth thereon).
"AUTHORIZED EMPLOYEES" shall have the meaning set forth in
Section 7.1(k).
"BUSINESS" means the business and operations of the Company at
any time on or prior to the date hereof, including (i) researching, developing,
designing, engineering, selling and supporting algorithms and silicon devices
utilizing OFDM and VSB demodulator technology for use in Digital Terrestrial
Communications, including those having applications for use with the European
Digital Video Broadcasting Project, DVB and American Television Standards
committee standards and (ii) all activities of the Company related to the
foregoing. For purposes of this definition, "Digital Terrestrial Communications"
means free-to-air broadcast transmission for the delivery of information and
entertainment content to a metropolitan area.
"BUSINESS INTELLECTUAL PROPERTY" means all Intellectual
Property owned by Seller or any of its Affiliates or by the Company that has
been, or is being, used in or developed by the Company at any time on or prior
to the date hereof, including all Intellectual Property owned by Seller pursuant
to the Intercompany Service Agreement between Seller and the Company; PROVIDED,
HOWEVER, that the Business Intellectual Property shall not include the
Intellectual Property set forth on Schedule 1.2.
"BUYER" shall have the meaning set forth in the preamble to
this Agreement.
"BUYER GROUP" shall have the meaning set forth in Section
12.1.
"BUYER SEC DOCUMENTS" shall have the meaning set forth in
Section 5.26.
"BUYER STOCK" shall have the meaning set forth in Section
3.1(a).
6
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"CASH CONSIDERATION" shall have the meaning set forth in
Section 3.1(b).
"CERCLA" means the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended to the date hereof.
"CLAIMS MADE POLICIES" shall have the meaning set forth in
Section 7.3(a).
"CODE" means the Internal Revenue Code of 1986, as amended
from time to time.
"COMMITMENT" means, with respect to any Person, any Contract
(a) to which such Person is a party, (b) under which such Person has any rights,
(c) under which such Person has any Liability or (d) by which such Person, or
any of the assets or properties owned or used by such Person, is bound.
"COMPANY" shall have the meaning set forth in the recitals to
this Agreement.
"COMPANY FINANCIAL STATEMENTS" shall have the meaning set
forth in Section 5.20(a).
"CONFIDENTIALITY AGREEMENT" means the Confidentiality
Agreement dated September 13, 1999 by and between Buyer and Seller.
"CONSENTS" means consents, waivers, approvals, requirements,
allowances, novations, authorizations, declarations, filings, registrations and
notifications.
"CONTINUED EMPLOYEES" shall have the meaning set forth in
Section 8.1(a).
"CONTRACTS" means all agreements, understandings, contracts,
obligations, binding commitments, arrangements, promises and understandings
(whether written or oral and whether express or implied), including all
Intellectual Property and other license agreements, manufacturing agreements,
supply agreements, purchase orders, sales orders, distributor agreements, sales
representation agreements, warranty agreements, indemnity agreements, service
agreements, employment and consulting agreements, guarantees, credit agreements,
notes, mortgages, security agreements, financing leases, leases (including
Leases), comfort letters, foreign currency forward exchange contracts, foreign
currency option and other derivative contracts, letters of credit,
confidentiality agreements, joint venture agreements, partnership agreements,
powers of attorney, memoranda of understanding and letters of intent, including,
in each case, all amendments, modifications and supplements thereto and waivers
and consents thereunder.
"DAMAGES" means any and all losses, liabilities, claims,
damages, deficiencies, fines, payments, Liens (other than Permitted Liens),
costs and expenses, whether known or unknown,
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asserted or unasserted, fixed, absolute or contingent, matured or unmatured,
accrued or unaccrued, liquidated or unliquidated or due or to become due, and
whenever or however arising and whether or not resulting from Third Party
Claims (including the costs and expenses of any and all Actions or other
legal matters; all amounts paid in connection with any demands, assessments,
judgments, settlements and compromises relating thereto; interest and
penalties with respect thereto; and costs and expenses, including attorneys',
accountants' and other experts' reasonable fees and expenses, incurred in
investigating, preparing for or defending against any such Actions or other
legal matters or in asserting, preserving or enforcing an Indemnitee's rights
hereunder).
"DATABASE" shall have the meaning set forth in Section 7.1(k).
"DATABASE INFORMATION" shall have the meaning set forth in
Section 7.1(k).
"ENVIRONMENTAL LAWS" means any and all applicable Laws and
Licenses issued, promulgated or entered into by any Governmental Entity relating
to the environment, the protection or preservation of human health or safety,
including the health and safety of employees, the preservation or reclamation of
natural resources, or the treatment, storage, disposal, management, Release or
threatened Release of Hazardous Materials, in each case as in effect on the date
hereof and as may be issued, promulgated or amended from time to time.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended from time to time.
"ESTIMATED U.K. STAMP TAX AMOUNT" means U.S.$100,000.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
"GAAP" means generally accepted accounting principles in the
United States of America.
"GOVERNMENTAL ENTITY" means, in any jurisdiction, any (i)
federal, state, local, foreign or international government, (ii) court, arbitral
or other tribunal, (iii) governmental or quasi-governmental authority of any
nature (including any political subdivision, instrumentality, branch,
department, official or entity) or (iv) agency, commission, authority or body
exercising, or entitled to exercise, any administrative, executive, judicial,
legislative, police, regulatory or taxing authority or power of any nature.
"HAZARDOUS MATERIALS" means those materials, substances or
wastes that are regulated by, or form the basis of liability under, any
Environmental Law, including PCBs, pollutants, solid wastes, explosive or
regulated radioactive materials or substances, hazardous or toxic materials,
substances, wastes or chemicals, petroleum (including crude oil or any fraction
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thereof) or petroleum distillates, asbestos or asbestos containing materials.
"INDEMNIFYING PARTY" shall have the meaning set forth in
Section 12.3(a).
"INDEMNITEE" means any member of the Buyer Group or the Seller
Group who or which may seek indemnification under this Agreement.
"INCOME TAXES" means all Taxes based upon, measured by, or
calculated with respect to (a) net income or profits (including any capital
gains, minimum taxes and any Taxes on items of tax preference, but not including
sales, use, real property gains, real or personal property, gross or net
receipts, transfer or other similar Taxes) or (b) multiple bases (including
corporate franchise, doing business or occupation Taxes) if one or more of the
bases upon which such Tax may be based upon, measured by, or calculated with
respect to is described in clause (a) of this definition.
"INSURANCE POLICIES" shall have the meaning set forth in
Section 5.21(a).
"INTELLECTUAL PROPERTY" means (a) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents (including utility and design patents,
industrial designs and utility models), patent applications and patent and
invention disclosures, and all other rights of inventorship, worldwide, together
with all reissuances, continuations, continuations-in-part, divisions,
revisions, supplementary protection certificates, extensions and re-examinations
thereof; (b) all registered and unregistered trademarks, service marks, trade
names, trade dress and logos, worldwide, and registrations and applications for
registration thereof; (c) all copyrights in copyrightable works, and all other
rights of authorship, worldwide, and all applications, registrations and
renewals in connection therewith; (d) all mask works and semiconductor chip
rights, worldwide, and all applications, registrations and renewals in
connection therewith; (e) all trade secrets and confidential business and
technical information (including ideas, research and development, know-how,
formulas, technology, compositions, manufacturing and production processes and
techniques, technical data, engineering, production and other designs, plans,
drawings, engineering notebooks, industrial models, software, specifications,
financial, marketing and business data, pricing and cost information, business
and marketing plans and customer and supplier lists and information); (f) all
computer and electronic data, data processing programs, documentation and
software, both source code and object code (including flow charts, diagrams,
descriptive texts and programs, computer print-outs, underlying tapes, computer
databases and similar items), computer applications and operating programs; (g)
all rights to sue for and remedies against past, present and future
infringements of any or all of the foregoing and rights of priority and
protection of interests therein under the Laws of
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any jurisdiction worldwide; (h) all copies and tangible embodiments of any or
all of the foregoing (in whatever form or medium, including electronic
media); and (i) all other proprietary rights relating to any or all of the
foregoing.
"IRS" means the Internal Revenue Service.
"KNOWLEDGE", with respect to Seller, shall have the meaning
set forth in Section 15.16(b).
"LAWS" means all laws, statutes, constitutions, treaties,
rules, regulations, policies, standards, directives, ordinances, codes,
judgments, rulings, orders, writs, decrees, stipulations, injunctions and
determinations of all Governmental Entities.
"LEASED PREMISES" shall have the meaning set forth in Section
5.10(c).
"LEASES" means all leases, subleases, licenses and rights to
occupy or use with respect to real property, including, in each case, all
amendments, modifications and supplements thereto and waivers and consents
thereunder.
"LIABILITY" means any and all claims, debts, liabilities,
obligations and commitments of whatever nature, whether known or unknown,
asserted or unasserted, fixed, absolute or contingent, matured or unmatured,
accrued or unaccrued, liquidated or unliquidated or due or to become due, and
whenever or however arising (including those arising out of any Contract or
tort, whether based on negligence, strict liability or otherwise) and whether or
not the same would be required by GAAP to be reflected as a liability in
financial statements or disclosed in the notes thereto.
"LICENSES" means all Consents, licenses, permits,
certificates, variances, exemptions, franchises and other approvals issued,
granted, given, required or otherwise made available by any Governmental Entity.
"LIEN" means any charge, "adverse claim" (as defined in
Section 8-102(a)(1) of the Uniform Commercial Code) or other claim, equitable
interest, lien, encumbrance, option, proxy, pledge, security interest, mortgage,
right of first refusal, right of first offer, retention of title agreement,
defect of title or restriction on use, voting, transfer, receipt of income or
exercise of any other attribute of ownership.
"LIMITED USE PURPOSES" shall have the meaning set forth in
Section 7.1(k).
"MARKET PRICE" shall have the meaning set forth in Section
3.1(c).
"MATERIAL ADVERSE EFFECT" means any circumstance, condition,
change, effect or development that, individually or in the aggregate, is, or is
reasonably likely to be, materially
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adverse to (a) the business, condition (financial or otherwise), operations,
results of operations, assets or liabilities of the Company, (b) the Business
or the Business Intellectual Property or (c) the ability of Seller or the
Company to consummate the Transaction.
"OCCURRENCE BASIS POLICIES" has the meaning set forth in
Section 7.3(a).
"PENSION SCHEME" means the Company's Group Personal Pension
Plan with Skandia Life.
"PERMITTED LIENS" means Liens for (a) Taxes, assessments and
other governmental charges, if such Taxes, assessments or charges shall not be
due and delinquent; (b) Liens in respect of pledges or deposits under workers'
compensation laws; and (c) inchoate workmen's, repairmen's or other similar
Liens arising or incurred in the ordinary course of business consistent with
past practices in respect of obligations which are not overdue, minor title
defects and recorded easements, which workmen's, repairmen's or other similar
Liens, minor title defects and recorded easements do not, individually or in the
aggregate, impair the continued use, occupancy, value or marketability of title
of the property to which they relate or the Company, assuming that the property
is used on substantially the same basis as such property is currently being used
by Seller or the Company.
"PERSON" means any individual, firm, partnership, joint
venture, trust, corporation, limited liability entity, unincorporated
organization, estate or other entity (including a Governmental Entity).
"PLANS" shall have the meaning set forth in Section 5.17(b).
"REAL PROPERTY" shall have the meaning set forth in Section
5.13.
"RELEASE" shall have the meaning set forth in Section 101(22)
of CERCLA.
"REPRESENTATIVES" means, with respect to any Person, such
Person's Affiliates, directors, officers, employees, agents, consultants,
advisors and other representatives, including legal counsel, accountants and
financial advisors.
"SEC" means the U.S. Securities and Exchange Commission.
"SECURITIES ACT" means the U.S. Securities Act of 1933, as
amended.
"SELLER" shall have the meaning set forth in the preamble to
this Agreement.
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"SELLER CONFIDENTIAL INFORMATION" shall have the meaning set
forth in Section 7.6(c).
"SELLER GROUP" shall have the meaning set forth in Section
12.2.
"SELLER IP COMMITMENTS" means all Commitments of Seller
relating to Business Intellectual Property.
"SHARES" shall have the meaning set forth in the recitals to
this Agreement.
"STOCK CONSIDERATION" shall have the meaning set forth in
Section 3.1(a).
"STRADDLE PERIOD" shall have the meaning set forth in Section
13.4.
"TAX CLAIM" shall have the meaning set forth in Section
13.8(a).
"TAX RETURNS" shall have the meaning set forth in Section
5.8(a).
"TAXES" means all taxes, charges, duties, fees, levies or
other assessments, including corporation tax, advance corporation tax, the
charge under Section 419 of the Taxes Act 1988, income tax, capital gains tax,
the charge under Section 601(2) of the Taxes Act 1988, value added tax, excise
duties, property, sales, use, gross receipts, recording, insurance profits,
license, withholding, payroll, employment, net worth, transfer, social security,
environmental, occupation and franchise taxes, the charge to tax under Schedule
9A of the Value Added Tax Act 1994, customs and other import duties, inheritance
tax, stamp duty, stamp duty reserve tax, capital duties, national insurance
contributions, local authority council taxes, petroleum revenue tax, foreign
taxation and duties, amounts payable in consideration for the surrender of group
relief or advance corporation tax or refunds pursuant to Section 102 of the
Finance Act 1989 and any payment whatsoever which the Company may be or become
bound to make to any Person as a result of the operation of any enactment
relating to any such taxes or duties imposed by any Governmental Entity and all
penalties, charges, interest and additions relating to any of the foregoing or
resulting from a failure to comply with the provisions of any enactment relating
to taxation.
"TAXES ACT 1988" means the Income and Corporation Taxes Act
1988.
"THIRD PARTY CLAIM" shall have the meaning set forth in
Section 12.3(a).
"TRANSACTION" means the transactions contemplated by the
Transaction Documents.
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"TRANSACTION DOCUMENTS" means this Agreement, agreements
entered into by the Company with certain employees of the Company in respect of
the Transaction and all other instruments, certificates and documents delivered
or required to be delivered by Seller, Buyer or the Company pursuant to this
Agreement.
"UK GAAP" means generally accepted accounting principles in
the United Kingdom.
"VALUE ADDED TAX" means value added tax as provided for in the
Value Added Tax Act 1994 and legislation supplemental thereto or replacing,
modifying or consolidating it; references to income or profits or gains earned,
accrued or received shall include income or profits or gains treated as earned,
accrued or received for the purposes of any legislation.
ARTICLE II
PURCHASE AND SALE OF SHARES AND ASSETS
Section 2.1. PURCHASE AND SALE OF SHARES AND ASSETS.
(a) Subject to the terms of this Agreement and in reliance on
the covenants, representations and warranties contained herein, Seller hereby
sells, conveys, transfers, assigns and delivers (with full title guaranty
according to the laws of England and Wales) to Buyer, and Buyer hereby purchases
and acquires from Seller, the Shares, free and clear of all Liens.
(b) Subject to the terms of this Agreement and in reliance on
the covenants, representations and warranties contained herein, Seller hereby
sells, conveys, transfers, assigns and delivers to Buyer, and Buyer hereby
purchases and acquires from Seller, all of Seller's right, title and interest in
and to all Business Intellectual Property, free and clear of all Liens (other
than Permitted Liens).
ARTICLE III
PURCHASE PRICE
Section 3.1. PURCHASE PRICE.
(a) Subject to the terms set forth herein, in consideration
for the sale, assignment, conveyance, transfer and delivery of the Shares, Buyer
will, within three business days after the execution and delivery hereof,
deliver to Seller a stock certificate duly registered in the name of Seller
representing that number of duly authorized, validly issued, fully paid and
nonassessable shares of Common Stock, par value $1 per share, of Buyer ("BUYER
STOCK"), equal to the quotient, rounded to the nearest whole share, of (x)
Twenty Million dollars
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(U.S.$20,000,000) divided by (y) the Market Price (as defined below) of Buyer
Stock (the "STOCK CONSIDERATION"). The parties acknowledge that the Stock
Consideration will equal 293,794 shares of Buyer Stock. Such stock
certificate will bear a legend substantially in the form of the following:
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE (A) HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE SECURITIES LAWS AND MUST BE REGISTERED UNDER SAID
ACT AND LAWS OR DISPOSED OF PURSUANT TO AN EXEMPTION FROM SUCH
REGISTRATION AND (B) MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED, GIFTED, ENCUMBERED OR OTHERWISE DISPOSED OF PRIOR TO THE
FIRST ANNIVERSARY OF JANUARY 19, 2000."
(b) Subject to the terms set forth herein, in consideration
for the sale, assignment, conveyance, transfer and delivery of the Business
Intellectual Property, Buyer is, concurrently with the execution and delivery
hereof, paying to Seller, by wire transfer of immediately available U.S. Dollars
to the bank account heretofore designated by Seller to Buyer, Five Million
dollars (U.S.$5,000,000) (the "CASH CONSIDERATION"), less the Estimated U.K.
Stamp Tax Amount.
(c) The "MARKET PRICE" of Buyer Stock means $68.075, which is
the average of the daily closing sale prices per share of Buyer Stock as
reported by the NASDAQ Stock Market (as published in The Wall Street Journal,
Eastern United States Edition) for the five consecutive full NASDAQ trading days
immediately preceding the first full NASDAQ trading day prior to the date
hereof.
(d) SECURITIES ACT EXEMPTION. The issuance of Buyer Stock
pursuant to this Agreement is intended to be exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereunder and from
applicable state securities laws. Each of Seller and Buyer hereby agrees to take
all reasonable actions and to execute all necessary documents to qualify the
issuance of Buyer Stock for such exemptions.
Section 3.2. ALLOCATION OF CASH CONSIDERATION. Buyer will, not
later than 180 days after the date hereof, prepare and deliver to Seller a
schedule (the "ALLOCATION SCHEDULE") allocating the Cash Consideration among the
Business Intellectual Property and the covenant not to compete contained in
Article XIV in accordance with Treas. Reg. 1.1060-1T (or any comparable
provisions of state or local tax law) or any successor provision. Seller will
have the right to raise reasonable objections to the Allocation Schedule within
10 days after its receipt thereof, in which event Seller and Buyer will
negotiate in good faith to resolve such objections. Except to the extent
otherwise required by applicable Laws, Buyer and Seller will make all tax
returns, reports, forms, declarations, claims and other statements in a manner
consistent with the Allocation Schedule and will not make
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any inconsistent statement or adjustment on any returns or during the course
of any IRS or other Tax audit.
ARTICLE IV
DELIVERIES AND TRANSFER TAXES
Section 4.1. DELIVERIES OF SELLER. Seller is, concurrently
with the execution and delivery hereof, delivering to Buyer the following:
(i) share certificates representing the Shares
accompanied by duly executed stock transfer forms in favor of Buyer and
powers of attorney in respect of the right attached to the Shares (in
either case, if requested by Buyer, with signatures thereon duly
guaranteed) and any other documents that are necessary to transfer to
Buyer good and marketable title to the Shares, free and clear of any
Liens;
(ii) written resignations of all directors of the
Company and such officers of the Company as were specified by Buyer to
Seller on or before the date hereof (including acknowledgments of such
directors and officers that they have no claims outstanding for
compensation (other than regularly scheduled compensation payments owed
to such Persons who are employees) or otherwise or for any payment
under the U.K. Employment Rights Act 1996);
(iii) the minute books, ledgers and stock transfer
books of the Company;
(iv) such other instruments of assignment, conveyance
and transfer as shall reasonably be requested by Buyer to effect or
evidence the sale, assignment, conveyance, transfer and delivery of the
Business Intellectual Property to Buyer, free and clear of any Liens
(other than Permitted Liens);
(v) evidence of a meeting of the Board of Directors
of the Company held prior to the date hereof at which (A) the transfer
of the Shares to Buyer or its designee was approved, (B) the
resignations referred to in Section 4.1(ii) were accepted and (C) such
Persons as were designated by Buyer were appointed as directors and
officers of the Company effective as of the date hereof; and
(vi) all other instruments, agreements and documents
required to be delivered by Seller at or prior to the date hereof
pursuant to this Agreement.
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Section 4.2. DELIVERIES OF BUYER. Buyer is, concurrently with
the execution and delivery hereof, delivering to Seller the following:
(i) the Cash Consideration, less the Estimated U.K.
Stamp Tax Amount, required by Section 3.1(b); and
(ii) all other instruments, agreements and documents
required to be delivered by Buyer at or prior to the date hereof
pursuant to this Agreement.
Within three business days after the execution and delivery hereof, Buyer will
deliver to Seller the Stock Consideration required by Section 3.1(a).
Section 4.3. TRANSFER TAXES. All applicable sales and transfer
Taxes (including any stock transfer or stamp Taxes due as a result of the sale
of the Shares and Taxes, if any, imposed upon the transfer of real and personal
property) and filing, recording, registration, stamp, documentary and other
Taxes and fees payable in connection with the Transaction will be the
responsibility of and be paid by Seller. Notwithstanding the foregoing, the
parties acknowledge that the Estimated U.K. Stamp Tax Amount has been deducted
from the Cash Consideration and that Buyer will be responsible for the actual
payment of U.K. stamp taxes payable in connection with the registration of the
transfer of the Shares and patent applications included in Business Intellectual
Property from Seller to Buyer (the actual amount of such U.K. stamp taxes paid
by Buyer is referred to herein as the "ACTUAL U.K. STAMP TAX AMOUNT"); provided,
however, that (i) if the Actual U.K. Stamp Tax Amount is less than the Estimated
U.K. Stamp Tax Amount, Buyer will pay Seller on demand the amount by which the
Actual U.K. Stamp Tax Amount is less than the Estimated U.K. Stamp Tax Amount
and (ii) if the Actual U.K. Stamp Tax Amount is greater than the Estimated U.K.
Stamp Tax Amount, Seller will pay Buyer on demand the amount by which the Actual
U.K. Stamp Tax Amount exceeds the Estimated U.K. Stamp Tax Amount. Within two
business days after Seller's payment of the Actual U.K. Stamp Tax Amount, Buyer
will provide Seller with written confirmation of the date of payment and the
amount thereof. All payments made by Buyer in connection with this Agreement are
exclusive of any value added or similar Taxes which may be imposed from time to
time, which Taxes shall be paid by Seller.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as follows:
Section 5.1. ORGANIZATION. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company is a corporation duly organized, validly existing and in
good standing under the laws of England and Wales. Each of Seller and the
Company has all
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requisite power and authority, corporate or otherwise, to own, lease and
operate its assets and properties (in the case of the Company) and the
Business Intellectual Property (in the case of Seller) and to carry on the
Business as presently conducted. Each of Seller and the Company is duly
qualified to transact business and in good standing as a foreign corporation
in each jurisdiction in which the ownership, leasing or holding of its
properties (in the case of the Company) or the Business Intellectual Property
(in the case of Seller) or the conduct or nature of its business (in the case
of Seller, as it relates to the Business) makes such qualification necessary,
except where the failure to be so qualified would not have, individually or
in the aggregate, a Material Adverse Effect. Set forth on Schedule 5.1 is a
list of the jurisdictions (other than England and Wales) in which the Company
is qualified to transact business. True and complete copies of the memorandum
and articles of association (or similar governance documents), corporate
minute books, stock certificate books and stock transfer books, in each case
as amended through the date hereof, of the Company have previously been
delivered or made available to Buyer.
Section 5.2. AUTHORITY. Seller has all requisite power and
authority, corporate or otherwise, to execute and deliver each Transaction
Document delivered by Seller and to perform all of its obligations hereunder and
thereunder. The Company has all requisite power and authority, corporate or
otherwise, to perform the transactions contemplated by each Transaction Document
to be performed by it. The execution, delivery and performance by Seller of each
Transaction Document delivered by Seller and the consummation by Seller of the
Transaction have been duly authorized by all necessary and proper action on the
part of Seller. The consummation by the Company of the Transaction has been duly
authorized by all necessary and proper action on the part of the Company. This
Agreement and each other Transaction Document delivered by Seller has been duly
executed and delivered by Seller and constitutes the legal, valid and binding
obligation of Seller, enforceable against Seller in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting the
enforcement of creditors' rights in general and by general principles of equity.
Section 5.3. NO BREACH. Except as set forth on Schedule 5.3,
none of the execution, delivery or performance by Seller of any Transaction
Document or the consummation by Seller of the Transaction, with or without the
giving of notice or the lapse of time or both, does or will result in the
creation of any Lien upon any of the Business Intellectual Property or any of
the assets or properties of the Company (except for Permitted Liens) or any Lien
upon the Shares, or conflict with, or result in a breach or violation of or a
default under, or give rise to a right of amendment, termination, cancellation
or acceleration of any obligation or to a loss of a benefit under (i) the
Articles of Incorporation or By-laws (or similar governance document) of Seller
or the memorandum and articles of association (or similar governance documents)
of the Company, (ii) any Seller IP
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Commitment or any Commitment of the Company, (iii) any other Commitment of
Seller or any of its Affiliates or (iv) any Law or License or other
requirement to which Seller or the Company or their respective properties or
assets is subject, except, in the case of items (iii) and (iv) above only,
for those which would not have, individually or in the aggregate, a Material
Adverse Effect.
Section 5.4. CAPITALIZATION. The authorized capital stock of
the Company consists solely of 1,000 ordinary shares, (pound)1 par value, of
which only the Shares are issued and outstanding. Except for the ShaRes, no
shares of capital stock or other securities of the Company are issued, reserved
for issuance or outstanding. Seller has good, valid and marketable title to, and
is the record and beneficial owner of, the Shares, free and clear of any Liens.
The Shares are duly authorized, validly issued, fully paid and non-assessable
and were not issued in violation of, and are not subject to, any preemptive
rights. There are no bonds, debentures, notes or other indebtedness of any type
whatsoever of the Company having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
any shareholders of the Company may vote. There are no outstanding options,
warrants, calls, demands, stock appreciation rights, Contracts or other rights
of any nature (other than this Agreement) to purchase, obtain or acquire or
otherwise relating to, or any outstanding securities or obligations convertible
into or exchangeable for, or any voting agreements with respect to, any shares
of capital stock of the Company or any other securities of the Company. None of
the Company, Seller or any of their Affiliates is obligated, pursuant to any
securities, options, warrants, calls, demands, Contracts (other than this
Agreement) or other rights of any nature or otherwise, now or in the future,
contingently or otherwise, to issue, deliver, sell, purchase or redeem any
capital stock of the Company, any other securities of the Company or any
interest in or assets of the Company or the Business (including the Business
Intellectual Property) to or from any Person or to issue, deliver, sell,
purchase or redeem any stock appreciation rights or other Contracts of the
Company relating to any capital stock or other securities of the Company to or
from any Person.
Section 5.5. TITLE TO STOCK. Seller is hereby transferring to
Buyer, and Buyer is hereby acquiring, good, valid and marketable title to the
Shares, free and clear of any Liens.
Section 5.6. EQUITY INTERESTS. Except for the ownership of the
Shares by Seller, neither Seller (with respect to the Business) nor the Company
owns any capital stock or other equity interest in any corporation, partnership,
limited liability entity or other entity.
Section 5.7. LIABILITIES. Except for Assumed Liabilities,
neither Seller (with respect to the Business) nor the Company has any material
Liabilities of any nature.
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Section 5.8. TAXES.
(a) Except as set forth on Schedule 5.8(a), all federal,
state, local and foreign Tax returns, reports, declarations, statements and
other documents ("TAX RETURNS") required to be filed by or on behalf of the
Company or Seller or any predecessor corporation of any of them, or any
consolidated, combined, affiliated or unitary group of which the Company or
Seller is or has ever been a member (in the case of Seller, with respect to (or
which include) the Business or the Business Intellectual Property) have been
timely filed with the appropriate tax authorities or requests for extensions
have been timely filed and any such extensions have been granted and have not
expired.
(b) Each such Tax Return was complete and correct in all
material respects.
(c) All Taxes with respect to taxable periods or portions
thereof covered by such Tax Returns and all other Taxes (without regard to
whether a Tax Return was or is required) for which the Company or Seller (with
respect to (or which relate to) the Business or the Business Intellectual
Property) is otherwise liable that are due and payable have been paid and to the
extent the liabilities for such Taxes are not due, adequate reserves have been
established on the balance sheet of the Company dated as of January 18, 2000 in
accordance with GAAP.
(d) The Company has timely withheld proper and accurate
amounts from its employees, customers, shareholders and others from whom it is
or was required to withhold Taxes in compliance with all applicable Laws and has
timely paid all such withheld amounts to the appropriate taxing authorities.
(e) All Taxes due with respect to any completed and settled
audit, examination or deficiency Action with any taxing authority for which the
Company or Seller (with respect to (or which relate to) the Business or the
Business Intellectual Property) is liable have been paid in full.
(f) To the knowledge of Seller, there is no audit,
examination, deficiency or refund Action pending with respect to any Taxes for
which the Company or Seller (with respect to (or which relate to) the Business
or the Business Intellectual Property) is or might otherwise be liable and no
taxing authority has given written notice of the commencement of any audit,
examination or deficiency Action with respect to any such Taxes. No issue has
arisen in any examination of the Company or Seller (with respect to (or which
relates to) the Business or the Business Intellectual Property) by any taxing
authority that, if raised with respect to the same or substantially similar
facts arising in any other Tax period not so examined, would result in a
deficiency for such other period, if upheld.
(g) The Company is and always has been resident in the United
Kingdom for Tax purposes and is not and never has been
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resident for Tax purposes in any jurisdiction other than the United Kingdom.
(h) The United Kingdom is the only country other than the
United States whose Tax authorities seek to charge Tax on the world-wide profits
or gains of the Company.
(i) The Company has at no time been a member of a group for
the purposes of Part X, Chapter IV of the Taxes Act 1988.
(j) Except as set forth on Schedule 5.8(j), there has been no
correspondence or communication to date between the Company and the Inland
Revenue regarding the Tax affairs of the Company.
(k) To the knowledge of Seller, the Company does not own any
property (other than property constituting intangibles or goodwill) which would
produce income from United States sources if sold or otherwise disposed of
outside the United States, and the Company is not engaged in a trade or business
within the United States.
(l) The Company is not a "passive foreign investment company",
within the meaning of Section 1297(a) of the Code.
(m) No Liens for Taxes exist with respect to any of the assets
or properties of the Company or the Business Intellectual Property.
(n) There has not been a change in ownership of the Company
within the meaning of Section 769 of the Taxes Act 1988 in the period commencing
three years before the date hereof, or in respect of any accounting period
commencing prior to that date the corporation tax computations for which have
yet to be agreed under Section 54 of the Taxes Management Act 1970.
(o) Schedule 5.8(o) contains full details of all dispensations
obtained by the Company and all details of any visit from the Audit Office of
the Inland Revenue within the last six years including full details of any
settlement made pursuant thereto.
(p) The Company has not made any payment to or provided any
benefit for any officer or employee or ex-officer or ex-employee of the Company
which is not allowable as a deduction in calculating the profits of the Company
for taxation purposes.
(q) Any payment made to or for the direct or indirect benefit
of any Person who is or might be regarded by any taxation authority as an
employee of the Company is made to such Person direct and is not made to any
company or other entity associated with that Person.
(r) The Company is not and never has been either a contractor
or a sub-contractor for the purposes of Chapter IV, Part XIII of the Taxes Act
1988.
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(s) The Company has paid all national insurance contributions
(or similar contributions in any other jurisdiction) for which it is liable and
has kept proper books and records relating to the same and has not been a party
to any scheme or arrangement to avoid any liability to account for primary or
secondary national insurance contributions (or similar contributions in any
other jurisdiction).
(t) The Company has duly paid or has procured to be paid all
stamp duty on documents to which it is a party and under which it acquired any
right or property or in which it is interested and which are liable to stamp
duty.
(u) The Company has made all returns and paid all stamp duty
reserve tax in respect of any transaction in securities to which it has been a
party or in respect of which it is liable to account for stamp duty reserve tax.
(v) The Company has complied with all statutory provisions and
regulations relating to Value Added Tax and has duly paid or provided for all
amounts of Value Added Tax for which the Company is liable.
Section 5.9. INTELLECTUAL PROPERTY MATTERS.
(a) Set forth on Schedule 5.9(a) are all patents, patent
applications, patent and invention disclosures awaiting filing, mask work and
copyright applications and registrations, and trademarks and trademark
applications and registrations which constitute Business Intellectual Property
and the entity that owns such Business Intellectual Property.
(b) Set forth on Schedule 5.9(b) are all Commitments of Seller
and the Company relating to Business Intellectual Property, including the
distribution or license of, or royalty payments with respect to, Business
Intellectual Property, whether as licensor or licensee, and all Seller IP
Commitments.
(c) Except as set forth on Schedule 5.9(c):
(i) The Company or Seller owns all right, title and
interest in and to (or, in the case of Business Intellectual Property
subject to license agreements in favor of the Company or Seller set
forth on Schedule 5.9(b), has the legal right to use) all of the
Business Intellectual Property, free and clear of any Liens (other than
Permitted Liens) and free from any requirement of any past, present or
future payments (other than maintenance and similar payments), charges
or fees or conditions, rights or restrictions;
(ii) no Business Intellectual Property or any
product, process or material developed, manufactured, produced or used
by the Company, is alleged to infringe upon or, to the knowledge of
Seller, infringes upon any Intellectual Property or other rights owned
or held by any other Person;
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(iii) the rights of the Company and Seller in and to
all Business Intellectual Property are valid and enforceable and no
Business Intellectual Property is subject to any outstanding Lien
(other than a Permitted Lien), judgment, ruling, order, writ, decree,
stipulation, injunction or determination by or with any Governmental
Entity, nor is there (or has there been) pending or (to the knowledge
of Seller) threatened, any claim, Action or other proceeding relating
to any Business Intellectual Property (including any interference,
reissue, reexamination or opposition proceeding or proceeding
contesting the rights of the Company or Seller to any Business
Intellectual Property or the ownership, use, enforceability or validity
of any Business Intellectual Property);
(iv) to the knowledge of Seller, there is no
infringement or misappropriation of any Business Intellectual Property
by any Person;
(v) there are no Contracts between Seller or the
Company, on the one hand, and any other Person, on the other hand,
which may have been terminated or expired prior to the date hereof and
under which Seller or the Company has granted rights or licenses in any
Business Intellectual Property to such other Persons or granted an
option to acquire such rights or licenses, which rights or licenses or
the option to acquire the same survived such termination or expiration;
(vi) neither Seller nor the Company has covenanted or
agreed with any Person not to sue or otherwise enforce any legal rights
with respect to any Business Intellectual Property;
(vii) all Business Intellectual Property (other than
Business Intellectual Property subject to license agreements in favor
of Seller or the Company set forth on Schedule 5.9(b)) was developed
entirely by employees of the Company during the time they were
employees of the Company; and
(viii) all of the Business Intellectual Property is in
compliance with all applicable Laws (including payment of filing,
examination, and maintenance fees and proofs of working or use).
(d) Each of Seller and the Company has taken all reasonable
steps (including measures to protect secrecy and confidentiality) to protect its
right, title and interest in and to all Business Intellectual Property. All
employees, agents, consultants and other representatives of Seller or the
Company who have access to confidential or proprietary information of Seller or
the Company included in the Business Intellectual Property have a legal
obligation of confidentiality to Seller or the Company with respect to such
information. All employees of Seller and Affiliates of Seller related to the
Business and all employees of the Company have duly executed and delivered
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agreements with Seller or the Company pertaining to the assignment, without
additional consideration, to Seller or the Company of all inventions,
discoveries and ideas, whether or not patented or patentable, conceived or
reduced to practice during the course of their employment by Seller or its
Affiliates or by the Company.
(e) The documentation relating to the Business Intellectual
Property is current, accurate, and sufficient in detail and content to identify
and explain all technical information included in the Business Intellectual
Property.
(f) The Business Intellectual Property constitutes all
Intellectual Property rights necessary to conduct fully the Business as
currently conducted.
Section 5.10. ASSETS AND PROPERTIES.
(a) The Company has (i) good and marketable title to all of
its assets and properties (whether real, personal or mixed, or tangible or
intangible) which it purports to own (including all assets and properties
recorded on the balance sheet of the Company dated as of January 18, 2000,
including cash, and those assets set forth on Schedule 5.10(a)) and (ii) valid
leasehold interests in all of its assets and properties which it purports to
lease, in each case (with respect to both clause (i) and (ii) above), free and
clear of any Liens, other than Permitted Liens. Seller or the Company has good,
valid and marketable title to all of the Business Intellectual Property, free
and clear of all Liens, other than Permitted Liens. The delivery by Seller of
this Agreement hereby transfers to Buyer good, valid and marketable title to the
Business Intellectual Property, free and clear of all Liens, other than
Permitted Liens.
(b) The Company does not own and has not previously owned any
real property.
(c) Schedule 5.10(c) contains a complete and accurate list of
all real estate leased, subleased or occupied by the Company pursuant to a Lease
(the "LEASED PREMISES"), indicating the ownership, street address and use of
each of the Leased Premises (and prior uses to the extent known to the Company)
and including a brief description of the Company's rental obligations under each
Lease pertaining thereto, its expiration date and renewal terms and whether
there is any requirement of a Consent by the lessor thereunder or any other
Person (including any mortgagee, trustee, bondholder or lessor under any
overlease) in connection with the execution, delivery or performance of any
Transaction Document or the consummation of the Transaction. There are no
subleases or other Leases through which the Company has granted any interest in
any of the Leased Premises, or any portion thereof, to any Person.
(d) The Company is not in breach of any of the terms of the
Leases relating to any Leased Premises or any agreement for their grant or of
the Rent Deposit Deed relating to any
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Leased Premises. All rents and other incomes reserved by such Leases and
owing at the date hereof have been paid at least up to and including the date
hereof. No notices have been received or served by the Company under the
Leases relating to any Leased Premises or any agreement for their grant or
any Rent Deposit Deed relating to any Leased Premises. There has not been and
there is not anticipated any call for payment under any Rent Deposit Deed
relating to any Leased Premises.
(e) The Company (and no other Person) is in actual occupancy
of each of the Leased Premises and the Company enjoys peaceful and undisturbed
possession thereof. There are no restrictions imposed by any Lease or other
Contract or by Law which preclude or restrict the ability to use the Leased
Premises for the purposes for which they are currently being used.
(f) All improvements on the Leased Premises were constructed
in compliance with all applicable Laws (including building, planning and zoning
Laws) and Licenses affecting such Leased Premises. To the knowledge of Seller,
no improvements on the Leased Premises and none of the current uses or
conditions thereof violate any applicable deed restrictions or other applicable
covenants, restrictions, agreements, site plan approvals or variances or the
certificate of occupancy for each of the improvements on the Leased Premises.
Except as set forth on Schedule 5.10(f), all improvements on the Leased Premises
are wholly within the boundaries of the real property covered by the Lease
relating thereto, and do not encroach upon the property of, or otherwise
conflict with the property rights of, any other Person.
(g) To the knowledge of Seller, all existing water, sewer,
steam, gas, electricity, telephone and other utilities and services required for
the use, occupancy, operation and maintenance of the Leased Premises are
adequate for the conduct of the Business as it has been and is conducted.
(h) There are no pending or (to the knowledge of Seller)
threatened Actions (including condemnation Actions) affecting any Leased
Premises.
Section 5.11. CONTRACTS.
(a) Schedule 5.11(a) lists all Commitments of the Company or
of Seller (with respect to the Business) (other than those set forth on Schedule
5.9(b), Schedule 5.17(b) or Schedule 5.17(c)), including:
(i) all Leases and Commitments relating to the lease
(whether as lessor or lessee) of personal property;
(ii) all Commitments for the purchase or sale of
inventories, materials, commodities, supplies, products, spare parts or
other property or for the furnishing or receipt of services;
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(iii) all Commitments concerning a partnership, joint
venture, joint development or other cooperation arrangement;
(iv) all Commitments providing for management
services or for the services of independent contractors or consultants
(or similar arrangements);
(v) all Commitments relating in whole or in part to
Intellectual Property not set forth on Schedule 5.9(b);
(vi) all Commitments relating to or evidencing
indebtedness of the Company (or the creation, incurrence, assumption,
securing or guarantee thereof);
(vii) all Commitments under which (A) any Person has
directly or indirectly guaranteed any indebtedness or other Liabilities
of the Company or (B) the Company has directly or indirectly guaranteed
any indebtedness or other Liabilities of any Person;
(viii) all Commitments under which the Company has
directly or indirectly made any advance, loan, extension of credit or
capital contribution to, or other investment in, any Person, including
employees, or which involve a sharing of profits, losses, costs or
Liabilities by the Company with any other Person;
(ix) all Commitments providing for or granting a Lien
(other than a Permitted Lien) upon any assets or properties of the
Company;
(x) all Commitments between or among the Company, on
the one hand, and any Affiliate, officer, director or employee of the
Company or any Affiliate of any thereof, on the other hand;
(xi) all Commitments with any broker, distributor,
dealer, sales representative, supplier or manufacturer;
(xii) all Commitments providing for or containing
confidentiality and non-disclosure obligations;
(xiii) all Commitments for the purchase or sale of any
business, corporation, partnership, joint venture, association or other
business organization or any division, assets, operating unit or
product line thereof;
(xiv) all Commitments which limit or purport to limit
the ability of the Company to compete in any line of business or with
any Person or in any geographic area or which limit or purport to limit
or restrict the ability of the Company with respect to the development,
manufacture, marketing, sale or distribution of, or other rights with
respect to, any products or services;
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(xv) all foreign currency forward exchange Contracts,
foreign currency option and other derivative Contracts and letters of
credit;
(xvi) all Commitments with any Governmental Entity;
and
(xvii) all Commitments containing any restrictions with
respect to payment of dividends or any other distributions in respect
of the capital stock of the Company.
(b) All Commitments of the Company and all Seller IP
Commitments were entered into in the ordinary course of business consistent with
past practices. Each Commitment of the Company and each Seller IP Commitment is
in full force and effect and is legal, valid, binding and enforceable in
accordance with its terms. Except as set forth on Schedule 5.11(b), none of the
Commitments of the Company or Seller IP Commitments requires any payments or the
performance of any obligations other than payments or the performance of any
obligations in the ordinary course of business consistent with past practice.
(c) Except as set forth on Schedule 5.11(c), each of Seller
and the Company (and, to the knowledge of Seller, each of the other party or
parties thereto), has performed all obligations required to be performed by it
under each Commitment of the Company and each Seller IP Commitment. Except as
set forth on Schedule 5.11(c), no event has occurred or circumstance exists with
respect to Seller or the Company or, to the knowledge of Seller, with respect to
any other Person that (with or without lapse of time or the giving of notice or
both) may contravene, conflict with or result in a violation or breach of or
give Seller or the Company or any other Person the right to declare a default or
exercise any remedy under, or to accelerate the maturity of, or to cancel,
terminate or modify, any Commitment of the Company or Seller IP Commitment. No
party to any Commitment of the Company or Seller IP Commitment has repudiated or
terminated any Commitment of the Company or Seller IP Commitment and Seller has
no reason to believe that any other party or parties to any Commitment of the
Company or Seller IP Commitment intends to exercise any right of cancellation,
termination or non-renewal thereof. Seller has heretofore delivered to Buyer
true and complete copies of all Commitments of the Company and Seller IP
Commitments.
(d) Except as set forth on Schedule 5.11(d), (i) there are no
"change of control" or similar provisions or any obligations arising under any
Commitment of the Company (other than immaterial Commitments which can be
readily replaced by the Company without expense in excess of $10,000 in the
aggregate on substantially similar terms) or Seller IP Commitment which are
created, accelerated or triggered by the execution, delivery or performance of
any Transaction Document or the consummation of the Transaction and (ii) none of
the execution, delivery or performance of any Transaction Document or
consummation of the Transaction will, under the terms, conditions or provisions
of
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any Commitment of the Company or Seller IP Commitment (A) require any Consent
of, with or to any Person, (B) result in any increase in any payment or change
in any term, (C) give rise to any right of amendment, termination, cancellation
or acceleration of any right or obligation or to a loss of benefit or (D) grant
any repayment or repurchase rights to any Person.
Section 5.12. LITIGATION.
(a) Except as set forth on Schedule 5.12(a) or Schedule
5.9(c), (i) no judgment, ruling, order, writ, decree, stipulation, injunction or
determination by or with any arbitrator, court or other Governmental Entity to
which Seller or the Company or any Affiliate of any thereof is party or by which
Seller or the Company or any Affiliate of either thereof or any assets of any
thereof is bound, and which relates to or affects the Company, the Business, the
assets, properties, Liabilities or employees of the Company, the Business
Intellectual Property, any Transaction Document or the Transaction is in effect
and (ii) none of Seller, the Company or any Affiliates of either thereof is
party to or engaged in or, to the knowledge of Seller, threatened with any
Action which relates to or affects the Company, the Business, the assets,
properties, Liabilities or employees of the Company, the Business Intellectual
Property, any Transaction Document or the Transaction, and, to the knowledge of
Seller, no event has occurred and no condition exists which could reasonably be
expected to result in any such Action.
(b) Neither Seller nor the Company is in default under or with
respect to any judgment, ruling, order, writ, decree, stipulation, injunction or
determination of the type described in Section 5.12(a)(i).
(c) No order has been made, petition presented or resolution
passed for the winding-up of the Company and no meeting has been convened for
the purposes of winding-up of the Company. No steps have been taken for the
appointment of an administrator or receiver (including an administrative
receiver) of all or any part of the Company's assets. The Company has not made
or proposed any arrangement or composition with its creditors or any class of
its creditors. The Company is not insolvent, and is not unable to pay its debts
within the meaning of the insolvency legislation applicable to the Company and
has not stopped paying its debts as they fall due.
(d) None of the Actions set forth on Schedule 5.12(a) or
Schedule 5.9(c), if adversely determined, will have a Material Adverse Effect.
Section 5.13. ENVIRONMENTAL MATTERS. To the knowledge of
Seller, except as disclosed on Schedule 5.13, none of the Leased Premises and no
real property previously owned, leased or operated by the Company or any
predecessor of the Company ("REAL PROPERTY") has been used at any time: (i) as a
site for the storage, except as authorized under applicable prior or existing
Environmental Laws, or disposal of any Hazardous Material or (ii) so as to cause
a violation of or to give rise to a removal,
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restoration or reimbursement Liability under any prior or existing
Environmental Law. Except as disclosed on Schedule 5.13, the Company does not
have any Liability under any applicable prior or existing Environmental Law
or under any Commitment with respect to or as a result of (A) the presence,
discharge, generation, treatment, storage, handling, removal, disposal,
transportation or Release of any Hazardous Material at, onto or from any Real
Property, (B) the disposition of such removed Hazardous Materials at any
other locations, (C) the Release, threatened Release or presence of Hazardous
Materials at any location or (D) the discontinuance, sale or transfer of
operations of any business conducted at any Real Property. The Company is in
compliance in all material respects with, and has at all times complied with,
all prior or existing Environmental Laws related to or affecting the Company,
including in connection with the acquisition, storage, handling,
transportation, processing, use or disposal of any goods or materials,
whether as raw materials, work-in-process, finished goods or otherwise.
Except as disclosed on Schedule 5.13, to the knowledge of Seller no
underground tanks, asbestos containing materials, lead-based paint or
polychlorinated biphenyls are, or have at any time been, present at any Real
Property.
Section 5.14. GOVERNMENTAL APPROVALS. Except as set forth on
Schedule 5.14, no material Consent or order of, with or to any Governmental
Entity is required to be obtained or made by or with respect to Seller or the
Company in connection with the execution, delivery and performance by Seller of
any Transaction Document or the consummation by Seller or the Company of the
Transaction.
Section 5.15. COMPLIANCE WITH APPLICABLE LAW.
(a) Except as set forth on Schedule 5.15(a), (i) each of
Seller (with respect to the Business and the Business Intellectual Property),
and the Company is in compliance in all material respects and has complied in
all material respects with all Laws applicable to the Company, the Business and
the Business Intellectual Property, including all Laws relating to the
exportation of goods and services and export compliance and control, (ii) no
claims or complaints from any Governmental Entities or other Persons have been
asserted or received by Seller, the Company or any Affiliate of either thereof
related to or affecting the Company, the Business or the Business Intellectual
Property and, to the knowledge of Seller, no claims or complaints are
threatened, alleging that Seller, the Company or any Affiliate of either thereof
is in violation of any Laws or Licenses applicable to the Company, the Business
or the Business Intellectual Property and (iii) no investigation, inquiry, or
review by any Governmental Entity with respect to the Company, the Business or
the Business Intellectual Property is pending or, to the knowledge of Seller,
threatened, nor has any Governmental Entity indicated an intention to conduct
any such investigation, inquiry or review.
(b) None of Seller (with respect to the Company, the Business
or the Business Intellectual Property) or the Company or
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any Affiliate of either thereof, nor to the knowledge of Seller any director,
officer, agent, employee or other Person associated with or acting on behalf
of any of Seller (with respect to the Company, the Business or the Business
Intellectual Property) or the Company or any Affiliate of either thereof has,
directly or indirectly, used any corporate funds for any unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity, made any unlawful payment to any Governmental Entity or
governmental, administrative or regulatory official or employee or to any
political party or campaign from corporate funds or made any bribe,
unrecorded rebate, payoff, influence payment, kickback or other unlawful
payment.
Section 5.16. LICENSES. Schedule 5.16 contains a complete and
accurate list of all Licenses that are held by Seller (with respect to the
Company, the Business or the Business Intellectual Property) or the Company or
that otherwise relate to the Business or any assets owned or used by the
Company. The Licenses listed on Schedule 5.16 constitute all the Licenses that
are necessary for Seller and the Company to operate the Business and to own and
use the Company's assets and the Business Intellectual Property in compliance
with all Laws applicable to such operation, ownership and use. All Licenses
listed on Schedule 5.16 are validly held by the Company or Seller and are in
full force and effect. Except as set forth on Schedule 5.16, no Licenses listed
on Schedule 5.16 will be subject to suspension, modification, revocation,
cancellation, termination or nonrenewal as a result of the execution, delivery
or performance of any Transaction Document or the consummation of the
Transaction. Each of Seller and the Company has complied in all material
respects with all of the terms and requirements of the Licenses listed on
Schedule 5.16.
Section 5.17. EMPLOYEE MATTERS.
(a) The Company is not a party to any Contracts regarding
collective bargaining or other Contracts with or to any labor or trade union or
association representing any employee of the Company, nor does any labor or
trade union or collective bargaining agent represent any employee of the
Company. No Contracts regarding collective bargaining have been requested by, or
are under discussion between management of the Company (or any management group
or association of which the Company is a member or otherwise a participant) and,
any group of employees of the Company, nor are there any representation
proceedings or petitions seeking a representation proceeding presently pending
against the Company, nor are there any other current activities known to Seller
to organize any employees of the Company into a collective bargaining unit.
There is no unfair labor practice charge or complaint pending or, to the
knowledge of Seller, threatened against the Company. Except as set forth on
Schedule 5.17(a), there has never been any labor strike, slow-down, work
stoppage, arbitration, grievance or other work-related dispute involving the
Company or otherwise related to the Business, and no such dispute is now pending
or, to the knowledge of Seller, threatened against the Company.
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(b) Schedule 5.17(b) sets forth a complete and accurate list
of each pension, retirement, savings, profit sharing, deferred compensation,
medical, vision, dental, hospitalization, prescription drug and other health
plan, cafeteria, flexible benefits, short-term and long-term disability,
accident and life insurance plan, bonus, stock option, stock purchase, stock
appreciation, incentive and special compensation and other plan and each other
employee benefit plan, program or Commitment to which the Company or any
Affiliate thereof contributes or is required to contribute, or which the Company
or any Affiliate thereof sponsors, maintains or administers or which is
otherwise applicable to employees or categories of employees, officers or
consultants of the Company, whether written or oral and whether direct or
indirect (hereinafter referred to collectively as the "PLANS").
(c) Schedule 5.17(c) sets forth a complete and accurate list
of each employment or engagement, termination, retention and severance
Commitment and policy (whether written or oral) with or for the benefit of, or
otherwise relating to, any employees or officers of the Company. All such
Commitments and policies are valid and enforceable, and neither the Company nor,
to the knowledge of Seller, any employee, officer or consultant is in default in
any material respect under the provisions thereof. Except as separately set
forth on Schedule 5.17(c), none of the execution, delivery or performance of any
Transaction Document or the consummation of the Transaction will result in any
obligation to pay any employees, officers or consultants of the Company
severance pay or termination, retention or other benefits.
(d) Schedule 5.17(d) contains a complete and accurate list of
the following information (as of December 15, 1999) for each employee and
officer of the Company, including each employee and officer on leave of absence,
layoff or disability status: job title; current compensation paid or payable and
any change in compensation since November 1, 1998; vacation accrued; and service
credited for purposes of vesting and eligibility to participate under any Plans.
(e) The Company has never employed or retained any employees,
consultants or independent contractors to provide services to the Company
outside of the United Kingdom and the Company has never maintained, contributed
to or incurred any Liability under any employee benefit plan, arrangement,
program or Commitment that is or was subject to ERISA.
(f) To the knowledge of Seller, every Person who has at any
time had the right to join, or apply to join, the Pension Scheme has been
properly advised of that right. No employee of the Company has been excluded
from membership of the Pension Scheme or from any of the benefits thereunder in
contravention of Article 119 of the Treaty of Rome, the Pensions Act 1995 or
other applicable laws or requirements or the provisions of the Pension Scheme or
otherwise.
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(g) The Company's contributions to the Pension Scheme are not
paid in arrears and all contributions and other amounts which have fallen due
for payment by the Company have been paid punctually. To the knowledge of
Seller, no fee, charge or expense relating to or in connection with the Pension
Scheme has been incurred but not paid.
(h) The Company has observed and performed those provisions of
the Pension Scheme which apply to it and has not been subject to any
investigation or determination by the Pensions Ombudsman or the Occupational
Pensions Advisory Service.
(i) All documentation and records in respect of the Pension
Scheme are up to date and complete and accurate in all material respects.
(j) The Pension Scheme is an exempt approved scheme (within
the meaning of Section 592(1) of the Income and Corporation Taxes Act 1988), has
properly and punctually accounted to the UK Inland Revenue for all and any tax
for which the Pension Scheme is liable or accountable and has at all times
complied with and been administered in accordance with all applicable laws,
regulations and requirements.
(k) On the date hereof, Seller shall deliver to Buyer any
personnel files, records, correspondence and documents relating to all persons
employed by Seller or the Company who are to become Continued Employees.
(l) No employee of the Company has given notice terminating
his or her contract of employment or is under notice or will be entitled to give
notice as a result of the provisions of this Agreement.
(m) No person previously employed by the Company has now or
may have a right to return to work or a right to be reinstated or re-engaged by
the Company under the Employment Rights Act 1996.
(n) The Company has at all relevant times complied in all
material respects with all its obligations under statute and otherwise
concerning the health and safety at work of its employees, and there are no
claims pending or, to the knowledge of Seller, capable of arising or threatened
by any party in respect of any accident or injury which are not fully covered by
insurance of the Company in respect of any accident or injury.
Section 5.18. ABSENCE OF MATERIAL ADVERSE EFFECT AND CERTAIN
EVENTS.
(a) Except as set forth on Schedule 5.18(a), no conditions,
circumstances or state of facts exist, and there have not been any events,
occurrences, changes, developments or circumstances, which, individually or in
the aggregate, have had or could reasonably be expected to have a Material
Adverse Effect.
(b) Except as set forth on Schedule 5.18(b), neither the
Company nor Seller (with respect to the Business) has:
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(i) suffered damages, destruction or casualty losses
(whether or not covered by insurance) in excess of $100,000 in the
aggregate;
(ii) made any capital expenditure or series of
capital expenditures in excess of $100,000 in the aggregate;
(iii) since January 1, 1999, made any change in the
rate of compensation, commission, bonus or other direct or indirect
remuneration payable or to become payable to any of their respective
directors, officers, employees or agents, or agreed or promised (orally
or otherwise) to pay, conditionally or otherwise, any bonus or extra
compensation or other employee benefit to any of such directors,
officers, employees or agents;
(iv) (A) entered into any employment or consulting
agreement with or for the benefit of any Person referred to in
subparagraph (iii) above; (B) paid any pension, retirement allowance or
other employee benefit not required by any Plan, agreement or
arrangement to any Person referred to in subparagraph (iii) above or
(C) since January 1, 1999 agreed or promised (orally or otherwise) to
pay (conditionally or otherwise) or otherwise committed itself
(conditionally or otherwise) to any additional pension, profit sharing,
bonus, incentive, deferred compensation, stock purchase, stock option,
stock appreciation, group insurance, vacation pay, severance pay,
retirement or other employee benefit plan, agreement or arrangement, or
changed the terms of any existing Plan or employee agreement or
arrangement;
(v) sold, assigned, leased or transferred any of its
assets or properties (other than the sale of inventory and immaterial
assets in the ordinary course of business);
(vi) incurred, assumed or created any indebtedness or
other material Liabilities;
(vii) subjected any of its assets or properties to any
Lien or permitted any of its assets or properties to be subjected to
any Lien, other than Permitted Liens;
(viii) made any change in its accounting methods,
policies, practices or principles;
(ix) waived or released any rights or claims of
material value, including rights or claims under any Commitment or
relating to Business Intellectual Property, or waived or released any
rights or claims against any Affiliate, director, officer or employee
of the Company or any Affiliate of any thereof;
(x) sold, transferred or permitted to lapse, any
Business Intellectual Property;
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(xi) acquired or agreed to acquire by merging or
consolidating with, or by purchasing a substantial portion of the
capital stock or assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other business
organization or Person, or division, operating unit or product line
thereof;
(xii) other than the creation and issuance of the
Shares, issued, delivered, pledged or otherwise encumbered, sold or
disposed of any shares of its capital stock or other securities, or
created, issued, delivered, pledged or otherwise encumbered, sold or
disposed of any securities convertible into, or rights with respect to,
or options or warrants to purchase or rights to subscribe to, any
shares of its capital stock or other securities;
(xiii) split, combined or reclassified any of its
shares of capital stock or issued or authorized the issuance of any
other securities in respect of, in lieu of or in substitution for any
of its shares of capital stock;
(xiv) declared, set aside, paid or made any dividend
or other distribution with respect to any of its shares of capital
stock, or otherwise made any payments to any of its shareholders in
their capacity as such, or redeemed, repurchased or otherwise acquired
any shares of its capital stock or other securities or any rights,
options or warrants to acquire any such shares or other securities;
(xv) amended its memorandum and articles of
association (or other similar governance documents);
(xvi) revalued any of its assets;
(xvii) made any tax election, changed any annual tax
accounting period, amended any tax return, settled or compromised any
income tax liability, entered into any closing agreement, settled any
tax claim or assessment, surrendered any right to claim a tax refund or
failed to make the payments or consent to any extension or waiver of
the limitations period applicable to any tax claim or assessment;
(xviii) (A) entered into any transaction with any
Affiliate, director, officer or employee of the Company or any
Affiliate of any thereof or (B) made, directly or indirectly, any
payments or transferred, directly or indirectly, any funds or other
property to or on behalf of any Affiliate, director, officer or
employee of the Company or any Affiliate of any thereof (other than (1)
regularly scheduled cash compensation payments and payments under
existing employee benefit plans listed on Schedule 5.17(b) to such
Persons who are employees of the Company and (2) reimbursements of
employees' ordinary and necessary business expenses incurred in
connection with their employment);
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(xix) purchased any real property or, other than
Leases set forth in Schedule 5.11(a) and other Leases of immaterial
personal property which are no longer in effect, entered into any
Lease;
(xx) settled or compromised any Action;
(xxi) suffered any other occurrence, event, incident,
action, failure to act or transaction which has had a Material Adverse
Effect or which could reasonably be expected to have a Material Adverse
Effect; or
(xxii) entered into any agreement or commitment (other
than the Transaction Documents) out of the ordinary course of business
or to take any of the types of action described in subclauses (i)
through (xxi) of this Section 5.18(b).
Section 5.19. SUFFICIENCY OF ASSETS. The assets and properties
of the Company and the Business Intellectual Property constitute (a) all of the
material assets and rights that are used in the operation of the Business as it
is being conducted as of the date hereof and (b) other than tools and equipment
owned or licensed by Seller relating to selling, marketing, layout,
manufacturing, assembling and packaging services provided by Seller on behalf of
the Company, all the property, real and personal, tangible and intangible,
necessary for the Company to conduct the Business after the date hereof as it is
being conducted as of the date hereof.
Section 5.20. FINANCIAL INFORMATION.
(a) Set forth on Schedule 5.20(a) are (i) the statutory
accounts of the Company as of and for the year ended June 30, 1999, (ii) the
balance sheet of the Company as of September 30, 1999 and the related profit and
loss account and statements of stockholders' equity and cash flows of the
Company for the three months ended September 30, 1999 and (iii) the balance
sheet of the Company as of January 18, 2000 (collectively, with the notes
thereto, the "COMPANY FINANCIAL STATEMENTS"). The Company Financial Statements
are true, fair and accurate and have been prepared from and in accordance with
the books, accounts and financial records of the Company (which are maintained
in accordance with UK GAAP) and are in accordance with UK GAAP consistently
applied. The Company Financial Statements present fairly in all material
respects, in conformity with UK GAAP applied on a consistent basis, the
financial position of the Company as of the dates set forth therein and the
profits and losses and cash flows for the periods set forth therein.
(b) The computer programs, software and firmware used in the
operations of the Company (including critical business systems, facilities, shop
floor controls and the flow of goods and services which the Company provides to
or procures from third parties) or in products sold by the Company can be
modified or replaced without expense in excess of U.S.$20,000 in the aggregate
to allow them correctly to recognize, calculate, sort,
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store, display and/or process dates outside of the range of 1900-1999,
including the years 2000 and beyond, and correctly to recognize that the year
2000 is a leap year, and such operations will not be materially interrupted
or delayed due to phenomena related to "year 2000".
Section 5.21. INSURANCE.
(a) Schedule 5.21(a) sets forth a complete and accurate list
of all current insurance policies and surety bonds which the Company or Seller
maintain with respect to the Company, its assets and Liabilities, the Business
Intellectual Property, the Business or employees, officers or directors of the
Company ("INSURANCE POLICIES"). Seller has previously delivered to Buyer true
and complete copies of all current Insurance Policies.
(b) The Insurance Policies: (i) are in full force and effect;
(ii) insure the Company in reasonably sufficient amounts against all risks
usually insured against by Persons operating similar businesses or properties in
the localities where such businesses or properties are located and (iii) are
sufficient for compliance with all requirements of Law and Commitments. Each of
the Company and Seller is current in all premiums or other payments due under
each Insurance Policy and has otherwise performed in all material respects all
of its respective obligations thereunder. Each of the Company and Seller has
given timely notice to the insurer under each Insurance Policy of all claims
that may be insured thereby. No Insurance Policy provides for any retrospective
premium adjustment or other experienced-based liability on the part of the
Company.
Section 5.22. BANK ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.22
sets forth a complete and accurate list of: (a) all bank accounts, investment
accounts, lock boxes and safe deposit boxes maintained by or on behalf of the
Company, including the location and account numbers of all such accounts, lock
boxes and safe deposit boxes, (b) the names of all Persons authorized to take
action with respect to such accounts, safe deposit boxes and lock boxes or who
have access thereto and (c) the names of all Persons holding general or special
powers of attorney from the Company, and a summary statement of the terms
thereof.
Section 5.23. NO MATERIAL MISSTATEMENT OR OMISSION. None of
the Transaction Documents (including any schedule or exhibit thereto) or any
other document furnished by Seller or the Company in connection therewith or
with the Transaction contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements contained in such
Transaction Document or other document not misleading. The financial projections
relating to the Company delivered to Buyer have been made in good faith and were
based upon reasonable assumptions, and neither Seller nor the Company is aware
of any fact or set of circumstances (other than facts communicated by Buyer)
that would lead it to believe that such projections are incorrect or misleading
in any material respect.
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Section 5.24. NO BROKERS. Except for Intellectual Capital
Advisors (whose fees will be paid by Seller), there is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf of Seller, the Company or any of their Affiliates who is or
might be entitled to any fee, commission or payment in connection with the
negotiation, preparation, execution or delivery of any Transaction Document or
the consummation of the Transaction, nor is there any basis for any such fee,
commission or payment to be claimed by any Person against the Company.
Section 5.25. INVESTMENT INTENT. Seller is acquiring the Buyer
Stock pursuant to this Agreement for its own account for investment purposes
only and not with a view to, or for sale or resale in connection with, any
public distribution thereof or with any present intention of selling,
distributing or otherwise disposing of any of such shares.
Section 5.26. INDEPENDENT INVESTIGATION. Seller acknowledges
that it has carefully examined the following filings of Buyer made with the SEC:
(a) the Information Statement of Buyer dated December 2, 1998 included in
Buyer's Registration Statement on Form 10 (File No. 000-24923), (b) the
Company's Registration Statement on Form S-3 (Registration No. 333-82399) with
respect to Buyer's 4-1/4% Convertible Subordinated Notes due May 1, 2006, (c)
Buyer's Annual Report on Form 10-K for the fiscal year ended September 30, 1999
and (d) the Proxy Statement of Buyer in connection with the 2000 Annual Meeting
of Shareowners of Buyer (collectively, the "BUYER SEC DOCUMENTS"). Seller
acknowledges that Buyer has made available to Seller all documents and
information that it has requested relating to Buyer and has had an opportunity
to ask executive officers of Buyer such questions as Seller considered necessary
or appropriate with respect to the Buyer Stock and Buyer, and that Buyer has
provided Seller with answers to any such questions. In evaluating the
suitability of the acquisition of Buyer Stock hereunder, Seller has conducted
its own investigation and has not relied upon any information (whether written
or oral) other than the documents referred to in the first sentence of this
Section 5.26. Seller acknowledges that none of Buyer or its Affiliates or any
other Person has made any representations or warranties, express or implied,
relating to Buyer Stock, other than as expressly set forth in this Agreement.
Seller acknowledges that it has consulted its own legal and financial advisors
with respect to its investment in the Buyer Stock and the risks associated with
that investment to the extent it believes is necessary or appropriate and that
it has received all information that it believes is necessary or appropriate in
connection with its receipt of the Buyer Stock in connection with the
Transaction.
Section 5.27. KNOWLEDGEABLE INVESTOR. Seller is aware that the
shares of Buyer Stock to be issued to Seller pursuant to this Agreement have not
been registered under the Securities Act or any applicable state securities
laws, and agrees that the Buyer Stock will not be offered or sold in the absence
of registration under the Securities Act and any applicable state securities
laws or, in the opinion of counsel reasonably
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acceptable to Buyer, an exemption from the registration requirements of the
Securities Act and any applicable state securities laws. Seller will not
transfer any shares of Buyer Stock in violation of the provisions of any
applicable federal or state securities laws. In this connection, Seller
represents that it is familiar with SEC Rule 144 promulgated pursuant to the
Securities Act, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act. Seller understands
that the offering and sale of the Buyer Stock is intended to be exempt from
registration under the Securities Act, by virtue of Section 4(2) of the
Securities Act and, if applicable, the provisions of Regulation D promulgated
thereunder, based, in part, upon the representations, warranties and
agreements contained in this Agreement and Buyer may rely on such
representations, warranties and agreements in connection therewith. Seller
represents that by reason of its business and financial experience, and the
business and financial experience of those persons, if any, retained by it to
advise it with respect to its investment in the Buyer Stock, Seller together
with such advisors have knowledge, sophistication and experience in business
and financial matters as to be capable of evaluating the merits and risk of
the prospective investment. Seller's financial condition and investments are
such that it is in a financial position to hold the Buyer Stock for an
indefinite period of time and to bear the economic risk of its investment in
the Buyer Stock, and Seller represents that it is an "accredited investor"
within the meaning of Rule 501(a) of the Securities Act.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Seller as follows:
Section 6.1. ORGANIZATION. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware.
Section 6.2. AUTHORITY; BINDING OBLIGATION. Buyer has all
requisite power and authority, corporate or otherwise, to execute and deliver
each Transaction Document delivered by Buyer and to perform all of its
obligations hereunder and thereunder. The execution, delivery and performance by
Buyer of each Transaction Document delivered by Buyer and the consummation by
Buyer of the Transaction have been duly authorized by all necessary and proper
action on the part of Buyer. This Agreement and each other Transaction Document
delivered by Buyer has been duly executed and delivered by Buyer and constitutes
the legal, valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws relating to
or affecting the enforcement of creditors' rights in general and by general
principles of equity.
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Section 6.3. NO BREACH. None of the execution, delivery or
performance by Buyer of any Transaction Document or the consummation by Buyer of
the Transaction does or will, with or without the giving of notice or the lapse
of time or both, conflict with, or result in a breach or violation of or a
default under, or give rise to a right of amendment, termination, cancellation
or acceleration of any right or obligation or to a loss of a benefit under (a)
the Restated Certificate of Incorporation or By-Laws of Buyer, (b) any Contract
to which Buyer is a party or by which any of its properties or assets are bound
or (c) any Law or License or other requirement to which Buyer or its properties
or assets are subject, except, in the case of items (b) and (c) above only, for
those which would not have, individually or in the aggregate, a material adverse
effect on the ability of Buyer to consummate the Transaction.
Section 6.4. GOVERNMENTAL APPROVALS. Except as set forth on
Schedule 6.4, no material Consent or order of, with or to any Governmental
Entity is required to be obtained or made by or with respect to Buyer in
connection with the execution, delivery and performance by Buyer of any
Transaction Documents or the consummation by Buyer of the Transaction, other
than those which, if not obtained, would not have, individually or in the
aggregate, a material adverse effect on the ability of Buyer to consummate the
Transaction.
Section 6.5. NO BROKERS. There is no investment banker,
broker, finder or other intermediary which has been retained by or is authorized
to act on behalf of Buyer who is or might be entitled to any fee, commission or
payment in connection with the negotiation, preparation, execution or delivery
of any Transaction Document or the consummation of the Transaction, nor is there
any basis for any such fee, commission or payment to be claimed by any Person
against Buyer.
Section 6.6. INVESTMENT INTENT. Buyer is purchasing the Shares
for investment for its own account and not with a view to, or for sale in
connection with, any distribution thereof.
Section 6.7. BUYER STOCK. Upon issuance thereof pursuant to
Section 3.1(a), the Buyer Stock to be issued to Seller pursuant to this
Agreement will be duly authorized, validly issued, fully paid and
non-assessable.
Section 6.8. BUYER SEC DOCUMENTS. As of their respective
dates, the Buyer SEC Documents complied in all material respects with the
requirements of the Exchange Act or the Securities Act (as applicable). As of
their respective dates, none of the SEC Documents contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading, except to the extent
corrected by a subsequently filed document with the SEC. As of the date hereof,
none of the Buyer SEC Documents are required to be amended pursuant to the
Securities Act or the Exchange Act or the rules promulgated thereunder (it being
understood that Buyer may have disclosed by means of a press release certain
events that may be deemed material, but which would not necessitate
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such an amendment). Buyer has filed all reports required to be filed pursuant
to Regulation 13A under the Exchange Act between September 30, 1999 and the
date hereof (it being understood that Buyer may have disclosed by means of a
press release certain events that may be deemed material, but which would not
necessitate such a report).
ARTICLE VII
COVENANTS
Section 7.1. COVENANTS OF SELLER.
(a) CONSENTS. Promptly after the date of this Agreement,
Seller will (at the sole expense of Seller) obtain all Consents and orders of
all Persons required to be obtained in connection with the execution, delivery
and performance by Seller of the Transaction Documents and the consummation of
the Transaction (other than Consents with respect to those Licenses set forth on
Schedule 5.16 which are marked "Consent Not Required").
(b) BOOKS AND RECORDS. Prior to the date hereof, Seller has
caused all books and records belonging or relating to the Company to be in the
possession of the Company.
(c) CERTAIN PAYMENTS. Seller has caused (i) all Affiliates,
employees, directors and officers of the Company and all Affiliates of any
thereof to pay in full to the Company all amounts owed by such Persons to the
Company on, and any time prior to, the date hereof, including all amounts due
under the Intercompany Service Agreement between Seller and the Company, and
(ii) the Company to be fully and irrevocably released from all guarantees of
indebtedness or other Liabilities of or relating to any Affiliates, employees,
directors and officers of the Company or any Affiliate of any thereof.
(d) INTERCOMPANY ARRANGEMENTS. Effective immediately prior to
the execution and delivery of this Agreement (but after payment of all amounts
pursuant to Section 7.1(c)), all intercompany and intracompany accounts or
Contracts between the Company, on the one hand, and Seller or any Affiliate of
Seller, on the other hand, are hereby canceled without any payment or further
liability to any party thereunder (other than liability for amounts required to
be paid under Section 7.1(c)), it being understood that all intercompany
accounts payable owed by the Company have been canceled without any payments
being made in respect thereof at any time on or prior to the date hereof.
(e) POWER OF ATTORNEY WITH RESPECT TO BUSINESS INTELLECTUAL
PROPERTY. Effective as of the date hereof, Seller hereby constitutes and
appoints Buyer the true and lawful attorney of Seller, with full power of
substitution, in the name and on behalf of Seller but for the benefit of and at
the sole cost and expense of Buyer, to institute and prosecute all
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proceedings that Buyer may deem proper in order to collect, assert or enforce
any claim, right or title of any kind in or to the Business Intellectual
Property, or to defend or compromise any Action in respect of any of the
Business Intellectual Property, and to take all such action in relation
thereto as Buyer shall deem advisable. Seller acknowledges that such powers
will be coupled with an interest and will not be revocable by Seller for any
reason. Buyer will retain for its own account any amount collected as a
result of any action taken pursuant to the foregoing powers.
(f) NON-SOLICITATION OF EMPLOYEES. For a period of two years
from and after the date hereof, without the prior written consent of Buyer,
Seller will not, and will cause its Affiliates not to, solicit, hire or retain
as an employee, independent contractor or consultant any Person employed by the
Company on the date hereof and will not, and will cause its Affiliates not to,
during such period, induce or attempt to induce any such employee to terminate
his or her employment with the Company or Buyer by resignation, retirement or
otherwise.
(g) RESTRICTIONS ON TRANSFER OF BUYER STOCK. For a period of
one year beginning on the date hereof, Seller agrees that it will not transfer,
sell, assign, pledge, hypothecate, gift, encumber or otherwise dispose of the
shares of Buyer Stock received by Seller pursuant to this Agreement (unless a
registration statement with respect to the sale of such Buyer Stock is declared
effective under the Securities Act by the SEC pursuant to Section 10.1).
Certificates representing such shares of Buyer Stock will bear a legend
substantially in the form described in Section 3.1(a). Buyer shall instruct its
stock transfer agent that the stock transfer records of Buyer should bear the
notation that transfers of such shares of Buyer Stock registered in the name of
Seller shall not be registered until the first anniversary of the date hereof
(unless Buyer instructs such transfer agent that a registration statement with
respect to the sale of such Buyer Stock has been declared effective under the
Securities Act by the SEC pursuant to Section 10.1).
(h) MEMBERSHIP ORGANIZATIONS. Within 15 days after the date
hereof, Seller will (at no cost to Buyer or the Company) cause the Company to
have a right to use Seller's JEDEC manufacturer's identification on the
Company's OTI-7000/7 products until the Company's first mask change or metal
change with respect to such products after the date hereof. Buyer hereby agrees
to indemnify Seller for any Damages to the extent arising solely out of Buyer's
use of Seller's JEDEC manufacturer's identification on the Company's OTI-700/7
products after the date hereof, other than Damages which are or relate to
Damages indemnifiable by Seller pursuant to Section 12.1(c).
(i) HARDWARE TRANSFERS. Effective as of the date hereof,
Seller hereby (at no cost to Buyer or the Company) transfers and assigns to the
Company ownership of the following hardware currently located in the Company's
offices: (i) Fireberd BER tester and (ii) HP noise and interface test set.
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(j) LICENSES. Seller will, by the date that is fifteen days
after the date hereof (at Seller's sole expense), (i) cause ownership of all
software, CAD, technology and other licenses used by the Company prior to the
date hereof which are not owned by the Company (including those set forth on
Schedule 7.1(j) which are not owned by the Company) to be transferred to the
Company (and obtain all Consents required in connection therewith) and (ii) make
all payments required in connection with the foregoing. Buyer will use its
reasonable efforts to cooperate with Seller to minimize payments to third
parties under such licenses in cases where Buyer has similar existing licenses
with such third parties (it being understood that such efforts of Buyer shall
not include any requirement to make any payments or grant any financial or other
accommodations).
(k) ACCESS TO PRODUCT DATABASES. Following the date hereof
until December 31, 2000, Seller will (at no cost to Buyer or the Company, other
than as set forth in the last sentence of this Section 7.1(k)) provide up to 14
employees of Buyer and the Company identified to Seller ("AUTHORIZED EMPLOYEES")
with full access to and the full right to use, for the limited purposes of
design and layout of 7000, 7002 and 7007 chipsets and to make, use, sell and
offer for sale products based thereon ("Limited Use Purposes"), the following
models and databases ("DATABASES") resident on Seller's internal network: (i)
0.35u (TSMC sptm) Mentor RAM models and layout used in the Company's OTI-7007/7
products, including Apollo data and phantom and GDSII, (ii) 0.35u (TSMC sptm)
oak 3iii standard cell library, including documentation, verilog, syn files,
Apollo layout views and ATPG and (iii) 0.35u (TSMC sptm) pad library and delay
cells, documentation, verilog, syn files, Apollo layout views and ATPG. The
contents of the Databases shall hereinafter be referred to as "DATABASE
INFORMATION". Nothing in this Section 7.1(k) shall be construed to convey any
intellectual property rights in the Databases or Database Information to Buyer,
other than a limited license to access and use the Databases and Database
Information for the Limited Use Purpose (including making, using, selling and
offering for sale products as provided above). No right is granted pursuant to
this Section 7.1(k) to access or use any information on Seller's internal
network other than the Databases and Database Information, and Buyer shall use
its reasonable best efforts to (i) prevent the Authorized Employees or any other
of its or the Company's personnel from accessing any such information, and (ii)
cause the Authorized Employees to comply with Seller's written network security
procedures which are delivered to Buyer. No license is granted by Seller to
Buyer or the Company to reproduce or distribute the Database Information. All
Databases and Database Information are trade secrets of Seller or its licensors
and Seller Confidential Information for purposes of Section 7.6. Seller reserves
the right to alter or modify any Database Information at any time (so long as
some alterations or modifications are done for valid business purposes relating
to development of Seller's products) and Seller makes no representations or
warranties with regards to the Database Information, its accuracy, completeness
or suitability for Buyer's or the Company's purposes. Promptly after December
31, 2000, or at such earlier time that the Company ceases using the Database
Information, Buyer will return to Seller, or certify to Seller the destruction
of, all copies of the Databases and Database Information in Buyer's and the
Company's possession, including without limitation all electronic copies. The
Company will pay to Seller a charge of $100 per hour for any assistance of
Seller's engineering personnel which Buyer or the Company requests Seller to
provide in connection with rights granted under this Section 7.1(k).
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(l) LICENSE OF CERTAIN EXCLUDED INTELLECTUAL PROPERTY. Seller
hereby grants to Buyer and the Company a fully paid-up, royalty-free,
world-wide, irrevocable, non-exclusive, assignable license, with the right to
sublicense, under all Intellectual Property described in Item Nos. 1, 2, 3, 4,
5, 6 and 10 of Schedule 1.2 (and all Intellectual Property rights relating
thereto) to make, have made, use, import, sell or otherwise dispose of products
of the Business or any derivatives of or improvements to such products, or to
practice any process in connection therewith and to use, disclose, perform
(internally and externally), display, copy, distribute and make derivative works
of any commercial or technical information relating thereto. Seller will, within
10 days after the date hereof, supply to Buyer and the Company (at no cost to
Buyer or the Company) copies of all information or materials relating to such
Intellectual Property licensed hereunder.
Section 7.2. INTERIM USE OF SELLER'S TRADEMARKS, TRADE NAMES
AND CORPORATE SYMBOLS. From and after the date hereof, except as permitted in
this Section 7.2, Buyer will not use or have any rights to the name "Oak" or any
derivatives thereof, or any corporate symbol or logo related thereto. However,
Buyer may utilize without obligation to pay royalties to Seller the trademark or
trade name "Oak", derivatives thereof or any corporate symbol or logo related
thereto or any thereof in connection with stationery, supplies, labels,
catalogs, inventory, work-in-process, displays and the name of the Company after
the date hereof, subject to the terms and conditions of this Section 7.2. Buyer
hereby agrees to indemnify Seller for any Damages to the extent arising solely
out of the use by the Company of the trademark or trade name "Oak" pursuant to
this Section 7.2 after the date hereof, other than Damages which are or relate
to Damages indemnifiable by Seller pursuant to Section 12.1(c).
(a) All documents within the following categories may be used
for the duration of the periods following the date hereof indicated below or
until the supply is exhausted, whichever is the first to occur:
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<TABLE>
<CAPTION>
MAXIMUM PERIOD
OF PERMITTED USE
FOLLOWING THE
CATEGORY OF DOCUMENTS DATE HEREOF
--------------------- ----------------
<S> <C>
A. Stationery 4 months
B. Invoices, purchase orders, debit
and credit memos and other similar
documents of a transactional nature 4 months
C. Business cards 4 months
D. Other outside forms such as packing materials
lists, labels, packing
and cartons, etc. 4 months
E. Forms for internal use only 9 months
F. Product literature 9 months
</TABLE>
(b) Products in finished goods inventory and work-in-process
(to the extent the same bears any such trademark at the date hereof or has any
such trademark applied to it in the ordinary course of business within four
months following the date hereof) may be disposed of by Buyer following the date
hereof without re-marking.
(c) Within two months following the date hereof, Buyer will
cause to be removed from display at all facilities constituting assets of the
Company all signs displaying the trademark or trade name "Oak".
(d) Within four months following the date hereof, Buyer will
change or cause to be changed the name of the Company in order that the word
"Oak" shall be deleted therefrom.
Section 7.3. INSURANCE.
(a) RIGHTS IN INSURANCE POLICIES. Buyer will have the right to
(i) assert claims (and Seller will use reasonable best efforts to assist Buyer
in asserting claims) with respect to the Business under insurance policies of
Seller and its Affiliates which are "occurrence basis" policies ("OCCURRENCE
BASIS POLICIES") arising out of insured incidents occurring from the date
coverage thereunder first commenced until the date hereof to the extent that the
terms and conditions of any such Occurrence Basis Policies so allow and (ii)
continue to prosecute claims with respect to the Business properly asserted with
the insurance carrier on or prior to the date hereof (and Seller will use
reasonable best efforts to assist Buyer in connection therewith) under insurance
policies of Seller and its Affiliates which are on a "claims made" basis
("CLAIMS MADE POLICIES") arising out of insured incidents occurring from the
date coverage thereunder first commenced until and including the date hereof to
the extent that the terms and conditions of any such Claims Made Policies so
allow. Buyer shall reimburse Seller for all of its reasonable
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out-of-pocket expenses in connection with the foregoing. All recoveries in
respect of such claims shall be for the account of Buyer.
(b) SELLER ACTIONS. Seller will not, and will cause its
Affiliates not to, amend, commute, terminate, buy-out, extinguish liability
under or otherwise modify any Occurrence Basis Policies or Claims Made Policies
under which Buyer has rights to assert claims pursuant to Section 7.3(a) in a
manner that would adversely affect any such rights of Buyer.
Section 7.4. PUBLIC ANNOUNCEMENTS. No press release or
announcement concerning the transactions contemplated hereby will be issued by
Seller or the Company without the prior consent of Buyer or by Buyer without the
prior consent of Seller, except as such release or announcement may be required
by law, rule or regulation, in which case the Person required to make the
release or announcement will allow the Person whose consent would otherwise be
required reasonable time to comment on such release or announcement in advance
of such issuance. Notwithstanding the foregoing, in no event will any press
release or announcement concerning the transactions contemplated hereby be
issued by Seller or Buyer prior to 1:35 p.m. (California time) on January 19,
2000.
Section 7.5. FURTHER ASSURANCES. From time to time, as and
when requested by either party to this Agreement, the other party will execute
and deliver, or cause to be executed and delivered, all such documents and
instruments and will take, or cause to be taken, all such reasonable actions, as
such other party may reasonably deem necessary or desirable to evidence or make
effective the transactions contemplated hereby.
Section 7.6. CONFIDENTIAL INFORMATION.
(a) From and after the date hereof, Seller will, and will use
its reasonable best efforts to cause each of its Affiliates and its and their
Representatives to (i) maintain in strict confidence any and all non-public or
proprietary information concerning the Company and the Business (including
non-public or proprietary information relating to products, designs, inventions,
research, trade secrets, personnel and financial matters) and (ii) refrain from
using any and all such information for its own benefit or to compete with or
otherwise to the detriment of Buyer or its Affiliates (including the Company) or
the Business. It is understood that Seller shall have no liability hereunder
with respect to information that (i) is in or, through no fault of Seller or any
of their Representatives, comes into the public domain or (ii) Seller is legally
required to disclose (subject to the terms of Section 7.6(b) below).
(b) In the event that Seller or any of its Affiliates or its
or their Representatives are required by Law to disclose any such non-public or
proprietary information, Seller will promptly notify Buyer in writing so that
Buyer may seek a protective order and/or other motion to prevent or limit the
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production or disclosure of such information. If such motion has been denied,
then the Person required to disclose such information may disclose only such
portions of such information which (i) in the opinion of Seller's legal counsel
is required by Law to be disclosed (PROVIDED that the Person required to
disclose such information will use all reasonable efforts to preserve the
confidentiality of the remainder of such information) or (ii) Buyer consents in
writing to having disclosed. Seller will not, and will not permit any of its
Affiliates or its or their Representatives to, oppose any motion for
confidentiality brought by Buyer or the Company. Seller will continue to be
bound by its obligations pursuant to this Section 7.6 for any information that
is not required to be disclosed, or that has been afforded protective treatment,
pursuant to such motion.
(c) "SELLER CONFIDENTIAL INFORMATION" means all non-public or
proprietary information relating to Seller's business (including non-public or
proprietary information relating to products, designs, inventions, research,
trade secrets, personnel, and financial matters) obtained by Buyer from Seller
from information resident on Seller's internal network as a result of Buyer's or
the Company's access to Seller's internal network pursuant to Section 7.1(k) or
the services to be performed pursuant to Section 9.1, including the Databases
and Database Information. Notwithstanding the foregoing, Seller Confidential
Information will not include any information (i) which is public knowledge or
becomes public knowledge without fault of Buyer, the Company or any of their
Representatives, or (ii) which Buyer is legally obligated to disclose (subject
to the terms of Section 7.6 (e) below). Buyer agrees to hold and use Seller
Confidential Information in confidence and to use its reasonable best efforts to
prevent unauthorized disclosure by Buyer of any Seller Confidential Information,
including, without limitation, precautions at least as great as the methods
Buyer uses to prevent disclosure of its own proprietary and confidential
information of equal importance. Buyer agrees to disclose Seller Confidential
Information only to its employees having a need-to-know for purposes of
performing their responsibilities and only after such persons receiving Seller
Confidential Information have entered into confidentiality agreements with Buyer
containing confidentiality obligations substantially similar to Buyer's
confidentiality obligations under this Section 7.6(c) (and containing no rights
for employees to use residuals of such Seller Confidential Information).
(d) No right, license, title or interest is granted, directly
or indirectly by Seller in or to any Seller Confidential Information or any
other property as a result of conveying Seller Confidential Information to
Buyer, except the limited license granted in Section 7.1(k) and any other
license or other rights as may be mutually and expressly agreed upon between
Buyer and Seller by a written agreement.
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(e) In the event that Buyer or any of its Affiliates or its or
their Representatives are required by Law to disclose any Seller Confidential
Information, Buyer will promptly notify Seller in writing so that Seller may
seek a protective order and/or other motion to prevent or limit the production
or disclosure of such Seller Confidential Information. If such motion has been
denied, then the Person required to disclose such information may disclose only
such portions of Seller Confidential Information which (i) in the opinion of
Buyer's legal counsel is required by Law to be disclosed (PROVIDED that the
Person required to disclose such information will use all reasonable efforts to
preserve the confidentiality of the remainder of Seller Confidential
Information) or (ii) Seller consents in writing to having disclosed. Buyer will
not, and will not permit any of its Affiliates or its or their Representatives
to, oppose any motion for confidentiality brought by Seller. Buyer will continue
to be bound by its obligations pursuant to this Section 7.6 for any information
that is not required to be disclosed, or that has been afforded protective
treatment, pursuant to such motion.
Section 7.7. CERTAIN LIABILITIES OF THE COMPANY. Seller will
pay when due all Liabilities of the Company described in Section 12.1(c) (other
than Assumed Liabilities); provided that Buyer or the Company may, at their
option, pay any such Liabilities, in which event Seller will reimburse Buyer or
the Company for all such amounts paid within three days after Buyer or the
Company submits a request therefor to Seller.
ARTICLE VIII
EMPLOYMENT MATTERS
Section 8.1. CONTINUATION OF EMPLOYMENT.
(a) Buyer will cause the Company to continue to employ,
commencing as of the date hereof, each of the employees listed on Schedule
8.1(a) who are employed by the Company (but excluding those who are on long-term
disability) immediately prior to the date hereof; PROVIDED, HOWEVER, that
nothing contained in this Section 8.1 is intended to confer upon any Continued
Employee any right to continued employment after evaluation by Buyer and the
Company of their employment needs after the date hereof. The employees who
continue in such employment with the Company are herein referred to as
"CONTINUED EMPLOYEES". Buyer will cause the Company to provide to each Continued
Employee employment and a salary or wage level comparable to the salary and wage
level applicable to such Continued Employee immediately prior to the date
hereof; PROVIDED, HOWEVER, that after the date hereof, Buyer expressly reserves
the right to, or cause the Company to, modify any salary or wage level of any
Continued Employee and to, or cause the Company to, amend, modify or terminate
any employee benefit plan or program for or for the benefit of Continued
Employees in accordance with the terms thereof and applicable law.
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<PAGE>
(b) On or prior to January 21, 2000, Seller will pay special
cash bonuses to Continued Employees in those individual amounts set forth on
Schedule 8.1(b). Such bonuses will be in addition to (and not in lieu of) all
bonuses and other amounts otherwise payable to Continued Employees, including
those under retention plans and policies of Seller and the Company.
Section 8.2. RETENTION PAYMENTS. Seller will be solely
responsible for, and will pay, perform and discharge when due, all Liabilities
relating to employees of Seller or the Company in respect of any payments
arising under any and all retention plans and policies of Seller or the Company
in effect at or prior to the date hereof. Without limiting the foregoing, on or
prior to January 21, 2000, Seller will pay retention bonuses to Continued
Employees in the amounts set forth in Item 2 of Schedule 5.17(c).
Section 8.3. WELFARE PLANS. Seller or the welfare benefit
plans of Seller will remain liable for, and pay, perform and discharge when due,
all Liabilities relating to Continued Employees and former employees of the
Company in respect of claims covered by the welfare benefit plans of Seller with
respect to medical (including vision care and prescription drugs),
hospitalization and dental services rendered or expenses incurred on or prior to
the date hereof (whether such claims are submitted prior to, on or after the
date hereof). Buyer, the Company or the welfare benefit plans of Buyer or the
Company will be liable for, and pay, perform and discharge when due, all
Liabilities relating to Continued Employees in respect of claims covered by the
welfare benefit plans of Buyer or the Company with respect to medical (including
vision care and prescription drugs), hospitalization and dental services
rendered or expenses incurred after the date hereof. Seller or welfare benefit
plans of Seller will remain liable for, and pay, perform and discharge when due,
all Liabilities relating to Continued Employees and former employees of the
Company in respect of claims covered by welfare benefit plans of Seller with
respect to all other employee welfare benefits (including, without limitation,
travel, accident and short- and long-term disability) arising out of injuries,
accidents, events, actions, occurrences or conditions occurring or existing at
or prior to the date hereof (whether such claims are submitted prior to, on or
after the date hereof).
ARTICLE IX
TRANSITION MATTERS
Section 9.1. TRANSITION MATTERS. Seller will provide Buyer and
the Company (for the applicable periods following the date hereof set forth on
Schedule 9.1) with the support services described on Schedule 9.1. Seller will
use the same degree of care in providing such services as it uses in providing
such services for its own businesses. Buyer will pay Seller for all of Seller's
actual costs (which, when specified on Schedule 9.1, shall be limited to the
amounts set forth thereon), including
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<PAGE>
taxes and other out-of-pocket expenses, actually incurred by Seller in
connection with the services described on Schedule 9.1. Invoices for expenses
payable pursuant to this Section 9.1 shall be rendered monthly and shall be
due and payable within 30 days after the date of receipt of such invoice,
without discount, at the address set forth in such invoice. Buyer will have
the option, at any time or from time to time, to terminate or suspend the
performance of any services described on Schedule 9.1 by providing notice
thereof to Seller, but Buyer will remain liable for all costs payable
pursuant to this Section 9.1 for such services through the date of such
termination or suspension thereof.
ARTICLE X
REGISTRATION RIGHTS
Section 10.1. REGISTRATION RIGHTS. Buyer hereby agrees to
provide Seller with the registration rights set forth on Schedule 10.1 with
respect to the Buyer Stock. Seller hereby agrees to be bound by all obligations
and agreements with respect to such registration rights applicable to Seller set
forth on Schedule 10.1.
ARTICLE XI
SURVIVAL
Section 11.1. SURVIVAL. The respective representations and
warranties of each of Seller and Buyer contained in this Agreement (other than
Seller's representations and warranties with respect to capitalization contained
in Section 5.4, title contained in Section 5.5 and Section 5.10, Taxes contained
in Section 5.8, environmental matters contained in Section 5.13 and brokers
contained in Section 5.24 and Buyer's representations and warranties with
respect to brokers contained in Section 6.5 and Buyer Stock contained in Section
6.7) will survive the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and will continue in full
force and effect until eighteen months after the date hereof and then terminate
and expire with respect to any theretofore unasserted claims arising out of or
otherwise in respect of any falsity, breach or inaccuracy of such
representations and warranties. Seller's representations and warranties with
respect to Taxes contained in Section 5.8 and environmental matters contained in
Section 5.13 and Seller's and Buyer's representations and warranties with
respect to brokers contained in Section 5.24 and Section 6.5, respectively, will
survive the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby until all applicable statutes of limitation
(including any extensions thereof) have expired and then expire with respect to
any theretofore unasserted claims arising out of or otherwise in respect of any
falsity, breach or inaccuracy of such representations and warranties. Seller's
representations and
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warranties with respect to capitalization contained in Section 5.4 and title
contained in Section 5.5 and Section 5.10 and Buyer's representations and
warranties with respect to Buyer Stock contained in Section 6.7 will survive
the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby without time limitation.
ARTICLE XII
INDEMNIFICATION
Section 12.1. INDEMNIFICATION BY SELLER. Seller shall
indemnify, defend and hold harmless Buyer and its Affiliates (including the
Company) and their respective employees, directors, officers and Representatives
(collectively, the "BUYER GROUP") from and against, and pay or reimburse, as the
case may be, the Buyer Group for, any and all Damages, as incurred, suffered by
Buyer or any other member of the Buyer Group directly or indirectly based upon,
arising out of or otherwise in any way relating to or in respect of:
(a) any falsity, breach or inaccuracy of any
representation or warranty made by Seller herein on the date of this
Agreement;
(b) any breach or violation of any covenant or
agreement of Seller contained in any Transaction Document;
(c) all Liabilities of the Company and all
Liabilities of Seller and its Affiliates based upon, arising out of or
otherwise relating to the conduct of the Business or the operation of
the Company on or prior to the date hereof (other than Liabilities of
the Company that are included in the definition of Assumed
Liabilities), including any Liabilities based upon, arising out of or
otherwise relating to any events, actions, occurrences, omissions,
circumstances or conditions whatsoever occurring or existing on or
prior to the date hereof, whether asserted prior to, on or after the
date hereof including:
(1) all Liabilities based upon, arising out
of or otherwise relating to any pending or threatened or
future Action with respect to any events, actions,
occurrences, omissions, circumstances or conditions occurring
or existing on or prior to the date hereof (whether asserted
prior to, on or after the date hereof), other than Actions
based on the Company's failure to pay or perform any Assumed
Liabilities;
(2) all Liabilities based upon, arising out
of or otherwise relating to any tort, breach or violation of
or non-compliance with any Commitment of Seller or the
Company, infringement, violation of Law or regulatory
non-compliance (whether civil or criminal) occurring or
existing on or prior to the date
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hereof, including such circumstances or conditions that may
continue to exist after the date hereof (whether such
liabilities are asserted prior to, on or after the date
hereof);
(3) all Liabilities under Environmental Laws
or otherwise relating to environmental matters based upon,
arising out of or otherwise relating to events, actions,
occurrences, omissions, circumstances or conditions occurring
or existing on or prior to the date hereof, including such
circumstances or conditions that may continue to exist after
the date hereof (whether such liabilities are asserted prior
to, on or after the date hereof);
(4) all Liabilities in respect of employees,
former employees, officers or consultants of the Company
relating to events, actions, occurrences, omissions,
circumstances or conditions occurring or existing on or prior
to the date hereof;
(5) all Liabilities based upon, arising out
of or otherwise relating to all incentive arrangements with
employees or other Persons relating to the sale or other
disposition of the Company, the Business or Business
Intellectual Property;
(6) all Liabilities for and relating to any
indebtedness for borrowed money;
(7) all Liabilities for and relating to the
guarantee of any indebtedness or obligation of any Person; and
(8) all Liabilities under Commitments not
set forth on Schedule 5.9(b), Schedule 5.11(a), Schedule
5.17(b) or Schedule 5.17(c) which pursuant to this Agreement
are required to be set forth thereon; or
(d) all Liabilities of the Company, Seller or any of
its Affiliates under the Indemnification Agreement effective as of
February 2, 1998 by and between Seller and Peter Claydon, as such
agreement may be amended.
Section 12.2. INDEMNIFICATION BY BUYER. Buyer shall indemnify,
defend and hold harmless Seller and its Affiliates and their respective
employees, directors, officers and Representatives (collectively, the "SELLER
GROUP") from and against, and pay or reimburse, as the case may be, the Seller
Group for, any and all Damages, as incurred, suffered by Seller or any other
member of the Seller Group directly or indirectly based upon, arising out of or
otherwise in any way relating to or in respect of:
(a) any falsity, breach or inaccuracy of any
representation or warranty made by Buyer in any Transaction Document on
the date of this Agreement;
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(b) any breach or violation of any covenant or
agreement of Buyer contained in any Transaction Document; or
(c) the Assumed Liabilities.
Section 12.3. PROCEDURES FOR INDEMNIFICATION.
(a) If a claim or demand is made against an Indemnitee, or an
Indemnitee shall otherwise learn of an assertion, by any Person who is not a
party to this Agreement (and who is not an Affiliate of a party to this
Agreement) (a "THIRD PARTY CLAIM") as to which a party (the "INDEMNIFYING
PARTY") may be obligated to provide indemnification pursuant to this Agreement,
such Indemnitee will notify the Indemnifying Party in writing, and in reasonable
detail, of the Third Party Claim reasonably promptly after becoming aware of
such Third Party Claim; PROVIDED, HOWEVER, that failure to give any such
notification will not affect the indemnification provided hereunder except to
the extent the Indemnifying Party shall have demonstrated that it has been
actually prejudiced as a result of such failure.
(b) If a Third Party Claim is made against an Indemnitee and
the Indemnifying Party unconditionally and irrevocably acknowledges in writing
its obligation to indemnify the Indemnitee therefor, the Indemnifying Party will
be entitled to assume the defense thereof (at the expense of the Indemnifying
Party) with counsel selected by the Indemnifying Party and reasonably
satisfactory to the Indemnitee. Should the Indemnifying Party so elect to assume
the defense of a Third Party Claim, the Indemnifying Party will not be liable to
the Indemnitee for any legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense thereof as long as the Indemnifying
Party diligently conducts such defense; provided that, if (i) in any
Indemnitee's reasonable judgment a conflict of interest exists in respect of
such claim or (ii) any Indemnifying Party fails to provide reasonable assurance
to the Indemnitee (upon request of the Indemnitee) of such Indemnifying Party's
financial capacity to defend such Third Party Claim and provide indemnification
with respect thereto, such Indemnitee will have the right to employ separate
counsel to represent such Indemnitee and in that event the reasonable fees and
expenses of such separate counsel will be paid by such Indemnifying Party. If
the Indemnifying Party assumes the defense of any such Third Party Claim, each
Indemnitee will have the right to participate in the defense thereof and to
employ counsel, at its own expense, separate from the counsel employed by the
Indemnifying Party. The Indemnifying Party will be liable for the fees and
expenses of counsel employed by the Indemnitee for any period during which the
Indemnifying Party has failed to assume the defense thereof or if it does not
expressly elect to assume the defense thereof (including the acknowledgment by
each Indemnifying Party of its indemnification obligation as aforesaid). If the
Indemnifying Party assumes the defense of any such Third Party Claim, the
Indemnifying Party will promptly supply to the Indemnitee copies of all
correspondence and documents relating to or in connection with such Third Party
Claim and keep the Indemnitee fully
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informed of all developments relating to or in connection with such Third
Party Claim (including, without limitation, providing to the Indemnitee on
request updates and summaries as to the status thereof). If the Indemnifying
Party chooses to defend a Third Party Claim, all the Indemnitees will
reasonably cooperate with the Indemnifying Party in the defense thereof (such
cooperation to be at the expense, including reasonable legal fees and
expenses, of the Indemnifying Party).
(c) No Indemnifying Party will consent to any settlement,
compromise or discharge (including the consent to entry of any judgment) of any
Third Party Claim without the Indemnitee's prior written consent; PROVIDED, that
if the Indemnifying Party unconditionally and irrevocably acknowledges in
writing its obligation to indemnify the Indemnitee for a Third Party Claim, the
Indemnitee will agree to any settlement, compromise or discharge of such Third
Party Claim which the Indemnifying Party may recommend and which by its terms
obligates the Indemnifying Party to pay the full amount of Damages in connection
with such Third Party Claim and unconditionally and irrevocably releases the
Indemnitee (pursuant to a release which is reasonably satisfactory to the
Indemnitee) completely from all Liability in connection with such Third Party
Claim, PROVIDED, HOWEVER, that the Indemnitee may refuse to agree to any such
settlement, compromise or discharge (x) that provides for injunctive or other
nonmonetary relief affecting the Indemnitee or (y) that, in the reasonable
opinion of the Indemnitee, would otherwise adversely affect the Indemnitee. If
the Indemnifying Party unconditionally and irrevocably acknowledges in writing
its obligation to indemnify the Indemnitee for a Third Party Claim, the
Indemnitee will not (unless required by law) admit any liability with respect
to, or settle, compromise or discharge, such Third Party Claim without the
Indemnifying Party's prior written consent (which consent will not be
unreasonably withheld).
(d) Any claim on account of Damages which does not involve a
Third Party Claim shall be asserted by written notice given by the Indemnitee to
the Indemnifying Party from whom such indemnification is sought. The failure by
any Indemnitee so to notify the Indemnifying Party will not relieve the
Indemnifying Party from any liability which it may have to such Indemnitee under
this Agreement, except to the extent that the Indemnifying Party shall have
demonstrated that it has been actually prejudiced as a result of such failure.
Any notice pursuant to this Section 12.3(d) will contain a statement, in
prominent and conspicuous type, that if the Indemnifying Party does not dispute
its liability to the Indemnitee with respect to the claim made in such notice by
notice to the Indemnitee prior to the expiration of a 60-calendar-day period
following the Indemnifying Party's receipt of notice of such claim, the claim
will be conclusively deemed a liability of the Indemnifying Party. If the
Indemnifying Party does not notify the Indemnitee prior to the expiration of a
60-calendar-day period following its receipt of such notice that the
Indemnifying Party disputes its liability to the Indemnitee under this
Agreement, such claim specified by the Indemnitee in such notice will be
conclusively deemed a liability
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of the Indemnifying Party under this Agreement and the Indemnifying Party shall
pay the amount of such liability to the Indemnitee on demand or, in the case of
any notice in which the amount of the claim (or any portion thereof) is
estimated, on such later date when the amount of such claim (or such portion
thereof) becomes finally determined. If the Indemnifying Party has timely
disputed its liability with respect to such claim, as provided above, the
Indemnifying Party and the Indemnitee will proceed in good faith to negotiate a
resolution of such dispute and, if not resolved through negotiations by the
60th day after notice of such claim was given to the Indemnifying Party, the
Indemnifying Party and the Indemnitee will resolve such dispute in accordance
with the provisions of Section 15.11.
Section 12.4. CERTAIN RIGHTS AND LIMITATIONS.
(a) No loss, Liability, damage or deficiency shall constitute
Damages to any party to the extent of any insurance proceeds actually received
by such party with respect to such loss, Liability, damage or deficiency (after
deducting reasonable costs and expenses incurred in connection with recovery of
such proceeds).
(b) No monetary amount shall be payable by Seller to any
member of the Buyer Group with respect to the indemnification of any claims
pursuant to Section 12.1(a) until the aggregate amount of Damages actually
incurred by the Buyer Group with respect to such claims exceeds $350,000 in the
aggregate, in which event Seller shall be responsible for the full amount of
such Damages.
(c) No monetary amount shall be payable by Buyer to any member
of the Seller Group with respect to the indemnification of any claims pursuant
to Section 12.2(a) until the aggregate amount of Damages actually incurred by
the Seller Group with respect to such claims exceeds $350,000 in the aggregate,
in which event Buyer shall be responsible for the full amount of such Damages.
(d) No monetary amount shall be payable by Seller to any
member of the Buyer Group with respect to the indemnification of any claims
pursuant to Section 12.1(a) after the aggregate amount of Damages actually paid
to members of the Buyer Group by Seller with respect to such claims shall equal
U.S.$25,000,000.
(e) No monetary amount shall be payable by Buyer to any member
of the Seller Group with respect to the indemnification of any claims pursuant
to Section 12.2(a) after the aggregate amount of Damages actually paid to
members of the Seller Group by Buyer with respect to such claims shall equal
U.S.$20,000,000.
Section 12.5. TERMINATION OF INDEMNIFICATION OBLIGATIONS. The
obligations of each party to indemnify, defend and hold harmless Indemnitees (i)
pursuant to Sections 12.1(a) and 12.2(a), shall terminate when the applicable
representation or warranty expires pursuant to Article XI, (ii) pursuant to
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Sections 12.1(b) and 12.2(b), shall terminate upon expiration of all applicable
statutes of limitation (giving effect to any extensions thereof) and (iii)
pursuant to Sections 12.1(c), 12.1(d) and 12.2(c), shall continue without time
limitation and shall not terminate at any time; PROVIDED, HOWEVER, that as to
clauses (i) and (ii) above, such obligations to indemnify, defend and hold
harmless shall not terminate with respect to any individual item as to which the
Indemnitee shall have, before the expiration of the applicable period, made a
claim by delivering a notice (stating in reasonable detail the basis of such
claim) to the Indemnifying Party.
ARTICLE XIII
TAX MATTERS
Section 13.1. PREPARATION AND FILING OF TAX RETURNS. Seller
will prepare and timely file or will cause to be prepared and timely filed all
appropriate Federal, state, provincial, local and foreign Tax Returns with
respect to the Business and the Company and its assets or activities that are
(a) required to be filed on or before the date hereof or (b) relate to a taxable
period ending on or before the date hereof. Buyer will prepare or cause to be
prepared and will timely file or cause to be timely filed all other Tax Returns
required of Buyer and its Subsidiaries and Affiliates with respect to the
Company, or in respect of its assets or activities. Any such Tax Returns that
include periods ending on or before the date hereof or that include the
activities with respect to the Business or the Company prior to the date hereof
will, insofar as they relate to the Business or the Company, be on a basis
consistent with the last previous such Tax Returns filed with respect to the
Business or the Company, unless Seller or Buyer, as the case may be, concludes
that there is no reasonable basis for such position. Neither Buyer nor the
Company will file any amended Tax Returns for any periods for or in respect of
the Company with respect to which Buyer is not obligated to prepare or cause to
be prepared the original such Tax Returns pursuant to this Section 13.1 without
the prior written consent of Seller (which consent will not be unreasonably
withheld).
Section 13.2. PAYMENT OF TAXES. From and after the date
hereof: (a) Seller will pay or cause to be paid all Taxes with respect to Tax
Returns which Seller is obligated to prepare and file or cause to be prepared
and filed pursuant to Section 13.1 and (b) Buyer will pay or cause to be paid
all Taxes shown as due with respect to Tax Returns which Buyer is obligated to
prepare and file or cause to be prepared and filed pursuant to Section 13.1.
Section 13.3. TAX SHARING AGREEMENTS. On the date hereof, all
Tax sharing agreements and arrangements between (a) the Company, on the one side
and (b) Seller or any of its Subsidiaries or Affiliates (other than the
Company), on the other side, will be terminated and have no further effect for
any
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taxable year or period (whether a past, present or future year or period),
and no additional payments will be made thereunder on or after the date
hereof in respect of a redetermination of Tax liabilities or otherwise.
Section 13.4. REFUNDS. Seller will be entitled to retain,
or receive prompt payment from Buyer or any of its Affiliates (including the
Company) of any refund or credit arising with respect to the Business or the
Company relating to Taxes with respect to any Tax period ending on or before
the date hereof. Buyer and the Company will be entitled to retain, or receive
prompt payment from Seller of, any refund or credit with respect to Taxes
with respect to any taxable period beginning after the date hereof relating
to the Company or the Business. Buyer and Seller will equitably apportion any
refund or credit with respect to Taxes with respect to any taxable period
that includes (but does not end on) the date hereof (a "STRADDLE PERIOD").
Section 13.5. TAX COOPERATION. From and after the Effective
Time, each of Buyer and Seller will provide the other party with such
information and records and make such of its Representatives available as may
reasonably be requested by such other party in connection with the preparation
of any Tax Return or any audit or other proceeding that relates to the Business
or the Company. Buyer will prepare or cause the Company to prepare, within 90
days after the date hereof, in a manner consistent with past practice, the Tax
work paper preparation package or packages necessary to enable Seller to prepare
Tax Returns Seller is obligated to prepare or cause to be prepared.
Section 13.6. TAX INDEMNIFICATION.
(a) Seller will indemnify, defend and hold the Buyer Group
harmless from and against all Liability for Taxes with respect to the Business
and the Company for any taxable period that ends on or before the date hereof
and the portion of any Straddle Period ending on the date hereof.
(b) Buyer will indemnify, defend and hold the Seller Group
harmless from and against, except to the extent Seller is otherwise required to
indemnify Buyer for such Tax pursuant to Section 13.6(a), all Liability for
Taxes of the Company for any taxable period ending after the date hereof,
including the portion of any Straddle Period following the date hereof.
(c) The obligations of each party to indemnify, defend and
hold harmless the other party and other Persons, pursuant to Sections 13.6(a)
and 13.6(b), will terminate upon the expiration of all applicable statutes of
limitations (giving effect to any extensions thereof), PROVIDED, HOWEVER, that
such obligations to indemnify, defend and hold harmless will not terminate with
respect to any individual item as to which an Indemnified Party shall have,
before the expiration of the applicable period, previously made a claim by
delivering a notice (stating in reasonable detail the basis of such claim) to
the applicable Indemnifying Party.
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(d) In the case of any Straddle Period, (i) the periodic Taxes
of the Company and the Business that are not based on income or receipts (E.G.,
property Taxes) for the portion of any Straddle Period ending on the date hereof
will be computed based on the ratio of the number of days in such portion of the
Straddle Period and the number of days in the entire taxable period, and (ii)
Taxes of the Company for the portion of any Straddle Period ending on the date
hereof (other than the Taxes described in Section 13.6(d)(i)) shall be computed
as if such taxable period ended as of the close of business on the date hereof,
and, in the case of any Income Taxes of the Company attributable to the
ownership by the Company of any equity interest in any partnership or other
"flowthrough" entity (other than the Company), as if a taxable period of such
partnership or other "flowthrough" entity ended as of the close of business on
the date hereof.
(e) Any indemnity payment required to be made pursuant to this
Section 13.6 will be paid within 30 days after the Indemnified Party makes
written demand upon the Indemnifying Party, but in no case earlier than five
business days prior to the date on which the relevant Taxes are required to be
paid (or would be required to be paid if no such Taxes are due) to the relevant
taxing authority (including estimated Tax payments).
Section 13.7. TIMING ADJUSTMENTS. In the event that a final
determination (which shall include the execution of a Form 870-AD or successor
form) results in a timing difference (E.G., an acceleration of income or delay
of deductions) that would increase Seller's liability for Taxes pursuant to
Article XII or this Article XIII or results in a timing difference (E.G., an
acceleration of deductions or delay of income) that would increase Buyer's
liability for Taxes pursuant to Article XII or this Article XIII, Buyer or
Seller, as the case may be, will promptly make payments to Seller or Buyer as
and when Buyer or Seller, as the case may be, actually realizes any Tax benefits
as a result of such timing difference (or under such other method for
determining the present value of any such anticipated Tax benefits as agreed to
by the parties). In determining the amount of any such Tax benefit, Buyer or
Seller, as the case may be, will be deemed to be subject to the applicable
Federal, State, local and/or local country Income Taxes at the maximum statutory
rate then in effect.
Section 13.8. TAX CONTESTS.
(a) If a claim is made by any taxing authority which, if
successful, might result in an indemnity payment pursuant to Section 13.6, the
Indemnified Party will promptly notify the Indemnifying Party of such claim (a
"TAX CLAIM"); PROVIDED, HOWEVER, that the failure to give such notice will not
affect the indemnification provided hereunder except to the extent the
Indemnifying Party has actually been prejudiced as a result of such failure.
(b) With respect to any Tax Claim relating to Income Taxes and
relating to a taxable period ending on or before the
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<PAGE>
date hereof, Seller will control all proceedings and may make all decisions
taken in connection with such Tax Claim (including selection of counsel) and,
without limiting the foregoing, may in its sole discretion pursue or forego
any and all administrative appeals, proceedings, hearings and conferences
with any taxing authority with respect thereto, and may, in its sole
discretion, either pay the Tax claimed and sue for a refund where applicable
Law permits such refund suits or contest the Tax Claim in any permissible
manner. Seller will keep Buyer informed in respect of all material aspects of
such Tax Claims.
(c) Except as otherwise provided in Section 13.8(b), Seller
and Buyer will jointly control and participate in all proceedings taken in
connection with any Tax Claim relating to Income Taxes of the Company for any
Straddle Period. Neither Seller nor Buyer will settle any such Tax Claim without
the prior written consent of the other (not to be unreasonably withheld).
(d) Except as otherwise provided in this Section 13.8, Buyer
will control all proceedings and may make all decisions taken in connection with
any Tax Claim (including selection of counsel) and, without limiting the
foregoing, may in its sole discretion pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with any taxing
authority with respect thereto, and may, in its sole discretion, either pay the
Tax claimed and sue for a refund where applicable Law permits such refund suits
or contest the Tax Claim in any permissible manner.
(e) Each of Buyer, the Company and their respective
Affiliates, on the one hand, and Seller and its respective Affiliates, on the
other, will cooperate in contesting any Tax Claim, which cooperation will
include the retention and (upon request) the provision to the requesting party
of records and information which are reasonably relevant to such Tax Claim, and
making employees available on a mutually convenient basis to provide additional
information or explanation of any material provided hereunder or to testify at
proceedings relating to such Tax Claim.
ARTICLE XIV
RESTRICTIVE COVENANT
Section 14.1. NON-COMPETE. Seller covenants and agrees that,
for a period of two years after the date hereof, none of Seller, any Affiliate
of Seller or any Person now or hereafter controlled by Seller will, directly or
indirectly, in any area of the world, enter into, engage in, represent or have
or acquire more than a 5% interest in any business engaged in any form or
manner, directly or indirectly, in competition with the Business (or in
competition with any products of the Company or its Affiliates which are
derivatives of or improvements to products of the Business), including in
researching, development, design, manufacture (including by means of procurement
from third
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parties components for), integration, maintenance, testing, sale,
installation, certification, modification, repair, servicing or support of
the products of the type being sold or in development by the Business at any
time on or prior to the date hereof or any derivatives of or improvements to
such products; PROVIDED, HOWEVER, that Seller may acquire control of any
business deriving less than 10% of its revenues from such operations so long
as it shall use reasonable best efforts to divest such operations as promptly
as practicable and in any event not later than one year following such
acquisition. This Section 14.1 shall not apply to any activities of any
entity that acquires and controls Seller after the date hereof that are being
conducted at the time of such acquisition.
Section 14.2. REMEDIES. No waiver of any breach of the
covenant contained in Section 14.1 shall be implied from any forbearance or
failure of Buyer to take action thereon.
Section 14.3. SEVERABILITY. Seller and Buyer agree that, if
any provision of this Article XIV should be adjudicated to be invalid or
unenforceable, such provision shall be deemed deleted herefrom with respect, and
only with respect, to the operation of such provision in the particular
jurisdiction in which such adjudication was made; PROVIDED, HOWEVER, that to the
extent any such provision may be valid and enforceable in such jurisdiction by
limitations on the scope of the activities, geographical area or time period
covered, Seller and Buyer agree that such provision instead shall be deemed
limited to the extent, and only to the extent, necessary to make such provision
enforceable to the fullest extent permissible under the laws and public policies
in such jurisdiction.
Section 14.4. NON-EXCLUSIVITY. The covenants contained in this
Article XIV shall be construed and enforced independently of any other provision
of this Agreement or any other understanding or agreement between the parties,
and the existence of any claim or cause of action of Seller against Buyer, of
whatever nature, shall not constitute a defense to the enforcement against
Seller of the covenants contained herein.
ARTICLE XV
GENERAL PROVISIONS
Section 15.1. ASSIGNMENT. Neither party to this Agreement will
convey, assign or otherwise transfer any of its rights or obligations under any
Transaction Document without the prior written consent of the other party,
except that Buyer may (without obtaining any consent, but subject to the last
sentence of this Section 15.1) assign its rights, interests or obligations under
any Transaction Documents, in whole or in part, to any direct or indirect
subsidiary of Buyer or to any successor to all or any portion of its business.
Any conveyance, assignment or transfer requiring the prior written consent of
the other party which is made without such consent will be void AB INITIO. No
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assignment of this Agreement will relieve the assigning party of its obligations
hereunder.
Section 15.2. PARTIES IN INTEREST. This Agreement is binding
upon and is for the benefit of the parties hereto and their respective
successors and permitted assigns. This Agreement is not made for the benefit of
any Person not a party hereto, and no Person other than the parties hereto or
their respective successors and permitted assigns will acquire or have any
benefit, right, remedy or claim under or by reason of this Agreement, except
that members of the Buyer Group and the Seller Group will be entitled to the
rights to indemnification provided to the Buyer Group and the Seller Group,
respectively, hereunder.
Section 15.3. AMENDMENT. This Agreement may not be amended,
modified or supplemented except by a written agreement executed by Buyer and
Seller.
Section 15.4. WAIVER; REMEDIES. No failure or delay on the
part of either Buyer or Seller in exercising any right, power or privilege under
any Transaction Document will operate as a waiver thereof, nor will any waiver
on the part of either Buyer or Seller of any right, power or privilege under any
Transaction Document operate as a waiver of any other right, power or privilege
under any Transaction Document, nor will any single or partial exercise of any
right, power or privilege thereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege under any
Transaction Document. The rights and remedies herein provided are cumulative and
are not exclusive of any rights or remedies which the parties may otherwise have
at law or in equity.
Section 15.5. EFFECT OF INVESTIGATION. All representations,
warranties, covenants and agreements made by Seller in this Agreement or in any
other Transaction Document shall be unaffected by any investigation made by or
on behalf of Buyer (whether before, on or after the date hereof) or knowledge
obtained (or capable of being obtained) as a result thereof or otherwise. All
representations, warranties, covenants and agreements made by Buyer in this
Agreement or in any other Transaction Document shall be unaffected by any
investigation made by or on behalf of Seller (whether before, on or after the
date hereof) or knowledge obtained (or capable of being obtained) as a result
thereof or otherwise.
Section 15.6. FEES AND EXPENSES. Each of Seller and Buyer will
pay, without right of reimbursement from the other, all of their respective
costs and expenses incident to the performance of their respective obligations
hereunder, including the fees and disbursements of counsel, accountants, experts
and consultants employed by the respective parties in connection with the
Transaction, whether or not the Transaction is consummated.
Section 15.7. NOTICES. All notices, requests, claims, demands
and other communications required or permitted to be given under any Transaction
Document shall be in writing and will be delivered by hand or telecopied or
sent, postage prepaid, by
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registered, certified or express mail or reputable overnight courier service
and will be deemed given when so delivered by hand or telecopied, or three
business days after being so mailed (one business day in the case of express
mail or overnight courier service). All such notices, requests, claims,
demands and other communications will be addressed as set forth below, or
pursuant to such other instructions as may be designated in writing by the
party to receive such notice in accordance with this Section 15.7:
(a) If to Buyer:
Conexant Systems, Inc.
4311 Jamboree Road
Newport Beach, California 92660-3095
ATTENTION: Dennis E. O'Reilly, Esq.
Senior Vice President,
General Counsel and Secretary
TELECOPY: (949) 483-3206
with a copy to:
Chadbourne & Parke LLP
30 Rockefeller Plaza
New York, New York 10112
ATTENTION: Peter R. Kolyer, Esq.
TELECOPY: (212) 541-5369
(b) If to Seller:
Oak Technology, Inc.
139 Kifer Court
Sunnyvale, California 94086
ATTENTION: Shawn M. Soderberg, Esq.
Vice President, General Counsel
and Secretary
TELECOPY: (408) 737-3838
with a copy to:
Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road, 2nd Floor
Palo Alto, California 94306
ATTENTION: Cynthia M. Loe, Esq.
TELECOPY: (650) 324-1808
Section 15.8. CAPTIONS; CURRENCY. The article and section
captions herein and the table of contents hereto are for
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convenience of reference only, do not constitute part of this Agreement and
will not be deemed to limit or otherwise affect any of the provisions hereof.
Unless otherwise specified, all references herein to numbered articles and
sections are to articles and sections of this Agreement and all references
herein to schedules are to schedules to this Agreement. Unless otherwise
specified, all references contained in any Transaction Document, in any
exhibit or schedule referred to therein or in any instrument or document
delivered pursuant thereto to dollars or "$" shall mean United States Dollars.
Section 15.9. ENTIRE AGREEMENT. This Agreement, the other
Transaction Documents and the Confidentiality Agreement collectively constitute
the entire agreement between the parties with respect to the subject matter
hereof and this Agreement, the other Transaction Documents and the
Confidentiality Agreement supersede all prior negotiations, agreements and
understandings of the parties of any nature, whether oral or written, relating
thereto.
Section 15.10. SEVERABILITY. If any provision of any
Transaction Document or the application thereof to any Person or circumstance is
determined by a court of competent jurisdiction to be invalid, void or
unenforceable, the remaining provisions thereof, or the application of such
provision to Persons or circumstances other than those as to which it has been
held invalid or unenforceable, shall remain in full force and effect and shall
in no way be affected, impaired or invalidated thereby.
Section 15.11. DISPUTE RESOLUTION.
(a) In the event that any dispute, claim or controversy
(collectively, a "dispute") arises with respect to any provision of this
Agreement or the performance thereof, the designees of the Vice President,
General Counsel and Secretary of Seller and the Senior Vice President, General
Counsel and Secretary of Buyer will attempt a good faith resolution of such
dispute within 30 days (or such longer period as Buyer and Seller may mutually
agree) after either party notifies the other of such dispute. If such dispute is
not resolved within 30 days (or such longer period as Buyer and Seller may
mutually agree) of such notification, such dispute will be referred for
resolution to the Vice President, General Counsel and Secretary of Seller and
the Senior Vice President, General Counsel and Secretary of Buyer.
(b) Should the Vice President, General Counsel and Secretary
of Seller and the Senior Vice President, General Counsel and Secretary of Buyer
be unable to resolve such dispute within 30 days (or such longer period as Buyer
and Seller may mutually agree) following such referral to them, such dispute
shall be submitted by Buyer and Seller to binding arbitration, conducted in
accordance with the then-existing CPR Rules for Non-Administered Arbitration of
Business Disputes, before arbitration panel consisting of three members, none of
whom shall be the same person as the mediator appointed pursuant to the
preceding paragraph. Buyer and Seller shall each select one arbitrator and the
two arbitrators shall jointly select the third arbitrator.
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The arbitration shall be conducted in California and shall be governed by the
United States Arbitration Act, 9 USC ss.ss.1-16, and judgment upon the award
may be entered by any court having jurisdiction thereof. The arbitration
panel shall have case management authority and shall resolve the dispute by a
majority vote of the panel members and render a final award within 90 days
from the commencement of the arbitration action. There shall be no appeal
from the arbitral award, except for fraud committed by any arbitrator in
carrying out his or her duties under the aforesaid rules; otherwise the
parties irrevocably waive their rights to judicial review of any dispute
arising out of or related to this Agreement.
(c) Notwithstanding anything to the contrary contained herein,
each of Seller and Buyer will have the right to pursue judicial remedies in
connection with the seeking of specific performance pursuant to Section 15.15.
Section 15.12. SCHEDULES; DISCLOSURE. All schedules attached
hereto are hereby incorporated in and made a part of this Agreement as if set
forth in full herein. Capitalized terms used in any other Transaction Document
or in the schedules hereto or thereto but not otherwise defined therein will
have the respective meanings assigned to such terms in this Agreement.
Section 15.13. GOVERNING LAW. This Agreement will be governed
by and construed in accordance with the internal laws of the State of Delaware
applicable to contracts made and to be performed entirely within such State,
without regard to the conflicts of law principles of such State, except that the
provisions of Section 2.1(a) as they relate to the procedures for the transfer
of the Shares only will be governed by and construed in accordance with the
internal laws of England and Wales.
Section 15.14. COUNTERPARTS. This Agreement may be executed in
separate counterparts, each such counterpart being deemed to be an original
instrument, and all such counterparts will together constitute the same
agreement.
Section 15.15. SPECIFIC PERFORMANCE. In the event of any
actual or threatened default in, or breach of, any of the terms, conditions and
provisions of any Transaction Document, the party or parties who are or are to
be thereby aggrieved will have the right of specific performance and injunctive
relief giving effect to its or their rights under such Transaction Document, in
addition to any and all other rights and remedies at law or in equity, and all
such rights and remedies will be cumulative. The parties agree that any such
breach or threatened breach would cause irreparable injury, that the remedies at
law for any such breach or threatened breach, including monetary damages, are
inadequate compensation for any loss and that any defense in any action for
specific performance that a remedy at law would be adequate is waived.
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Section 15.16. CONSTRUCTION; INTERPRETATION.
(a) The parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the parties and no presumption or burden of proof shall arise
favoring or disfavoring any party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any Federal, state, local, or
foreign Law shall be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context requires otherwise. For the purposes
of this Agreement, (i) words in the singular shall be held to include the plural
and VICE VERSA and words of one gender shall be held to include the other gender
as the context requires, (ii) the terms "hereof", "herein", and "herewith" and
words of similar import shall, unless otherwise stated, be construed to refer to
this Agreement as a whole and not to any particular provision of this Agreement,
(iii) the word "including" and words of similar import when used in this
Agreement shall mean "including, without limitation" and (iv) the word "or"
shall not be exclusive.
(b) For purposes of this Agreement, "KNOWLEDGE" or "aware of"
or a similar phrase with respect to Seller shall mean the knowledge of any
officer or director of the
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Company, including Peter Claydon, or of Young K. Sohn, Robert O. Hersh, Paul
Vroomen or Shawn M. Soderberg if any such Person is actually aware of such fact
or other matter (after review of applicable files in such Person's possession
relating to such fact or other matter).
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the parties hereto as of the date first above written.
CONEXANT SYSTEMS, INC.
By _______________________
Name:
Title:
OAK TECHNOLOGY, INC.
By _______________________
Name:
Title:
64
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