<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
<TABLE>
<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
</TABLE>
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
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 NUMBER 0-26944
------------------------
SILICON STORAGE TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 77-0225590
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1171 SONORA COURT, SUNNYVALE, CA 94086
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code: (408) 735-9110
</TABLE>
------------------------
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- -------------- -----------------------------------------
<S> <C>
None. None.
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value.
------------------------
Indicate by check mark whether SST (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 SST was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X/ No / /.
Aggregate market value of the voting stock held by non-affiliates of SST as
of January 31, 2000: $820,375,898 based on the closing price of SST's Common
Stock as reported on the Nasdaq National Market. Number of shares outstanding of
SST's Common Stock, no par value, as of January 31, 2000: 25,071,223.
Documents incorporated by reference: Exhibits previously filed as noted on
page 34. Part III--A portion of the Registrant's definitive proxy statement for
the Registrant's Annual Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SILICON STORAGE TECHNOLOGY, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters................................................... 13
Item 6. Selected Consolidated Financial Data........................ 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk...................................................... 30
Item 8. Consolidated Financial Statements and Supplementary Data.... 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 32
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 33
Item 11. Executive Compensation...................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 33
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on
Form 8-K.................................................. 34
Index to Exhibits........................................................... 34
Signatures.................................................................. 36
Index to Consolidated Financial Statements.................................. 39
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
OVERVIEW
We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communication and Internet computing
markets. Flash memory is nonvolatile memory that does not lose data when the
power source is removed and is capable of electrically erasing selected blocks
of data. We believe our proprietary flash memory technology, SuperFlash, offers
superior performance to other flash memory solutions. We further believe that
the benefits of SuperFlash include high reliability, fast write performance,
ability to be scaled to a smaller size and a low-cost manufacturing process.
We offer over 40 products based on our SuperFlash design and manufacturing
process technology. We also offer mass storage products that are used for
storing images, music and other data in devices such as digital cameras and MP3
players.
Our customers include 3Com, Acer, Apple, Compaq, Diamond Multimedia, FIC,
Hyundai, Intel, IBM, LG, Lucent, Motorola, Panasonic, Samsung, Sanyo, Siemens
and Sony. In addition, we have recently added Cisco and Nortel as new customers.
We also license our SuperFlash technology to leading semiconductor companies
including Analog Devices, ATMI, IBM, ISD, Motorola, Samsung, Sanyo, Seiko-Epson
and TSMC to embed in semiconductor devices that integrate flash memory with
other functions on a single chip. Our products are manufactured at leading wafer
foundries and semiconductor manufacturers including Samsung Electronics, Sanyo,
Seiko-Epson, TSMC and UMC. We also work with IBM, Samsung Electronics, Sanyo,
Seiko-Epson and TSMC to develop new technology for manufacturing our products.
INDUSTRY BACKGROUND
Semiconductor integrated circuits are critical components used in an
increasingly wide variety of applications, such as computers and computer
systems, communications equipment, consumer products and industrial automation
and control systems. As integrated circuit performance has increased and size
and cost have decreased, the use of semiconductors in these applications has
grown significantly. According to the Semiconductor Industry Association, or
SIA, worldwide semiconductor device revenue will grow from $125.6 billion in
1998 to $215.7 billion in 2002.
Historically, the demand for semiconductors has been driven by the personal
computer, or PC, market. The demand for PCs has grown in recent years, in part
due to increased use of PCs for Internet access. The PC market grew from
80 million units shipped in 1997 to 100 million units shipped in 1998 to
115 million units shipped in 1999, according to Dataquest. In recent years,
growth in demand for semiconductors relating to PCs has been outpaced by growth
in demand for semiconductors in digital electronic devices for communication and
consumer applications. Communications applications include digital subscriber
line modems, cable modems, wireless local area network devices, cellular phones
and pagers. Consumer-oriented digital electronic devices include digital
cameras, DVD players, MP3 players, personal digital assistants, set-top boxes,
CD-ROM drives and GPS navigation systems.
In order to function correctly, PCs and other digital electronic devices
require program code. The program code defines how devices function and affects
how they are configured. In PCs, this program code, or BIOS, initiates the
loading of the PC's operating system, which is then read from the disk drive. In
the case of other digital electronic devices, the program code is stored in its
entirety in nonvolatile memory, mostly in flash memory. As a result, virtually
all complex electronic systems that use a processor or controller for computing,
consumer, communications, and industrial applications require nonvolatile
memory.
3
<PAGE>
System manufacturers generally prefer nonvolatile memory devices that can be
reprogrammed efficiently in the system in order to achieve several important
advantages. With reprogrammable memory, manufacturers can cost effectively
change program code in response to faster product cycles and changing market
specifications. This in turn greatly simplifies inventory management and
manufacturing processes. Reprogrammable memory also allows the manufacturer to
reconfigure or update a system either locally or through a network connection.
In addition, in-system reprogrammable devices can be used for data storage
functions, such as storage of phone numbers for speed dialing in a cellular
phone.
Flash memory is the predominant reprogrammable nonvolatile memory device
used to store program codes. Flash memory can electrically erase select blocks
of data on the chip much faster and more simply than with alternative solutions,
such as Erasable Programmable Read-Only Memory, or EPROM. Moreover, flash memory
is significantly less expensive than other reprogrammable solutions, such as
Electrically Erasable Programmable Read-Only Memory, or EEPROMs. As a result,
the demand for flash memory has grown dramatically. This growth has been fueled
by the need for code sharing and other storage functions in a wide array of
digital devices. According to SIA, worldwide flash memory revenue was
$4.6 billion in 1999, a 83% increase over 1998. According to Dataquest, as a
result of newly emerging applications, worldwide flash revenue is projected to
reach $8.0 billion by 2003.
OUR SOLUTION
We are a leading supplier of flash memory semiconductor devices addressing
the needs of high volume electronic applications. We believe our proprietary
flash memory technology, SuperFlash, offers superior performance to other flash
memory solutions. In addition, we believe SuperFlash's benefits include high
reliability, fast write performance, ability to be scaled to a smaller size and
a low-cost manufacturing process. Many leading technology companies use our
technology in their products including 3Com, Acer, Apple, Compaq, Diamond
Multimedia, FIC, Hyundai, Intel, IBM, LG, Lucent, Motorola, Panasonic, Samsung,
Sanyo, Siemens and Sony. New customers include Cisco and Nortel.
We offer over 40 products based on our proprietary SuperFlash design and
manufacturing process technology. These products are produced to meet the needs
of a wide range of digital consumer, networking, wireless communication and
Internet computing markets. Our product offerings include standard flash
products, application specific memory products, standard embedded controllers
and mass storage products. Our memory devices have densities ranging from 256
Kbit to 16 Mbit and are generally used for the storage of program code. Our
flash embedded microcontrollers support concurrent flash read-while-write
operations using In-Application Programming, or IAP. Our mass storage products
are used for storing images, music and other data in devices such as digital
cameras and MP3 players.
Our products are manufactured at leading wafer foundries and semiconductor
manufacturers including Samsung Electronics, Sanyo, Seiko-Epson, TSMC and UMC.
We also work with IBM, Samsung Electronics, Sanyo, Seiko-Epson and TSMC to
develop new technology for manufacturing our products. We license our SuperFlash
technology to leading semiconductor companies including Analog Devices, ATMI,
IBM, ISD, Motorola, Samsung, Sanyo, Seiko-Epson and TSMC to embed in
semiconductor devices that integrate flash memory with other functions on a
single chip.
OUR STRATEGY
Our objective is to be the leading worldwide supplier of flash memory
devices and intellectual property for program code storage applications. In
addition, we intend to leverage our SuperFlash technology to penetrate the high
density mass storage markets. We intend to achieve our objectives by:
4
<PAGE>
MAINTAINING A LEADING POSITION IN THE PROGRAM CODE STORAGE MARKET. We
believe that program code storage is an attractive segment of the flash memory
market for a number of reasons. While experiencing continued growth in all
densities, solutions for program code storage applications benefit from the
increasing number and variety of digital electronic applications, longer product
lives and lower density requirements relative to mass data storage applications.
We believe that our proprietary SuperFlash technology is a superior product for
program code storage applications because it offers reliability and high
performance at a low cost.
CONTINUING TO ENHANCE OUR LEADING FLASH MEMORY TECHNOLOGY. We believe that
our proprietary SuperFlash technology is less complicated, more reliable, more
scalable and more cost-effective than competing flash memory technologies. Our
ongoing research and development efforts are focused on enhancing our leading
flash memory technology. We are working with IBM, Samsung, Sanyo, Seiko Epson
and TSMC to develop new process technologies for SuperFlash.
INTRODUCING NEW PRODUCTS BASED ON SUPERFLASH. We intend to introduce new
and different application specific products. We are currently developing
ComboMemory, a new class of devices for wireless and portable applications that
combine volatile and nonvolatile memory on a single monolithic silicon chip or
in a common package with optimized performance. We are also developing a new
reprogrammable microcontroller family and new mass storage products. In
addition, we plan to introduce 1, 2 and 4 Mbit serial flash, 2, 4 and 8 Mbit
firmware hubs and 8, 16, 32 and 64 Mbit concurrent flash. ComboMemory and
concurrent flash are designed to address the memory needs of wireless
communications devices, such as cellular phones, wireless modems and pagers.
MAINTAINING A LEADING POSITION IN LICENSING EMBEDDED FLASH TECHNOLOGY. We
believe that SuperFlash technology is well-suited for embedded memory
applications, which integrate flash memory and other functions onto a single
chip. We intend to continue to license SuperFlash technology to semiconductor
manufacturers for use in embedded flash applications and to enhance our
technology to facilitate integration at higher densities and higher levels of
complexity.
PENETRATING THE HIGH DENSITY MASS STORAGE MARKET. Many digital electronic
devices currently being introduced, such as MP3 players, digital cameras and
PDAs, require high density flash memory for storing music, pictures and other
data that require mass storage capacities. We believe that the market for high
density flash memory is attractive based on its potential growth. We further
believe that SuperFlash technology can readily scale to address this market
growth. We intend to leverage our leading technology and strong manufacturing
partnerships to introduce high density mass storage flash products and to
compete effectively in this market.
OUR FLASH PRODUCTS
STANDARD FLASH MEMORY PRODUCTS. Currently, we offer low and medium density
devices that target a broad range of existing and emerging applications in the
digital consumer, networking, wireless communication and Internet computing
markets. Our products are differentiated based upon attributes such as density,
voltage, access speed, packaging and predicted endurance.
We have three Standard Flash Memory product families: the Small-Sector
Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family. These families allow us to produce
products optimized for cost and functionality to support the broad range of
applications that use nonvolatile memory products.
Among the three product families, SSF provides the highest functionality.
MPF is a lower cost flash solution because it eliminates much of the peripheral
circuitry of SSF products while retaining many of the benefits of the SuperFlash
core--high reliability, faster write performance, geometric scalability and a
low-cost manufacturing process. Both SSF and MPF address mainstream flash
applications that require In System Programming, or ISP. MTP devices are our
lowest cost flash
5
<PAGE>
products. Our MTP products provide an electrically-erasable alternative to EPROM
and other low-end flash products that do not require ISP.
APPLICATION-SPECIFIC MEMORY PRODUCTS. Our application-specific memory
products consist of ComboMemory, FlashBank, Serial Flash and Firmware Hub, or
FWH. These products are designed to address specific applications such as
cellular phones, pagers, PDAs, set-top boxes, hard disk drives and PC BIOS
applications.
FLASH EMBEDDED CONTROLLERS. Our flash embedded controllers include the
FlashFlex51 microcontroller product family, which features products that are
both software and pin compatible with industry standard 8051 microcontroller
products. This family is designed with two banks of program memory to support
concurrent read and write operations using IAP. It also contains SoftLock
security features allowing IAP while preventing software piracy. These products
target the 8-bit microcontroller market segment with products addressing the
emerging applications for in-system reprogrammable microcontrollers.
MASS STORAGE PRODUCTS. Our mass storage products, including the
CompactFlash Card product family, address digital cameras, digital cellular
phones, PDAs, MP3 players and other types of mass data storage applications. Our
mass storage products leverage our patented ATA controller technology and flash
memory design expertise to offer favorable read/write data transfer rates to the
flash memory, which allows significant speed advantages for applications such as
digital cameras.
TECHNOLOGY LICENSING
We license our SuperFlash technology to semiconductor manufacturers for use
in embedded flash applications. We intend to increase our market share by
entering into additional license agreements for our process and SuperFlash
memory cell technology with leading wafer foundries and semiconductor
manufacturers. We expect to continue to receive licensing fees and royalties
from these agreements. We design our products using patented memory cell
technology and fabricate them using patented process technology. We own 22
patents in the United States relating to certain aspects of our products and
processes, and have filed for several more. In addition, we hold two patents in
Europe, one patent in Germany and additional foreign patent applications have
been filed in Europe, Japan, Taiwan and Canada.
CUSTOMERS
We provide high-performance flash memory solutions to customers in four
major markets: digital consumer, networking, wireless communications and
Internet computing. Our customers benefit by obtaining products that we believe
are highly reliable, technologically advanced and that have an attractive cost
structure. As a result of these highly desirable benefits, we have developed
relationships with many of the industry's leading companies. In digital consumer
products, we provide memory components for consumer companies including Canon,
Datel, Freetron, GSL, IDT, Panasonic, Sanyo, Siemens, Sony, TiVo and Xerox. In
networking, we provide memory components for 3Com, E-tech, Intel, Nortel and
Xircom. In wireless communications, we provide products for companies including
Kirks, Lucent, Maxon, RTX, Siemens and VTech. In Internet computing, we provide
a wide array of memory components for companies including Acer, Apple, Asustek,
Compal, Dell, FIC, Gigabyte, Mitac, NEC and Quanta.
6
<PAGE>
The following tables illustrate the geographic regions in which our
customers or licensees operate based on the country to which the product is
shipped or license revenue is generated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States................................... $10,032 $ 5,099 $ 13,644
Europe.......................................... 3,381 6,929 7,347
Japan........................................... 17,878 13,739 16,396
Korea........................................... 4,203 3,756 11,750
Taiwan.......................................... 22,027 19,134 33,541
China (including Hong Kong)..................... 11,863 14,104 28,776
Other Asian countries........................... 5,890 6,119 9,340
Rest of world................................... 48 531 4,000
------- ------- --------
$75,322 $69,411 $124,794
======= ======= ========
</TABLE>
SALES AND DISTRIBUTION
We sell a majority of our products to customers in Asia through
manufacturers' representatives. We also sell and distribute our products in
North America and Europe through a direct sales organization supported primarily
by manufacturers' representatives and distributors. Our manufacturer
representative and distributor relationships are generally cancellable by us or
the other parties with reasonable notice.
APPLICATIONS
As the Internet, communications and consumer electronics industries continue
to expand and diversify, new applications are likely to be developed. We believe
our products are designed to address this expanding set of applications:
<TABLE>
<CAPTION>
WIRELESS INTERNET
DIGITAL CONSUMER NETWORKING COMMUNICATIONS COMPUTING
- ---------------------------------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
TV Replayer Set-top Box DSL Modem Cellular Phone Network PC
Digital TV CD-ROM Drive Cable Modem Data Pager Notebook PC
Digital Camera CD-RW Drive V.90/56K Modem Cordless Telephone Palm PC
DVD Player DVD-ROM Drive Wireless LAN Cellular Phone GPS X-PC
VCD Player DVD-RAM Drive Network Interface Card Bluetooth Applications Server
MP3 Player DVD-RW Drive Router PC Firmware Hub
Video Game Web Browser Graphics Card
PDA Hand Held GPS Printer
Electronic Book Digital Camcorder Copier/Scanner
Memory Cards Electronic Toys Bar Code Scanner
</TABLE>
MANUFACTURING
We purchase wafers and sorted die from semiconductor manufacturing
foundries, have this product shipped directly to subcontractors for packaging,
testing, and finishing, and then ship the final product to our customers.
Virtually all of our subcontractors are located in Asia.
WAFER AND SORTED DIE. We have manufacturing arrangements with Samsung,
Sanyo, Seiko-Epson, TSMC and UMC. As of December 31, 1999, our major wafer
fabrication foundries were TSMC, Sanyo and Samsung. In 1999, wafer sort, which
is the process of taking silicon wafers and separating them into individual die,
was performed at Sanyo, TSMC, Seiko-Epson, Samsung and KYE. Although capacity is
not guaranteed, under these arrangements we generally receive preferential
treatment regarding wafer pricing and capacity.
7
<PAGE>
In order to obtain, on an ongoing basis, an adequate supply of wafers, we
have considered and will continue to consider various possible options,
including equity investments in foundries in exchange for guaranteed production
volumes, the formation of joint ventures to own and operate foundries and the
licensing of our proprietary technology.
PACKAGING, TESTING AND FINISHING. In the assembly process, the individual
die are assembled into packages. Following assembly, the packaged devices
require testing and finishing to segregate conforming from nonconforming devices
and to identify devices by performance levels. Currently, all devices are tested
and inspected pursuant to our quality assurance program at our test facilities
in Sunnyvale, California or at other domestic or international subcontracted
facilities. Finishing operations are performed at our Sunnyvale facility or at
other domestic or international subcontracted facilities before shipment to
customers. Certain facilities currently perform consolidated assembly,
packaging, test and finishing operations at one location. During 1999, the two
facilities performing the substantial majority of consolidated operations were
Lingsen in Taiwan and Amkor's facility in Korea. For newly released products,
most of the test and finishing activities are performed at our Sunnyvale
facility.
RESEARCH AND DEVELOPMENT
We believe that our future success will depend in part on the development of
next generation technologies with reduced feature size. During 1999, 1998 and
1997, we spent $18.2 million, $14.5 million and $8.7 million, respectively, on
research and development. Our research efforts are focused on process
development and product development. Our research strategy is to collaborate
with our partners to advance our technologies. We work simultaneously with
several partners on the development of multiple generations of technologies. In
addition, we allocate our resources and personnel into category-specific teams
to focus on new product development.
From time to time we invest in, jointly develop with or license or acquire
technology from other companies in the course of developing products. For
example, in June 1999, we acquired Linvex Technology, Corp., a privately held,
memory design company located in Sunnyvale, California.
COMPETITION
The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence. We compete with major domestic and international semiconductor
companies, many of whom have substantially greater financial, technical,
marketing, distribution, manufacturing and other resources than us. Our low to
medium density memory products, sales of which presently account for
substantially all of our revenues, compete against products offered by Intel
Corporation, Advanced Micro Devices, Inc., Atmel Corporation,
STMicroelectronics, Inc., Winbond Electronics Corporation, and Macronix, Inc.
Our high density memory products compete with products offered by Intel,
Advanced Micro Devices, Atmel, Fujitsu Limited, Sharp Electronics Corporation,
Samsung, Mitsubishi Corporation and Toshiba Corporation. In addition,
competition may come from alternative technologies such as ferroelectric random
access memory device, or FRAM, technology.
The competition in the existing markets for our new products such as the
FlashFlex51 microcontroller product family and the CompactFlash product family
is extremely intense. We compete principally with major companies such as
Philips Electronics, Atmel, Intel, and Microchip Technology Inc. in the
microcontroller market and with SanDisk Corporation and Hitachi Corporation in
the memory card market.
We may, in the future, also experience direct competition from our foundry
partners. We have licensed to each foundry the right to fabricate certain
products based on our proprietary technology and circuit design, and to sell
such products worldwide, subject to royalty payments back to us.
8
<PAGE>
We compete principally on price, reliability, functionality and the ability
to offer timely delivery to customers. During the extreme currency devaluations
in Asia in 1997-1998, we were severely impaired in our ability to compete on the
basis of price. While we believe that our medium density products currently
compete favorably on the basis of reliability and functionality, it is important
to note that our principal competitors have a significant advantage over us in
terms of greater financial, technical and marketing resources. Our long-term
ability to compete successfully in the evolving flash memory market will depend
on factors both within and beyond our control, including access to advanced
process technologies at competitive prices, successful and timely product
development, wafer supply, product pricing, actions of our competitors and
general economic conditions.
EMPLOYEES
As of December 31, 1999, we employed 277 individuals on a full-time basis,
all but five of whom reside in the United States. Two employees reside in Japan
and one employee resides in each of England, Denmark and Taiwan. Of these 277
employees, 65 were employed in manufacturing support, 141 in engineering, 45 in
sales and marketing and 26 in administration and finance. No employees are
represented by a collective bargaining agreement, nor have we ever experienced
any work stoppage related to strike activity. We believe that our relationship
with our employees is good.
EXECUTIVE OFFICERS AND DIRECTORS
The following table lists the names, ages and positions of our executive
officers and directors as of December 31, 1999. There are no family
relationships between any of our directors or executive officers. Executive
officers serve at the discretion of the board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- ---- -------------------------------------------------
<S> <C> <C>
Bing Yeh(1)(4)............................ 49 President and Chief Executive Officer and
Director
Yaw Wen Hu................................ 50 Senior Vice President, Operations and Process
Development and Director
Derek Best................................ 49 Vice President, Sales and Marketing
Michael Briner............................ 52 Vice President, Products
Isao Nojima............................... 55 Vice President, Advanced Development
Paul Lui.................................. 49 Vice President and General Manager of the Linvex
Product Line
Jeffrey L. Garon.......................... 39 Chief Financial Officer and Vice President,
Finance and Administration and Secretary
Tsuyoshi Taira(1)(2)(3)................... 61 Director
Yasushi Chikagami(1)(2)(3)................ 61 Director
Ronald Chwang(1)(2)(3).................... 51 Director
</TABLE>
- ------------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Stock Option Committee
(4) Sole Member of Non-Officer Stock Option Committee
BING YEH, one of our co-founders, has served as our President and Chief
Executive Officer and been a member of our board of directors since our
inception in 1989. Prior to that, Mr. Yeh served as a senior research and
development manager of Xicor, Inc., a nonvolatile memory semiconductor company.
From 1981 to 1984, Mr. Yeh held program manager and other positions at
Honeywell Inc.
9
<PAGE>
From 1979 to 1981, Mr. Yeh was a senior development engineer of EEPROM
technology of Intel Corporation. He was a Ph.D. candidate in Applied Physics and
earned an Engineer degree at Stanford University. Mr. Yeh holds an M.S. and a
B.S. in Physics from National Taiwan University.
YAW WEN HU, Ph.D., joined us in 1993 as Vice President, Technology
Development. In 1997, he was given the additional responsibility of wafer
manufacturing and, in August 1999, he became Vice President, Operations and
Process Development. In January 2000, he was promoted to Senior Vice President,
Operations and Process Development. Dr. Hu has been a member of our board of
directors since September 1995. From 1990 to 1993, Dr. Hu served as deputy
general manager of technology development of Vitelic Taiwan Corporation. From
1988 to 1990, he served as FAB engineering manager of Integrated Device
Technology, Inc. From 1985 to 1988, he was the director of technology
development at Vitelic Corporation. From 1978 to 1985 he worked as a senior
development engineer in Intel Corporation's Technology Development group.
Mr. Hu holds a B.S. in Physics from National Taiwan University and an M.S. in
Computer Engineering and a Ph.D. in Applied Physics from Stanford University.
DEREK BEST joined us in June 1997 as Vice President of Sales and Marketing.
Prior to that, he worked for Micromodule Systems, a manufacturer of high density
interconnect technology, as vice president marketing and sales world wide from
1992 to 1996. From 1987 to 1992, he owned his own company, Mosaic Semiconductor,
a semiconductor company. Mr. Best holds an Electrical Engineering degree from
Portsmouth University in England.
MICHAEL BRINER joined us as Vice President, Design Engineering in
November 1997 and became Vice President, Products during 1999. From 1993 to
1997, he served as vice president of design engineering for Micron Quantum
Devices, Inc., a subsidiary of Micron Technology, Inc., chartered to develop and
manufacture flash memory products. From 1986 through 1992, he served as director
of design engineering for the Nonvolatile Division of Advanced Micro
Devices, Inc. In this position, he was instrumental in helping AMD become a
major nonvolatile memory manufacturer. Mr. Briner holds a B.S. in Electrical
Engineering from the University of Cincinnati.
ISAO NOJIMA has served as our Vice President, Advanced Development since
July 1997. From March 1993 to June 1997, he served as our Vice President, Memory
Design and Product Engineering. From 1990 to 1993, Mr. Nojima served as director
of design engineering of Pioneer Semiconductor Corporation, now called Pericom,
a manufacturer of semiconductors. From 1980 to 1990, he served as design manager
of Xicor Inc., a nonvolatile semiconductor company. From 1977 to 1980, he served
as a senior design engineer for Intel Corporation. From 1969 to 1976, he was a
senior researcher at Toshiba's R&D Center in Japan. Mr. Nojima holds a B.S. and
an M.S. in Electrical Engineering from Osaka University in Japan.
PAUL LUI joined us as Vice President and General Manager of the Linvex
Product Line in June 1999. From 1994 to 1999, he was the president and founder
of Linvex Technology, Corporation. From 1987 to 1994, he was the president and
chief executive officer of Macronix, Inc.. From 1981 to 1985, he served as group
general manager at VLSI Technology, Inc. where he was responsible for
transferring that company's technology to Korea. In addition, Mr. Lui has held
senior engineering positions at the Synertek Division of Honeywell and McDonnell
Douglas. Mr. Lui holds an M.S.E.E. degree from University of California,
Berkeley and a B.S. degree in Electrical Engineering and Mathematics from
California Polytechnic State University, San Luis Obispo.
JEFFREY L. GARON joined us as Chief Financial Officer and Vice President,
Finance and Administration and Secretary in March 1998. Prior to that,
Mr. Garon served as president and senior operating officer of The Garon
Financial Group, Inc., a venture capital and venture consulting firm
specializing in start-ups, turnarounds and restarts, from 1994 to 1998. From
1993 to 1994, he served as a vice president and chief financial officer of
Monster Cable Products, Inc., a leading provider of audio cables and supplies to
consumers and the consumer electronic retail channel. Prior to this, Mr. Garon
10
<PAGE>
held senior financial positions with Visual Edge Technology, Inc., a provider of
large format digital imaging systems, Oracle Corporation, Ashton-Tate
Corporation and Teledyne Microelectronics. Mr. Garon holds a B.S. in Business
Administration Finance from California State University, Northridge and a M.B.A.
from Loyola Marymount University.
TSUYOSHI TAIRA has been a member of our board of directors since July 1993.
Mr. Taira served as a member of the board of directors of Atmel Corporation from
1987 to 1992. Mr. Taira served as president of Sanyo Semiconductor Corporation
from 1986 to 1993. Mr. Taira was chairman of the Sanyo Semiconductor Corporation
from 1993 to 1996. Mr. Taira left the Sanyo Semiconductor Corporation in August
1996. Mr. Taira currently owns and runs a marketing and management consulting
company, Tazan International, Inc. Mr. Taira holds a B.S. from Tokyo
Metropolitan University.
YASUSHI CHIKAGAMI has been a member of our board of directors since
September 1995. Mr. Chikagami has been chairman of Keian Corporation, a personal
computer and PC peripheral distributor, since 1993. Mr. Chikagami has also
served as director of GVC Corporation and Trident Microsystems, Inc. since 1993.
Mr. Chikagami holds a B.S. in Agricultural Engineering from Taiwan University
and a M.S. in engineering from University of Tokyo.
RONALD CHWANG, PH.D., has been a member of our board of directors since
June 1997. Dr. Chwang is the president of Acer Capital America and managing
general partner of Acer Technology Venture Fund. Previously, Dr. Chwang was
president and chief executive officer of Acer America, a subsidiary of Acer
Group, a worldwide computer, component and semiconductor manufacturer, from 1992
to 1997, and has been with Acer in various capacities since 1986. Dr. Chwang has
previously held development and management positions at Intel Corporation and
Bell Northern Research. Dr. Chwang holds a B.S. in Engineering from McGill
University and a Ph.D. in Electrical Engineering from the University of Southern
California.
ITEM 2. PROPERTIES
As of January 31, 2000, we occupy four leased facilities totaling
approximately 86,000 square feet in Sunnyvale, California in which our executive
offices, manufacturing, engineering, research and development and testing
facilities are located. The lease on one facility expires in May, 2003, and the
leases on the other three facilities expire in April, 2005. We believe these
facilities are adequate to meet our needs for at least the next 12 months.
ITEM 3. LEGAL PROCEEDINGS
ATMEL LITIGATION
On January 3, 1996, Atmel sued us in the U.S. District Court for the
Northern District of California. Atmel's complaint alleged that we willfully
infringed on five U.S. patents owned or exclusively licensed to Atmel. Atmel
later amended its complaint to allege infringement of a sixth patent. Regarding
each of these six patents, Atmel sought a judgment that we infringed the patent,
an injunction prohibiting future infringement, and treble damages, as well as
attorney's fees and expenses.
On two of these six patents, the District Court granted in our favor a
summary judgment that we did not infringe. Two of the other patents were
invalidated by another U.S. District Court in a proceeding to which we were not
a party, but this decision was reversed by the Federal Circuit. Thus, four
patents remain at issue in Atmel's District Court case against us. That case has
been stayed, and Atmel has not requested a trial date.
On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving five of the
six patents that Atmel alleged that we infringed in the District Court case
above. We intervened as a party in that action. Pursuant to indemnification
11
<PAGE>
agreements with these suppliers, we are obligated to indemnify both to the
extent provided in those agreements.
As to two of these five patents, Atmel's claims were withdrawn because of
the summary judgment granted by the District Court above. As to another two
patents, the Administrative Law Judge, or ALJ, which makes recommendations to
the ITC, has ruled that we did not infringe. This ruling has yet to be confirmed
by the ITC, which is free to adopt or reject the ALJ's findings. As to the fifth
patent, the ALJ held a hearing, which concluded on February 17, 2000, to
determine if it was invalid due to failure to name an inventor, and whether or
not Atmel committed inequitable conduct in its dealings with the Patent and
Trademark Office when it attempted to add a co-inventor. We expect that the ALJ
will rule on this issue sometime in April, and make a recommendation to the ITC.
Any final decisions by the ITC will not be dispositive because Atmel can
still pursue its claims in the District Court action. Any decisions by the ITC
are not binding on the District Court. We intend to defend ourselves vigorously
against these actions.
WINBOND LITIGATION
On July 31, 1998, we filed suit against Winbond Electronics Corporation in
the U.S. District Court for the Northern District of California, San Jose
Division. Winbond has answered the complaint and has counter-claimed. Since
then, the parties have amended the complaint and the answer and counterclaim. As
of February 24, 2000, we have asserted eight causes of action, including breach
of contract, misappropriation of trade secrets, and other contractual and
tortious claims. Our suit seeks damages and equitable remedies to prevent
Winbond from using any of our technology.
Winbond has answered and asserted counter-claims for a declaration that it
is not in material breach of the agreement, breach of the agreement, breach of
the covenant of good faith and fair dealing, interference with prospective
economic advantage, unlawful business practice in violation of state law, common
law unfair competition, a declaration that Winbond is not obligated to pay us
under the agreement and/or they own or jointly own the technology embodied in
their products, misappropriation of Winbond's trade secrets, unfair competition
in violation of the Federal Lanham Act, and common law fraud and
misrepresentation. Winbond seeks, in part, restitution of the payments made, and
other damages, and an injunction. We have replied by denying these charges. We
believe that the substantive allegations in the Winbond counter-claims are
without merit and we intend to defend ourselves vigorously against the action.
From time to time, we are also involved in other legal actions arising in
the ordinary course of business. While we have accrued certain amounts for the
estimated legal costs associated with defending these matters, there can be no
assurance the Atmel complaint, the Winbond complaint or other third party
assertions will be resolved without costly litigation, in a manner that is not
adverse to our financial position, results of operations or cash flows or
without requiring royalty payments in the future which may adversely impact
gross margins. No estimate can be made of the possible loss or possible range of
loss associated with the resolution of these contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter to a vote of security
holders.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The principal U.S. market for our Common Stock is The Nasdaq Stock Market's
National Market. The only class of our securities that is traded is our Common
Stock. Our Common Stock has traded on The Nasdaq Stock Market's National Market
since November 21, 1995, under the symbol SSTI. The following table sets forth
the quarterly high and low closing sales prices of the Common Stock for the
period indicated as reported by The Nasdaq Stock Market. These prices do not
include retail mark-ups, mark-downs, or commissions. The closing sales price of
our Common Stock on December 31, 1999, the last trading day in 1999, was
$41.250.
<TABLE>
<CAPTION>
1998: HIGH CLOSE LOW CLOSE
- ----- ---------- ---------
<S> <C> <C> <C>
First Quarter: January 1 - March 31, 1998 $ 3.750 $ 2.938
Second Quarter: April 1 - June 30, 1998 3.688 2.656
Third Quarter: July 1 - September 30, 1998 4.250 2.031
Fourth Quarter: October 1 - December 31, 1998 2.750 1.313
</TABLE>
<TABLE>
<CAPTION>
1999: HIGH CLOSE LOW CLOSE
- ----- ---------- ---------
<S> <C> <C> <C>
First Quarter: January 1 - March 31, 1999 $ 4.063 $ 2.406
Second Quarter: April 1 - June 30, 1999 7.500 3.625
Third Quarter: July 1 - September 30, 1999 17.875 7.094
Fourth Quarter: October 1 - December 31, 1999 46.125 14.125
</TABLE>
<TABLE>
<CAPTION>
2000: HIGH CLOSE LOW CLOSE
- ----- ---------- ---------
<S> <C> <C> <C>
First Quarter: January 1 - February 22, 2000 $58.625 $29.563
</TABLE>
APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS
As of December 31, 1999, there were approximately 5,800 record holders of
our Common Stock.
DIVIDENDS
We have never paid a cash dividend on our Common Stock and we intend to
continue to retain earnings, if any, to finance future growth. Accordingly, we
do not anticipate the payment of cash dividends to holders of Common Stock in
the foreseeable future. In addition, our line of credit does not permit the
payment of dividends.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
notes thereto included elsewhere in this report. The statements of operations
data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet
data at December 31, 1998 and 1999 are derived from, and should be read in
conjunction with, the audited consolidated financial statements and notes
thereto included elsewhere in this report. The statements of operations data for
the year ended December 31, 1995 and 1996 and the balance sheet data at
December 31, 1995, 1996 and 1997 are derived from audited financial statements
not included in this report. The results of operations are not necessarily
indicative of the results to be expected for future periods.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues:
Product revenues........................... $38,283 $90,638 $73,796 $ 66,875 $118,242
License revenues........................... 1,245 2,652 1,526 2,536 6,552
------- ------- ------- -------- --------
Total net revenues....................... 39,528 93,290 75,322 69,411 124,794
Cost of revenues............................. 26,360 59,494 62,747 62,703 94,652
------- ------- ------- -------- --------
Gross profit................................. 13,168 33,796 12,575 6,708 30,142
------- ------- ------- -------- --------
Operating expenses:
Research and development................... 4,058 6,948 8,744 14,527 18,199
Sales and marketing........................ 2,455 5,292 6,587 7,290 10,576
General and administrative................. 1,464 3,370 9,479 4,592 3,800
In-process research and development........ -- -- -- -- 2,011
------- ------- ------- -------- --------
Total operating expenses................. 7,977 15,610 24,810 26,409 34,586
------- ------- ------- -------- --------
Income (loss) from operations................ 5,191 18,186 (12,235) (19,701) (4,444)
Interest and other income, net............... 517 1,763 2,146 1,573 730
Interest expense............................. (273) -- -- (31) (214)
------- ------- ------- -------- --------
Income (loss) before provision for (benefit
from) income taxes......................... 5,435 19,949 (10,089) (18,159) (3,928)
Provision for (benefit from) income taxes.... (594) 7,598 (3,165) (571) 88
------- ------- ------- -------- --------
Net income (loss)............................ $ 6,029 $12,351 $(6,924) $(17,588) $ (4,016)
======= ======= ======= ======== ========
Net income (loss) per share--basic........... $ 0.70 $ 0.54 $ (0.30) $ (0.77) $ (0.17)
======= ======= ======= ======== ========
Net income (loss) per share--diluted......... $ 0.32 $ 0.49 $ (0.30) $ (0.77) $ (0.17)
======= ======= ======= ======== ========
BALANCE SHEET DATA:
Total assets................................. $66,403 $80,914 $82,539 $ 56,138 $ 88,806
======= ======= ======= ======== ========
Long-term obligations........................ $ 76 $ 71 $ 66 $ 663 $ 446
======= ======= ======= ======== ========
Shareholders' equity......................... $52,172 $64,788 $55,889 $ 38,030 $ 41,015
======= ======= ======= ======== ========
</TABLE>
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING
DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE
BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW UNDER THE HEADING "BUSINESS RISKS", AS WELL AS THOSE DISCUSSED ELSEWHERE
IN THIS REPORT.
OVERVIEW
We are a leading supplier of flash memory semiconductor devices for the
digital consumer, networking, wireless communication and Internet computing
markets.
Historically, the semiconductor industry has been cyclical, alternately
experiencing periods of over supply and increased demand. During 1999, the
semiconductor industry transitioned from a period of over-supply to a period of
increased demand against the available capacity, resulting in an industry-wide
shortage of flash memory product. From late 1996 through mid-1999, selling
prices of our products declined significantly. Selling prices of semiconductor
products have generally declined over time and are expected to continue to
decline over the long term, principally due to increased market competition.
Specifically, during 1999 and 1998, industry over-capacity resulted in higher
than normal price declines in our markets, which unfavorably impacted our
revenues, gross margins, and profitability. During the second half of 1999, we
were able to increase the selling price of some of our products as the industry
shifted to a period of industry-wide shortage. This trend may not continue and
prices may not remain stable. In addition, the current market environment may
constrain our ability to obtain wafers to manufacture our products, which may
also impair our profitability.
We derived 81% of our product revenues during 1999 from product shipments to
Asia. Additionally, our major wafer suppliers and packaging and testing
subcontractors are all located in Asia. During 1998 and 1997, several Asian
countries where we do business, including Japan, Taiwan and Korea, experienced
severe currency fluctuation and economic deflation, which negatively impacted
our revenues and our ability to collect payments from these customers. In
September 1999, Taiwan experienced a major earthquake. The resulting disruption
to the manufacturing operations in the wafer foundries and assembly and testing
subcontractors that we use in Taiwan negatively impacted our revenues and
operating results during the fourth and third quarter of 1999.
Our product sales are made primarily using short-term cancelable purchase
orders. The quantities actually purchased by the customer, as well as shipment
schedules, are frequently revised to reflect changes in the customer's needs and
in our supply of product. Accordingly, our backlog of open purchase orders at
any given time is not a meaningful indicator of future sales. Changes in the
amount of our backlog do not necessarily reflect a corresponding change in the
level of actual sales.
Direct sales to customers are recognized upon shipment of product net of an
allowance for estimated returns. Sales to distributors are made primarily under
arrangements allowing price protection and the right of stock rotation on
merchandise unsold to customers. Because of the uncertainty associated with
pricing concessions and future returns, we defer recognition of such revenues,
related costs of revenues and related gross margin until we are notified by the
distributor that merchandise is sold by the distributor.
Most of our technology licenses provide for the payment of up-front license
fees and continuing royalties based on product sales. For license and other
arrangements for technology that we are continuing to enhance and refine and
under which we are obligated to provide unspecified enhancements, revenue is
recognized over the lesser of the estimated period we have historically enhanced
and developed refinements to the technology, generally three years, the upgrade
period, or the remaining portion of the upgrade period from the date of
delivery, provided all specified
15
<PAGE>
technology and documentation has been delivered, the fee is fixed and
determinable and collection of the fee is probable. From time to time, we
reexamine the estimated upgrade period relating to license technology to
determine if a change in the estimate upgrade period is needed. Revenue from
license or other technology arrangements where we are not continuing to enhance
and refine the technology or are not obligated to provide unspecified
enhancements is recognized upon delivery, if the fee is fixed and determinable
and collection of the fee is probable.
We recognize royalties received under these arrangements during the upgrade
period as revenue based on the ratio of the elapsed portion of the upgrade
period to the estimated upgrade period. We recognize the remaining portion of
the royalties ratably over the remaining portion of the upgrade period. We
recognize royalties received after the upgrade period has elapsed when reported
to us, which generally coincides with the receipt of payment.
In 1999, Silicon Technology, a company located in Japan, and Actron
Technology, Ltd., a company located in Hong Kong, China, accounted for 8.1% and
11.8%, respectively, of our net revenues. In 1998, Silicon Technology and
Actron, accounted for 14.7% and 10.8%, respectively, of our net revenues. In
1997, Silicon Technology accounted for 15.4% of our net revenues. We own a 14%
interest in Silicon Technology.
RESULTS OF OPERATIONS: YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
NET REVENUES
Net revenues were $124.8 million in 1999 compared to $69.4 million in 1998
and $75.3 million in 1997. The increase from 1998 to 1999 was due to increased
shipment volume of new and existing products and due to our ability to raise
prices slightly in the second half of 1999. The decrease from 1997 to 1998 was a
result of a decline in selling prices for our products.
PRODUCT REVENUES. Product revenues were $118.2 million in 1999,
$66.9 million in 1998 and $73.8 million in 1997. The increase from 1998 to 1999
was primarily due to shipments of over 30 new products that we introduced in the
second half of 1998 and the first half of 1999. The decrease from 1997 to 1998
was primarily the result of a decline in selling prices due to industry
over-supply.
LICENSE REVENUES. Revenues from license fees and royalties were
$6.6 million in 1999, $2.5 million in 1998 and $1.5 million in 1997. The
increase from 1998 to 1999 was primarily due to recognition of up-front fees
paid by licensees and an increase in the number of licensees from 1998. We
anticipate that license revenues will fluctuate significantly in the future.
GROSS PROFIT
Gross profit was $30.1 million, or 24.2% of net revenues, in 1999,
$6.7 million, or 10% of net revenues, in 1998 and $12.6 million, or 17% of net
revenues, in 1997. Gross profit increased from 1998 to 1999 due to increased
unit shipments from existing cost-reduced products and from increased shipments
of new, higher margin products. The decrease from 1997 to 1998 was primarily due
to declines in selling prices in 1998.
OPERATING EXPENSES
Our operating expenses consist of research and development, sales and
marketing, general and administrative expenses, and, in 1999, the charge for
in-process research and development related to an acquisition. Operating
expenses were $34.6 million, or 28% of net revenues, in 1999, $26.4 million, or
38% of net revenues, in 1998, and $24.8 million, or 33% of net revenues, in
1997. The increase in absolute dollars in each year was due to hiring additional
personnel, the development of new products and, in 1999, the charge for
in-process research and development related to an acquisition. We anticipate
that we will continue to devote substantial resources to research and
development, sales and
16
<PAGE>
marketing and to general and administrative, and that these expenses will
continue to increase in absolute dollar amounts.
RESEARCH AND DEVELOPMENT. Research and development expenses include costs
associated with the development of new products, enhancements to existing
products and quality assurance activities. These costs consist primarily of
employee salaries, benefits and the cost of outside resources that supplement
the internal development team. Research and development expenses were
$18.2 million, or 15% of net revenues, in 1999, $14.5 million, or 21% of net
revenues, in 1998 and $8.7 million, or 12% of net revenues, in 1997. These
increases were primarily due to the hiring of additional personnel, depreciation
expenses related to purchases of additional test equipment, increased
prototyping and product qualification costs associated with our product and
process development efforts, and increases in the use of outside resources. We
expect research and development expenses to increase in absolute dollars.
SALES AND MARKETING. Sales and marketing expenses consist of salaries,
commissions to manufacturers representatives, travel and entertainment and
promotional expenses. Sales and marketing expenses were $10.6 million, or 8% of
net revenues, in 1999, $7.3 million, or 11% of net revenues, in 1998, and
$6.6 million, or 9% of net revenues, in 1997. The increase from 1998 to 1999 was
due to increased commissions as a result of higher product revenues. The
increase from 1997 to 1998 was primarily due to the hiring of additional sales
personnel. We expect sales and marketing expenses to increase in absolute
dollars as we continue to expand our sales and marketing efforts and as our
revenues increase.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, recruiting costs,
information systems costs, professional service fees and allowances for doubtful
accounts. General and administrative expenses were $3.8 million, or 3% of net
revenues, in 1999, $4.6 million, or 7% of net revenues, in 1998, and
$9.5 million, or 13% of net revenues, in 1997. General and administrative
expenses during 1998 included a one-time charge of $500,000 for the termination
of a land purchase agreement and in 1999 these expenses were offset by the
reversal of $1.2 million in legal accruals associated with the settlement of the
Intel lawsuit in the second quarter. The high level of general and
administrative expenses during 1997 was primarily due to legal expenses
associated with pending lawsuits. We anticipate that general and administrative
expenses will continue to increase in absolute dollar amount as we scale our
facilities, infrastructure, and head count to support our overall expected
growth. We expect to incur additional expenses in connection with the Winbond
litigation and may incur additional expenses in connection with the Atmel
litigation. For further information on this litigation see "Legal Proceedings."
IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE. A charge of $2.0 million, or 2%
of net revenues, in 1999, relates to the expense for in-process research and
development incurred during the acquisition of Linvex. Refer also to Note 6 of
Notes to the Consolidated Financial Statements. The fair value of Linvex' core
technology, existing products, and the technology currently under development
was determined by an independent appraiser using the income approach, which
discounts expected future cash flows to present value. The discount rates used
in the present value calculations were derived from a weighted average cost of
capital analysis, adjusted upward by a premium of 5% to reflect additional risks
inherent in the development life cycle. We believe that the pricing model
related to this acquisition is consistent within the high-technology industry.
We do not expect to achieve a material amount of expense reductions or synergies
as a result of integrating the acquired in-process technology. Therefore the
valuation assumptions do not include anticipated cost savings. In process
research and development valued at $2.0 million consisted of a single project to
combine flash and SRAM memory on a single chip, the ComboMemory chip. At the
time of the acquisition the estimated cost to complete the ComboMemory chip was
$1.1 million and the chip was approximately 42% complete. The risk adjusted
discount rate relating to in-process technology was 40%.
17
<PAGE>
We expect that the ComboMemory chip will be completed and begin to generate
cash flows within 3 to 6 months. However, development of the ComboMemory chip
remains a significant risk due to the remaining effort to achieve technical
viability, rapidly changing customer markets, uncertain standards for new
products and significant competitive threats from numerous companies. The nature
of the efforts to develop the ComboMemory chip into a commercially viable
product consists principally of planning, designing and testing activities
necessary to determine that the ComboMemory chip can meet market expectations,
including functionality and technical requirements. Failure to bring the
ComboMemory chip to market in a timely manner could result in a lost opportunity
to capitalize on emerging markets. Failure to achieve the expected levels of
revenues and net income from the ComboMemory chip will negatively impact the
return on investment expected at the time of the acquisition and potentially
result in impairment of other assets related to the development activities.
Recent actions and comments regarding other companies from the Securities
and Exchange Commission have indicated that they are reviewing the current
valuation methodology of purchased in-process research and development relating
to acquisitions. The Commission is concerned that some companies are writing off
more of the value of an acquisition than is appropriate. We believe that we are
in compliance with all of the rules and related guidance as they currently
exist. However, the Commission may seek to reduce the amount of purchased
in-process research and development we have previously expensed. This would
result in the restatement of our previously filed financial statements and could
have a material negative impact on the financial results for the period
subsequent to the acquisition.
INTEREST AND OTHER INCOME. Interest and other income was approximately
$730,000, or 1% of net revenues, in 1999, $1.6 million, or 2% of net revenues,
in 1998, and $2.1 million, or 3% of net revenues, in 1997. Interest income
decreased over these years as cash, cash equivalents and short-term investments
decreased.
INTEREST EXPENSE. Interest expense for 1999 was approximately $214,000 and
interest expense for 1998 was approximately $31,000. Interest expense increased
during 1999 due to interest charges incurred as we borrowed against our line of
credit. There was no interest expense in 1997.
PROVISION FOR (BENEFIT FROM) INCOME TAXES
The provision for (benefit from) income taxes was approximately $88,000 in
1999, approximately ($571,000) in 1998, and ($3.2) million in 1997. The benefit
in 1997 and 1998 related to our loss position for those years and related future
tax benefits. The provision for income taxes in 1999 related to foreign taxes
paid on foreign license revenues offset by an income tax refund received during
the year. During 1998, we determined that our cumulative net operating losses
incurred exceeded the amount of tax carry back available. For this reason, in
the third quarter of 1998, we recorded a full valuation allowance against the
deferred tax asset. We will provide a full valuation against our deferred tax
asset until such time as evidence shows that the deferred tax asset is more
likely than not to be recovered.
SEGMENT REPORTING
Our business has two segments: flash products and technology licensing.
Flash products comprise our standard flash memory products, our
application-specific memory products, flash embedded controllers and mass
storage products. Technology licensing comprises design service fees, technical
consultation fees, license fees and royalties earned through technology
agreements that we have with wafer foundries and manufacturers for non-competing
applications.
18
<PAGE>
The table below presents information about reported segments for the three years
ended December 31:
<TABLE>
<CAPTION>
TECHNOLOGY
FLASH PRODUCTS LICENSING TOTAL
-------------- --------------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
1999:
Revenues................................................ $118,242 $6,552 $124,794
Gross profit............................................ $ 23,590 $6,552 $ 30,142
1998:
Revenues................................................ $ 66,875 $2,536 $ 69,411
Gross profit............................................ $ 4,172 $2,536 $ 6,708
1997:
Revenues................................................ $ 73,796 $1,526 $ 75,322
Gross profit............................................ $ 11,049 $1,526 $ 12,575
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 established a new model for
accounting for derivative and hedging activities. In July, 1999 the Financial
Accounting Standards Boards issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 133). SFAS 137 deferred the effective date of SFAS 133
until the first quarter beginning after June 15, 2000. The impact of SFAS 133 on
our consolidated financial statements has not yet been determined.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin: No. 101 "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain of the Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
We have until the first quarter of 2000 to comply with the guidance in SAB 101.
The impact of SAB 101 on our consolidated financial statements has not yet been
determined.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operations was $35.8 million in 1999 and relates primarily to
the increase in accounts receivable and accounts receivable from related parties
by $26.4 million due to increased sales in the third and fourth quarters and
also relates to the increase in inventories of $24.7 million due to the
production ramp, offset in part by an $8.4 million increase in trade accounts
payable. Cash used in operating activities was $18.2 million during 1998 and
primarily resulted from a net loss of $17.6 and a decrease in accounts payable
of $8.6 million offset by a decrease in net deferred income taxes of
$3.7 million, a decrease in net inventory of $3.6 million and depreciation and
amortization of $4.2 million. Cash provided by operations was $13.2 million
during 1997 and primarily resulted from a decrease in accounts receivable and
accounts receivable from related parties of $2.1 million, an increase in
accounts payable of $8.5 million and an increase in accrued expenses of
$2.7 million offset by a net loss of $6.9 million.
In September 1998, we signed a credit agreement with Foothill Capital
Corporation, which provides for up to $25.0 million of borrowings through
September 2001. We must pay an unused line fee at the annual rate of one-quarter
of one percent and we are required to maintain a minimum level of tangible net
worth. The line of credit is collateralized by substantially all our assets and
availability under the line is limited to 80% of eligible world-wide accounts
receivable. At December 31, 1999 the borrowing base was approximately $28.0
million of which approximately $8.7 million was unused at that date. Interest is
payable at one-half of one percent above the bank's base rate (8.5% at
December 31, 1999). On September 30, 1999 a new agreement was signed to increase
our line of credit to
19
<PAGE>
$35.0 million immediately, increasing to $50.0 million from January 1, 2000
through March 30, 2000, dropping back down to $40.0 million from April 1, 2000
through May 31, 2000, thereafter returning to $25.0 million until
September 2002. The funds in excess of $25.0 million are available only if
certain profitability covenants are met. At December 31, 1999, we had borrowed
$19.3 million against this agreement and met the profitability covenants. In
January 2000 we amended the agreement to include a sub-line to cover the
issuance of letters of credit to a vendor from whom we purchase wafers.
We made capital expenditures of $7.9 million in 1999, $3.8 million in 1998,
and $2.8 million in 1997. These expenditures were primarily for the purchase of
test equipment, design and engineering tools, computer equipment and the
enterprise resource planning and supply chain management system software. During
1997, we resold certain equipment to a subcontractor for proceeds of
$2.6 million. Management estimates that gross expenditures for capital equipment
will be $3.8 million in 2000.
In the second quarter of 1998, we terminated an agreement to purchase a 14
acre plot of land located in San Jose, California. The costs associated with the
termination of the agreement were approximately $500,000 and are included in
general and administrative expenses.
In January 1998, our board of directors authorized a stock repurchase
program whereby 1,000,000 shares of our common stock could be repurchased on the
open market at prevailing market prices. The repurchase program ended
June 1998. Approximately 449,000 shares were repurchased under this
authorization during the six months ended June 1998 for an aggregate purchase
price of approximately $1.6 million. Purchase prices ranged from $3.19 to $3.78
per share. No shares were repurchased during 1999.
In February 1998, we agreed to purchase technology from a product
development partner for $1.8 million, payable upon the completion of certain
product development milestones over the next eighteen months. During 1998, we
paid approximately $295,000 pursuant to this agreement. During 1999, the
agreement was terminated and we expensed $50,000 as a result of this
termination. In addition, we incurred $1.0 million in expenses related to a
project to jointly develop new products with another development partner.
As of December 31, 1999, our principal sources of liquidity included cash
and cash equivalents of $1.2 million. As of December 31, 1999, we had an open
line of credit of up to $25.0 million to secure sufficient working capital to
finance growth in operations and new product development efforts. As noted
above, the credit line increased to $50.0 million on January 1, 2000. We believe
that our cash balances, together with funds expected to be generated from
operations and the line of credit availability, will be sufficient to meet our
projected working capital and other cash requirements through at least the next
twelve months. However, there can be no assurance that future events will not
require us to seek additional borrowings or capital and, if so required, that
such borrowings or capital will be available on acceptable terms.
YEAR 2000
STATE OF READINESS
We have completed all Year 2000 readiness work and did not experience
disruption in our business related to the Year 2000 Issue. However, we cannot
provide any assurance that no Year 2000 issues will impact our systems, products
or other aspects of our business in the future.
Our key suppliers have not experienced disruptions in their businesses
related to the Year 2000 issue. However, we cannot provide any assurance that no
Year 2000 issue will effect our suppliers in the future.
20
<PAGE>
COSTS
The total cost of our Year 2000 readiness program is estimated to be
approximately $750,000. All costs were charged to expense as incurred, and did
not include potential costs related to any customers or other claims or the cost
of internal software or hardware replaced in the normal course of business.
RISKS/CONTINGENCY PLANS
We have taken appropriate steps to assess and address the Year 2000 issues.
We completed the implementation of our contingency plan prior to December 31,
1999.
BUSINESS RISKS
RISKS RELATED TO OUR BUSINESS
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED DECLINE IN
REVENUE MAY DISAPPOINT SECURITIES ANALYSTS OR INVESTORS AND RESULT IN A DECLINE
IN OUR STOCK PRICE.
Our recent growth rate may not be sustainable and you should not use our
past financial performance to predict future operating results. We have incurred
net losses for the past three fiscal years. Our recent quarterly and annual
operating results have fluctuated, and will continue to fluctuate, due to the
following factors, all of which are difficult to forecast and many of which are
out of our control:
- the availability, timely deliverability and cost of wafers from our
suppliers;
- competitive pricing pressures and related changes in selling prices;
- fluctuations in manufacturing yields and significant yield losses which
affect our ability to fulfill orders;
- new product announcements and introductions for competing products by us
or our competitors;
- product obsolescence;
- lower of cost or market inventory adjustments;
- unpredictability of changes in demand for, or in the mix of, our products;
- the gain or loss of significant customers;
- market acceptance of products utilizing our SuperFlash technology;
- changes in the channels through which our products are distributed and the
timeliness of receipt of distributor resale information;
- exchange rate fluctuations;
- general economic, political and environmental-related conditions, such as
natural disasters;
- difficulties in forecasting, planning and management of inventory levels;
- unanticipated research and development expenses associated with new
product introductions; and
- the timing of significant orders and of license and royalty revenue.
A downturn in the market for consumer products such as personal computers
and cellular telephones that incorporate our products can also harm our
operating results.
21
<PAGE>
We typically receive and fulfill a majority of our orders within the
quarter, with a substantial portion occurring during the last month of the
quarter. One reason for this is that our products are primarily sold to large
manufacturers, which, typically place orders at or near the end of a quarter. As
a result, we may not learn of revenue shortfalls until late in a quarter and may
not be able to predict future revenues with accuracy. Additionally, our costs
consist of salaries for personnel and materials that must be ordered several
months in advance. These costs are based in part on our expectations for future
revenues and are relatively fixed in the short term. As a result, any revenue
shortfall below expectations could harm our business.
WE DEPEND ON A LIMITED NUMBER OF FOREIGN FOUNDRIES TO MANUFACTURE OUR PRODUCTS,
AND THESE FOUNDRIES MAY NOT BE ABLE TO SATISFY OUR MANUFACTURING REQUIREMENTS
WHICH COULD CAUSE OUR REVENUES TO DECLINE.
We outsource all of our manufacturing with the exception of limited testing
activities. We currently buy all of our wafers, and sorted die, from a limited
number of suppliers. During 1999, substantially all of our products were
manufactured by two foundries, Sanyo Electric Co., Ltd. in Japan and Taiwan
Semiconductor Manufacturing Co., Ltd., or TSMC, in Taiwan. We anticipate that
these foundries will continue to manufacture the majority of our products in
2000. If these suppliers fail to satisfy our requirements on a timely basis and
at competitive prices we could suffer manufacturing delays, a possible loss of
revenues or higher than anticipated costs of revenues, any of which could
seriously harm our operating results.
Given the current constraints on worldwide semiconductor manufacturing
capacity, our revenues for the next several quarters will largely be determined
by our ability to obtain adequate wafer supplies from our foundries. We are
currently unable to meet all of the demand for our products, and have in the
past failed to meet scheduled shipment dates, due to our inability to obtain a
sufficient supply of wafers and sorted die from our foundries. The foundries
with which we currently have arrangements, together with any additional foundry
at which capacity might be obtained, may not be willing or able to satisfy all
of our manufacturing requirements on a timely basis at favorable prices. In
addition, we have encountered delays in qualifying new products and in ramping
new product production and could experience these delays in the future. We are
also subject to the risks of service disruptions, raw material shortages and
price increases by the foundries. Such disruptions, shortages and price
increases could seriously harm our operating results.
IF WE ARE UNABLE TO INCREASE OUR MANUFACTURING CAPACITY, OUR REVENUES MAY
DECLINE.
In order to grow, we need to increase our present manufacturing capacity.
Events that we have not foreseen could arise which would limit our capacity. In
addition, we have not secured adequate capacity beyond this year. If we cannot
satisfactorily increase our manufacturing capacity, our ability to grow will be
severely impaired and this may harm our operating results.
OUR COST OF REVENUES MAY INCREASE IF WE ARE REQUIRED TO PURCHASE MANUFACTURING
CAPACITY IN THE FUTURE.
To obtain additional manufacturing capacity, we may be required to make
deposits, equipment purchases, loans, joint ventures, equity investments or
technology licenses in or with wafer fabrication companies. These transactions
could involve a commitment of substantial amounts of our capital and technology
licenses in return for production capacity. We may be required to seek
additional debt or equity financing if we need substantial capital in order to
secure this capacity and we cannot assure you that we will be able to obtain
such financing.
22
<PAGE>
IF OUR FOUNDRIES FAIL TO ACHIEVE ACCEPTABLE WAFER MANUFACTURING YIELDS, WE WILL
EXPERIENCE HIGHER COSTS OF REVENUES AND REDUCED PRODUCT AVAILABILITY.
The fabrication of our products requires wafers to be produced in a highly
controlled and ultra-clean environment. Semiconductor companies that supply our
wafers sometimes have experienced problems achieving acceptable wafer
manufacturing yields. Semiconductor manufacturing yields are a function of both
our design technology and the foundry's manufacturing process technology. Low
yields may result from marginal design or manufacturing process drift. Yield
problems may not be identified until the wafers are well into the production
process, which often makes them difficult, time consuming and costly to correct.
Furthermore we rely on independent foreign foundries for our wafers which
increases the effort and time required to identify, communicate and resolve
manufacturing yield problems. If our foundries fail to achieve acceptable
manufacturing yields, we will experience higher costs of revenues and reduced
product availability, which would harm our operating results.
IF OUR FOUNDRIES DISCONTINUE THE MANUFACTURING PROCESSES NEEDED TO MEET OUR
DEMANDS, OR FAIL TO UPGRADE THE TECHNOLOGIES NEEDED TO MANUFACTURE OUR PRODUCTS,
WE MAY FACE PRODUCTION DELAYS AND LOWER REVENUES.
Our wafer and product requirements typically represent a small portion of
the total production of the foundries that manufacture our products. As a
result, we are subject to the risk that a foundry will cease production on an
older or lower-volume manufacturing process that it uses to produce our parts.
Additionally, we cannot be certain our foundries will continue to devote
resources to advance the process technologies on which the manufacturing of our
products is based. Each of these events could increase our costs and harm our
ability to deliver our products on time.
OUR DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO ASSEMBLE AND TEST OUR PRODUCTS
SUBJECTS US TO A NUMBER OF RISKS, INCLUDING AN INADEQUATE SUPPLY OF PRODUCTS AND
HIGHER COSTS OF MATERIALS.
We depend on independent subcontractors to assemble and test our products.
Our reliance on these subcontractors involves the following significant risks:
- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of strong demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other factors;
and
- potential misappropriation of our intellectual property.
These risks may lead to increased costs, delayed product delivery or loss of
competitive advantage which would harm our profitability and customer
relationships.
OUR GROWTH DEPENDS UPON OUR ABILITY TO COMMERCIALIZE PRODUCTS FOR COMMUNICATIONS
AND CONSUMER ELECTRONICS APPLICATIONS.
In 1998 and 1999, the majority of our revenues came from PC BIOS and PC
peripheral applications. However, communications and consumer electronics
applications are central to our growth strategy. We believe that products for
these applications will encounter intense competition and be highly price
sensitive. While we are currently developing and introducing new products for
these applications, we cannot assure you that these products will reach the
market on time, will satisfactorily address customer needs, will be sold in high
volume, or will be sold at profitable margins.
23
<PAGE>
OUR OPERATING EXPENSES ARE RELATIVELY FIXED, AND WE ORDER MATERIALS IN ADVANCE
OF ANTICIPATED CUSTOMER DEMAND. THEREFORE, WE HAVE LIMITED ABILITY TO REDUCE
EXPENSES QUICKLY IN RESPONSE TO ANY REVENUE SHORTFALLS.
Our operating expenses are relatively fixed, and we therefore have limited
ability to reduce expenses quickly in response to any revenue shortfalls.
Consequently, our operating results will be harmed if our revenues do not meet
our revenue projections. We may experience revenue shortfalls for the following
reasons:
- significant pricing pressures that occur because of declines in selling
prices over the life of a product;
- sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers which, in turn, harm our ability
to meet our sales obligations; and
- the reduction, rescheduling or cancellation of customer orders.
In addition, we typically plan our production and inventory levels based on
internal forecasts of customer demand, which are highly unpredictable and can
fluctuate substantially. From time to time, in response to anticipated long lead
times to obtain inventory and materials from our outside suppliers and
foundries, we may order materials in advance of anticipated customer demand.
This advance ordering may result in excess inventory levels or unanticipated
inventory write-downs if expected orders fail to materialize.
BECAUSE OUR FLASH MEMORY PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES, WE MAY
EXPERIENCE SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES RELATED TO RESEARCH AND
DEVELOPMENT AND THE GENERATION OF REVENUES.
Due to the flash memory product cycle we usually require more than
nine months to realize volume shipments after we first contact a customer. We
first work with customers to achieve a design win, which may take three months
or longer. Our customers then complete the design, testing and evaluation
process and begin to ramp up production, a period which typically lasts an
additional six months or longer. As a result, a significant period of time may
elapse between our research and development efforts and our realization of
revenue, if any, from volume purchasing of our products by our customers.
WE FACE INTENSE COMPETITION FROM COMPANIES WITH SIGNIFICANTLY GREATER FINANCIAL,
TECHNICAL AND MARKETING RESOURCES THAT COULD ADVERSELY AFFECT OUR ABILITY TO
INCREASE SALES OF OUR PRODUCTS.
We compete with major domestic and international semiconductor companies,
many of which have substantially greater financial, technical, marketing,
distribution, and other resources than we do. Many of our competitors have their
own facilities for the production of semiconductor memory components and have
recently added significant capacity for such production. Our memory products,
which presently account for substantially all of our revenues, compete
principally against products offered by Intel, Advanced Micro Devices, Atmel,
STMicroelectronics, Sanyo, Winbond Electronics and Macronix. If we are
successful in developing our high density products, these products will compete
principally with products offered by Intel, Advanced Micro Devices, Fujitsu,
Sharp, Samsung Semiconductor, SanDisk and Toshiba, as well as any new entrants
to the market.
In addition, we may in the future experience direct competition from our
foundry partners. We have licensed to our foundry partners the right to
fabricate products based on our technology and circuit design, and to sell such
products worldwide, subject to our receipt of royalty payments.
Competition may also come from alternative technologies such as
ferroelectric random access memory, or FRAM, or other developing technologies.
24
<PAGE>
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND, THEREFORE, OUR
SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
The markets for our products are characterized by:
- rapidly changing technologies;
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- rapid product obsolescence.
To develop new products for our target markets, we must develop, gain access
to and use leading technologies in a cost-effective and timely manner and
continue to expand our technical and design expertise. In addition, we must have
our products designed into our customers' future products and maintain close
working relationships with key customers in order to develop new products that
meet their changing needs.
In addition, products for communications applications are based on
continually evolving industry standards. Our ability to compete will depend on
our ability to identify and ensure compliance with these industry standards. As
a result, we could be required to invest significant time and effort and incur
significant expense to redesign our products and ensure compliance with relevant
standards.
We cannot assure you that we will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by our competitors. In addition, we may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. Our pursuit of necessary
technological advances may require substantial time and expense. Failure in any
of these areas could harm our operating results.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY DESIGN
ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO
IDENTIFY, RECRUIT AND RETAIN ADDITIONAL PERSONNEL.
We are highly dependent on Bing Yeh, our President and Chief Executive
Officer, as well as the other principal members of our management and
engineering staff. There is intense competition for qualified personnel in the
semiconductor industry, in particular the highly skilled design, applications
and test engineers involved in the development of flash memory technology.
Competition is especially intense in Silicon Valley, where our corporate
headquarters is located. We may not be able to continue to attract and retain
engineers or other qualified personnel necessary for the development of our
business or to replace engineers or other qualified personnel who may leave our
employ in the future. Our anticipated growth is expected to place increased
demands on our resources and will likely require the addition of new management
and engineering personnel and the development of additional expertise by
existing management personnel. The failure to recruit and retain key design
engineers or other technical and management personnel could harm our business.
OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO PROTECT.
We rely on a combination of patent, trade secrets, copyright and mask work
production laws and rights, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
Policing unauthorized use of our products, however, is difficult, especially in
foreign countries. Litigation may continue to be necessary in the future to
enforce our intellectual
25
<PAGE>
property rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others, or to defend against claims of
infringement or invalidity. Litigation could result in substantial costs and
diversion of resources and could harm our business, operating results and
financial condition regardless of the outcome of the litigation. For example, in
1998, we filed suit against Winbond Electronics Corporation alleging breach of
contract and breach of covenant of good faith and fair dealing and are seeking
an injunction prohibiting Winbond from using any of our licensed technology.
Winbond has responded by denying the claims and asserting counterclaims.
We own 22 patents in the United States relating to our products and
processes, and have filed for several more. In addition, we hold two patents in
Europe, one patent in Germany and additional foreign patent applications have
been filed in Europe, Japan, Taiwan and Canada. We cannot assure you that any
pending patent application will be granted. Our operating results could be
seriously harmed by the failure to protect our intellectual property.
IF WE ARE ACCUSED OF INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHER
PARTIES WE MAY BECOME SUBJECT TO TIME-CONSUMING AND COSTLY LITIGATION. IF WE
LOSE, WE COULD SUFFER A SIGNIFICANT IMPACT ON OUR BUSINESS AND BE FORCED TO PAY
DAMAGES.
Third parties may assert that our products infringe their proprietary
rights, or may assert claims for indemnification resulting from infringement
claims against us. Any such claims may cause us to delay or cancel shipment of
our products or pay damages which could seriously harm our business, financial
condition and results of operations. In addition, irrespective of the validity
or the successful assertion of such claims, we could incur significant costs in
defending against such claims.
Over the past three years we were sued both by Atmel Corporation and Intel
Corporation regarding patent infringement issues and by Winbond Electronics
Corporation regarding our contractual relationship with them. Significant
management time and financial resources have been devoted to defending these
lawsuits. We settled with Intel in May 1999 and the Atmel and Winbond litigation
is ongoing.
In addition to the Atmel, Intel and Winbond actions, we receive from time to
time letters or communications from other companies stating that such companies
have patent rights which involve our products. Since the design of all of our
products is based on SuperFlash technology, any legal finding that the use of
our SuperFlash technology infringes the patent of another company would have a
significantly negative effect on our entire product line and operating results.
Furthermore, if such a finding were made, there can be no assurance that we
could license the other company's technology on commercially reasonable terms or
that we could successfully operate without such technology. Moreover, if we are
found to infringe, we could be required to pay damages to the owner of the
protected technology and could be prohibited from making, using, selling, or
importing into the United States any products that infringe the protected
technology. In addition, the management attention consumed by and legal cost
associated with any litigation could have a negative effect on our operating
results.
PUBLIC ANNOUNCEMENTS MAY HURT OUR STOCK PRICE. During the course of
lawsuits there may be public announcements of the results of hearings, motions,
and other interim proceedings or developments in the litigation. If securities
analysts or investors perceive these results to be negative, it could have a
substantial negative effect on the trading price of our stock.
OUR LITIGATION MAY BE EXPENSIVE, MAY BE PROTRACTED AND CONFIDENTIAL
INFORMATION MAY BE COMPROMISED. Whether or not we are successful in our lawsuits
with Winbond and Atmel, we expect this litigation to consume substantial amounts
of our financial and managerial resources. At any time Winbond or Atmel may file
additional claims against us, which could increase the risk, expense and
duration of the litigation. Further, because of the substantial amount of
discovery required in connection with this type
26
<PAGE>
of litigation, there is a risk that some of our confidential information could
be compromised by disclosure.
OUR BUSINESS MAY SUFFER DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES AND
OPERATIONS.
During 1997, 1998, and 1999, our export product and licensing revenues
accounted for approximately 87%, 93%, and 86% of our net revenues, respectively.
Our international business activities are subject to a number of risks, each of
which could impose unexpected costs on us that would have an adverse effect on
our operating results. These risks include:
- difficulties in complying with regulatory requirements and standards;
- tariffs and other trade barriers;
- costs and risks of localizing products for foreign countries;
- reliance on third parties to distribute our products;
- longer accounts receivable payment cycles;
- potentially adverse tax consequences;
- limits on repatriation of earnings; and
- burdens of complying with a wide variety of foreign laws.
We derived 81% of our product revenue from Asia during 1999. Additionally,
our major wafer suppliers and assembly and packaging subcontractors are all
located in Asia. Any kind of economic, political or environmental instability in
this region of the world can have a severe negative impact on our operating
results due to the large concentration of our production and sales activities in
this region. For example, during 1998 and 1997, several Asian countries where we
do business, such as Japan, Taiwan and Korea, experienced severe currency
fluctuation and economic deflation, which negatively impacted our total revenues
and also negatively impacted our ability to collect payments from these
customers. During this period, the lack of capital in the financial sectors of
these countries made it difficult for our customers to open letters of credit or
other financial instruments that are guaranteed by foreign banks. Finally, the
economic situation in this period exacerbated a decline in selling prices for
our products as our competitors reduced product prices to generate needed cash.
It should be also be noted that we are greatly impacted by the political,
economic and military conditions in Taiwan. Taiwan and China are continuously
engaged in political disputes and both countries have recently conducted
military exercises in or near the other's territorial waters and airspace. Such
disputes may continue and even escalate, resulting in an economic embargo, a
disruption in shipping or even military hostilities. This could severely harm
our business by interrupting or delaying production or shipment of our products.
Any kind of activity of this nature or even rumors of such activity could
severely negatively impact our operations, revenues, operating results, and
stock price.
BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR, AND ARE LIKELY TO
CONTINUE TO ACCOUNT FOR, A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES
COULD DECLINE DUE TO THE LOSS OF ONE OF THESE CUSTOMERS.
More than half of our revenues come from a small number of customers. For
example, product sales to our top 10 customers accounted for approximately 62%,
66%, and 57%, respectively, of our product revenues for 1997, 1998, and 1999.
One customer accounted for 16% and 15% of product sales in 1997 and 1998.
Another customer accounted for 11% and 12% of product sales in 1998 and 1999. If
we were to lose any of these customers or experience any substantial reduction
in orders from these
27
<PAGE>
customers, our revenues and operating results would suffer. In addition, the
composition of our major customer base changes from year to year as the market
demand for our customers' products change.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS AND THE LOSS OF A MAJOR
CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS.
We do not typically enter into long-term contracts with our customers, and
we cannot be certain as to future order levels from our customers. When we do
enter into a long-term contract, the contract is generally terminable at the
convenience of the customer. An early termination by one of our major customers
would harm our financial results as it is unlikely that we would be able to
rapidly replace that revenue source.
OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE WHICH WOULD SERIOUSLY HARM OUR
BUSINESS.
Due to possible customer changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business.
IF AN EARTHQUAKE OR OTHER NATURAL DISASTER STRIKES OUR MANUFACTURING FACILITY OR
THOSE OF OUR SUPPLIERS, WE WOULD BE UNABLE TO MANUFACTURE OUR PRODUCTS FOR A
SUBSTANTIAL AMOUNT OF TIME AND WE WOULD EXPERIENCE LOST REVENUES.
Our corporate headquarters are located in California near major earthquake
faults. In addition, some of our suppliers are located near fault lines. In the
event of a major earthquake or other natural disaster near our headquarters, our
operations could be harmed. Similarly, a major earthquake or other natural
disaster near one or more of our major suppliers, like the one that occurred in
Taiwan in September 1999, could disrupt the operations of those suppliers, which
could limit the supply of our products and harm our business.
IF WE DID NOT ADEQUATELY PREPARE FOR THE TRANSITION TO YEAR 2000, OUR BUSINESS
COULD BE HARMED.
We have executed a plan designed to make our computer systems, applications,
computer and manufacturing equipment and facilities year 2000 compliant. To
date, none of our systems, applications, equipment or facilities have
experienced any difficulties from the transition to year 2000. However, it is
possible that significant difficulties could be discovered or could arise. We
cannot guarantee that our year 2000 readiness plan has been successfully
implemented, and actual results could still differ substantially from our plan.
In addition, we have communicated with our critical suppliers to determine the
extent to which we may be vulnerable to such parties' failure to resolve their
own year 2000 issues. Where practicable, we have attempted to mitigate our risks
with respect to the failure of these entities to be year 2000 compliant. The
effect, if any, on our results of operations from any failure of such parties to
be year 2000 compliant cannot yet be determined.
WE MAY REQUIRE ADDITIONAL CAPITAL IN ORDER TO BRING NEW PRODUCTS TO MARKET, AND
THE ISSUANCE OF NEW EQUITY SECURITIES WILL DILUTE YOUR INVESTMENT IN OUR COMMON
STOCK.
To implement our strategy of diversified product offerings, we need to bring
new products to market. Bringing new products to market and ramping up
production requires significant working capital. We have in place a credit
agreement with Foothill Capital Credit Corporation to provide up to $50 million
of additional capital to support potential on-going working capital
requirements. As of December 31, 1999, we had borrowed $19.3 million under this
facility. We anticipate that we will continue to borrow under this credit
facility for some time. We may also sell additional shares of our stock or seek
additional borrowings or outside capital infusions. We cannot assure you that
such
28
<PAGE>
financing options will be available on terms acceptable to us, if at all. In
addition, if we issue shares of our common stock, our shareholders will
experience dilution with respect to their investment.
WE DEPEND ON MANUFACTURERS' REPRESENTATIVES AND DISTRIBUTORS TO GENERATE A
MAJORITY OF OUR REVENUES.
We rely on manufacturers' representatives and distributors to sell our
products and these entities could discontinue selling our products at any time.
Two of our manufacturers' representatives are responsible for substantially all
of our sales in Taiwan, which accounted for 28% of our product revenues during
1999. One manufacturers' representative accounted for substantially all of our
sales in China, including Hong Kong, during 1999, which accounted for 24% of our
total 1999 product revenues. The loss of any of these manufacturers'
representatives, or any other significant manufacturers' representative or
distributor could seriously harm our operating results by impairing our ability
to sell our products.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT SYSTEMS AND
RESOURCES AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET AND SELL
OUR PRODUCTS AND DEVELOP NEW PRODUCTS MAY BE HARMED.
Our business is experiencing rapid growth which has strained our internal
systems and will require us to continuously develop sophisticated information
management systems in order to manage the business effectively. We expect to
complete the implementation of an Oracle enterprise resource planning and
management system for our operations during the first quarter of 2000. We also
plan to implement a supply-chain management system and a vendor electronic data
interface system during this year. There is no guarantee that we will be able to
implement these new systems in a timely fashion, that in themselves they will be
adequate to address our expected growth, or that management will be able to
foresee in a timely manner other infrastructure needs before they arise. Our
success depends on the ability of our executive officers to effectively manage
our growth. If we are unable to manage our growth effectively, our results of
operations will be seriously harmed. If we fail to successfully implement the
Oracle enterprise resource planning and management system, our business may
suffer severe inefficiencies that may adversely impact the results of our
operations.
RISKS RELATED TO OUR INDUSTRY
OUR SUCCESS IS DEPENDENT ON THE GROWTH AND STRENGTH OF THE FLASH MEMORY MARKET.
All of our products, as well as all new products currently under design, are
stand-alone flash memory devices or devices embedded with flash memory. A memory
technology other than SuperFlash may be adopted as an industry standard. Our
competitors are generally in a better financial and marketing position than we
are from which to influence industry acceptance of a particular memory
technology. In particular, a primary source of competition may come from
alternative technologies such as FRAM devices if such technology is
commercialized for higher density applications. To the extent our competitors
are able to promote a technology other than SuperFlash as an industry standard,
our business will be seriously harmed.
THE SELLING PRICES FOR OUR PRODUCTS ARE EXTREMELY VOLATILE AND HAVE HISTORICALLY
DECLINED. IN ADDITION, THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD
CREATE FLUCTUATIONS IN OUR OPERATING RESULTS, AS WE EXPERIENCED IN 1997 AND
1998.
The semiconductor industry has historically been cyclical, characterized by
wide fluctuations in product supply and demand. From time to time, the industry
has also experienced significant downturns, often in connection with, or in
anticipation of, maturing product cycles and declines in general economic
conditions. Downturns of this type occurred in 1997 and 1998. These downturns
have been characterized by diminished product demand, production over-capacity
and accelerated decline of
29
<PAGE>
average selling prices, and in some cases have lasted for more than a year. Our
business could be harmed by industry-wide fluctuations in the future. The flash
memory products portion of the semiconductor industry, from which we derived
substantially all of our revenues in 1998, continued to suffer from excess
capacity in 1998, which resulted in greater than normal price declines in our
markets, which unfavorably impacted our revenues, gross margins and
profitability. While these conditions improved in 1999, if they were to resume
our growth and operating results would be harmed.
THERE IS SEASONALITY IN OUR BUSINESS AND IF WE FAIL TO CONTINUE TO INTRODUCE NEW
PRODUCTS THIS SEASONALITY MAY BECOME MORE PRONOUNCED.
Sales of our products in the consumer electronics applications market are
subject to seasonality. As a result, sales of these products are impacted by
seasonal purchasing patterns with higher sales generally occurring in the second
half of each year. In 1998 and 1999 this seasonality was partially offset by the
introduction of new products as we continued to diversify our product offerings.
If we fail to continue to introduce new products, our business may suffer and
the seasonality of a portion of our sales may become more pronounced.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risks associated with foreign exchange rate fluctuations
due to our international manufacturing and sales activities. These exposures may
change over time as business practices evolve and could negatively impact our
operating results and financial condition. All of our sales are denominated in
U.S. dollars. An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive and therefore reduce the
demand for our products. Such a decline in the demand could reduce revenues
and/or result in operating losses. In addition, a downturn in the Japanese
economy could impair the value of our investment in our Japanese affiliate. If
we consider the value of Silicon Technology, in which we have a 14% interest, to
be impaired, we would write off, or expense, some or all of our approximately
$939,000 investment.
At any time, fluctuations in interest rates could affect interest earnings
on our cash, cash equivalents and short-term investments or increase any
interest expense owed on the line of credit facility. We believe that the
effect, if any, of reasonably possible near term changes in interest rates on
our financial position, results of operations and cash flows would not be
material. Currently, we do not hedge these interest rate exposures.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP, independent accountants, dated January 17, 2000,
except for Note 4, which is as of February 24, 2000, are included in a separate
section of this report.
SUPPLEMENTARY DATA: SELECTED CONSOLIDATED QUARTERLY DATA
The following table presents our unaudited consolidated statements of
operations data for each of the eight quarters in the period ended December 31,
1999. In our opinion, this information has been presented on the same basis as
the audited consolidated financial statements included in a separate section of
this report, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts stated below to present fairly
the unaudited quarterly results when read in conjunction with the audited
consolidated financial statements and related notes. The operating results for
any quarter should not be relied upon as necessarily indicative of results for
any future
30
<PAGE>
period. We expect our quarterly operating results to fluctuate in future periods
due to a variety of reasons, including those discussed in "Business Risks."
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Product revenues............ $15,754 $16,422 $17,333 $17,366 $17,793 $20,433 $32,508 $47,508
License revenues............ 611 402 806 717 535 2,558 2,639 820
------- ------- ------- ------- ------- ------- ------- -------
Total net revenues........ 16,365 16,824 18,139 18,083 18,328 22,991 35,147 48,328
Gross profit (loss)........... 1,975 3,418 1,902 (587) 1,349 4,966 9,206 14,621
Income (loss) from
operations.................. (3,866) (3,513) (5,373) (6,949) (6,788) (3,831) 773 5,402
Net income (loss)............. (2,325) (1,242) (7,273) (6,748) (6,577) (3,630) 448 5,743
Net income (loss) per share--
basic....................... $ (0.10) $ (0.05) $ (0.32) $ (0.29) $ (0.28) $ (0.15) $ 0.02 $ 0.23
Net income (loss) per share--
diluted..................... $ (0.10) $ (0.05) $ (0.32) $ (0.29) $ (0.28) $ (0.15) $ 0.02 $ 0.21
</TABLE>
QUARTERLY DISCUSSION
NET REVENUES. During 1999, units shipped continued to increase and new
products began to ship at high volume levels from the second quarter of 1998 to
the fourth quarter of 1999. Net revenues increased during 1998 as the volume of
units shipped increased each quarter for our existing products. The slow quarter
to quarter percentage increase in revenue in early 1998 and the flat growth from
the third quarter of 1998 through the first quarter of 1999 was due to declining
selling prices offsetting the increased numbers of units shipped. License
revenues as a portion of net revenues fluctuated from quarter to quarter. The
increase in license revenues in the second and third quarters of 1999 is
primarily related to the recognition of up-front license fees.
GROSS PROFIT. Gross margin increased in 1999 from quarter to quarter due to
the recovery of margin on our existing products in the first half of 1999 and
the volume shipment of new products with improved gross margin in the second
half of 1999 as we returned to profitability in the third quarter. Overall,
gross margin decreased in 1998 despite increased unit shipment activity due to
an approximate 14% decrease in weighted selling prices from quarter to quarter,
due to industry over capacity. Gross margin increased from the first quarter of
1998 to the second quarter as a result of renegotiated die prices and increased
unit shipment activity. The decreases in gross margin and gross profit during
the fourth and third quarters of 1998 were due to continued price erosion.
INCOME (LOSS) FROM OPERATIONS. Net loss from operations decreased in the
first half of 1999 and net income from operations increased in the second half
of 1999 as we returned to profitability in the third quarter. This has been due
to the overall increases in units shipped for both new and existing products and
due to selling prices increases on our existing products in the second half of
1999. Net loss from operations increased from the first quarter of 1998 through
the first quarter of 1999 because declining selling prices outpaced
manufacturing cost reductions.
NET INCOME (LOSS). Net loss decreased in the first half of 1999 and net
income increased in the second half of 1999 as we returned to profitability in
the third quarter. This resulted from overall increases in units shipped for
both new and existing products and from selling price increases on existing
products in the second half of 1999. Net loss decreased from the first quarter
to the second quarter of 1998 due to an increase in the tax benefit rate from
30% to 44%. Net loss increased during the last two quarters of 1998 due to
declining gross margins and a $2.2 million charge in the third
31
<PAGE>
quarter to provide a full valuation allowance against the carrying value of our
deferred tax asset as a result of cumulative net operating losses.
NET INCOME (LOSS) PER SHARE. Net loss per share decreased in the first half
of 1999 and net income per share increased in the second half of 1999 as we
returned to profitability in the third quarter. This was primarily due to
overall increases in units shipped for both new and existing products, selling
prices increase and cost reduction on existing products in the second half of
1999. Net loss per share decreased from the first quarter to the second quarter
of 1998 due to an increase in the tax benefit rate from 30% to 44%. Net loss per
share increased during the second half of 1998 due to declining gross margins
and a $2.2 million charge to the provision for income taxes in the third quarter
to provide a full valuation allowance against the carrying value of our deferred
tax asset as a result of cumulative net operating losses.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders under the
captions "Election of Directors--Nominees," and "Security Ownership of Certain
Beneficial Owners and Management--Compliance with the Reporting Requirement of
Section 16(a)," and is incorporated by reference into this report. The
information relating to our executive officers and directors is contained in
Part I, Item 1 of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders under the
caption "Executive Compensation," and is incorporated by reference into this
report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Stockholders under the
captain "Security Ownership of Certain Beneficial Owners and Management," and is
incorporated by reference into this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be contained in the our
definitive Proxy Statement with respect to our Annual Meeting of Stockholders
under the caption "Certain Transactions," and is incorporated by reference into
this report.
33
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K.
(a) (1) CONSOLIDATED FINANCIAL STATEMENTS. The index to the consolidated
financial statements is found on page 39 of this Report.
(2) FINANCIAL STATEMENT SCHEDULE. Financial statement schedule Number II is
included.
(3) EXHIBITS. See Exhibit Index in part (c), below.
(b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
(c) INDEX TO EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
3.2 + Bylaws of SST.
3.4 + Form of Restated Articles of Incorporation of SST to be
effective upon the closing of the offering, dated
November 3, 1995.
4.1 + Reference is made to Exhibits 3.2.
10.1 + Equity Incentive Plan and related agreements.
10.2 + 1990 Stock Option Plan and related agreements.
10.3 + Employee Stock Purchase Plan.
10.4 + 1995 Non-Employee Directors' Stock Option Plan.
10.5 + Profit Sharing Plan.
10.6 + Lease Agreement between SST and Sonora Court Properties,
dated March 15, 1993, as amended.
10.7 + Lease Agreement between SST and Coast Properties, dated
May 4, 1995, as amended.
10.8 + License Agreement between SST and Winbond Electronics
Corporation, dated July 30, 1990, as amended on
September 14, 1990, August 27, 1992, December 15, 1992 and
December 1, 1993.
10.9 + License Agreement between SST and Sanyo Electric Co., Ltd.,
dated April 7, 1993, as clarified by two letters each
dated April 8, 1993.
10.10+ Manufacturing Agreement between SST and Sanyo Electric Co.,
Ltd., dated December 10, 1994.
10.11+ License and Technical Assistance Agreement between SST and
Rockwell International Corporation, Digital Communications
Division, dated September 1993, as amended on March 29,
1995.
10.13++ Documents relating to investment in Japanese company.
10.15++ License Agreement between SST and Seiko Epson Corporation
dated March 31, 1996.
10.16++ License Agreement between SST and Taiwan Semiconductor
Manufacturing Co., Ltd. dated February 26, 1997.
10.17++ Lease amendment, dated March 4, 1998, between SST and Sonora
Court Properties.
10.18++ Lease amendment, dated March 4, 1998, between SST and Coast
Properties.
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------------------- -----------------------
<C> <S>
10.19++ Loan and Security Agreement between SST and Foothill Capital
Corporation, dated September 22, 1998.
10.20++ Loan and Security Agreement amendment between SST and
Foothill Capital Corporation dated December 8, 1998.
10.21++ 0.25 Micron Agreement between SST and Motorola, Inc., dated
May 5, 1999.
10.22++ Loan and Security Agreement amendment between SST and
Foothill Capital Corporation, dated September 30, 1999.
10.23 Second Amendment to Lease, dated September 13, 1999, between
SST and Coast Properties.
10.24 Lease Agreement between SST and Bhupinder S. Lehga and
Rupinder K. Lehga, dated November 15, 1999.
10.25 Lease Agreement between SST and The Irvine Company, dated
November 22, 1999.
10.26* Agreement between SST and Samsung Electronic Co. Ltd., dated
March 19, 1998.
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants.
27.1 Financial Data Schedule.
</TABLE>
- ------------------------
+ Previously filed as an Exhibit to the Registration Statement filed on
Form S-1 (33-97802) and incorporated by reference herein.
++ Previously filed as an Exhibit to Form 10-K or Form 10-Q and incorporated by
reference herein.
* Confidential treatment has been requested for portions of this exhibit.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of Sunnyvale, County of
Santa Clara, State of California, on the 24th day of February, 2000.
<TABLE>
<S> <C> <C>
SILICON STORAGE TECHNOLOGY, INC.
By: /s/ BING YEH
-----------------------------------------
Bing Yeh
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of SST and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ BING YEH President, Chief Executive Officer
------------------------------------ and Director (PRINCIPAL February 24, 2000
Bing Yeh EXECUTIVE OFFICER)
Vice President Finance &
/s/ JEFFREY L. GARON Administration, Chief Financial
------------------------------------ Officer and Secretary (PRINCIPAL February 24, 2000
Jeffrey L. Garon FINANCIAL AND ACCOUNTING
OFFICER)
/s/ YAW WEN HU Senior Vice President, Operations
------------------------------------ and Process Development and February 24, 2000
Yaw Wen Hu Director
/s/ TSUYOSHI TAIRA
------------------------------------ Director February 24, 2000
Tsuyoshi Taira
/s/ RONALD CHWANG
------------------------------------ Director February 24, 2000
Ronald Chwang
/s/ YASUSHI CHIKAGAMI
------------------------------------ Director February 24, 2000
Yasushi Chikagami
</TABLE>
36
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of Silicon Storage Technology, Inc. and Subsidiaries:
Our audits of the consolidated financial statements referred to in our
report dated January 17, 2000, except for Note 4, which is as of February 24,
2000, appearing on page 40 of this Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in Item 14(a)(2) of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 17, 2000
37
<PAGE>
SCHEDULE II
SILICON STORAGE TECHNOLOGY, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND WRITE-OFF OF END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS/OTHER PERIOD
- ----------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts................ $ 350 $ 400 $ 30 $ 720
Allowance for sales returns.................... $1,456 $ (759) $ 28 $ 669
Allowance for excess and obsolete
inventories.................................. $2,718 $ 4,175 $3,160 $ 3,733
Valuation allowance on net deferred tax
assets....................................... $ -- $ -- $ -- $ --
Year ended December 31, 1998
Allowance for doubtful accounts................ $ 720 $ 13 $ 170 $ 563
Allowance for sales returns.................... $ 669 $ (609) $ -- $ 60
Allowance for excess and obsolete
inventories.................................. $3,733 $ 2,740 $5,051 $ 1,422
Valuation allowance on net deferred tax
assets....................................... $ -- $ 9,607 $ -- $ 9,607
Year ended December 31, 1999
Allowance for doubtful accounts................ $ 563 $ 32 $ 60 $ 535
Allowance for sales returns.................... $ 60 $ 144 $ 163 $ 41
Allowance for excess and obsolete
inventories.................................. $1,422 $ 3,293 $4,565 $ 150
Valuation allowance on net deferred tax
assets....................................... $9,607 $ 3,092 $ -- $12,699
</TABLE>
38
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Accountants........................... 40
Consolidated Balance Sheets................................. 41
Consolidated Statements of Operations....................... 42
Consolidated Statements of Shareholders' Equity............. 43
Consolidated Statements of Cash Flows....................... 44
Notes to the Consolidated Financial Statements.............. 45
</TABLE>
39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Silicon Storage Technology, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Silicon
Storage Technology, Inc. and Subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 17, 2000, except for Note 4,
which is as of February 24, 2000
40
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 23,007 $ 1,223
Short-term investments.................................... 851 --
Accounts receivable, net of allowance for doubtful
accounts of $563 in 1998 and $535 in 1999............... 9,249 33,285
Accounts receivable from related parties.................. 2,838 5,573
Inventories, net.......................................... 8,297 29,766
Other current assets...................................... 2,615 3,341
-------- --------
Total current assets.................................... 46,857 73,188
Equipment, furniture and fixtures, net...................... 6,847 11,131
Other assets................................................ 2,434 4,487
-------- --------
Total assets............................................ $ 56,138 $ 88,806
======== ========
LIABILITIES
Current liabilities:
Borrowings under line of credit facility.................. $ -- $ 19,287
Trade accounts payable.................................... 10,309 19,207
Accrued expenses.......................................... 5,309 4,707
Deferred revenue.......................................... 1,827 4,144
-------- --------
Total current liabilities............................... 17,445 47,345
Other liabilities........................................... 663 446
-------- --------
Total liabilities....................................... 18,108 47,791
-------- --------
Commitments and contingencies (Note 4)
SHAREHOLDERS' EQUITY
Preferred Stock, no par value
Authorized: 7,000 shares
Series A Junior Participating Preferred Stock, no par
value
Designated: 450 shares
Issued and outstanding: none............................ -- --
Common stock, no par value:
Authorized: 45,000 shares
Issued and outstanding: 23,086 shares (1998) and
24,946 shares (1999).................................... 53,601 60,570
Deferred stock compensation................................. (32) --
Accumulated deficit......................................... (15,539) (19,555)
-------- --------
Total shareholders' equity.............................. 38,030 41,015
-------- --------
Total liabilities and shareholders' equity.............. $ 56,138 $ 88,806
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
41
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net revenues:
Product revenues--non related parties..................... $ 57,696 $ 51,611 $ 99,769
Product revenues--related parties......................... 16,100 15,264 18,473
License revenues.......................................... 1,526 2,536 6,552
-------- -------- --------
Total net revenues...................................... 75,322 69,411 124,794
Cost of revenues............................................ 62,747 62,703 94,652
-------- -------- --------
Gross profit................................................ 12,575 6,708 30,142
-------- -------- --------
Operating expenses:
Research and development.................................. 8,744 14,527 18,199
Sales and marketing....................................... 6,587 7,290 10,576
General and administrative................................ 9,479 4,592 3,800
In-process research and development....................... -- -- 2,011
-------- -------- --------
Total operating expenses................................ 24,810 26,409 34,586
-------- -------- --------
Loss from operations........................................ (12,235) (19,701) (4,444)
Interest income............................................. 2,146 1,542 714
Interest expense............................................ -- (31) (214)
Other income, net........................................... -- 31 16
-------- -------- --------
Loss before provision for (benefit from) income taxes....... (10,089) (18,159) (3,928)
Provision for (benefit from) income taxes................... (3,165) (571) 88
-------- -------- --------
Net loss.................................................... $ (6,924) $(17,588) $ (4,016)
======== ======== ========
Net loss per share--basic and diluted....................... $ (0.30) $ (0.77) $ (0.17)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
42
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- DEFERRED STOCK RETAINED EARNINGS/
SHARES AMOUNT COMPENSATION (ACCUMULATED DEFICIT) TOTAL
-------- -------- -------------- --------------------- --------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996........ 23,225 $54,312 $(100) $ 10,576 $ 64,788
Repurchase of shares of common
stock.......................... (725) (1,682) -- (1,053) (2,735)
Issuance of shares of common
stock under employees' stock
purchase and option plans...... 607 599 -- -- 599
Tax benefit from exercise of
stock options.................. -- 127 -- -- 127
Amortization of deferred stock
compensation................... -- -- 34 -- 34
Net loss......................... -- -- -- (6,924) (6,924)
------ ------- ----- -------- --------
Balances, December 31, 1997........ 23,107 53,356 (66) 2,599 55,889
Repurchase of shares of common
stock.......................... (449) (1,034) -- (550) (1,584)
Issuance of shares of common
stock under employees' stock
purchase and option plans...... 428 572 -- -- 572
Tax benefit from exercise of
stock options.................. -- 707 -- -- 707
Amortization of deferred stock
compensation................... -- -- 34 -- 34
Net loss......................... -- -- -- (17,588) (17,588)
------ ------- ----- -------- --------
Balances, December 31, 1998........ 23,086 53,601 (32) (15,539) 38,030
Issuance of shares for
acquisition of Linvex
Technology Corporation......... 895 5,146 -- 5,146
Issuance of shares of common
stock under employees' stock
purchase and option plans...... 965 1,823 -- -- 1,823
Amortization of deferred stock
compensation................... -- -- 32 -- 32
Net loss......................... -- -- -- (4,016) (4,016)
------ ------- ----- -------- --------
Balances, December 31, 1999........ 24,946 $60,570 $ -- $(19,555) $ 41,015
====== ======= ===== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
43
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (6,924) $(17,588) $ (4,016)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 4,206 4,235 4,613
Provision for doubtful accounts receivable.............. 400 13 32
Provision for excess and obsolete inventories and write
down of inventory to market........................... 4,175 2,740 3,293
Amortization of deferred stock compensation............. 34 34 32
Loss on sale of equipment............................... 7 1 3
Deferred income taxes................................... (127) 3,747 --
Purchased in-process research and development........... -- -- 2,011
Changes in operating assets and liabilities (in 1999,
net of effects of acquisition):
Accounts receivable................................... 1,084 (944) (23,745)
Accounts receivable from related parties.............. 1,000 (714) (2,735)
Inventories........................................... (2,121) 872 (24,662)
Other current and noncurrent assets................... 361 (1,219) (321)
Trade accounts payable................................ 8,470 (8,648) 8,385
Accrued expenses...................................... 2,690 (1,287) (881)
Deferred revenue...................................... (104) 527 2,205
--------- -------- --------
Net cash provided by (used in) operating
activities........................................ 13,151 (18,231) (35,786)
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of equipment, furniture and fixtures.......... (2,777) (3,758) (7,928)
Proceeds from sale of equipment........................... 2,614 -- --
Purchases of available-for-sale investments............... (101,659) (25,167) --
Sales and maturities of available-for-sale investments.... 107,143 44,792 851
Cash acquired in acquisition.............................. -- -- 110
Other..................................................... -- (1,000) --
--------- -------- --------
Net cash provided by (used in) investing
activities........................................ 5,321 14,867 (6,967)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit facility.................. -- -- 42,150
Repayments under line of credit facility.................. -- -- (22,863)
Tax benefit from exercise of stock options................ 127 707 --
Issuance of shares of common stock........................ 599 572 1,823
Repurchase of common stock................................ (2,735) (1,584) --
Other..................................................... -- (67) (141)
--------- -------- --------
Net cash provided by (used in) financing
activities........................................ (2,009) (372) 20,969
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 16,463 (3,736) (21,784)
Cash and cash equivalents at beginning of period............ 10,280 26,743 23,007
--------- -------- --------
Cash and cash equivalents at end of period.................. $ 26,743 $ 23,007 $ 1,223
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ -- $ 31 $ 213
Net cash paid (received) during the period for income
taxes................................................... $ 130 $ 95 $ (1,652)
Common stock issued in relation to the acquisition of
Linvex.................................................. $ -- $ -- $ 5,146
Write-off of fully depreciated equipment, furniture and
fixtures................................................ $ -- $ -- $ 11,847
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
44
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS:
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF OPERATIONS:
Silicon Storage Technology, Inc. ("SST" or "the Company") supplies flash
memory semiconductor devices for digital consumer, networking, wireless
communication and Internet computing markets. Flash memory is nonvolatile memory
that does not lose data when the power source is removed and is capable of
electrically erasing selected blocks of data. The Company licenses its
SuperFlash technology to other companies for non-competing applications.
Substantially all of the Company's product revenues to date have been derived
from the sale of four products: 512Kbit, 1Mbit, 2Mbit and 4Mbit memory devices
used in personal computers, personal computer peripheral devices and consumer
electronics and communications devices. The products are sold to manufacturers
located primarily in Asia.
USE OF ESTIMATES IN PREPARATION OF THE FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RISKS AND UNCERTAINTIES:
SST's sales are concentrated in the nonvolatile memory class of the
semiconductor memory industry, which is highly competitive and rapidly changing.
Significant technological changes in the industry, changes in customer
requirements, changes in product costs and selling prices, or the emergence of
competitor products with new capabilities or technologies could affect SST's
operating results adversely. SST currently buys all of its wafers and sorted
die, an integral component of its products, from outside suppliers and is
dependent on third party subcontractors to assemble and test products. During
1999, substantially all of SST's wafers and sorted die were supplied by two
foundries and substantially all its products were assembled and tested by two
subcontractors. If these suppliers and subcontractors fail to satisfy SST's
requirements on a timely basis and at competitive prices SST could suffer
manufacturing delays, a possible loss of revenues, or higher than anticipated
cost of revenues any of which could severely adversely affect operating results.
Most of SST's sales are made through manufacturers' representatives and
distributors. These manufacturers' representatives and distributors can
discontinue selling SST's products at any time. Two of the manufacturers'
representatives are responsible for substantially all sales into Taiwan, which
accounted for approximately 28% of SST's product revenues during 1999. One
manufacturer representative accounted for substantially all sales in China,
including Hong Kong, during 1999, which counted for 24% of SST's product
revenues during 1999. The loss of any of the manufacturers' representatives or
any other significant manufacturers' representatives or distributors could have
a material adverse effect on SST's operating results. A majority of SST's
product revenue came from sales to customers in the personal computer and
computer peripherals industries. A decline in demand in these industries could
have a material adverse affect on SST's operating results and financial
condition.
SST derived 81% of product revenue from Asia during 1999. Additionally, SST
major wafer suppliers and assembly and packaging subcontractors are all located
in Asia. Any kind of economic,
45
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
political or environmental instability in this region of the world can have a
severe negative impact on SST's operating results due to the large concentration
of SST's production and sales activities in this region. For example, during
1998 and 1997, several Asian countries where SST does business, such as Japan,
Taiwan and Korea, experienced severe currency fluctuation and economic
deflation, which negatively impacted SST's total revenues and also negatively
impacted SST's ability to collect payments from these customers. During this
period, the lack of capital in the financial sectors of these countries made it
difficult for SST's customers to open letters of credit or other financial
instruments that are guaranteed by foreign banks. Finally, the economic
situation in this period exacerbated a decline in selling prices for SST's
products as SST's competitors reduced product prices to generate needed cash.
It should be noted that SST may be greatly impact by the political, economic
and military conditions in Taiwan. Taiwan and China are continuously engaged in
political disputes and both countries have recently conducted military exercises
in or near the other's territorial waters and airspace. Such disputes may
continue and even escalate, resulting in an economic embargo, a disruption in
shipping or even military hostilities. This could severely harm SST's business
by interrupting or delaying production or shipment of SST's product. Any kind of
activity of this nature or even rumors of such activity could severely and
negatively impact SST's operations, revenues, operating results, and stock
price.
SST's corporate headquarters are located in California near major earthquake
faults. In addition, some of SST's suppliers are located near fault lines. In
the event of a major earthquake or other natural disaster near SST's
headquarters, SST's operations could be harmed. Similarly, a major earthquake or
other natural disaster near one or more of SST's major suppliers, like the one
that occurred in Taiwan in September 1999, could disrupt the operations of those
suppliers, which could limit the supply of SST's products and harm SST's
business.
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of SST and its
wholly-owned subsidiaries after elimination of intercompany balances and
transactions.
FINANCIAL INSTRUMENTS AND CONCENTRATIONS:
Cash equivalents are highly liquid investments with original or remaining
maturities of three months or less as of the dates of purchase. Highly liquid
investments included in cash equivalents are classified as available for sale
and are carried at cost which approximates fair value. Cash equivalents present
insignificant risk of changes in value because of interest rate changes. SST
maintains substantially all of its cash balances with several major financial
and/or brokerage institutions domiciled in the United States and has not
experienced any material losses relating to these investment instruments.
Short-term investments, which are comprised of corporate bonds and United
States government securities, are classified as available-for-sale and carried
at fair value, based on quoted market prices, with the unrealized gains or
losses, net of tax, reported in shareholders' equity. Gross unrealized holding
gains and losses have not been material. The cost of debt securities is adjusted
for amortization of premiums and accretion of discounts to maturity, both of
which are included in interest income. Realized gains and losses are recorded on
the specific identification method. As of December 31, 1998,
46
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
the fair value of available for sale securities included in cash equivalents and
short-term investments approximated cost as follows:
<TABLE>
<CAPTION>
UNREALIZED
AMORTIZED GAIN FAIR
COST (LOSS) VALUE
--------- ---------- --------
<S> <C> <C> <C>
As of December 31, 1998:
Government bonds and notes.................... $ 6,436 $ -- $ 6,436
Corporate bonds and notes..................... 5,432 -- 5,432
-------- ---------- --------
11,868 -- 11,868
Less amounts classified as cash equivalents... (11,017) -- (11,017)
-------- ---------- --------
Short-term investments........................ $ 851 $ -- $ 851
======== ========== ========
Contractual maturity dates less than 1 year... $ 851
========
</TABLE>
The carrying amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are considered to approximate
fair values based upon the short maturities of those financial instruments. The
carrying amount of borrowing under the line of credit are also considered to
approximate fair values as the interest rate on the borrowing adjusts to the
banks reference rate.
Financial instruments that potentially subject SST to concentrations of
credit risks comprise, principally, cash, investments and trade accounts
receivable. SST invests its excess cash in accordance with its investment policy
which is approved by the Board of Directors and reviewed periodically. SST
performs credit evaluations of new customers and requires those without
positive, established histories to pay in advance, upon delivery or through
letters of credit. Otherwise, SST does not require collateral of its customers,
and maintains allowances for potential credit losses which have historically not
been material. One customer represented 11% of SST's accounts receivable at
December 31, 1999. Another customer represented 18% of SST's accounts receivable
at December 31, 1998. At December 31, 1999 and 1998 no other customers exceed
10% of SST's accounts receivable.
In 1999, 1998 and 1997 sales to SST's top 10 customers accounted for
approximately 57%, 66% and 62% of product revenues.
SST acquired a 14% interest in a privately held Japanese company in January,
1996 (see Note 8). The investment is carried at its original cost and when a
decline in value is other than temporary the securities are reduced to their net
realized value. Dividends and other distributions of earnings from the investee,
if any, are included in income when declared.
INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. SST's inventories include high technology
parts and components that are specialized in nature or subject to rapid
technological obsolescence. While SST has programs to minimize the required
inventories on hand and considers technological obsolescence when estimating
allowances for potentially excess and obsolete inventories and those required to
reduce recorded amounts to market values, it is reasonably possible that such
estimates could change in the near term.
47
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
EQUIPMENT, FURNITURE AND FIXTURES:
Furniture, fixtures and equipment are stated at cost and depreciated using
the straight-line method over estimated useful lives of three to seven years
(see Note 3).
INTANGIBLE ASSETS:
Intangible assets include technology acquired in the acquisition of Linvex
Technology Corporation (see Note 6) and technology acquired under licensing
arrangements. These amounts are included in other assets and amortized over
estimated lives of three years.
LONG-LIVED ASSETS:
Long-lived assets include furniture, fixtures and equipment and intangibles
assets. Whenever events or changes in circumstances indicate that the carrying
amounts of long-lived assets may not be recoverable, SST estimates the future
cash flows, undiscounted and without interest charges, expected to result from
the use of those assets and their eventual cash position. If the sum of the
expected future cash flows is less then the carrying amount of those assets, SST
recognizes an impairment loss based on the excess of the carrying amount over
the fair value of the assets.
WARRANTIES:
SST's products are generally subject to warranty and SST provides for the
estimated future costs of repair, replacement or customer accommodation upon
shipment of the product in the accompanying statements of operations.
REVENUE RECOGNITION:
Direct sales to customers are recognized upon shipment of product net of an
allowance for estimated returns. Sales to distributors are made primarily under
arrangements allowing price protection and the right of stock rotation on
merchandise unsold to distributors. Because of the uncertainty associated with
pricing concessions and future returns, SST defers recognition of such revenues,
related costs of revenues and related gross profit until the merchandise is sold
by the distributor to the end user.
For license and other arrangements for technology that SST is continuing to
enhance and refine and under which we are obligated to provide unspecified
enhancements, revenue is recognized over the lessor of the estimated period SST
has historically enhanced and developed refinements to the technology, generally
three years (the upgrade period), or the remaining portion of the upgrade period
from the date of delivery, provided all specified technology and documentation
has been delivered, the fee is fixed and determinable and collection of the fee
is probable. From time to time, SST reexamines the estimated upgrade period
relating to license technology to determine if a change in the estimate upgrade
period is needed. Revenue from license or other technology arrangements where
SST is not continuing to enhance and refine the technology or is not obligated
to provide unspecified enhancements is recognized upon delivery, if the fee is
fixed and determinable and collection of the fee is probable.
48
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Royalties received under these arrangements during the upgrade period are
recognized as revenue based on the ratio of the elapsed portion of the upgrade
period to the estimated upgrade period. The remaining portion of the royalties
are recognized ratably over the remaining portion of the upgrade period.
Royalties received after the upgrade period has elapsed are recognized when
reported to SST, which generally coincides with the receipt of payment.
RESEARCH AND DEVELOPMENT:
Research and development expenses are charged to operations as incurred.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
COMPUTATION OF NET LOSS PER SHARE:
SST has computed and presented net loss per share under two methods, basic
and diluted. Basic net loss per share is computed by dividing net loss by the
weighted average number of common shares outstanding for the period. Diluted net
loss per share is computed by dividing loss by the sum of the weighted average
number of common shares outstanding and potential common shares (when dilutive).
STOCK COMPENSATION:
SST accounts for stock-based compensation using the intrinsic value method.
SST calculates the fair value of stock-based compensation and discloses the pro
forma impact of the value on net loss and net loss per share in the footnotes to
the financial statements.
COMPREHENSIVE INCOME:
There was no material difference between SST's net loss and its total
comprehensive loss for the periods reported in these financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June, 1998, the Financial Accounting Standards Boards issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 established a new model for
accounting for derivative and hedging activities. In July, 1999 the Financial
Accounting Standards Boards issued SFAS No. 137 "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133" (SFAS 137). SFAS 137 deferred the effective date of SFAS 133
until the first fiscal quarter beginning after June 15, 2000. The impact of the
implementation of SFAS 133 on the consolidated financial statements of SST has
not yet been determined.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 summarizes certain of
49
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
the Staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. SST has until the first quarter of
2000 to comply with the guidance in SAB 101. The implementation of SAB 101 on
the consolidated financial statements of SST has not yet been determined.
2. INVENTORIES (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Raw materials.............................................. $ 311 $ 6,855
Work in process............................................ 4,717 19,338
Finished goods............................................. 3,269 3,573
------ -------
$8,297 $29,766
====== =======
</TABLE>
3. EQUIPMENT, FURNITURE AND FIXTURES, NET (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- ESTIMATED
1998 1999 USEFUL LIVES
-------- -------- ------------
<S> <C> <C> <C>
Equipment.................................... $13,325 $ 7,932 Four years
Design hardware.............................. 3,559 2,540 Three years
Software..................................... 2,131 2,478 Four years
Furniture and fixtures....................... 804 1,109 Seven years
------- -------
19,819 14,059
Less accumulated depreciation................ 12,972 4,859
------- -------
6,847 9,200
Construction in progress..................... -- 1,931
------- -------
$ 6,847 $11,131
======= =======
</TABLE>
Depreciation expense was $3,676,000, $4,134,000 and $4,206,000 for 1999, 1998
and 1997, respectively. Construction in progress relates to software and
consulting costs incurred to implement our enterprise resource planning system
and our supply chain management system. These costs will be depreciated over
three years beginning during the month that each system is fully functional. It
is anticipated that both systems will be fully functional by the end of the
first half of 2000.
4. COMMITMENTS AND CONTINGENCIES:
SST leases its corporate facilities under noncancelable operating leases
that expire in 2003 and 2005. The leases require escalating monthly payments
over their terms and, therefore, periodic rent expense is being recognized on a
straight-line basis. Under the terms of the leases, SST is responsible for
maintenance costs, including real property taxes, utilities and other costs.
Rent expense was $1,107,000, $749,000 and $421,000 in 1999, 1998 and 1997
respectively.
50
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Future minimum rental payments at December 31, 1999 are as follows
(IN THOUSANDS):
<TABLE>
<S> <C>
2000........................................................ $1,610
2001........................................................ 1,804
2002........................................................ 1,872
2003........................................................ 1,427
2004........................................................ 1,549
Thereafter.................................................. 365
------
$8,627
======
</TABLE>
In February 1998, SST agreed to purchase technology from a product
development partner for $1.8 million, payable upon the completion of certain
product development milestones over the next eighteen months. During 1998, SST
paid $275,000 pursuant to this agreement. During 1999, the agreement was
terminated. No future payments are required of SST under this agreement.
LINE OF CREDIT:
On September 30, 1999, SST signed an agreement with Foothill Capital
Corporation to increase SST's line of credit, which provided for borrowings up
to $25 million. The new agreement allows SST to borrow up to $35 million,
increasing to $50 million from January 1, 2000 through March 31, 2000, declining
to $40 million from April 1, 2000 through May 31, 2000 and thereafter, returning
to $25 million until September, 2002. Borrowing is limited to 80% of eligible
world-wide accounts receivable and is collateralized by subtantially all the
assets of SST. At December 31, 1999 the borrowing base was approximately
$28 million of which approximately $8.7 million was unused at that date. The
funds in excess of $25 million are available only if certain profitability
covenants are met. SST is required to maintain specified levels of tangible net
worth. Under the agreement SST is not permitted to pay a dividend, is restricted
to capital expenditures of $15 million per annum, and is not permitted to make
any debt or equity investments if those investments are funded from borrowings.
The line bears interest at a rate of the bank's reference rate (8.5% at
December 31, 1999) plus 0.5%. There is a minimum interest rate of 6.0%. SST must
pay an unused line fee at the annual rate of one quarter of one percent on the
unused portion. As of December 31, 1999, SST had borrowed approximately
$19,287,000 under the line of credit and met the profitability covenant.
LEGAL CONTINGENCIES:
On January 3, 1996, Atmel sued SST in the U.S. District Court for the
Northern District of California. Atmel's complaint alleged that SST willfully
infringed on five U.S. patents owned or exclusively licensed to Atmel. Atmel
later amended its complaint to allege infringement of a sixth patent. Regarding
each of these six patents, Atmel sought a judgment that SST infringed the
patent, an injunction prohibiting future infringement, and treble damages, as
well as attorney's fees and expenses.
On two of these six patents, the District Court granted in SST's favor a
summary judgment that SST did not infringe. Two of the other patents were
invalidated by another U.S. District Court in a proceeding to which SST was not
a party, but this decision was reversed by the Federal Circuit. Thus, four
patents remain at issue in Atmel's District Court case against SST. That case
has been stayed, and Atmel has not requested a trial date.
51
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of SST parts, involving five of the
six patents that Atmel alleged that SST infringed in the District Court case
above. SST intervened as a party in that action. Pursuant to indemnification
agreements with these suppliers, SST is obligated to indemnify both to the
extent provided in those agreements.
As to two of these five patents, Atmel's claims were withdrawn because of
the summary judgment granted by the District Court above. As to another two
patents, the Administrative Law Judge, or ALJ, which makes recommendations to
the ITC, has ruled that SST did not infringe. This ruling has yet to be
confirmed by the ITC, which is free to adopt or reject the ALJ's findings. As to
the fifth patent, the ALJ held a hearing, which concluded on February 17, 2000,
to determine if it was invalid due to failure to name an inventor, and whether
or not Atmel committed inequitable conduct in its dealings with the Patent and
Trademark Office when it attempted to add a co-inventor. SST expects that the
ALJ will rule on this issue sometime in April, and make a recommendation to the
ITC.
Any final decisions by the ITC will not be dispositive because Atmel can
still pursue its claims in the District Court action. Any decisions by the ITC
are not binding on the District Court. SST management intends to vigorously
defend SST against these actions.
On September 14, 1998, Intel sued SST in the U.S. District Court for the
Northern District of California, San Jose Division. Intel's complaint alleged
that, by making, using and selling devices, SST was willfully infringing four
U.S. patents owned by Intel. Regarding each of these four patents, Intel sought:
(1) a judgment that SST infringed on the patent;
(2) an injunction prohibiting further infringement; and
(3) an accounting of all damages caused by the alleged infringement, treble
the amount of damages caused by the alleged infringement and attorney's
fees, costs and expenses.
SST denied infringement of any of the Intel patents and counter-claimed for
invalidity and non-infringement of the Intel patents. Through neutral mediation,
a settlement of the pending litigation was reached on May 13, 1999. The terms of
the settlement were immaterial to SST's financial statements. However, as a
result of the settlement an accrual for legal costs of $1.2 million was reversed
to the statement of operations.
On July 31, 1998, SST filed suit against Winbond Electronics Corporation in
the U.S. District Court for the Northern District of California, San Jose
Division. Winbond has answered the complaint and has counter-claimed. Since
then, the parties have amended the complaint and the answer and counterclaim. As
of February 24, 2000, SST has asserted eight causes of action, including breach
of contract, misappropriation of trade secrets, and other contractual and
tortious claims. SST's suit seeks damages and equitable remedies to prevent
Winbond from using any of SST's technology.
Winbond has answered and asserted counter-claims for a declaration that it
is not in material breach of the agreement, breach of the agreement, breach of
the covenant of good faith and fair dealing, interference with prospective
economic advantage, unlawful business practice in violation of state law, common
law unfair competition, a declaration that Winbond is not obligated to pay SST
under the agreement and/or they own or jointly own the technology embodied in
their products, misappropriation of Winbond's trade secrets, unfair competition
in violation of the Federal Lanham
52
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
Act, and common law fraud and misrepresentation. Winbond seeks, in part,
restitution of the payments made, and other damages, and an injunction. SST has
replied by denying these charges. SST management believes that the substantive
allegations in the Winbond counter-claims are without merit and intends to
vigorously defend SST against the action.
From time to time, SST is also involved in other legal actions arising in
the ordinary course of business.
While SST has accrued certain amounts for the estimated legal costs
associated with defending these matters, there can be no assurance the Atmel
complaint, the Winbond complaint or other third party assertions will be
resolved without costly litigation, in a manner that is not adverse to SST's
financial position, results of operations or cash flows or without requiring
royalty payments in the future which may adversely impact gross margins. No
estimate can be made of the possible loss or possible range of loss associated
with the resolution of these contingencies.
5. SHAREHOLDERS' EQUITY:
AUTHORIZED CAPITAL SHARES:
SST's authorized capital shares consist of 45,000,000 shares of common stock
and 7,000,000 shares of preferred stock. Of the preferred stock, 450,000 shares
has been designated as series A junior participating preferred stock. All of
SST's capital shares have no par value.
SHARE PURCHASE RIGHTS PLAN:
In May 1999, SST adopted a Share Purchase Rights Plan in which preferred
stock rights were distributed as a rights dividend at a rate of one right for
each share of common stock held as of the close of business on May 27, 1999.
Preferred stock rights will also be issued with any new issuance of common
shares. Each Right entitles the registered holder under certain circumstances to
purchase from SST one one-hundredth of a share of series A junior participating
preferred stock. Until the occurrence of certain events the preferred stock
rights will be transferable with and only with the Common Shares. The effect
will be to discourage acquisitions of more than 15 percent of SST's common stock
without negotiations with the Board of Directors. The rights expire May 3, 2009.
NET LOSS PER SHARE:
A reconciliation of the numerator and the denominator of basic and diluted
loss per share is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Numerator--Basic and Diluted:
Net loss....................................... $(6,924) $(17,588) $(4,016)
======= ======== =======
Denominator--Basic and Diluted:
Weighted average common stock outstanding...... 23,166 22,958 24,059
======= ======== =======
Basic and Diluted net loss per share............. $ (0.30) $ (0.77) $ (0.17)
======= ======== =======
</TABLE>
53
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
Stock options to purchase 3,206,000, 3,095,000 and 2,886,000 shares of
common stock were outstanding at December 31, 1999, 1998 and 1997, but were not
included in the computation of diluted loss per share because SST had a net loss
in 1999, 1998 and 1997.
REPURCHASE OF COMMON STOCK:
In January 1998, the Board of Directors approved a stock repurchase program
whereby up to an aggregate of 1,000,000 shares of SST's common stock may be
repurchased on the open market at prevailing market prices. The repurchase
program ended June 1998. Approximately 449,000 shares were repurchased under
this authorization during the period ended June 1998 for an aggregate purchase
price of $1,584,000 at prices ranging from $3.19 to $3.78 per share.
In July 1997 the Board of Directors authorized a stock repurchase program
whereby 1,000,000 shares of SST's common stock may be repurchased on the open
market at prevailing market prices. The repurchase program ended December 1997.
Approximately 233,000 shares were repurchased under this authorization during
the period ended December 1997 for an aggregate purchase price of $872,000 at
prices ranging from $3.62 to $3.78 per share.
In February 1997 the Board of Directors approved a stock repurchase program
whereby up to an aggregate of 1,000,000 shares of SST's common stock may be
repurchased on the open market at prevailing market prices. The repurchase
program ended June 1997. Approximately 492,000 shares were repurchased under
this authorization during the quarter ended June 1997 for an aggregate purchase
price of $1,863,000 at prices ranging from $3.69 to $3.88 per share.
EQUITY INCENTIVE PLAN:
In 1990, SST adopted a combined incentive and supplemental stock option plan
(the Option Plan) under which the Board of Directors could issue options to
purchase up to 4,000,000 shares of common stock to employees and directors of
and consultants to SST and its affiliates. In November 1995, SST amended the
Option Plan, restated it as the Equity Incentive Plan and reserved an additional
2,000,000 shares of common stock for issuance under the plan. In July 1998 and
1999, SST amended the Equity Incentive Plan and reserved an additional 750,000
and 1,000,000 shares, respectively, of common stock for issuance under the plan.
Under the Equity Incentive Plan, the Board of Directors has the authority to
determine to whom options will be granted, the number of shares under option,
the option term and the exercise price. The options generally are exercisable
beginning one year from date of grant and thereafter become exercisable ratably
over four or five years from the date of grant. During 1999, options were issued
to employees that begin to be exercisable three years from the date of grant and
are fully exercisable four years from the date of grant. The term of any options
issued under either plan may not exceed ten years from the date of grant. At
December 31, 1999, options to purchase approximately 1,217,000 shares of common
stock were exercisable at a weighted average exercise price of $1.88. At
December 31, 1998, options to purchase approximately 1,343,000 shares of common
stock were exercisable at a weighted average exercise price of $1.25. At
December 31, 1997, options to purchase approximately 1,132,000 shares of common
stock were exercisable at a weighted average exercise price of $0.67.
54
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
DIRECTORS' OPTION PLAN:
In October 1995, SST adopted the Non-Employee Directors' Stock Option Plan
(the "Directors' Plan") which became effective upon the effective date of SST's
initial public offering. The Directors' Plan provided for the automatic grant of
options to purchase 24,000 shares of SST's common stock to non-employee
directors of SST upon the initial public offering. It also provides for
automatic grants upon new non-employee directors being elected to the Board of
Directors. The Directors' Plan also provides for the grant of options to
purchase up to an additional 6,000 shares annually thereafter. Options under the
Directors' Plan vest over 48 months and the exercise price of options granted
must equal or exceed the fair market value of SST's common stock on the date of
grant. The options expire ten years after the date of grant. In July 1999, SST
amended the Directors' Plan to change the vesting terms from ratably over four
years to upon date of grant, decreased the initial grant amount of options from
24,000 to 15,000 shares, and increased the aggregate number of share authorized
by 50,000 shares to 200,000 shares.
At December 31, 1999, 90,000 options were exercisable at a weighted-average
exercise price of $9.17 per share. At December 31, 1998, 52,000 options were
exercisable at a weighted-average exercise price of $7.30 per share. At
December 31, 1997, 29,000 options were exercisable at a weighted-average
exercise price of $6.52 per share.
Activity under the Equity Incentive Plan and Directors' Plan follows: (IN
THOUSANDS, EXCEPT PER SHARE DATA):
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------
AVAILABLE PRICE WEIGHTED AVERAGE
FOR GRANT SHARES PER SHARE AMOUNT EXERCISE PRICE
--------- -------- ------------ -------- ----------------
<S> <C> <C> <C> <C> <C>
Balances, December 31, 1996........... 1,798 2,396 $0.15-$16.50 $ 4,700 $1.96
Granted............................. (2,307) 2,307 3.13-6.00 8,755 3.79
Exercised........................... -- (493) 0.15-3.13 (167) 0.34
Terminated.......................... 1,105 (1,105) 0.15-9.63 (5,355) 4.77
------ ------ ------------ ------- -----
Balances, December 31, 1997........... 596 3,105 0.15-16.50 7,933 2.56
Granted............................. (888) 888 1.31-3.00 2,335 2.63
Exercised........................... -- (268) 0.15-3.13 (155) 0.58
Terminated.......................... 607 (607) 0.25-6.00 (2,797) 3.17
Authorized.......................... 750 -- -- -- --
------ ------ ------------ ------- -----
Balances, December 31, 1998........... 1,065 3,118 0.15-16.50 7,316 2.35
Granted............................. (1,019) 1,019 2.41-24.88 7,990 7.84
Exercised........................... -- (712) 0.15-6.00 (1,117) 1.57
Terminated.......................... 219 (219) 0.33-13.25 (643) 2.36
Authorized.......................... 1,050 -- -- -- --
------ ------ ------------ ------- -----
Balances, December 31, 1999........... 1,315 3,206 $0.15-$24.88 $13,546 $4.23
====== ====== =======
</TABLE>
On April 23, 1997, the Board of Directors approved an offer to employees of
SST to reprice outstanding options granted prior to that date with an exercise
price above $3.125 per share (the "1997 Repricing Program"). Under the 1997
Repricing Program, as of April 28, 1997, 845,000 option grants were converted
into repriced option grants with an exercise price of $3.125 (based on the
closing price as reported on the Nasdaq National Stock Market on such date). As
consideration for the grant of
55
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
repriced options, optionees are prohibited from exercising the repriced options
for a period of three months following the initial vest date of such repriced
options. The 1997 Repricing Program terminated on April 28, 1997.
EMPLOYEE STOCK PURCHASE PLAN:
In October 1995, SST adopted the Employee Stock Purchase Plan (the "Purchase
Plan") which became effective upon the effective date of SST's initial public
offering. A total of 850,000 shares of common stock were reserved for issuance
under the Purchase Plan. The Purchase Plan provides for eligible employees to
purchase shares of common stock at a price equal to 85% of the fair market value
of SST's common stock on the date of the option grant by withholding up to
10 percent of their annual base earnings. In July 1999 the Purchase Plan was
amended to increase the aggregate number of shares of common stock authorized
for issuance by 350,000 shares to 1,200,000 shares. At December 31, 1999, shares
available for purchase under this plan were 649,000. Shares issued under the
Purchase Plan in 1999, 1998 and 1997 were 253,000, 160,000 and 114,000,
respectively.
STOCK COMPENSATION:
SST has adopted the disclosure-only provisions of SFAS 123. Had compensation
cost for the Equity Incentive Plan, the Directors' Plan or the Purchase Plan
been determined based on the fair value at the grant date for the awards
consistent with the provisions of SFAS 123, SST's net loss and net loss per
share for 1999, 1998 and 1997 would have been increased to the pro forma amounts
indicated below (IN THOUSANDS):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss............................... $(8,939) $(19,316) $(6,479)
Pro forma net loss per share--basic and
diluted........................................ $ (0.39) $ (0.84) $ (0.26)
</TABLE>
The fair value of each option grant for both the Directors' Plan and the
Equity Incentive Plan is estimated on the date of grant using the Black-Scholes
multiple options pricing model with the following weighted average assumptions
by year:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate....................... 5.5-6.0% 4.1-5.8% 4.6-5.9%
Expected term of option....................... 2 years 2 years 2 years
Expected volatility........................... 92% 92% 92%
Expected dividend yield....................... 0% 0% 0%
</TABLE>
The weighted average fair value of options granted under the Equity
Incentive Plan and the Directors' Option Plan during 1999, 1998 and 1997 was
$7.79, $2.64 and $3.14, respectively, per share.
56
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
5. SHAREHOLDERS' EQUITY: (CONTINUED)
The fair value of each stock purchase right granted under the Purchase Plan
is estimated using the Black-Scholes model with the following weighted average
assumptions by year:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate....................... 5.7% 5.3-5.5% 4.6-5.3%
Expected term of option....................... 1/2 year 1/2 year 1/2 year
Expected volatility........................... 92% 92% 92%
Expected dividend yield....................... 0% 0% 0%
</TABLE>
The risk-free interest rate range represents the low and high end of the
range used at different points during the year.
The weighted average valuation of right grants under the Purchase Plan
during 1999, 1998 and 1997 was $1.34, $1.32 and $2.03, respectively, per share.
The options outstanding and currently exercisable by exercise price under
the Equity Incentive Plan and the Directors' Plan at December 31, 1999, are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$0.150-$0.200............ 445,000 3.64 $ 0.156 445,000 $ 0.156
$0.250-$0.400............ 86,000 5.29 0.264 86,000 0.264
$0.500-$1.313............ 32,000 8.32 1.192 11,000 0.975
$1.813-$2.656............ 245,000 8.82 2.154 54,000 2.167
$2.844-$4.063............ 1,467,000 7.98 3.080 594,000 3.129
$4.375-$6.000............ 252,000 8.91 5.074 36,000 5.992
$6.250-$9.000............ 400,000 9.07 7.357 52,000 8.861
$10.688-$16.688.......... 253,000 9.58 13.910 29,000 12.280
$23.625-$24.875.......... 26,000 9.89 24.243 -- 0.000
--------- ---------
$0.150-$24.875........... 3,206,000 7.72 $ 4.226 1,307,000 $ 2.377
========= =========
</TABLE>
6. ACQUISITION
On June 4, 1999, SST purchased all of the outstanding capital stock of
Linvex Technology, Corp. (Linvex), a privately held, memory design company
located in Sunnyvale, California, in exchange for 789,000 shares of SST common
stock with a fair market value of $4.7 million. The purchase price of
$4.8 million, which includes acquisition costs of $0.1 million, was accounted
for using the purchase method of accounting, which means that the purchase price
was allocated to the assets acquired and liabilities assumed based on the
estimated fair values at the date of the acquisition. The results of operations
of Linvex have been included with those of SST since June 4, 1999, the date that
the acquisition was consummated.
57
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
6. ACQUISITION (CONTINUED)
The fair value of the assets of Linvex, which was determined through
established valuation techniques used by an independent appraiser, and a summary
of the consideration exchanged for these assets is as follows (in thousands):
<TABLE>
<S> <C>
Total purchase price........................................ $ 4,794
=======
Assets acquired:
Tangible assets, primarily cash, accounts receivable, and
computer software....................................... $ 701
Core technology........................................... 2,827
Completed products........................................ 163
Workforce................................................. 272
Purchased in-process research and development............. 2,011
Liabilities assumed......................................... (1,180)
-------
$ 4,794
=======
</TABLE>
The amount allocated to the core technology, the completed products, for
which technological feasibility had been established at the acquisition date,
and the workforce is amortized on a straight line basis over three years. At
December 31, 1999, accumulated amortization related to these items was $634,000.
The amount of the purchase price allocated to purchased in-process research and
development, which had no alternative future use and relates to a product for
which technological feasibility had not been established, was expensed at the
acquisition date.
In addition, after the purchase, notes payable and deferred salary payable
to shareholders and employees of $476,000 were converted into an additional
106,000 shares of SST's common stock.
Summarized below are the unaudited pro forma results of SST as though Linvex
had been acquired at the beginning of periods presented. Adjustments have been
made for the estimated increases in amortization related to the purchase of core
technology, completed products and workforce, and other appropriate pro forma
adjustments.
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net revenues............................................ $ 70,515 $125,311
Net loss................................................ $(19,495) $ (3,146)
Net loss per share--basic and diluted................... $ (0.82) $ (0.13)
</TABLE>
The above amounts are based upon certain assumptions and estimates which we
believe are reasonable and do not reflect any benefit from economies which might
be achieved from combined operations. The pro forma financial information
presented above is not necessarily indicative of either the results of
operations that would have occurred had the acquisition taken place at the
beginning of the periods presented or of future results of operations of the
combined companies. The charge for purchased in process research and development
has not been included in the pro forma results above because it is nonrecurring
and directly related to the acquisition.
58
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
7. INCOME TAXES:
The components of the provision for (benefit from) income taxes reflected in
the statements of operations are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $(2,693) $(4,445) $ (489)
State........................................... (471) 1 248
Foreign......................................... 126 126 329
------- ------- -------
(3,038) (4,318) 88
------- ------- -------
Deferred:
Federal......................................... 240 -- --
State........................................... (367) -- --
Change in valuation allowance................... -- 3,747 --
------- ------- -------
(127) 3,747 --
------- ------- -------
$(3,165) $ (571) $ 88
======= ======= =======
</TABLE>
Substantially all of SST's revenue is taxable in the United States. The
principal items accounting for the difference between income taxes computed at
the U.S. statutory rate and the provision for income taxes reflected in the
statements of operations are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States statutory rate....................... (34.0)% (35.0)% (35.0)%
State taxes, net of federal benefit................ (3.0) 4.3 6.3
Foreign taxes, net................................. 1.0 -- 8.4
Net operating losses not utilized.................. -- 9.3 21.5
Change in valuation allowance...................... -- 20.6 --
Other.............................................. 4.6 (2.3) 1.1
----- ----- -----
(31.4)% (3.1)% 2.3%
===== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are as follows (IN THOUSANDS):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Accrued expenses and allowances.......................... $ 2,754 $ 2,599
Net operating loss carry-forwards........................ 3,530 4,992
Credits.................................................. 3,742 5,431
------- --------
Total.................................................. 10,026 13,022
Depreciation............................................. (419) (323)
Valuation Allowance...................................... (9,607) (12,699)
------- --------
Net deferred tax asset................................... $ -- $ --
======= ========
</TABLE>
59
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
7. INCOME TAXES: (CONTINUED)
Due to the uncertainties surrounding the realization of the deferred tax
assets resulting from SST's accumulated losses and net losses in 1999, 1998 and
1997, SST has provided a full valuation allowance and, therefore, no benefit has
been recognized for the operating loss and other deferred tax assets. SST
evaluates positive and negative evidence about the recoverablity of its net
deferred tax asset each quarter and will record the net deferred tax asset when
it is more likely than not that it will be recovered.
At December 31, 1999, SST had available approximately $12,100,000 for
federal and approximately $11,500,000 for state net operating loss
carry-forwards. These net operating losses, if not utilized, expire between 2003
and 2019. At December 31, 1999, SST also had available research and development
credit carry-forwards for federal and state income tax purposes of approximately
$2,951,000 and $1,328,000, respectively. These credit carry-forwards expire
between 2016 and 2019. In addition, SST has approximately $846,000 of foreign
tax credit carry-forwards which expire between 2000 and 2004. At December 31,
1999, SST also had available manufacturer's investment credits for state income
tax purposes of $306,000 that expire between 2005 and 2007.
8. SEGMENT AND RELATED PARTY REPORTING:
SST's business has two reportable segments: Flash Products and Technology
Licensing based on SST's method of internal reporting. The table below presents
information about reported segments:
<TABLE>
<CAPTION>
1999 (IN THOUSANDS):
--------------------------------
FLASH TECHNOLOGY
PRODUCTS LICENSING TOTAL
-------- ---------- --------
<S> <C> <C> <C>
Revenues...................................... $118,242 $6,552 $124,794
Gross profits................................. $ 23,590 $6,552 $ 30,142
<CAPTION>
1998 (IN THOUSANDS):
--------------------------------
FLASH TECHNOLOGY
PRODUCTS LICENSING TOTAL
-------- ---------- --------
<S> <C> <C> <C>
Revenues...................................... $ 66,875 $2,536 $ 69,411
Gross profits................................. $ 4,172 $2,536 $ 6,708
<CAPTION>
1997 (IN THOUSANDS):
--------------------------------
FLASH TECHNOLOGY
PRODUCTS LICENSING TOTAL
-------- ---------- --------
<S> <C> <C> <C>
Revenues...................................... $ 73,796 $1,526 $ 75,322
Gross profits................................. $ 11,049 $1,526 $ 12,575
</TABLE>
SST does not allocate operating expenses, interest income or expense, other
income net, or the provision for (benefits from) income taxes to these segments
for internal reporting purposes.
60
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
8. SEGMENT AND RELATED PARTY REPORTING: (CONTINUED)
The Flash Products segment comprises four product groups, standard flash
memory products, application-specific memory products, flash embedded
controllers and mass storage products. Revenues were as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Standard flash memory products.................. $73,796 $66,845 $111,675
All other....................................... -- 30 6,567
------- ------- --------
Total flash product segment revenue............. $73,796 $66,875 $118,242
======= ======= ========
</TABLE>
Due to the low volume of the new products relative to the volume of Standard
Flash Memory Products it is not practicable to report gross margin by product
group for the Flash Products segment. The Technology Licensing segment comprises
license fees and royalties earned through technology agreements that we have
with wafer foundries and manufacturers for non-competing applications.
SST's revenues are all denominated in U.S. dollars and are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States................................... $10,032 $ 5,099 $ 13,644
Europe.......................................... 3,381 6,929 7,347
Japan........................................... 17,878 13,739 16,396
Korea........................................... 4,203 3,756 11,750
Taiwan.......................................... 22,027 19,134 33,541
China (including Hong Kong)..................... 11,863 14,104 28,776
Other Asian countries........................... 5,890 6,119 9,340
Rest of world................................... 48 531 4,000
------- ------- --------
$75,322 $69,411 $124,794
======= ======= ========
</TABLE>
Foreign revenue is based on the country to which the product is shipped.
The locations and net book value of long lived assets follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States..................................... $ 7,018 $8,251 $13,921
Taiwan............................................ 1,554 924 1,655
Malaysia.......................................... -- -- 42
Philippines....................................... -- 106 --
------- ------ -------
$ 8,572 $9,281 $15,618
======= ====== =======
</TABLE>
On January 31, 1996, SST acquired a 14% interest in a Japanese company for
approximately $939,000 paid in cash, which interest is carried at cost in the
other noncurrent assets category in the accompanying balance sheet. The
president of the Japanese company is a shareholder of SST. In 1999,
61
<PAGE>
SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS: (CONTINUED)
8. SEGMENT AND RELATED PARTY REPORTING: (CONTINUED)
1998 and 1997 this customer accounted for 8.1%, 14.7% and 15.4% respectively or
approximately $10,032,000, $10,180,000 and $11,598,000, respectively, of net
revenues.
In 1997, no other customer accounted for more than 10% of net revenues for
SST. In both 1999 and 1998, only one other customer accounted for more than 10%
of net revenues for SST. This customer accounted for 11.8% and 10.8%, or
approximately $14,700,000 and $7,187,000 of net revenues in 1999 and 1998,
respectively.
In June 1997, Dr. Ronald Chwang became a member of the Board of Directors.
Dr. Chwang is the president of Acer Capital America and managing general partner
of Acer Technology Venture Fund. Related Acer entities, Acer Corporation, Acer
Peripherals and Acer Technologies are customers of SST. In 1999, 1998 and 1997
the combined Acer entities accounted for 6.3%, 7.3% and 6.0%, respectively, or
$7,900,000, $5,084,000 and $4,502,000 of net revenues.
In 1999, SST added Ocean Automation Ltd. and related entities as a customer.
Mr. Yasushi Chikagami, a member of the SST Board of Directors, is also a member
of the Board of Directors of Ocean. During 1999, Ocean accounted for 0.4% or
$541,000 of net revenues.
9. EMPLOYEE BENEFIT PLANS:
PROFIT SHARING PLAN:
In April 1995, the Board adopted the Profit Sharing Plan under which
employees may collectively earn up to 10% of SST's operating profit, provided
that both net earnings before interest income (expense), net and provision for
(benefit from) income taxes and operating profit are greater than 10% of sales.
For purposes of the Profit Sharing Plan, "operating profit" is product revenues
less cost of revenues and less operating expenses. The sum paid to any
particular employee as profit sharing is a function of the employee's length of
service, performance and salary. SST plans to pay profit sharing sums, when
available, to employees twice a year. No profit sharing was paid in 1999, 1998
or 1997.
401(k) PLAN:
In 1995, SST adopted the SST 401(k) Tax Sheltered Savings Plan and Trust
(the Plan), as amended, which is intended to qualify under Section 401 of the
Internal Revenue Code of 1986. The Plan covers essentially all employees. Each
eligible employee may elect to contribute to the Plan, through payroll
deductions, up to 15% of their compensation, subject to certain limitations.
SST, at its discretion, may make additional contributions on behalf of
employees. All employee contributions are 100% vested. No employer contributions
were made in 1999, 1998 or 1997.
62
<PAGE>
Exhibit 10.23
SECOND AMENDMENT TO LEASE
I. PARTIES AND DATE.
This Amendment to Lease ("Second Amendment") dated as of September 13,
1999 is entered into by and between Coast Properties ("Landlord"), and Silicon
Storage Technology, Inc. ("Tenant").
II. RECITALS.
A. Landlord and Tenant entered into that certain Lease dated as of
April 6, 1995 as amended by an amendment dated March 4, 1998 (as amended, the
"Lease"), concerning a certain premises ("Premises") referred herein as "Initial
Premises" located at 1156 Sonora Court, Sunnyvale California. The capitalized
terms used and not otherwise defined herein shall have the same definitions as
set forth in the Lease.
B. Landlord and Tenant desire to modify the Lease to extend the term
and to expand the Premises to include the additional 19,748 gross square feet of
space located at 1154 Sonora Court, more particularly shown on Exhibit "A"
attached hereto and incorporated herein by reference ("Additional Space"), which
modifications shall be deemed effective as of the commencement date of this
Second Amendment.
III. MODIFICATIONS.
Landlord and Tenant hereby agree that the Lease shall be modified and/or
supplemented as follows:
A. EXPANDED PREMISES. Landlord hereby leases the Additional Space to
Tenant, and Tenant hereby leases the Additional Space from Landlord, on the same
terms and conditions as are set forth in the Lease, as supplemented hereby, from
and after the date hereof, the Premises (as defined in the Lease) shall consist
of the Premises described in the Lease, together with the Additional Space
described in Exhibit "A" to this Second Amendment.
B. TENANT'S SHARE. Tenant's Share shall be increased to One Hundred
percent (100%). Such increase shall take effect as of the Additional Space
Commencement Date.
1.
<PAGE>
C. RENT/COMMENCEMENT DATE. Commencing on the earliest to occur
of: (i), the date the Additional Space Improvements are substantially
completed, or (ii) the date Tenant commences occupancy of the Additional
Space (such earliest date being hereinafter referred to as the "Additional
Space Commencement Date"), Monthly Rent payable by Tenant to Landlord shall
be increased to the amount of:
<TABLE>
<CAPTION>
ADDITIONAL SPACE RENT TOTAL RENT
MONTHS PER MO. PER MO.
---------- --------------------- ----------
<S> <C> <C>
1-12 $33,769 $55,568
13-24 $35,151 $57,822
25-36 $36,533 $60,111
37-48 $37,916 $62,437
49-* $39,496 $64,998
*April 5, 2005
</TABLE>
D. LANDLORD'S WORK - ADDITIONAL SPACE IMPROVEMENTS: Prior to Tenant's
occupancy of the Additional Space, Landlord, at Landlord's sole cost and
expense, shall perform the following work to the Additional Space including
related cost associated with architecture, construction drawings, and building
permits:
a. Repaint the interior, with a color mutually agreed upon by Tenant
and Landlord;
b. Replace all carpeting and v.c.t floor coverings (except areas to
remain v.c.t), selection of the floor covering subject to mutual
approval of Tenant and Landlord;
c. Install new HVAC units servicing the Additional Space;
d. Repair, re-seal and re-stripe the entire parking lot;
e. Create two (double door size) opening between 1154 and 1156 Sonora
Court-placement to be mutually agreeable;
f. Landlord is responsible for the cost of any code compliance work
as required by the City of Sunnyvale relating to Landlord's Work;
Any subsequent work could trigger additional code compliance work;
Tenant would be responsible for those costs associated with any
subsequent work and any related code compliance work.
g. Tenant to choose between the floor plans attached in Exhibit "B"
and Exhibit "C" by September 30, 1999.
E. LANDLORD'S WORK - INITIAL PREMISES: Landlord has no obligation to
improve or modify the Initial Premises pursuant to the terms of this Second
Amendment. Landlord has fully performed all of Landlord's obligations to
improve or modify the Initial Premises in accordance with the terms of the
Lease; Tenant shall continue in possession of the Initial Premises "As-Is".
F. ADDITIONAL SPACE SECURITY DEPOSIT. Concurrently with its
execution of this Second Amendment, Tenant shall deposit an additional
Thirty-Seven Thousand Dollars ($37,000.00). with Landlord as an increase in
the Security Deposit. With payment of the aforementioned amount, Tenant's
Security Deposit held by landlord the Security Deposit held by Landlord will
total $45,984.16. The Security Deposit paid by Tenant, as so increased,
shall be held and applied as set forth in the Lease.
2.
<PAGE>
G. TERM-ADDITIONAL SPACE: Approximately sixty-two (62) months.
The anticipated commencement date shall be February 1, 2000 and the Lease
Termination date shall be April 5, 2005.
TERM-INITIAL PREMISES: The lease term of the Initial Premises is hereby
extended to be coterminous with the expiration of the Additional Space. The
amended expiration of the Initial Premises is hereby extended to April 5, 2005
H. TERMINATION: Landlord grants Tenant the one time right to
terminate the obligations of the Second Amendment. If Casto Travel fails to
vacate by January 31, 2000, Tenant, by providing written notice to Landlord on
or before the close of business February 4, 2000, may elect to terminate the
obligation of the Second Amendment. In the event Tenant does exercise the
aforementioned termination right, all deposits Landlord by Tenant for the
Additional Space shall be returned and all rights between the parties for the
Additional Space shall be null and void, however, all terms and conditions of
the Initial Premises shall remain in full force and effect.
I. ACCESS DURING CONSTRUCTION: Provided Tenant does not interfere
with Landlord's Work described in paragraph E and provided Tenant furnishes
Landlord with proof of Tenant's insurance for the Additional Space, Tenant shall
be permitted to enter the Additional Space for the purpose of preparing the
space for Tenant's occupancy.
J. BROKERS: Tenant and Landlord acknowledge that Colliers
International (Broker) is acting solely as the agent for the Tenant in this
transaction and that CPS is acting, solely as the agent for Landlord, and that
neither broker represents the other's client. Landlord shall pay a commission
to CPS per CPS's standard schedule.
K. PARKING/SIGNAGE: Upon the Commencement of the Additional Space,
Tenant shall be entitled to the exclusive right to all parking and signage that
belong to the Premises.
L. OPTION TO RENEW-ARBITRATED RENT: Tenant is given the option to
extend the term of both 1154 and 1156 Sonora Court subject to an the provisions
contained in this Second Amendment for a period of five (5) years ("extended
term") following, the expiration of the existing term by giving notice of
exercise of the option ("option notice") to Landlord at least six (6) months,
but not more than (9) nine months before the expiration of the existing term.
Provided that, if Tenant is in default at the date of giving, the option notice,
the option notice shall be totally ineffective, or if the Tenant is in default
on the date the extended term is to commence, Landlord may elect that the
extended term shall not commence and this lease shall expire at the end of the
existing term. Base monthly rent for the option period is to be set at 100% of
the then market rent for the Premises. However, in no event will the option
rent be less than the rent during, the last period of the existing term. The
parties shall have thirty (30) days after Landlord receives the option notice in
which to agree on a base monthly rent during the extended term. If the parties
agree on the base monthly rent for the extended term during, that period, they
shall immediately execute an amendment to this lease stating the base monthly
rent for the extended term.
3.
<PAGE>
If the parties are unable to agree on a base monthly rent for the
extended term within that period, then ten (10) days after the expiration of
that period each party, at it's cost, and by giving notice to the other party,
shall appoint a real estate appraiser or broker with at least five (5) years
full-time commercial appraisal or brokerage experience in the area in which the
Premises are located, to appraise and set the base monthly rent for the extended
term. If a party does not appoint an appraiser or broker within ten (10) days
after the other party has given notice of the name of its appraiser or broker,
this single appraiser or broker appointed shall be the sole appraiser or broker
and shall set the base monthly rent for the extended term. If the two
appraisers or brokers are appointed by the parties as stated in this paragraph,
they shall meet promptly and attempt to set the base monthly rent for the
extended term. If they are unable to agree within ten (10) days after the
second appraiser or broker has been appointed, they shall attempt to elect a
third appraiser or broker meeting the qualifications stated in this paragraph
within five (5) days after the last day the two appraisers or brokers are given
to set the base monthly rent. If they are unable to agree on the third
appraiser or broker, either of the parties to this lease, by giving ten (10)
days notice to the other party, can apply to the then president of the County
Real Estate Board of Santa Clara County, or the presiding judge of the Superior
Court of that county for the selection of a third appraiser or broker who meets
the qualifications stated in this paragraph. Each of the parties shall bear one
half of the cost of appointing a third appraiser or broker and paying for the
third appraiser or broker's fee. The third appraiser or broker, however
selected, shall be a person who has not previously acted in any capacity for
either party or for either party's broker.
Within twenty (20) days after the selection of the third appraiser or
broker, a majority of the appraisers/brokers shall set the base monthly rent for
the extended term. If the appraisers/brokers are unable to set a base monthly
rent within the stipulated time, the two closest appraisers shall be added
together and divided by two; the resulting quotient shall be the base monthly
rent for the Premises during the extended term. The third broker's value, which
is farthest apart, shall be disregarded.
In all appraisals referred to herein, the property is to be appraised
based on comparable buildings in the Sunnyvale area as close as possible to the
Premises, with similar tenant improvements and Tenant credit worthiness.
The option shall be personal to Tenant and shall be non-assignable, and
non-transferable.
IV. GENERAL.
A. EFFECT OF SECOND AMENDMENT, RATIFICATION. Except to the extent
the Lease is modified by this Second Amendment, the terms and provisions of the
Lease shall remain unmodified and in full force and effect. In the event of
conflict between the terms of the Lease and the terms of this Second Amendment,
the terms of this Second Amendment shall prevail.
B. ATTORNEYS' FEES. The provisions of the Lease respecting payment
of attorney's fees shall also apply to this Second Amendment.
4.
<PAGE>
C. COUNTERPARTS. If this Second Amendment is executed in
counterparts, each counterpart shall be deemed an original.
D. AUTHORITY TO EXECUTE SECOND AMENDMENT. Each individual executing
this Second Amendment on behalf of a corporation or partnership represents that
he or she is duly authorized to execute and deliver this Second Amendment on
behalf of the corporation or partnership and that this Second Amendment is
binding upon the corporation or partnership in accordance with its terms.
E. GOVERNING LAW. This Second Amendment and any enforcement of the
agreements and modifications set forth above shall be governed by and construed
in accordance with the laws of the State of California.
"LANDLORD"
COAST PROPERTIES,
a California General Partnership
By: /s/ illegible
------------------------------------
Its: Managing Partner
-----------------------------------
"TENANT"
SILICON STORAGE TECHNOLOGY, INC.
a California Corporation
By: /s/ Jeffrey L. Garon
------------------------------------
Its: Vice President and
Chief Financial Officer
-----------------------------------
By: /s/ Humberto Chacon
------------------------------------
Its: Manager, Human Resources
-----------------------------------
5.
<PAGE>
EXHIBIT A
1154-1156 SONORA COURT
SUNNYVALE
[Schematic of Premises]
<PAGE>
EXHIBIT B
1154-1156 SONORA COURT
SUNNYVALE
[Schematic of Premises]
<PAGE>
EXHIBIT C
1154-1156 SONORA COURT
SUNNYVALE
[Schematic of Premises]
<PAGE>
EXHIBIT 10.24
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("Basic Provisions").
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes
only, November 15, 1999, is made by and between BHUPINDER S. LEHGA & RUPINDER
K. LEHGA ("Lessor") and SILICON STORAGE TECHNOLOGY INC. ("Lessee"),
(collectively, the "Parties," or individually a "Party").
(a) PREMISES: That certain real property, including all
improvements therein or to be provided by Lessor under the terms of this
Lease, and commonly known AS 1159 Sonora Court, Sunnyvale, located in the
County of Santa Clara, State of California, and generally described as
(describe briefly the nature of the property and, if applicable, the
"Project". If the property is located within a Project) 13,534 square foot
industrial building ("Premises"). (See also Paragraph 2)
1.2 TERM: Five (5) years and five (5) months ("Original Term")
commencing November 15, 1999 ("Commencement Date") and ending April 4, 2005
("Expiration Date"). (See also Paragraph 3).
1.3 EARLY POSSESSION: N/A ("Early Possession Date"). (See also
Paragraphs 3.2 and 3.3)
1.4 BASE RENT: $ SEE ADDENDUM per month ("Base Rent"), payable on
the First Day of Month day of each month commencing November 15, 1999. (See
also Paragraph 4)
/X/ if this box is check, there are provisions in this Lease for the Base
Rent to be adjusted.
1.5 BASE RENT PAID UPON EXECUTION: $22,737.12, as Base Rent for the
period [SEE ADDENDUM].
1.6 SECURITY DEPOSIT: $22,737.12 ("Security Deposit"). (See also
Paragraph 5)
1.7 AGREED USE: Any legally permitted use. (See also Paragraph 6)
1.8 INSURING PARTY: Lessor is the "Insuring Party" unless otherwise
stated herein. (See also Paragraph 8)
1.9 REAL ESTATE BROKERS: (See also Paragraph 15)
(a) REPRESENTATION: The following real estate brokers
(collectively, the "Brokers") and brokerage relationships exist in this
transaction (check applicable box(es)):
/ / N/A represents Lessor exclusively ("Lessor's Broker's);
/ / N/A represents Lessee exclusively ("Lessee's Broker"); or
/ / Represents both Lessor and Lessee ("Dual Agency").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this
Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in
this separate written agreement (or if there is no such agreement, the sum of
N/A % of the total Base Rent for the brokerage services rendered by said
Broker).
INITIALS: ___________ __________
Page 1 of 27
<PAGE>
1.10 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by None ("Guarantor"). (See also Paragraph 37).
1.11 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs _______ and through ______ and Exhibits ____________,
all of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of size set forth in this Lease, or that may have
been used in calculating rental, is an approximation which the Parties agree is
reasonable and the rental based thereon is not subject to revision whether or
not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession
Date, whichever first occurs ("Start Date"), and, so long as the required
service contracts described in Paragraph 7.1(b) below are obtained by Lessee
within thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, firs sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"Building") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole
obligation with respect to such matter, except as otherwise provided in this
Lease, promptly after receipt of written notice from Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If, after the Start Date, Lessee does not give Lessor
written notice of any non-compliance with this warranty within: (i) one year
as to the surface of the roof and the structural portions of the roof,
foundations and bearing walls, (ii) six (6) months as to the HVAC systems,
(iii) one hundred eighty (180) days as to the remaining systems and other
elements of the Building, correction of such non-compliance shall be the
obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of
record, building codes, regulations and ordinances ("Applicable
Requirements") in effect on the Start Date. Said warranty does not apply to
the use to which Lessee will put the Premises or to any Alternations or
Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by
Lessee. NOTE: Lessee is responsible for determining whether or not the
zoning is appropriate for Lessee's intended use, and acknowledges that past
uses of the Premises may no longer be allowed. If the Premises do not comply
with said warranty, Lessor shall, except as otherwise provided, promptly
after receipt of written notice from Lessee setting forth with specificity
the nature and extent of such non-compliance, rectify the same at Lessor's
expense. If the Applicable Requirements are hereafter changed (as opposed to
being in existence at the Start Date, which is addressed in Paragraph 6.2(e)
below) so as to require during the term of this Lease the construction of an
addition to or an alteration of the Building, the remediation of any
Hazardous Substance, or the reinforcement or other physical modification of
the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the
cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall
be fully responsible for the cost thereof, provided, however that if such
Capital Expenditure is required during the last two (2) years of this Lease
and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead
terminate this Lease unless Lessor notifies Lessee, in writing, within ten
(10) days after receipt of Lessee's termination notice that Lessor has
elected to pay the difference between the actual cost thereof and the amount
equal to six (6) months' Base Rent. If Lessee elects termination, Lessee
shall immediately cease the use of the Premises which requires such Capital
Expenditure and deliver to Lessor written notice specifying a termination
date at least ninety (90) days thereafter. Such termination date shall,
however, in no event be earlier than the last day that Lessee could legally
utilize the Premises without commencing such Capital Expenditure.
INITIALS: ___________ __________
Page 2 of 27
<PAGE>
(b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by Lessee (such as, governmentally
mandated seismic modifications), then Lessor and Lessee shall allocate the
obligation to pay for such costs pursuant to the provisions of Paragraph
7.1(c), provided, however, that if such Capital Expenditure is required
during the last two years of this Lease or if Lessor reasonably determines
that it is not economically feasible to pay its share thereof, Lessor shall
have the option to terminate this Lease upon ninety (90) days prior written
notice to Lessee unless Lessee notifies Lessor, in writing within ten (10)
days after receipt of Lessor's termination notice that Lessee will pay for
such Capital Expenditure. If Lessor does not elect to terminate, and fails to
tender its share of any such Capital Expenditure, Lessee may advance such
funds and deduct same, with interest, from Rent until Lessor's share of such
costs have been fully paid. If Lessee is unable to finance Lessor's share,
or if the balance of the Rent due and payable for the remainder of this Lease
is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall
have the right to terminate this Lease upon thirty (30) days written notice
to Lessor.
(c) Notwithstanding the above, the provisions concerning
Capital Expenditures are intended to apply only to non-voluntary, unexpected,
and new Applicable Requirements. If the Capital Expenditures are instead
triggered by Lessee as a result of an actual or proposed change in use,
change in intensity of use, or modification to the Premises then, and in that
event, Lessee shall be fully responsible for the cost thereof, and Lessee
shall not have any right to terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to electrical, HVAC and
fire sprinkler systems, security, environmental aspects and compliance with
Applicable Requirements), and their suitability for Lessee's intended use;
(b) Lessee has made such Investigation as it deems necessary with reference
to such matters and assumes all responsibility therefor as the same related
to its occupancy of the Premises; and (c) neither Lessor, Lessor's agents,
nor any Broker has made any oral or written representations or warranties
with respect to said matters other than as set forth in this Lease. Lessor
acknowledges that (a) Broker has made no representations, promises or
warranties concerning Lessee's ability to honor the Lease or suitability to
occupy the Premises; and (b) it is Lessor's sole responsibility to
investigate the financial capability and/or suitability of all proposed
tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor
in Paragraph 2 shall be of no force or effect if immediately prior to the
Start Date Lessee was the owner or occupant to the Premises. In such event,
Lessee shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other terms of
this Lease (including, but not limited to, the obligations to pay Real
Property Taxes and Insurance premiums and to maintain the Premises) shall,
however, be in effect during such period. Any such early possession shall
not affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best
commercially reasonable efforts to deliver possession of the Premises to
Lessee by the Commencement Date. If, despite said efforts, Lessor is unable
to deliver possession as agreed, Lessor shall not be subject to any liability
therefor, nor shall such failure affect the validity of this Lease. Lessee
shall not, however, be obligated to pay Rent or perform its other obligations
until it receives possession of the Premises. If possession is not delivered
within sixty (60) days after the Commencement Date, Lessee may , at its
option, by notice in writing within ten (10) days after the end of such sixty
(60) day period, cancel this Lease, in which event the Parties shall be
discharged from all obligations hereunder. If such written notice is not
received by Lessor within said ten (10) day period, Lessee's right to cancel
shall terminate. Except as otherwise provided, if possession is not tendered
to Lessee by the Start Date and Lessee does not terminate this Lease, as
aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the
INITIALS: ___________ __________
Page 3 of 27
<PAGE>
terms hereof, but minus any days of delay caused by the acts of omissions of
Lessee. If possession of the Premises is not delivered within four (4)
months after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its
obligation to provide evidence of insurance (Paragraph 8.5). Pending
delivery of such evidence, Lessee shall be required to perform all of its
obligations under this Lease from and after the Start Date, including the
payment of Rent, notwithstanding Lessor's election to withhold possession
pending receipt of such evidence of insurance. Further, if Lessee is
required to perform any other conditions prior to or concurrent with the
Start Date, the Start Date shall occur but Lessor may elect to withhold
possession until such conditions are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor
under the terms of this Lease (except for the Security Deposit) are deemed to
be rent ("Rent").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction
(except as specifically permitted in this Lease), on or before the day on
which it is due. Rent for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of said month. Payment of Rent shall be made to Lessor at its
address stated herein or to such other persons or place as Lessor may from
time to time designated in writing. Acceptance of payment which is less than
the amount then due shall not be a waiver of Lessor's rights to the balance
of such Rent, regardless of Lessor's endorsement of any check so stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit as security for Lessee's faithful performance of
its obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage
which Lessor may suffer or incur by reason hereof. If Lessor uses or applies
all or any portion of said Security Deposit, Lessee shall within ten (10)
days after written request thereof deposit monies with Lessor sufficient to
restore said Security Deposit to the full amount required by this lease. If
the Base Rent increases during the term of this Lease, Lessee shall upon
written request from Lessor, deposit additional monies with Lessor so that
the total amount of the Security Deposit shall at all times bear the same
portion to the increase Base Rent as the initial Security Deposit bore to the
initial Base Rent. Should the Agreed Use be amended to accommodate a
material change in the business of Lessee or to accommodate a sublessee or
assignee, Lessor shall have the right to increase the Security Deposit to the
extent necessary, in Lessor' reasonable judgement, to account for any
increased wear and tear that the Premises may suffer as a result thereof. If
a change in control of Lessee occurs during the Lease and following such
change the financial condition of Lessee is, in Lessor's reasonable
judgement, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or
termination of this Lease, if Lessor elects to apply the Security Deposit
only to unpaid Rent, and otherwise within thirty (30) days after the Premises
have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return
that portion of the Security Deposit not used or applied by Lessor. No part
of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the
Agreed Use, or any other legal use which is reasonably comparable thereto,
and for no other purpose. Lessee shall not use or permit the use of the
Premises in a manner that is unlawful, creates damage, waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to neighboring
properties. Lessor shall not unreasonably withhold or delay its consent to
any written request for a modification of the Agreed Use, so long as the same
will not impair the structural integrity of the improvements on the Premises
or the mechanical or electrical systems therein, is not significantly more
burdensome to the Premises. If Lessor elects to withhold consent, Lessor
shall within five (5) business days after
INITIALS: ___________ __________
Page 4 of 27
<PAGE>
such request give written notification of same, which notice shall include an
explanation of Lessor's objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USE REQUIRE CONSENT. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release,
either by itself or in combination with other materials expected to be on the
Premises, is either (i) potentially injurious to the public health, safety or
welfare, the environment or the Premises, (ii) regulated or monitored by any
government authority, or (iii) a basis for potential liability of Lessor to
any government agency or authorized agent under any applicable statute or
common law theory. Hazardous Substances shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, and/or crude oil or any products or
products or fractions thereof. Lessee shall not engage in any activity in or
on the Premises which constitutes a Reportable Use of Hazardous Substances
without the express prior written consent of Lessor and timely compliance (at
Lessee's expense) with all Applicable Requirements. "Reportable Use" shall
mean (i) the installation or use of any above or below ground storage tank,
(ii) the generation, possession, storage, use, transportation, or disposal of
a Hazardous Substance that requires a permit from or with respect to which a
report notice, registration or business plan is required to be filed with,
any governmental authority, and/or (iii) the presence at the Premises of a
Hazardous Substance with respect to which any Applicable Requirements
requires that a notice be given to persons entering or occupying the Premises
or neighboring properties. Notwithstanding the foregoing, Lessee may use any
ordinary and customary materials reasonably required to be used in the normal
course of the Agreed Use, as long as such use is in compliance with all
Applicable Requirements, is not a Reportable Use, and does not expose the
Premises or neighboring property to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may
condition its consent to any Reportable Use upon receiving such additional
assurances as Lessor reasonably deems necessary to protect itself, the
public, the Premises and/or the environment against damage, contamination,
injury and/or liability, including, but not limited to, the installation (and
removal on or before Lease expiration or termination) of protective
modifications (such as concrete encasements) and /or increasing the Security
Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has
reasonable cause to believe, that a Hazardous Substance has come to be
located in, on, under or about the Premises, other than as previously
consented to by Lessor, Lessee shall immediately give written notice of such
fact to Lessor, and provide Lessor with a copy of any report, notice, claim
or other documentation with it has concerning the presence of such Hazardous
Substance.
(c) LEASE REMEDIATION. Lessee shall not cause or permit
any Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee' expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to be Lessee, or pertaining to or involving any
Hazardous Substance brought onto the Premises during the term of this Lease,
by or for Lessee, or any authorized agent.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend
and hold Lessor, its agents, employees, lenders and ground lessor, if any,
harmless from and against any and all loss of rents and/or damages,
liabilities, judgements, claims, expenses, penalties, and attorney's and
consultants' fees arising out of or involving any Hazardous Substances
brought onto the Premises by or for Lessee, or any third party (provided,
however, that Lessee shall have no liability under this Lease with respect to
underground migration of any Hazardous Substance under the Premises from
adjacent properties). Lessee's obligations shall include, but not limited
to, the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation,
removal, remediation, restoration and/or abatement, and shall survive the
expiration or termination of this Lease. No termination, cancellation or
release agreement entered into by Lessor and Lessee shall release Lessee from
its obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessor in writing at time of such agreement.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and
assigns shall indemnify, defend, reimburse and hold Lessee, its employees and
lenders, harmless from and against any and all environmental damages,
including the cost of remediation, which existed as a result of Hazardous
Substances on the Premises prior
INITIALS: ___________ __________
Page 5 of 27
<PAGE>
to the Start Date or which are caused by the gross negligence or willful
misconduct of Lessor, its agents or employees. Lessor's obligations, as and
when required by the Applicable Requirements, shall include, but not limited
to, the cost of investigation, removal, remediation, restoration and/or
abatement, and shall survive the expiration or termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain
the responsibility and pay for investigations or remediation measures
required by governmental entities having jurisdiction with respect to the
existence of Hazardous Substances on the Premises prior to the Start Date,
unless such remediation measure is required as a result of Lessee's use
(including "Alterations", as defined in Paragraph 7.3(a) below) of the
Premises. In which event Lessee shall be responsible for such payment.
Lessee shall cooperate fully in any such activities at the request of Lessor,
including allowing Lessor and Lessor's agents to have reasonable access to
the Premises at reasonable times in order to carry out Lessor's investigative
and remedial responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance
Condition occurs during the term of this Lease, unless Lessee is legally
responsible therefor (in which case Lessee shall make the Investigation and
remediation thereof required by the Applicable Requirements and this Lease
shall continue in full force and effect, but subject to Lessors' rights under
Paragraph 6.2(d) and Paragraph 13), Lessor may at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required as
soon as reasonably possible at lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost to
remediate such condition exceeds twelve (12) times the then monthly Base Rent
or $100,00, whichever is greater, give written notice to Lessee, within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of
such Hazardous Substance Condition, of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In
the event Lessor elects to give a termination notice, Lessee may, within ten
(10) days thereafter, give written notice to Lessor of Lessee's commitment to
pay the amount by which the cost of the remediation of such Hazardous
Substance Condition exceeds an amount equal to twelve (12) times the then
monthly Base Rent of $100,000, whichever is greater. Lessee shall provide
Lessor with said funds or satisfactory assurance thereof within thirty (30)
days following such commitment. In such event, this Lease shall continue in
full force and effect, and Lessor shall proceed to make such remediation as
soon as reasonably possible after the required funds are available. If
Lessee does not give such notice and provide the required funds or assurance
thereof within the time provided, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all
Applicable Requirements, the requirements of any applicable fire insurance
underwriter or rating bureau, and the recommendations of Lessor's engineers
and/or consultants which relate to the tenant's use of the Premises, without
regard to whether said requirements are now in effect or become effective
after the Start Date. Lessee shall, within ten (10) days after receipt of
Lessor's written request, provide Lessor with copies of all permits and other
documents, and other information evidencing Lessee's compliance with any
Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving the failure of Lessee or the Premises to
comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as
defined under Paragraph 30 below) and consultants shall have the right to
enter into Premises at any time, in the case of an emergency, and otherwise
at reasonable times, for the purpose of inspecting the condition of the
Premises and for verifying compliance by Lessee with this Lease. The cost of
any such inspections shall be paid by Lessor, unless a violation of
Applicable Requirements, or a contamination is found to exist or be imminent,
or the inspection is requested or ordered by a governmental authority. In
such case, Lessee shall upon request reimburse lessor for the cost of such
inspections, so long as such Inspection is reasonably related to the
violation or contamination.
INITIALS: ___________ __________
Page 6 of 27
<PAGE>
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means
of repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises),
including, but not limited to, all equipment or facilities, such as
electrical, lighting, facilities, boilers, pressure vessels, fire protection
systems, fixtures, walls (interior and exterior), ceilings, floors, windows,
doors, plate glass, skylights, landscaping, fences, retaining walls, signs,
sidewalks and parkways located in, on or adjacent to the Premises. Lessee,
in keeping the Premises in good order, condition and repair, shall exercise
and perform good maintenance practices, specifically including the
procurement and maintenance of the service contracts required by Paragraph
7.1(b) below. Lessee's obligations shall include restorations, replacements
or renewals when necessary to keep the Premises and all improvements thereon
or a part hereof in good order, condition and state of repair. Lessee shall,
during the term of this Lease, keep the exterior appearance of the Building
in a first-class condition consistent with the exterior appearance of other
similar facilities of comparable age and size in the vicinity, including,
when necessary, the exterior repainting of the Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole
expense, procure and maintain contracts, with copies to Lessor, in customary
form and substance for, and with contractors specializing in maintenance of
the following equipment and improvements, if any, if and when installed on
the Premises (i) HVAC equipment, (ii) boiler and pressure vessels, (iii) fire
extinguishing systems, including fire alarm and/or smoke detection, (iv)
landscaping and irrigation systems, (v) roof covering and drains, (vi)
driveways and parking lots, (vii) clarifiers, (viii) basic utility feed to
the perimeter of the Building, and (ix) any other equipment, if reasonably
required by Lessor.
(c) REPLACEMENT. Subject to Lessee's Indemnification of
Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of
liability resulting from Lessee's failure to exercise and perform good
maintenance practices. If the Basic Elements described in Paragraph 7.1(b)
cannot be repaired other than at a cost which is in excess of 50% of the cost
of replacing such Basic Elements, then such Basic Elements shall be replaced
by Lessor, and the cost thereof shall be prorated between the Parties and
Lessee shall only be obligated to pay, each month during the remainder of the
term of this Lease, on the date on which Base Rent is due, an amount equal to
the product of multiplying the cost of such replacement by a fraction, the
numerator of which is one, and the denominator of which is the number of
months of the useful life of such replacement as such useful life is
specified pursuant to Federal Income tax regulations or guidelines for
depreciation thereof (including interest on the unamortized balance as is
then commercially reasonable in the judgement of Lessor's accounant(s), with
Lessee reserving the right to prepay its obligation at any time.
7.2 LESSOR'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 2.2 (Condition),
2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is
intended by the Parties hereto that Lessor have no obligation, in any manner
whatsoever, to repair and maintain the Premises, or the equipment therein,
all of which obligations are intended to be that of the Lessee. It is the
intention of the Parties that the terms of this Lease govern the respective
obligations of the Parties as to maintenance and repair of the Premises, and
they expressly waive the benefit of any statute now or hereinafter in effect
to the extent it is inconsistent with the terms of this Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and
fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's
machinery and equipment that can be removed without doing material
INITIALS: ___________ __________
Page 7 of 27
<PAGE>
damage to the Premises. The term "ALTERATIONS" shall mean any modification of
the Improvements, other than Utility Installations or Trade Fixtures, whether
by addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY
INSTALLATIONS" are defined as Alterations and/or Utility Installations made
by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a).
Lessee shall not make any Alterations or Utility Installations to the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises
(excluding the roof) without Lessor's such consent but upon notice to Lessor,
as long as they are not visible from the outside, do not involve puncturing,
relocating or removing the roof or any existing walls, and the cumulative
cost thereof during this Lease as extended does not exceed $50,000 in the
aggregate or $10,000 in any one year.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall
be presented to Lessor in written form with detailed plans. Consent shall be
deemed conditioned upon: (i) acquiring all applicable governmental permits,
(ii) furnishing Lessor with copies of both the permits and the plans and
specifications prior to commencement of the work, and (iii) compliance with
all conditions of said permits and other Applicable Requirements in a prompt
and expeditious manner. Any Alterations or Utility Installations shall be
performed in a workmanlike manner with good and sufficient materials. Lessee
shall promptly upon completion furnish Lessor with as-built plans and
specifications. For work which costs an amount equal to the greater of one
month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee
providing a lien and completion bond in an amount equal to the greater of one
month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee
providing a lien and completion bond in an amount equal to one and one-half
times the estimated cost of such Alteration or Utility Installation and/or
upon Lessee's posting an additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanics' or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post notices of non-responsibility. If Lessee shall
contest the validity of any such lien, claim or demand, then Lessee shall, at
its sole expense defend and protect itself, Lessor and the Premises against
the same and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof. If Lessor shall require,
Lessee shall furnish a surety bond in an amount equal to one and one-half
times the amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same. If Lessor elects to participate in any such
action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal
or elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered
a part of the Premises. Unless otherwise instructed per subparagraph 7.4(b)
hereof, all Lessee Owned Alterations and Utility Installations shall, at the
expiration or termination of this Lease, become the property of Lessor and be
surrendered by Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from
Lessor not earlier than ninety (90) and not later than thirty (30) days prior
to the end of the term of this Lease, Lessor may require that any or all
Lessee Owned Alterations or Utility Installations be removed by the
expiration or termination of this Lease. Lessor may require the removal at
any time of all or any part of any Lessee Owned Alterations or Utility
Installations made without the required consent. Lessor will advise Lessee
at the time of approval of any Installation if a removal may be required.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the Expiration Date or any earlier termination date, with all of
the improvements, parts and surfaces thereof broom clean and free of debris
and in good operating order, condition and state of repair, ordinary wear and
tear excepted. "ORDINARY WEAR AND TEAR" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater
INITIALS: ___________ __________
Page 8 of 27
<PAGE>
contaminated by Lessee. Trade Fixtures shall remain the property of Lessee
and shall be removed by Lessee. The failure by Lessee to timely vacate the
Premises pursuant to this Paragraph 7.4(c) without the express written
consent of Lessor shall constitute a holdover under the provisions of
Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to
or extending beyond the Lease term shall be prorated to correspond to the
Lease term. Payment shall be made by Lessee to Lessor within ten (10) days
following receipt of an invoice.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in
force a Commercial General Liability policy of insurance protecting Lessee
and Lessor against claims for bodily injury, personal injury and property
damage based upon or arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. Such
insurance shall be on an occurrence basis providing single limit coverage in
an amount not less than $2,000,000 per occurrence with an "Additional
Insured-Managers or Lessors of Premises Endorsement" and contain the
"Amendment of the Pollution Exclusion" for damage caused by heat, smoke or
fumes from a hostile fire. The policy shall not contain any intra-insured
exclusions as between insured persons or organizations, but shall include
coverage for liability assumed under this Lease as an "insured contract" for
the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be carried
by Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE - BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall
obtain and keep in force a policy or policies in the name of Lessor, with
loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss
or damage to the Premises. The amount of such insurance shall be equal to
the full replacement cost of the Premises, as the same shall exist from time
to time, or the amount required by Lenders, but in no event more than the
commercially reasonable and available insurable value thereof. If Lessor is
the Insuring Party, however, Lessee Owned Alterations and Utility
Installations, Trade Fixtures and Lessee's personal property shall be insured
by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is
available and commercially appropriate, such policy or policies shall insure
against all risks of direct physical loss or damage (except the perils of
flood and/or earthquake unless required by a Lender), including coverage for
debris removal and the enforcement of any Applicable Requirements requiring
the upgrading, demolition, reconstruction or replacement of any portion of
the Premises as the result of a covered loss. Said policy or policies shall
also contain an agreed valuation provision in lieu of any coinsurance clause,
waiver of subrogation, and inflation guard protection causing an increase in
the annual property insurance coverage amount by a factor of not less than
the adjusted U.S. Department of Labor Consumer Price Index for All Urban
Consumers for the city nearest to where the Premises are located. If such
insurance coverage has a deductible clause, the deductible amount shall not
exceed $1,000 per occurrence, and lessee shall be liable for such deductible
amount in the event of an Insured Loss.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep
in force a policy or policies in the name of Lessor with loss payable to
Lessor and any Lender, insuring the loss of the full Rent for one (1) year.
Said insurance shall provide that in the event the Lease is terminated by
reason of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of Rent from the date of any
such loss. Said insurance shall contain an agreed valuation provision in
lieu of any coinsurance clause, and the amount of coverage shall be adjusted
annually
INITIALS: ___________ __________
Page 9 of 27
<PAGE>
to reflect the projected Rent otherwise payable by Lessee, for the next
twelve (12) month period. Lessee shall be liable for any deductible amount
in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to
the Premises, the Lessee shall pay for any increase in the premiums for the
property insurance of such building or buildings if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain
insurance coverage on all of Lessee's personal property, Trade Fixtures, and
Lessee Owned Alterations and Utility Installations. Such insurance shall be
full replacement cost coverage with a deductible selected by Lessee. The
proceeds from any such insurance shall be used by Lessee for the replacement
of personal property, Trade Fixtures and Lessee Owned Alterations and Utility
Installations. Lessee shall provide Lessor with written evidence that such
insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain
loss of income and extra expense insurance in amounts as will reimburse
Lessee for direct or indirect loss of earnings attributable to all perils
commonly insured against by prudent lessees in the business of Lessee or
attributable to prevention of access to the Premises as a result of such
perils.
(c) NO REPRESENTATION OF ADEQUATE INSURANCE. Lessor makes
no representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where
the Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current
issue of "Best's Insurance Guide," or such other rating as may be required by
a Lender. Lessee shall not do or permit to be done anything which
invalidates the insurance policies. Lessee shall, prior to the Start Date,
cause to be delivered to Lessor certified copies of policies of such
insurance or certificates evidencing the existence and amounts of the
required insurance. No such policy shall be cancelable or subject to
modification except after thirty (30) days prior written notice to Lessor.
Lessee shall, at least thirty (30) days prior to the expiration of such
policies, furnish Lessor with evidence of renewals or "insurance binders"
evidencing renewal thereof, or Lessor may order such insurance and charge the
cost thereof to Lessee, which amount shall be payable by Lessee to Lessor
upon demand. Such policies shall be for a term of at least one year, or the
length of the remaining term of this Lease, whichever is less. If either
Party shall fail to procure and maintain the insurance required to be carried
by it, the other Party may, but shall not be required to, procure and
maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loss of or
damage to its property arising out of or incident to the perils required to
be insured against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property
damage insurance carriers waive any right to subrogation that such companies
may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willful
misconduct, Lessee shall indemnify, protect, defend and hold harmless, the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, liens, judgments, penalties, permits, attorney's and consultant's
fees, expenses and/or liabilities arising out of, involving, or in connection
with, the use and/or occupancy of the Premises by Lessee. If any action or
proceeding is brought against Lessor by reason of any of the foregoing
matters, Lessee shall upon notice from Lessor defend the same at Lessee's
expense by counsel reasonably satisfactory to Lessor and Lessor shall
cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be defended or indemnified.
INITIALS: ___________ __________
Page 10 of 27
<PAGE>
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or
from the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from
any other cause, whether the said injury or damage results from conditions
arising from the Premises or upon other portions of the building of which the
Premises are a part, or from other sources or places. Lessor shall not be
liable for any damages arising from any act or neglect of any other tenant of
Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances be liable for injury to Lessee's business or for
any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or
destruction to the improvements on the Premises, other than Lessee Owned
Alterations and Utility Installations, which can reasonably be repaired in
six (6) months or less from the date of the damage or destruction. Lessor
shall notify Lessee in writing within thirty (30) days from the date of the
damage or destruction as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or
destruction to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six
(6) months or less from the date of the damage or destruction. Lessor shall
notify Lessee in writing within thirty (30) days from the date of the damage
or destruction as to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurrence to
their condition existing immediately prior thereto, including demolition,
debris removal and upgrading required by the operation of Applicable
Requirements, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the
occurrence or discovery of a condition involving the presence of, or a
contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in,
on, or under the Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee Owned
Alterations and Utility Installations) as soon as reasonably possible and
this Lease shall continue in full force and effect; provided, however, that
Lessee shall, at Lessor's election, make the repair of any damage or
destruction the total cost to repair of which is $10,000 or less, and, in
such event, Lessor shall make any applicable insurance proceeds available to
Lessee on a reasonable basis for that purpose. Notwithstanding the
foregoing, if the required insurance was not in force or the insurance
proceeds are not sufficient to effect such repair, the Insuring Party shall
promptly contribute the shortage in proceeds (except as to the deductible
which is Lessee's responsibility) as and when required to complete said
repairs. In the event, however, such shortage was due to the fact that, by
reason of the unique nature of the improvements, full replacement cost
insurance coverage was not commercially reasonable and available, Lessor
shall have no obligation to pay for the shortage in insurance proceeds or to
fully restore the unique aspects of the Premises unless Lessee provides
Lessor with the funds to cover same, or adequate assurance thereof, within
ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurances
thereof within said ten (10) day period, the party responsible for making the
repairs shall complete them as soon as reasonably possible and this Lease
shall remain in full force and effect. If such funds or assurance are not
received, Lessor may nevertheless elect by written notice to Lessee within
ten (10) days thereafter to: (i) make such restoration and repair as is
commercially reasonable with Lessor paying any shortage in proceeds, in which
case this Lease shall remain in full force and effect, or have this Lease
terminate
INITIALS: ___________ __________
Page 11 of 27
<PAGE>
thirty (30) days thereafter. Lessee shall not be entitled to reimbursement
of any funds contributed by Lessee to repair any such damage or destruction.
Premises Partial Damage due to flood or earthquake shall be subject to
Paragraph 9.3, notwithstanding that there may be some insurance coverage, but
the net proceeds of any such insurance shall be made available for the
repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), Lessor may either: (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in
full force and effect, or (ii) terminate this Lease by giving written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage. Such termination shall be effective sixty (60)
days following the date of such notice. In the event Lessor elects to
terminate this Lease, Lessee shall have the right within ten (10) days after
receipt of notice to give written notice to Lessor of Lessee's commitment to
pay for the repair of such damage without reimbursement from Lessor. Lessee
shall provide Lessor with the required funds or satisfactory assurance
thereof within thirty (30) days after making such commitment. In such event
this Lease shall continue in full force and effect, and Lessor shall proceed
to make such repairs as soon as reasonably possible after the required funds
are available. If Lessee does not make the required commitment, this Lease
shall terminate as of the date specified in the termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by
the gross negligence or willful misconduct of Lessee, Lessor shall have the
right to recover Lessor's damages from Lessee, except as provided in
Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of the term of this Lease there is damage for which the cost to
repair exceeds one (1) month's Base Rent, whether or not an Insured Loss,
Lessor may terminate this Lease effective sixty (60) days following the date
of occurrence of such damage by giving written notice to Lessee within thirty
(30) days after the date of occurrence of such damage. Notwithstanding the
foregoing, if Lessee at that time has an exercisable option to extend this
Lease or to purchase the Premises, then Lessee may preserve this Lease by,
(a) exercising such option and (b) providing Lessor with any shortage in
insurance proceeds (or adequate assurance thereof) needed to make the repairs
on or before the earlier of (i) the date which is ten days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or
(ii) the day prior to the date upon which such option expires. If Lessee
duly exercises such option during such period and provides Lessor with funds
(or adequate assurance thereof) to cover any shortage in insurance proceeds,
Lessor shall, at Lessor's commercially reasonable expense, repair such damage
as soon as reasonably possible and this Lease shall continue in full force
and effect. If Lessee fails to exercise such option and provide such funds
or assurance during such period, then this Lease shall terminate on the date
specified in the termination notice and Lessee's option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which
Lessee is not responsible under this Lease, the Rent payable by Lessee for
the period required for the repair, remediation or restoration of such damage
shall be abated in proportion to the degree to which Lessee's use of the
Premises is impaired, but not to exceed the proceeds received from the Rental
Value Insurance. All other obligations of Lessee hereunder shall be
performed by Lessee, and Lessor shall have no liability for any such damage,
destruction, remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or
restore the Premises and does not commence, in a substantial and meaningful
way, such repair or restoration within ninety (90) days after such obligation
shall accrue, Lessee may, at any time prior to the commencement of such
repair or restoration, give written notice to Lessor and to any Lenders of
which Lessee has actual notice, of Lessee's election to terminate this Lease
on a date not less than sixty (60) days following the giving of such notice.
If Lessee gives such notice and such repair or restoration is not commenced
within thirty (30) days thereafter, this Lease shall terminate as of the date
specified in said notice. If Lessee gives such notice and such repair or
restoration is commenced within said thirty (30) days, this Lease shall
continue in full force and effect. "COMMENCE" shall mean either the
unconditional
INITIALS: ___________ __________
Page 12 of 27
<PAGE>
authorization of the preparation of the required plans, or the beginning of
the actual work on the Premises, whichever first occurs.
9.7 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to Paragraph 9, an equitable adjustment shall be made concerning
advance Base Rent and any other advance payments made by Lessee to Lessor.
Lessor shall, in addition, return to Lessee so much of Lessee's Security
Deposit as has not been, or is not then required to be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions
of any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.1 DEFINITION OF "REAL PROPERTY TAXES." As used herein, the term
"REAL PROPERTY TAXES" shall include any form of assessment; real estate,
general, special, ordinary or extraordinary, or rental levy or tax (other
than inheritance, personal income or estate taxes), improvement bond, and/or
license fee imposed upon or levied against any legal or equitable interest of
Lessor in the Premises, Lessor's right to other income therefrom, and/or
Lessor's business of leasing, by any authority having the direct or indirect
power to tax and where the funds are generated with reference to the Building
address and where the proceeds so generated are to be applied by the city,
county or other local taxing authority of a jurisdiction within which the
Premises are located. The term "REAL PROPERTY TAXES" shall also include any
tax, fee, levy, assessment or charge, or any increase therein, imposed by
reason of events occurring during the term of this Lease, including but not
limited to, a change in the ownership of the Premises.
10.2
(a) PAYMENT OF TAXES. Lessee shall pay the Real Property
Taxes applicable to the Premises during the term of this Lease. Subject to
Paragraph 10.2(b), all such payments shall be made at least ten (10) days
prior to the delinquency date. Lessee shall promptly furnish Lessor with
satisfactory evidence that such taxes have been paid. If any such taxes
cover any period of time prior to or after the expiration or termination of
this Lease, Lessee's share of such taxes shall be prorated to cover only that
portion of the tax bill applicable to the period that this Lease is in
effect, and Lessor shall reimburse Lessee therefor upon demand. If Lessee
shall fail to pay any required Real Property Taxes, Lessor shall have the
right to pay the same, and Lessee shall reimburse Lessor therefor upon demand.
(b) ADVANCE PAYMENT. In the event Lessee incurs a late
charge on any Rent payment, Lessor may, at Lessor's option, estimate the
current Real Property Taxes, and require that such taxes be paid in advance
to Lessor by Lessee, either: (i) in a lump sum amount equal to the
installment due, at least twenty (20) days prior to the applicable
delinquency date, or (ii) monthly in advance with the payment of the Base
Rent. If Lessor elects to require payment monthly in advance, the monthly
payment shall be an amount equal to the amount of the estimated installment
of taxes divided by the number of months remaining before the month in which
said installment becomes delinquent. When the actual amount of the
applicable tax bill is known, the amount of such equal monthly advance
payments shall be adjusted as required to provide the funds needed to pay the
applicable taxes. If the amount collected by Lessor is insufficient to pay
such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such
additional sums as are necessary to pay such obligations. All monies paid to
Lessor under this Paragraph may be intermingled with other monies of Lessor
and shall not bear interest. In the event of a Breach by Lessee in the
performance of its obligations under this Lease, then any balance of funds
paid to Lessor under the provisions of this Paragraph may, at the option of
Lessor, be treated as an additional Security Deposit.
10.3 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the Real Property
Taxes of all of the land and improvements included within the tax parcel
assessed, such proportion to be conclusively determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available.
INITIALS: ___________ __________
Page 13 of 27
<PAGE>
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to
delinquency, all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment
and all personal property of Lessee. When possible, Lessee shall cause such
property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within ten (10) days after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light,
power, telephone, trash disposal and other utilities and services supplied to
the Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, if all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or encumber (collectively, "ASSIGN or ASSIGNMENT")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee by an amount
greater than twenty-five percent (25%) of such Net Worth as it was
represented at the time of the execution of this Lease or at the time of the
most recent assignment to which Lessor has consented, or as it exists
immediately prior to said transaction or transactions constituting such
reduction, whichever was or is greater, shall be considered an assignment of
this Lease to which Lessor may withhold its consent. "NET WORTH OF LESSEE"
shall mean the net worth of Lessee (excluding any guarantors) established
under generally accepted accounting principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or
a noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a
noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon
thirty (30) days written notice, increase the monthly Base Rent to one
hundred ten percent (110%) of the Base Rent then in effect. Further, in the
event of such Breach and rental adjustment, (i) the purchase price of any
option to purchase the Premises held by Lessee shall be subject to similar
adjustment to one hundred ten percent (110%) of the price previously in
effect, and (ii) all fixed and non-fixed rental adjustments scheduled during
the remainder of the Lease term shall be increased to One Hundred Ten Percent
(110%) of the scheduled adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written
assumption by such assignee or sublessee of the obligations of Lessee under
this Lease, (ii) release Lessee of any obligations hereunder, or (iii) alter
the primary liability of Lessee for the payment of Rent or for the
performance of any other obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of
INITIALS: ___________ __________
Page 14 of 27
<PAGE>
such assignment nor the acceptance of any Rent or performance shall
constitute a waiver or estoppel of Lessor's right to exercise its remedies
for Lessee's Default or Breach.
(c) Lessor's consent to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor
may proceed directly against Lessee, any Guarantors or anyone else
responsible for the performance of the Lessee's obligations under this Lease,
including any assignee or sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefor to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises, if
any, together with a fee of $1,000 or ten percent (10%) of the current
monthly Base Rent applicable to the portion of the Premises which is the
subject of the proposed assignment or sublease, whichever is greater, as
consideration for Lessor's considering and processing said request. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be as reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall,
by reason of accepting such assignment or entering into such sublease, be
deemed to have assumed and agreed to conform and comply with each and every
term, covenant, condition and obligation herein to be observed or performed
by Lessee during the term of said assignment or sublease, other than such
obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease;
provided, however, that until a Breach shall occur in the performance of
Lessee's obligations Lessee may collect said Rent. Lessor shall not, by
reason of this or any other assignment of such sublease, nor by reason of the
collection of the Rent, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor all Rent due and to become due under the sublease. Sublessee shall
rely upon any such statement and notice from Lessor and shall pay all Rents
to Lessor without any obligation or right to inquire as to whether such
Breach exists, and notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time
of the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor for any other prior Defaults or
Breaches of such subleasor.
(c) Any matter requiring the consent of the sublessor under
a sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any
part of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The
INITIALS: ___________ __________
Page 15 of 27
<PAGE>
sublessee shall have a right to reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "BREACH is defined as the occurrence of any one or
more of the following Defaults, and the failure by Lessee to cure such
Default within any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or
where the coverage of the property insurance described in Paragraph 8.3 is
jeopardized as a result thereof, or without providing reasonable assurances
to minimize potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor
or to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of
three (3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service
contracts, (iii) the rescission of an unauthorized assignment or subletting,
(iv) a Tenancy Statement, (v) a requested subordination, (vi) evidence
concerning any guaranty and/or Guarantor, (vii) any document requested under
Paragraph 42 (easements), or (viii) any other documentation or information
which Lessor may reasonably require of Lessee under the terms of this Lease,
where any such failure continues for a period of ten (10) days following
written notice to Lessee.
(d) A Default by Lessee as to the terms, covenants,
conditions or provisions of this Lease, or of the rules adopted under
Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b)
or (c) above, where such Default continues for a period of thirty (30) days
after written notice; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for
its cure, then it shall not be deemed to be a Breach if Lessee commences such
cure within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion.
(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S.C. Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment
of a trustee or receiver to take possession of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this subparagraph
13.1(e) is contrary to any applicable law, such provision shall be of no
force or effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or
any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor; (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty; (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing; (iv) a Guarantor's refusal to honor the
guaranty; or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee,
equals or exceeds the combined financial resources of Lessee and the
Guarantors that existed at the time of execution of this Lease.
INITIALS: ___________ __________
Page 16 of 27
<PAGE>
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in the
case of an emergency, without notice), Lessor may, at its option, perform
such duty or obligation on Lessee's behalf, including but not limited to the
obtaining of reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any such
performance by Lessor shall be due and payable by Lessee upon receipt of
invoice therefor. If any check given to Lessor by Lessee shall not be
honored by the bank upon which it is drawn, Lessor, at its option, may
require all future payments to be made by Lessee to be by cashier's check.
In the event of a Breach, Lessor may, with or without further notice or
demand, and without limiting Lessor in the exercise of any right or remedy
which Lessor may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises
by any lawful means, in which case this Lease and the term hereof shall
terminate and Lessee shall immediately surrender possession to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) unpaid Rent
which had been earned at the time of termination; (ii) the worth at the time
of award of the amount by which the unpaid rent which would have been earned
after termination until the time of award exceeds the amount of such rental
loss that the Lessee proves could have been reasonably avoided; (iii) the
worth at the time of award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such rental
loss that the Lessee proves could be reasonably avoided; and (iv) any other
amount necessary to compensate Lessor for all the detriment proximately
caused by the Lessee's failure to perform it obligations under this Lease or
which in the ordinary course of things would be likely to result therefrom,
including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and
alteration of the Premises, reasonable attorneys' fees, and that portion of
the leasing commission paid by Lessor in connection with the this Lease
applicable to the unexpired term of this Lease. The worth at the time of
award of the amount referred to in provision (iii) of the immediately
preceding sentence shall be computed by discounting such amount at the
discount rate of the Federal Reserve Bank of the District within which the
Premises are located at the time of award plus one percent (1%). Efforts by
Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not
waive Lessor's right to recover damages under Paragraph 12. If termination
of this Lease is obtained through the provisional remedy of unlawful
detainer, Lessor shall have the right to recover in such proceeding the
unpaid Rent and damages as are recoverable therein, or Lessor may reserve
therein the right to recover all or any part thereof in a separate suit. If
a notice and grace period required under Paragraph 13.1 was not previously
given, a notice to pay rent or quit, or to perform or quit given to Lessee
under the unlawful detainer statute shall also constitute the notice required
by Paragraph 13.1. In such case, the applicable grace period required by
Paragraph 13.1 and under unlawful detainer statute shall run concurrently,
and the failure of Lessee to cure the Default within the greater of the two
such grace periods shall constitute both an unlawful detainer and a Breach of
this Lease entitling Lessor to the remedies provided for in this Lease and/or
by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts
to relet, and/or the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available under
the laws of judicial decisions of the state wherein the Premises are located.
The expiration or termination of this Lease and/or the termination of
Lessee's right to possession shall not relieve Lessee from liability under
any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent or
other charges, or for the giving or paying by Lessor to or for Lessee of any
cash or other bonus, inducement or consideration for Lessee's entering into
this Lease, all of which concessions are hereinafter referred to as
"INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and
faithful performance of all of the terms, covenants and conditions of this
Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision
shall automatically be deemed deleted from this Lease and of no further force
or effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement
Provision shall be immediately due and payable by Lessee to Lessor,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance
by Lessor of Rent or the cure of the Breach which initiated the operation of
this paragraph shall not be deemed a waiver
INITIALS: ___________ __________
Page 17 of 27
<PAGE>
by Lessor of the provisions of this paragraph unless specifically so stated
in writing by Lessor at the time of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee of Rent will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting
charges, and late charges which may be imposed upon Lessor. Accordingly, if
any Rent shall not be received by Lessor within five (5) days after such
amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a one-time late charge equal to five percent (5%)
of each such overdue amount. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Lessor will incur by
reason of late payment. Acceptance of such late charge by Lessor shall in no
event constitute a waiver of Lessee's Default or Breach with respect to such
overdue amount, nor prevent the exercise of any of the other rights and
remedies granted hereunder. In the event that a late charge is payable
hereunder, whether or not collected, for three (3) consecutive installments
of Base Rent, then notwithstanding any provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable
quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other
than late charges, not received by Lessor, when due as to scheduled payments
(such as Base Rent) or within thirty (30) days following the date on which it
was due for a non-scheduled payment, shall bear interest from the date when
due, as to scheduled payments, or the thirty-first (31st) day after it was
due as to non-scheduled payments. The interest ("INTEREST") charged shall be
equal to the prime rate reported in The Wall Street Journal as published
closest prior to the date when due plus four percent (4%), but shall not
exceed the maximum rate allowed by law. Interest is payable in addition to
the potential late charge provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach
of this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
Paragraph, a reasonable time shall in no event be less than thirty (30) days
after receipt by Lessor, and any Lender whose name and address shall have
been furnished Lessee in writing for such purpose, of written notice
specifying wherein such obligation of Lessor has not been performed;
provided, however, that if the nature of Lessor's obligation is such that
more than thirty (30) days are reasonably required for its performance, then
Lessor shall not be in breach if performance is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within thirty (30) days
after receipt of said notice, or if having commenced said cure they do not
diligently pursue it to completion, then Lessee may elect to cure said breach
at Lessee's expense and offset from Rent an amount equal to the greater of
one months' Base Rent or the Security Deposit, and to pay an excess of such
expense under protest, reserving Lessee's right to reimbursement from Lessor.
Lessee shall document the cost of said cure and supply said documentation to
Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (collectively "CONDEMNATION"), this Lease shall terminate as to the
part taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of any building
portion of the Premises, or more than twenty-five percent (25%) of the land
area portion of the Premises not occupied by any building, is taken by
Condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in proportion to the reduction in
utility of the Premises caused by such Condemnation. Condemnation awards
and/or payments shall be the property of Lessor, whether such award shall be
made as compensation for diminution in value of the leasehold, the value of
the part taken, or for severance damages; provided, however, that Lessee
shall be entitled to any compensation for Lessee's relocation expenses, loss
of business goodwill and/or Trade Fixtures, without regard to whether or not
this Lease is
INITIALS: ___________ __________
Page 18 of 27
<PAGE>
terminated pursuant to the provisions of this Paragraph. All Alterations and
Utility Installations made to the Premises by Lessee, for purposes of
Condemnation only, shall be considered the property of the Lessee and Lessee
shall be entitled to any and all compensation which is payable therefor. In
the event that this Lease is not terminated by reason of the Condemnation,
Lessor shall repair any damage to the Premises caused by such Condemnation.
15. BROKER'S FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed
pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise
agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b)
if Lessee acquires any rights to the Premises or other premises owned by
Lessor and located within the same Project, if any, within which the Premises
is located, (c) if Lessee remains in possession of the Premises, with the
consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is
increased, whether by agreement or operation of an escalation clause herein,
then, Lessor shall pay Brokers a fee in accordance with the schedule of said
Brokers in effect at the time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions
of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any
amounts due as and for commissions pertaining to this Lease when due, then
such amounts shall accrue interest. In addition, if Lessor fails to pay any
amounts to Lessee's Broker when due, Lessee's Broker may send written notice
to Lessor and Lessee of such failure and if Lessor fails to pay such amounts
within ten (10) days after said notice, Lessee shall pay said monies to its
Broker and offset such amounts against Rent. In addition, Lessee's Broker
shall be deemed to be a third party beneficiary of any commission agreement
entered into by and/or between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS.
Lessee and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers, if
any) in connection with this Lease, and that no one other than said named
Brokers is entitled to any commission or finder's fee in connection herewith.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
the other harmless from and against liability for compensation or charges
which may be claimed by any such unnamed broker, finder or other similar
party by reason of any dealings or actions of the Indemnifying Party,
including any costs, expenses, and/or attorneys' fees reasonably incurred
with respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within the (10)
days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in
writing in form similar to the then most current "Estoppel Certificate" form
published by the American Industrial Real Estate Association, plus such
additional information, confirmation and/or statements as may be reasonably
requested by the Requesting Party.
(b) If the Responding Party shall fail to execute or deliver
the Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force
and effect without modification except as may be represented by the
Requesting Party, (ii) there are no uncured defaults in the Requesting
Party's performance, and (iii) if Lessor is the Requesting Party, not more
than one month's Rent has been paid in advance. Prospective purchasers and
encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and
the Responding Party shall be estopped from denying the truth of the facts
contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements
as may be reasonably required by such lender or purchaser, including, but not
limited to, Lessee's financial statements for the past three (3) years. All
such financial statements shall be received by Lessor and such lender or
purchaser in confidence and shall be used only for the purposes herein set
forth.
INITIALS: ___________ __________
Page 19 of 27
<PAGE>
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or,
if this is a sublease, of the Lessee's interest in the prior lease. In the
event of a transfer of Lessor's title or interest in the Premises or this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by
credit) any unused Security Deposit held by Lessor. Except as provided in
Paragraph 15, upon such transfer or assignment and delivery of the Security
Deposit, as aforesaid, the prior Lessor shall be relieved of all liability
with respect to the obligations and/or covenants under this Lease thereafter
to be performed by the Lessor. Subject to the foregoing, the obligations
and/or covenants in this Lease to be performed by the Lessor shall be binding
only upon the Lessor as hereinabove defined. Notwithstanding the above, and
subject to the provisions of Paragraph 20 below, the original Lessor under
this Lease, and all subsequent holders of the Lessor's Interest in this Lease
shall remain liable and responsible with regard to the potential duties and
liabilities of Lessor pertaining to Hazardous Substances as outlined in
Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any of the provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the
word "DAYS" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute
personal obligations of Lessor, the individual partners of Lessor or its or
their individual partners, directors, officers or shareholders, and Lessee
shall look to the Premises, and to no other assets of Lessor, for the
satisfaction of any liability of Lessor with respect to this Lease, and shall
not seek recourse against the individual partners of Lessor, or its or their
individual partners, directors, officers or shareholders, or any of their
personal assets for such satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties
under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any mater mentioned
herein, and no other prior or contemporaneous agreement or understanding
shall be effective. Lessor and Lessee each represents and warrants to the
Brokers that it has made, and is relying solely upon, its own investigation
as to the nature, quality, character and financial responsibility of the
other Party to this Lease and as to the nature, quality and character of the
Premises. Brokers have no responsibility with respect thereto or with
respect to any default or breach hereof by either Party. The liability
(including court costs and Attorneys' fees), of any Broker with respect to
negotiation, execution, delivery or performance by either Lessor or Lessee
under this Lease or any amendment or modification hereto shall be limited to
an amount up to the fee received by such Broker pursuant to this Lease;
provided, however, that the foregoing limitation on each Broker's liability
shall not be applicable to any gross negligence or willful misconduct of such
Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by
courier) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile
transmission, and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. The addresses noted adjacent to a Party's
signature on this Lease shall be that Party's address for delivery or mailing
of notices. Either Party may by written notice to the other specify a
different address for notice, except that upon Lessee's taking possession of
the Premises, the Premises shall constitute Lessee's address for notice. A
copy of all notices to Lessor shall be concurrently transmitted to such party
or parties at such addresses as Lessor may from time to time hereafter
designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given
forty-eight (48) hours after the same is addressed as required herein and
mailed with postage prepaid. Notices delivered by United States Express Mail
or overnight courier that guarantee next day delivery shall be deemed given
twenty-four (24) hours after delivery of the same to the Postal Service or
courier. Notices transmitted by facsimile transmission or similar means shall
be deemed
INITIALS: ___________ __________
Page 20 of 27
<PAGE>
delivered upon telephone confirmation of receipt, provided a copy is also
delivered via delivery or mail. If notice is received on a Saturday, Sunday
or legal holiday, it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. The acceptance of Rent by Lessor shall not be a waiver of any
Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor
on account of monies or damages due Lessor, notwithstanding any qualifying
statements or conditions made by Lessee in connection therewith, which such
statements and/or conditions shall be of no force or effect whatsoever unless
specifically agreed to in writing by Lessor at or before the time of deposit
of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible of repayment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over, then the Base Rent shall be
increased to one hundred fifty percent (150%) of the Base Rent applicable
during the month immediately preceding the expiration or termination.
Nothing contained herein shall be construed as consent by Lessor to any
holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all of the
remedies at law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions
of this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the Parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the
plural and vice versa. This Lease shall not be construed as if prepared by
one of the Parties, but rather according to its fair meaning as a whole, as
if both Parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall
be subject and subordinate to any ground lease, mortgage, deed of trust, or
other hypothecation or security device (collectively, "SECURITY DEVICE"), now
or hereafter placed upon the Premises, to any and all advances made on the
security thereof, and to all renewals, modifications, and extensions thereof.
Lessee agrees that the holders of any such Security Devices (in this Lease
together referred to as "LESSOR'S LENDER") shall have no liability or
obligation to perform any of the obligations of Lessor under this Lease. Any
Lender may elect to have this Lease and/or any Option granted hereby superior
to the lien of its Security Device by giving written notice thereof to
Lessee, whereupon this Lease and such Options shall be deemed prior to such
Security Device, notwithstanding the relative dates of the documentation or
recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender of any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership, (ii) be subject to any
offsets or
INITIALS: ___________ __________
Page 21 of 27
<PAGE>
defenses which Lessee might have against any prior lessor, or (iii) be bound
by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which
Non-Disturbance Agreement provides that Lessee's possession of the Premises,
and this Lease, including any options to extend the term hereof, will not be
disturbed so long as Lessee is not in Breach hereof and attorns to the record
owner of the Premise. Further, within sixty (60) days after the execution of
this Lease, Lessor shall use its commercially reasonable efforts to obtain a
Non-Disturbance Agreement from the holder of any pre-existing Security Device
which is secured by the Premises. In the event that Lessor is unable to
provide the Non-Disturbance Agreement within said sixty (60) days, then
Lessee may, at Lessee's option, directly contact Lessor's lender and attempt
to negotiate for the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection
with a sale, financing or refinancing of the Premises, Lessee and Lessor
shall execute such further writings as may be reasonably required to
separately document any subordination, attornment and/or Non-Disclosure
Agreement provided for herein.
31. ATTORNEY'S FEES. If any Party or Broker brings an action or
proceeding involving the Premises to enforce the terms hereof or to declare
rights hereunder, the Prevailing Party (as hereafter defined) in any such
proceeding, action, or appeal thereon, shall be entitled to reasonable
attorneys' fees. Such fees may be awarded in the same suit or recovered in a
separate suit, whether or not such action or proceeding is pursued to
decision or judgment. The term, "PREVAILING PARTY," shall include, without
limitation, a Party or Broker who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or
the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fees award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees
reasonably incurred. In addition, Lessor shall be entitled to attorneys'
fees, costs and expense incurred in the preparation and service of notices of
Default and consultations in connection therewith, whether or not a legal
action is subsequently commenced in connection with such Default or resulting
Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement of rent or
liability to Lessee. Lessor may at any time place on the Premises any
ordinary "For Sale" signs and Lessor may during the last six (6) months of
the term hereof place on the Premises any ordinary "For Lease" signs. Lessee
may at any time place on or about the Premises any ordinary "For Sublease"
sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor
shall not be obligated to exercise any standard of reasonableness in
determining whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not
place any sign upon the Premises without Lessor' prior written consent. All
signs must comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the
mutual termination or cancellation hereof, or a termination hereof by Lessor
for Breach by Lessee, shall automatically terminate any sublease or lesser
estate in the Premises; provided, however, that Lessor may elect to continue
any one or all existing subtenancies. Lessor's failure within ten (10) days
following any such event to elect to the contrary by written notice to the
holder of any such lesser interest, shall constitute Lessor's election to
have such event constitute the termination of such interest.
INITIALS: ___________ __________
Page 22 of 27
<PAGE>
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including, but not limited to, architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including, but not limited to, consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon
receipt of an invoice and supporting documentation therefor. Lessor's consent
to any act, assignment or subletting shall not constitute an acknowledgement
that no Default or Breach by Lessee of this Lease exists, nor shall such
consent be deemed a waiver of any then existing Default or Breach, except as
may be otherwise specifically stated in writing by Lessor at the time of such
consent. The failure to specify herein any particular condition to Lessor's
consent shall not preclude the imposition by Lessor at the time of consent of
such further or other conditions as are then reasonable with reference to the
particular matter for which consent is being given. In the event that either
Party disagrees with any determination made by the other hereunder and
reasonably requests the reasons for such determination, the determining party
shall furnish its reasons in writing and in reasonable detail within ten (10)
business days following such request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a
guaranty in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations
as Lessee under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements,
(c) a Tenancy Statement, or (d) written confirmation that the guaranty is
still in effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease or to extend or renew any lease that Lessee has
on other property of Lessor; (b) the right of first refusal or first offer to
lease either the premises or other property of Lessor; (c) the right to
purchase or the right of first refusal to purchase the Premises or other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be
assigned or exercised by anyone other than said original Lessee and only
while the original Lessee is in full possession of the Premises.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised
unless the prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i)
during the period commencing with the giving of any notice of Default and
continuing until said Default is cured, (ii) during the period of time any
Rent is unpaid (without regard to whether notice thereof is given Lessee),
(iii) during the time Lessee is in Breach of this Lease, or (iv) in the event
that Lessee has been given three (3) or more notices of separate Default,
whether or not the Defaults are cured, during the twelve (12) month period
immediately preceding the exercise of the Option.
(b) The period of time within which an Option may be
exercised shall not be extended or enlarged by reason of Lessee's inability
to exercise an Option because of the provisions of Paragraph 39.4(a).
INITIALS: ___________ __________
Page 23 of 27
<PAGE>
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during
any twelve (12) month period, whether or not the Defaults are cured, or (iii)
if Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of
buildings controlled by Lessor, Lessee agrees that it will observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, and care of said properties, including the care and
cleanliness of the grounds and including the parking, loading and unloading
of vehicles, and that Lessee will pay its fair share of common expenses
incurred in connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or the
security measures, and that Lessor shall have no obligation whatsoever to
provide same. Lessee assumes all responsibility for the protection of the
Premises, Lessee, its agents and invitees and their property from the acts of
third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights
and dedications that Lessor deems necessary, and to cause the recordation of
parcel maps and restrictions, so long as such easements, rights, dedications,
maps and restrictions do not unreasonably interfere with the use of the
Premises by Lessee. Lessee agrees to sign any documents reasonably requested
by Lessor to effectuate any such easement rights, dedication, map or
restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other Party
satisfactory evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease
to the other Party. This Lease is not intended to be binding until executed
and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification.
48. MULTIPLE PARTIES. If more than one person or entity is named herein
as either Lessor or Lessee, such multiple Parties shall have joint and
several responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease / / is /X/ is not attached to this Lease.
INITIALS: ___________ __________
Page 24 of 27
<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
INITIALS: ___________ __________
Page 25 of 27
<PAGE>
- -------------------------------------------------------------------------------
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY,
LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT
RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF
THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE
POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE
STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE
SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN
PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE
STATE IN WHICH THE PREMISES IS LOCATED.
- -------------------------------------------------------------------------------
The parties hereto have executed this Lease at the place on the dates specified
above to their respective signatures.
Executed at 3043 Summerhill Court, Executed at 1171 Sonora Court,
San Jose, CA, on November 5, 1999 Sunnyvale, CA on November 5, 1999
by LESSOR: BHUPINDER S. LEHGA. by LESSEE: SILICON STORAGE
RUPINDER K. LEHGA TECHNOLOGY, INC.
By: /s/ Bhupinder S. Lehga By /s/ Jeffrey L. Garon
Name Printed: BHUPINDER S. LEHGA Name Printed: JEFFREY L. GARON
Title: ___________________________________ Title: Vice President, Chief
Financial Officer
By: /s/ Rupinder K. Lehga By: /s/ Humberto Chacon
Name Printed: RUPINDER K. LEHGA Name Printed: HUMBERTO CHACON
Title: ___________________________________ Title: Manager, Human Resources
Address: _________________________________ Address: 1171 Sonora Court
__________________________________________ Sunnyvale, CA 94086
Telephone: (408) 238-0454 / (408) 524-8630 Telephone: (408) 523-7705
Facsimile: (408) 524-8631 Facsimile: (408) 523-7707
Federal ID No. : _________________________ Federal ID No.:__________________
NOTE: These forms are often modified to meet the changing requirements of
law and industry needs.
Always write or call to make sure you are utilizing the most current form:
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street,
Suite l600, Los Angeles, California 90017,
(213) 687-8777, Fax No. (213) 687-8616.
INITIALS: ___________ __________
Page 26 of 27
<PAGE>
ADDENDUM - 1
ADDENDUM TO THAT CERTAIN STANDARD INDUSTRIAL/COMMERCIAL SINGLE-
TENANT LEASE - NET DATED: NOVEMBER 15, 1999
BY AND BETWEEN BHUPINDER S. LEHGA & RUPINDER K. LEHGA ("LESSOR")
AND SILICON STORAGE TECHNOLOGY, INC. ("LESSEE")
FOR THE PROPERTY LOCATED AT 1159 SONORA COURT, SUNNYVALE, CALIFORNIA.
1. Monthly rent shall be as follows:
<TABLE>
<S> <C>
Month 1 Nov. 15 to Nov. 30, 1999 $ 5684.28
Months 2 $ 11368.56
Months 3-12 $ 22737.12
Months 13-24 $ 23646.60
Months 25-36 $ 24592.47
Months 37-48 $ 25576.17
Months 49-60 $ 26599.22
Months 61-64 $ 27663.18
</TABLE>
2. Lessee shall have first right of refusal to expand into the adjacent
"Wave Systems" space within said Property. Lessor to serve written
notice to Lessee regarding said first right of refusal and Lessee to
respond in writing within five (5) calendar days. (Exhibit A)
3. Lessee to one (1) five (5) year option to extend lease at the then fair
market fair lease rate.
4. Lessor will also install condensation outlets from all existing air
conditioners on the roof.
By: /s/ BHUPINDER LEHGA Date: November 5, 1999
------------------------------- --------------------------------
Lessor
By: /s/ RUPINDER LEHGA Date: November 9, 1999
------------------------------- --------------------------------
Lessor
By: /s/ JEFFREY L. GARON Date: November 6, 1999
------------------------------- --------------------------------
Lessee
By: /s/ HUMBERTO CHACON Date: November 5, 1999
------------------------------- --------------------------------
Lessee
<PAGE>
EXHIBIT 10.25
INDUSTRIAL LEASE
(SINGLE TENANT: NET; STAND-ALONE)
BETWEEN
THE IRVINE COMPANY
AND
SILICON STORAGE TECHNOLOGY, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE 1 BASIC LEASE PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . .1
ARTICLE 2 PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Section 2.1 LEASED PREMISES. . . . . . . . . . . . . . . . . . . . . . . . .2
Section 2.2 ACCEPTANCE OF PREMISES . . . . . . . . . . . . . . . . . . . . .2
Section 2.3 BUILDING NAME AND ADDRESS. . . . . . . . . . . . . . . . . . . .2
Section 2.4 LANDLORD'S RESPONSIBILITIES. . . . . . . . . . . . . . . . . . .2
ARTICLE 3 TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Section 3.1 GENERAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Section 3.2 RIGHT TO EXTEND THIS LEASE . . . . . . . . . . . . . . . . . . .3
ARTICLE 4 RENT AND OPERATING EXPENSES. . . . . . . . . . . . . . . . . . . . . . . .4
Section 4.1 BASIC RENT . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Section 4.2 OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . .4
Section 4.3 SECURITY DEPOSIT . . . . . . . . . . . . . . . . . . . . . . . .6
ARTICLE 5 USES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 5.1 USE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
Section 5.2 SIGNS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
Section 5.3 HAZARDOUS MATERIALS. . . . . . . . . . . . . . . . . . . . . . .7
ARTICLE 6 SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Section 6.1 UTILITIES AND SERVICES . . . . . . . . . . . . . . . . . . . . .9
Section 6.2 PARKING. . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
ARTICLE 7 MAINTAINING THE PREMISES . . . . . . . . . . . . . . . . . . . . . . . . 10
Section 7.1 TENANT'S MAINTENANCE AND REPAIR. . . . . . . . . . . . . . . . 10
Section 7.2 LANDLORD'S MAINTENANCE AND REPAIR. . . . . . . . . . . . . . . 10
Section 7.3 ALTERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.4 MECHANIC'S LIENS . . . . . . . . . . . . . . . . . . . . . . . 11
Section 7.5 ENTRY AND INSPECTION . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE 8 TAXES AND ASSESSMENTS ON TENANT'S PROPERTY . . . . . . . . . . . . . . . 12
ARTICLE 9 ASSIGNMENT AND SUBLETTING. . . . . . . . . . . . . . . . . . . . . . . . 12
Section 9.1 RIGHTS OF PARTIES. . . . . . . . . . . . . . . . . . . . . . . 12
Section 9.2 EFFECT OF TRANSFER . . . . . . . . . . . . . . . . . . . . . . 14
Section 9.3 SUBLEASE REQUIREMENTS. . . . . . . . . . . . . . . . . . . . . 14
Section 9.4 CERTAIN TRANSFERS. . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 10 INSURANCE AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 15
Section 10.1 TENANT'S INSURANCE . . . . . . . . . . . . . . . . . . . . . . 15
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 10.2 LANDLORD'S INSURANCE . . . . . . . . . . . . . . . . . . . . . 15
Section 10.3 TENANT'S INDEMNITY . . . . . . . . . . . . . . . . . . . . . . 15
Section 10.4 LANDLORD'S NONLIABILITY. . . . . . . . . . . . . . . . . . . . 15
Section 10.5 WAIVER OF SUBROGATION. . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 11 DAMAGE OR DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . 16
Section 11.1 RESTORATION. . . . . . . . . . . . . . . . . . . . . . . . . . 16
Section 11.2 LEASE GOVERNS. . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 12 EMINENT DOMAIN. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 12.1 TOTAL OR PARTIAL TAKING. . . . . . . . . . . . . . . . . . . . 17
Section 12.2 TEMPORARY TAKING . . . . . . . . . . . . . . . . . . . . . . . 17
Section 12.3 TAKING OF PARKING AREA . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 13 SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS . . . . . . . . . . 18
Section 13.1 SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 13.2 ESTOPPEL CERTIFICATE . . . . . . . . . . . . . . . . . . . . . 18
Section 13.3 FINANCIALS.. . . . . . . . . . . . . . . . . . . . . . . . . . 18
ARTICLE 14 DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 19
Section 14.1 TENANT'S DEFAULTS. . . . . . . . . . . . . . . . . . . . . . . 19
Section 14.2 LANDLORD'S REMEDIES. . . . . . . . . . . . . . . . . . . . . . 19
Section 14.3 LATE PAYMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 14.4 RIGHT OF LANDLORD TO PERFORM . . . . . . . . . . . . . . . . . 21
Section 14.5 DEFAULT BY LANDLORD. . . . . . . . . . . . . . . . . . . . . . 21
Section 14.6 EXPENSES AND LEGAL FEES. . . . . . . . . . . . . . . . . . . . 21
Section 14.7 WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . 22
Section 14.8 SATISFACTION OF JUDGMENT . . . . . . . . . . . . . . . . . . . 22
Section 14.9 LIMITATION OF ACTIONS AGAINST LANDLORD . . . . . . . . . . . . 22
ARTICLE 15 END OF TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 15.1 HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 15.2 MERGER ON TERMINATION. . . . . . . . . . . . . . . . . . . . . 22
Section 15.3 SURRENDER OF PREMISES; REMOVAL OF PROPERTY . . . . . . . . . . 23
ARTICLE 16 PAYMENTS AND NOTICES. . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 17 RULES AND REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 18 BROKER'S COMMISSION . . . . . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 19 TRANSFER OF LANDLORD'S INTEREST . . . . . . . . . . . . . . . . . . 24
ARTICLE 20 INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
Section 20.1 GENDER AND NUMBER. . . . . . . . . . . . . . . . . . . . . . . 24
Section 20.2 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 20.3 JOINT AND SEVERAL LIABILITY. . . . . . . . . . . . . . . . . . 24
Section 20.4 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 20.5 TIME OF ESSENCE. . . . . . . . . . . . . . . . . . . . . . . . 24
Section 20.6 CONTROLLING LAW. . . . . . . . . . . . . . . . . . . . . . . . 24
Section 20.7 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 20.8 WAIVER AND CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . 24
Section 20.9 INABILITY TO PERFORM . . . . . . . . . . . . . . . . . . . . . 25
Section 20.10 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . 25
Section 20.11 QUIET ENJOYMENT. . . . . . . . . . . . . . . . . . . . . . . . 25
Section 20.12 SURVIVAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ARTICLE 21 EXECUTION AND RECORDING . . . . . . . . . . . . . . . . . . . . . . 25
Section 21.1 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 21.2 CORPORATE AND PARTNERSHIP AUTHORITY. . . . . . . . . . . . . . 25
Section 21.3 EXECUTION OF LEASE; NO OPTION OR OFFER . . . . . . . . . . . . 25
Section 21.4 RECORDING. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 21.5 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 21.6 EXECUTED COPY. . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 21.7 ATTACHMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE 22 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 22.1 NONDISCLOSURE OF LEASE TERMS . . . . . . . . . . . . . . . . . 26
Section 22.2 GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 22.3 CHANGES REQUESTED BY LENDER. . . . . . . . . . . . . . . . . . 26
Section 22.4 MORTGAGEE PROTECTION . . . . . . . . . . . . . . . . . . . . . 26
Section 22.5 COVENANTS AND CONDITIONS . . . . . . . . . . . . . . . . . . . 26
Section 22.6 SECURITY MEASURES. . . . . . . . . . . . . . . . . . . . . . . 26
Section 22.7 EXPIRATION OF EXISTING LEASE . . . . . . . . . . . . . . . . . 27
Section 22.8 JAMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
</TABLE>
iii.
<PAGE>
INDUSTRIAL LEASE
(SINGLE TENANT; NET; STAND-ALONE)
THIS LEASE is made as of the 22nd day of November, 1999, by and between
The Irvine Company, hereafter called "Landlord," and SILICON STORAGE
TECHNOLOGY, INC., a California corporation hereinafter called "Tenant."
ARTICLE I
BASIC LEASE PROVISIONS
Each reference in this Lease to the "Basic Lease Provisions" shall mean
and refer to the following collective terms, the application of which shall
be governed by the provisions in the remaining Articles of this Lease.
1. Premises: The Premises are more particularly
described in Section 2.1.
2. Address of Building: 1175 Sonora Court, Sunnyvale,
CA 94086
3. Use of Premises: General office, research and
development, storage, distribution and testing of computer flash memory
products.
4. Estimated Commencement Date: April 6, 2000
5. Lease Term: The Term of this Lease shall expire at
midnight on April 5, 2005.
6. Basic Rent: Thirty Four Thousand Dollars
($34,000.00) per month, based on $1.70 per rentable square foot. Basic Rent
is subject to adjustment as follows:
Commencing April 1, 2001, the Basic Rent shall be Thirty Five
Thousand Dollars ($35,000.00) per month, based on $1.75 per
rentable square foot.
Commencing April 1, 2002, the Basic Rent shall be Thirty Six
Thousand Dollars ($36,000.00) per month, based on $1.80 per
rentable square foot.
Commencing April 1, 2003, the Basic Rent shall be Thirty Seven
Thousand Two Hundred Dollars ($37,200.00) per month, based on
$1.86 per rentable square foot.
Commencing April 1, 2004, the Basic Rent shall be Thirty Eight
Thousand Two Hundred Dollars ($38,200.00) per month, based on
$1.91 per rentable square foot.
7. Guarantor(s): None
8. Floor Area of Premises: approximately 20,000
rentable square feet
9. Security Deposit: $21,000.00
10. Broker(s): Colliers International
11. Additional Insureds: Insignia\ESG of California,
Inc.
12. Address for Payments and Notices:
1.
<PAGE>
<TABLE>
<S> <C>
LANDLORD TENANT
INSIGNIA\ESG OF CALIFORNIA, INC. SILICON STORAGE TECHNOLOGY, INC.
160 Santa Clara Street, Suite 1350 1171 Sonora Court
San Jose, CA 95113 Sunnyvale, CA 94086
with a copy of notices to:
IRVINE INDUSTRIAL COMPANY
P.O. Box 6370
Newport Beach, CA 92658-6370
Attn: Vice President, Industrial
Operations
</TABLE>
13. Tenant's Liability Insurance Requirement: $2,000,000.00
14. Vehicle Parking Spaces: See Section 6.2
ARTICLE II
PREMISES
SECTION 2.1 LEASED PREMISES. Landlord leases to Tenant and Tenant
leases from Landlord the premises shown in EXHIBIT A (the "Premises"),
including the building identified in Item 2 of the Basic Lease Provisions
(which together with the underlying real property, is called the "Building"),
and containing approximately the floor area set forth in Item 8 of the Basic
Lease Provisions. The Building is located on the site (the "Site") shown on
EXHIBIT A-1 attached hereto.
SECTION 2.2 ACCEPTANCE OF PREMISES. Tenant acknowledges that neither
Landlord nor any representative of Landlord has made any representation or
warranty with respect to the Premises or the Building or the suitability or
fitness of either for any purpose, including without limitation any
representations or warranties regarding zoning or other land use matters.
Tenant further acknowledges that neither Landlord nor any representative of
Landlord has agreed to undertake any alterations or additions or construct
any improvements to the Premises except as expressly provided in this Lease.
Tenant is currently in possession of the Premises pursuant to a separate
lease agreement with Landlord that will expire on the day before the
Commencement Date of this Lease (the "Existing Lease"). Tenant shall take
possession of the premises as of the Commencement Date of the Lease in an
"as-is" condition without further obligation on Landlord's part as to
improvements whatsoever, except that Landlord shall make repairs to the
mechanical system at a cost not to exceed Twenty Three Thousand Dollars
($23,000.00).
SECTION 2.3 BUILDING NAME AND ADDRESS. Tenant shall not utilize any
name selected by Landlord from time to time for the Building as any part of
Tenant's corporate or trade name. Landlord shall have the right to change
the name, address, number or designation of the Building without liability to
Tenant.
SECTION 2.4 LANDLORD'S RESPONSIBILITIES. Notwithstanding the
provisions of Section 7.2 of this Lease, during the Term of this Lease,
Landlord agrees to repair and/or replace, at its sole cost and expense and
not as a "Building Cost", the structural components of the roof, the
load-bearing walls and the foundations and footings of the Building.
Notwithstanding the foregoing, Landlord's obligation contained in this
Section 2.4 to bear such costs and expenses shall not apply: (i) to the costs
and expenses of periodic maintenance of the roof, walls, foundations and
footings of the Building, nor (ii) to the extent of the negligence or willful
misconduct by Tenant, its employees, agents, contractors, licensees or
invitees (in which case Tenant shall be responsible for the reasonable costs
of such repairs and/or replacements). The repairs or replacements required
of Landlord pursuant to this Section 2.4(a) shall be made promptly following
notice from Tenant of the need for such repairs or replacements.
2.
<PAGE>
ARTICLE III
TERM
SECTION 3.1 GENERAL. The Term shall be for the period shown in Item 5
of the Basic Lease Provisions. The Term shall commence ("Commencement Date")
on the date set forth in Item 4 of the Basic Lease Provisions and shall
expire on the corresponding date (the "Expiration Date") of the expiration of
the Term.
SECTION 3.2 RIGHT TO EXTEND THIS LEASE. Provided that Tenant is not
in default under any provision of this Lease, either at the time of exercise
of the extension right granted herein or at the time of the commencement of
such extension, and provided further that Tenant is occupying the Premises
and has not assigned its interest in this Lease, Tenant may extend the Term
of this Lease for one (1) period of sixty (60) months. Tenant shall
exercise its right to extend the Term by and only by delivering to Landlord,
not less than nine (9) months or more than twelve (12) months prior to the
expiration date of the Term, Tenant's irrevocable written notice of its
commitment to extend (the "Commitment Notice"). The Basic Rent payable
under the Lease during any extension of the Term shall be determined as
provided in the following provisions.
If Landlord and Tenant have not by then been able to agree upon the
Basic Rent for the extension of the Term, then within one hundred twenty
(120) and ninety (90) days prior to the expiration date of the Term, Landlord
shall notify Tenant in writing of the Basic Rent that would reflect the
prevailing market rental rate for a 60-month renewal of comparable space in
the area of the Premises (together with any increases thereof during the
extension period) as of the commencement of the extension period ("Landlord's
Determination"). Should Tenant disagree with the Landlord's Determination,
then Tenant shall, not later than twenty (20) days thereafter, notify
Landlord in writing of Tenant's determination of those rental terms
("Tenant's Determination"). In no event, however, shall Landlord's
Determination or Tenant's Determination be less than the Basic Rent payable
by Tenant during the final month of the initial Term. Within ten (10) days
following delivery of the Tenant's Determination, the parties shall attempt
to agree on an appraiser to determine the fair market rental. If the parties
are unable to agree in that time, then each party shall designate an
appraiser within ten (10) days thereafter. Should either party fail to so
designate an appraiser within that time, then the appraiser designated by the
other party shall determine the fair market rental. Should each of the
parties timely designate an appraiser, then the two appraisers so designated
shall appoint a third appraiser who shall, acting alone, determine the fair
market rental for the Premises. Any appraiser designated hereunder shall
have an MAI certification with not less than five (5) years experience in the
valuation of commercial industrial buildings in Santa Clara County,
California.
Within thirty (30) days following the selection of the appraiser and
such appraiser's receipt of the Landlord's Determination and the Tenant's
Determination, the appraiser shall determine whether the rental rate
determined by Landlord or by Tenant more accurately reflects the fair market
rental rate for the 60-month renewal of the Lease for the Premises, as
reasonably extrapolated to the commencement of the extension period.
Accordingly, either the Landlord's Determination or the Tenant's
Determination shall be selected by the appraiser as the fair market rental
rate for the extension period. In making such determination, the appraiser
shall consider rental comparables for similarly improved space in thc area of
the Premises with appropriate adjustment for location and quality of project,
but the appraiser shall not attribute any factor for market tenant
improvement allowances or brokerage commissions in making its determination
of the fair market rental rate. At any time before the decision of the
appraiser is rendered, either party may, by written notice to the other
party, accept the rental terms submitted by the other party, in which event
such terms shall be deemed adopted as the agreed fair market rental. The
fees of the appraiser(s) shall be borne entirely by the party, whose
determination of the fair market rental rate was not accepted by the
appraiser.
Within twenty (20) days after the determination of the fair market
rental, Landlord shall prepare an appropriate amendment to this Lease for the
extension period, and Tenant shall execute and return same to Landlord within
twenty (20) days. Should the fair market rental not be established by the
commencement of the extension period, then Tenant shall continue paying rent
at the rate in effect during the last month of the initial Term, and a lump
sum adjustment shall be made promptly upon the determination of such new
rental.
3.
<PAGE>
If Tenant fails to timely comply with any of the provisions of this
paragraph, Tenant's right to extend the Term shall be extinguished and the
Lease shall automatically terminate as of the expiration date of the Term,
without any extension and without any liability to Landlord. Any attempt to
assign or transfer any right or interest created by this paragraph shall be
void from its inception. Tenant shall have no other right to extend the Term
beyond the single sixty (60) month extension period created by this
paragraph. Unless agreed to in a writing signed by Landlord and Tenant, any
extension of the Term, whether created by an amendment to this Lease or by a
holdover of the Premises by Tenant, or otherwise, shall be deemed a part of,
and not in addition to, any duly exercised extension period permitted by this
paragraph.
ARTICLE IV
RENT AND OPERATING EXPENSES
SECTION 4.1 BASIC RENT. From and after the Commencement Date, Tenant
shall pay to Landlord without deduction or offset, Basic Rent for the
Premises in the total amount shown (including subsequent adjustments, if any)
in Item 6 of the Basic Lease Provisions. Any rental adjustment shown in Item
6 shall be deemed to occur on the specified monthly anniversary of the
Commencement Date. The rent shall be due and payable in advance commencing on
the Commencement Date (as prorated for any partial month) and continuing
thereafter on the first day of each successive calendar month of the Term.
No demand, notice or invoice shall be required for the payment of Basic Rent.
SECTION 4.2 OPERATING EXPENSES.
(a) Tenant shall pay to Landlord, as additional rent, "Building
Costs" and "Property Taxes," as those terms are defined below, incurred by
Landlord in the operation of the Building. For convenience of reference,
Property Taxes and Building Costs shall be referred to collectively as
"Operating Expenses".
(b) Commencing prior to the start of the first full "Expense
Recovery Period" (as defined below) of the Lease, and prior to the start of
each full or partial Expense Recovery Period thereafter, Landlord shall give
Tenant a written estimate of the amount of Operating Expenses for the Expense
Recovery Period. Tenant shall pay the estimated amounts to Landlord in equal
monthly installments, in advance, with Basic Rent. If Landlord has not
furnished its written estimate for any Expense Recovery Period by the time
set forth above, Tenant shall continue to pay cost reimbursements at the
rates established for the prior Expense Recovery Period, if any; provided
that when the new estimate is delivered to Tenant, Tenant shall, at the next
monthly payment date, pay any accrued cost reimbursements based upon the new
estimate. For purposes hereof, "Expense Recovery Period" shall mean every
twelve month period during the Term (or portion thereof for the first and
last lease years) commencing July 1 and ending June 30.
(c) Within one hundred twenty (120) days after the end of each
Expense Recovery Period, Landlord shall furnish to Tenant a statement showing
in reasonable detail the actual or prorated Operating Expenses incurred by
Landlord during the period, and the parties shall within thirty (30) days
thereafter make any payment or allowance necessary to adjust Tenant's
estimated payments, if any, to Tenant's actual owed amounts as shown by the
annual statement. Any delay or failure by Landlord in delivering any
statement hereunder shall not constitute a waiver of Landlord's right to
require Tenant to pay Operating Expenses pursuant hereto. Any amount due
Tenant shall be credited against installments next coming due under this
Section 4.2, and any deficiency shall be paid by Tenant together with the
next installment. If Tenant has not made estimated payments during the
Expense Recovery Period, any amount owing by Tenant pursuant to subsection
(a) above shall be paid to Landlord in accordance with Article XVI. Should
Tenant fail to object in writing to Landlord's determination of actual
Operating Expenses within sixty (60) days following delivery of Landlord's
expense statement, Landlord's determination of actual Operating Expenses for
the applicable Expense Recovery Period shall be conclusive and binding on the
parties and any future claims to the contrary shall be barred.
Provided Tenant is not then in default of any monetary covenant of this
Lease (including, without limitation, the obligation to pay Basic Rent and/or
Tenant's Share of Operating Expenses), or any material non-monetary covenant,
following written notice and the expiration of the applicable cure period,
then Tenant shall have
4.
<PAGE>
the right to have Tenant's financial officer or a certified public accountant
audit Landlord's Operating Expenses, subject to the terms and conditions
hereof. In no event, however, shall such auditor be compensated by Tenant on
a "contingency" basis, or on any other basis tied to the results of said
audit. Tenant shall give written notice to Landlord of Tenant's intent to
audit, if at all, within sixty (60) days following delivery of Landlord's
expense statement for each of the Expense Recovery Periods. Following at
least ten (10) business days notice to Landlord, such audit shall be
conducted at a mutually agreeable time during normal business hours at the
office of Landlord or its management agent where the records are maintained.
Landlord agrees to make such personnel available to Tenant as is reasonably
necessary for Tenant's employees and agents, to conduct such audit. Landlord
shall make such records available to Tenant's employees and agents, for
inspection during normal business hours. Tenant's employees and agents shall
be entitled to make photostatic copies of such records, provided Tenant bears
the expense of such copying, and further provided that Tenant keeps such
copies in a confidential manner and does not discuss, display or distribute
such copies to any other third party. If Tenant's audit determines that
actual Operating Expenses have been overstated by more than five percent
(5%), then subject to Landlord's right to review and/or contest the audit
results, Landlord shall reimburse Tenant for the reasonable out-of-pocket
costs of such audit. Tenant's Basic Rent shall be appropriately adjusted to
reflect any overstatement in Operating Expenses. In the event or a dispute
between Landlord and Tenant regarding the results of such audit, such
dispute shall be submitted to and resolved by JAMS as provided in Section
22.7 of this Lease.
All of the information obtained by Tenant and/or its auditor in
connection with such audit. as well as any compromise, settlement, or
adjustment reached between Landlord and Tenant as a result thereof, shall be
held in strict confidence and, except as may be required pursuant to
litigation, shall not be disclosed to any third party, directly or
indirectly, by Tenant or its auditor or any of their officers, agents or
employees. Landlord may require Tenant and its auditor to execute a separate
confidentiality agreement as a condition precedent to any audit.
(d) Even though the Lease has terminated and the Tenant has
vacated the Premises, when the final determination is made of Operating
Expenses for the Expense Recovery Period in which the Lease terminates,
Tenant shall upon notice pay the entire increase due over the estimated
expenses paid. Conversely, any overpayment made in the event expenses
decrease shall be rebated by Landlord to Tenant.
(e) If, at any time during any Expense Recovery Period, any one or
more of the Operating Expenses are increased to a rate(s) or amount(s) in
excess of the rate(s) or amount(s) used in calculating the estimated expenses
for the year, then the estimate of Operating Expenses shall be increased for
the month in which such rate(s) or amount(s) becomes effective and for all
succeeding months by an amount equal to the increase. Landlord shall give
Tenant written notice of the amount or estimated amount of the increase, the
month in which the increase will become effective, and the month for which
the payments are due. Tenant shall pay the increase to Landlord as a part of
Tenant's monthly payments of estimated expenses as provided in paragraph (b)
above, commencing with the month in which effective.
(f) The term "Building Costs" shall include all expenses of
operation and maintenance of the Building and all landscaping, walkways,
parking areas and lighting of the Site to the extent such expenses are not
billed to and paid directly by Tenant, and shall include the following
charges by way of illustration but not limitation: water and sewer charges;
insurance premiums or reasonable premium equivalents should Landlord elect to
self-insure any risk that Landlord is authorized to insure hereunder;
license, permit, and inspection fees; heat; light; power; air conditioning;
supplies; materials; equipment; tools; the cost of any environmental,
insurance, tax or other consultant utilized by Landlord in connection with
the Building; costs incurred in connection with compliance of any laws or
changes in laws applicable to the Building; the cost of any capital
investments (other than tenant improvements for specific tenants) to the
extent of the amortized amount thereof over the useful life of such capital
investments calculated at a market cost of funds, all as determined by
Landlord, for each such year of useful life during the Term; labor;
reasonably allocated wages and salaries, fringe benefits, and payroll taxes
for administrative and other personnel directly applicable to the Building,
including both Landlord's personnel and outside personnel; any expense
incurred pursuant to Sections 6.1, 6.2, 7.2, and 10.2; and a reasonable
overhead/management fee for the professional operation of the Building.
Notwithstanding anything to the contrary contained herein, the amount of such
overhead/management fee to be charged to Tenant shall be determined by
multiplying the actual fee charged (which from time to time may be with
respect to the Building only or the Building together with other properties
owned by Landlord and/or its affiliates) by a fraction, the numerator of
which is the floor area of the Premises (as set forth in Item No. 8 of the
Basic Lease Provisions) and the denominator of which is the total square
footage of space
5.
<PAGE>
charged with such fee actually leased to tenants (including Tenant). It is
understood that Building Costs shall include competitive charges for direct
services provided by any subsidiary or division of Landlord, and may include
the Building's or the Site's proportionate share of the cost of maintenance
or repair contracts which cover the Building and/or the Site and other
buildings and/or projects in Landlord's portfolio, as reasonably allocated by
Landlord.
(g) The term "Property Taxes" as used herein shall include the
following: (i) all real estate taxes or personal property taxes, as such
property taxes may be reassessed from time to time; and (ii) other taxes,
charges and assessments which are levied with respect to this Lease, to the
Building or to the Site, and any improvements, fixtures and equipment and
other property, of Landlord located in the Building or on the Site, except
that general net income and franchise taxes imposed against Landlord shall be
excluded; and (iii) all assessments and fees for public improvements,
services, and facilities and impacts thereon, including without limitation
arising out of any Community Facilities Districts, "Mello Roos" districts,
similar assessment districts, and any traffic impact mitigation assessments
or fees; and (iv) any tax, surcharge or assessment which shall be levied in
addition to or in lieu of real estate or personal property taxes, other than
taxes covered by Article VIII; and (v) costs and expenses incurred in
contesting the amount or validity of any Property Tax by appropriate
proceedings.
SECTION 4.3 SECURITY DEPOSIT. Concurrently with Tenant's delivery of
this Lease, Tenant shall deposit with Landlord the sum, if any, stated in
Item 9 of the Basic Lease Provisions, to be held by Landlord as security for
the full and faithful performance of Tenant's obligations under this Lease
(the "Security Deposit"). Subject to the last sentence of this Section, the
Security Deposit shall be understood and agreed to be the property of
Landlord upon Landlord's receipt thereof, and may be utilized by Landlord in
its discretion towards the payment of all prepaid expenses by Landlord for
which Tenant would be required to reimburse Landlord under this Lease,
including without limitation brokerage commissions and Tenant Improvement
costs. Upon any default by Tenant, including specifically Tenant's failure
to pay rent or to abide by its obligations under Sections 7.1 and 15.3 below,
whether or not Landlord is informed of or has knowledge of the default, the
Security Deposit shall be deemed to be automatically and immediately applied,
without waiver of any rights Landlord may have under this Lease or at law or
in equity as a result of the default, as a setoff for full or partial
compensation for that default. If any portion of the Security Deposit is
applied after a default by Tenant, Tenant shall within five (5) days after
written demand by Landlord deposit cash with Landlord in an amount sufficient
to restore the Security Deposit to its original amount. Landlord shall not be
required to keep this Security Deposit separate from its general funds, and
Tenant shall not be entitled to interest on the Security Deposit. If Tenant
fully performs its obligations under this Lease, the Security Deposit or any
balance thereof shall be returned to Tenant (or, at Landlord's option, to the
last assignee of Tenant's interest in this Lease) after the expiration of the
Term, provided that Landlord may retain the Security Deposit to the extent
and until such time as all amounts due from Tenant in accordance with this
Lease have been determined and paid in full. Tenant hereby authorizes
Landlord to retain any remaining balance of the security deposit funded to
Landlord under the Existing Lease (as defined in Section 22.7), which balance
shall be applied by Landlord to offset the sums owing under this Section 4.3.
ARTICLE V
USES
SECTION 5.1 USE. Tenant shall use the Premises only for the purposes
stated in Item 3 of the Basic Lease Provisions, all in accordance with
applicable laws and restrictions and pursuant to approvals to be obtained by
Tenant from all relevant and required governmental agencies and authorities.
The parties agree that any contrary use shall be deemed to cause material and
irreparable harm to Landlord and shall entitle Landlord to injunctive relief
in addition to any other available remedy. Tenant, at its expense, shall
procure, maintain and make available for Landlord's inspection throughout the
Term, all governmental approvals, licenses and permits required for the
proper and lawful conduct of Tenant's permitted use of the Premises. Tenant
shall not use or allow the Premises to be used for any unlawful purpose, nor
shall Tenant permit any nuisance or commit any waste in the Premises. Tenant
shall not do or permit to be done anything which will invalidate or increase
the cost of any insurance policy(ies) covering the Building or its contents,
and shall comply with all applicable insurance underwriters rules and the
requirements of the Pacific Fire Rating Bureau or any other organization
performing a similar function. Tenant shall comply at its expense with all
present and future laws, ordinances, restrictions, regulations, orders, rules
and requirements of all governmental authorities that pertain to Tenant or
its use of the Premises, including without limitation all federal and
6.
<PAGE>
state occupational health and safety requirements, whether or not Tenant's
compliance will necessitate expenditures or interfere with its use and
enjoyment of the Premises. Tenant shall comply at its expense with all
present and future covenants, conditions, easements or restrictions now or
hereafter affecting or encumbering the Building, and any amendments or
modifications thereto, including without limitation the payment by Tenant of
any periodic or special dues or assessments charged against the Premises or
Tenant which may be allocated to the Premises or Tenant in accordance with
the provisions thereof. Tenant shall promptly upon demand reimburse Landlord
for any additional insurance premium charged by reason of Tenant's failure to
comply with the provisions of this Section, and shall indemnify Landlord from
any liability and/or expense resulting from Tenant's noncompliance.
SECTION 5.2 SIGNS. Except for Tenant's existing signage on or about
the Premises or the Building (which existing signage is hereby approved by
Landlord), Tenant shall not have the right to install new signage on or about
the Premises or the Building visible from the exterior of the Building,
without Landlord's approval. The size, design, graphics, material, style,
color and other physical aspects of any such new signage shall be subject to
Landlord's written approval prior to installation (which approval may be
withheld in Landlord's discretion), any covenants, conditions or restrictions
encumbering the Premises, Landlord's signage program, if any, as in effect
from time to time ("Signage Criteria"), and any applicable municipal or other
governmental permits and approvals. Tenant acknowledges having received and
reviewed a copy of the current Signage Criteria, if applicable. Tenant shall
be responsible for the cost of any permitted sign, including the fabrication,
installation, maintenance and removal thereof. If Tenant fails to maintain
its sign, or if Tenant fails to remove same upon termination of this Lease
and repair any damage caused by such removal, Landlord may do so at Tenant's
expense.
SECTION 5.3 HAZARDOUS MATERIALS.
(a) For purposes of this Lease, the term "Hazardous Materials"
includes (i) any "hazardous materials" as defined in Section 25501(n) of the
California Health and Safety Code, (ii) any other substance or matter which
results in liability to any person or entity from exposure to such substance
or matter under any statutory or common law theory, and (iii) any substance
or matter which is in excess of permitted levels set forth in any federal,
California or local law or regulation pertaining to any hazardous or toxic
substance, material or waste.
(b) Tenant shall not cause or permit any Hazardous Materials to be
brought upon, stored, used, generated, released or disposed of on, under,
from or about the Premises or the Site (including without limitation the soil
and groundwater thereunder) without the prior written consent of Landlord.
Notwithstanding the foregoing, Tenant shall have the right, without obtaining
prior written consent of Landlord: (A) to utilize within the Premises
standard office products that may contain Hazardous Materials (such as
photocopy toner, "White Out," and the like), provided, however, that (i)
Tenant shall maintain such products in their original retail packaging, shall
follow all instructions on such packaging with respect to the storage, use
and disposal of such products, and shall otherwise comply with all applicable
laws with respect to such products, and (ii) all of the other terms and
provisions of this Section 5.3 shall apply with respect to Tenant's storage,
use and disposal of all such products, and (B) to utilize those Hazardous
Materials in kind and quantity as set forth on Tenant's Environmental
Questionnaire delivered to Landlord prior to the execution of this Lease,
provided that all of the terms and provisions of this Section 5.3 shall apply
with respect to Tenant's storage, use and disposal of such Hazardous
Materials. Landlord may, in its sole discretion, place such conditions as
Landlord deems appropriate with respect to any Hazardous Materials other than
those described in the preceding sentence, and may further require that
Tenant demonstrate that any such Hazardous Materials are necessary or useful
to Tenant's business and will be generated, stored, used and disposed of in a
manner that complies with all applicable laws and regulations pertaining
thereto and with good business practices. Tenant understands that Landlord
may utilize an environmental consultant to assist in determining conditions
of approval in connection with the storage, generation, release, disposal or
use of Hazardous Materials by Tenant on or about the Premises, and/or to
conduct periodic inspections of the storage, generation, use, release and/or
disposal of such Hazardous Materials by Tenant on and from the Premises, and
Tenant agrees that any reasonable costs incurred by Landlord in connection
therewith shall be reimbursed by Tenant to Landlord as additional rent
hereunder upon demand, provided Tenant has been the cause of the
contamination justifying the use of the environmental consultant.
(c) Prior to the execution of this Lease, Tenant shall complete,
execute and deliver to Landlord an Environmental Questionnaire and Disclosure
Statement (the "Environmental Questionnaire") in the form of Exhibit B
attached hereto. The completed Environmental Questionnaire shall be deemed
incorporated into
7.
<PAGE>
this Lease for all purposes, and Landlord shall be entitled to rely fully on
the information contained therein. On each anniversary of the Commencement
until the termination of this Tenant shall disclose to Landlord in writing
the names and amounts of all Hazardous Materials which were stored,
generated, used, released and/or disposed of on, under or about the Premises
for the twelve-month period prior thereto, and which Tenant desires to store,
generate, use, release and/or dispose of on, under or about the Premises for
the succeeding twelve-month period. In addition, to the extent Tenant is
permitted to utilize Hazardous Materials upon the Premises, Tenant shall
promptly provide Landlord with complete and legible copies of all the
following environmental documents relating thereto: reports filed pursuant to
any self-reporting requirements; permit applications, permits, monitoring
reports, workplace exposure and community exposure warnings or notices and
all other reports, disclosures, plans or documents (even those which may be
characterized as confidential) relating to water discharges, air pollution,
waste generation or disposal, and underground storage tanks for Hazardous
Materials; orders, reports, notices, listings and correspondence (even those
which may be considered confidential) of or concerning the release,
investigation of, compliance, cleanup, remedial and corrective actions, and
abatement of Hazardous Materials; and all complaints, pleadings and other
legal documents filed by or against Tenant related to Tenant's use, handling,
storage, release and/or disposal of Hazardous Materials.
(d) Landlord and its agents shall have the right, but not the
obligation, to inspect, sample and/or monitor the Premises, the Site and/or
the soil or groundwater thereunder at any time to determine whether Tenant is
complying with the terms of this Section 5.3, and in connection therewith
Tenant shall provide Landlord with full access in all relevant facilities,
records and personnel. If Tenant is not in compliance with any of the
provisions of this Section 5.3, or in the event or a release of any
Hazardous Material on, under or about the Premises and/or the Site caused or
permitted by Tenant, its agents, employees, contractors, licensees or
invitees, Landlord and its agents shall have the right, but not the
obligation, without limitation upon any of Landlord's other rights and
remedies under this Lease, to immediately enter upon the Premises and/or the
Site without notice and to discharge Tenant's obligations under this Section
5.3 at Tenant's expense, including without limitation the taking of emergency
or long-term remedial action. Landlord and its agents shall endeavor to
minimize interference with Tenant's business in connection therewith, but
shall not be liable for any such interference. In addition, Landlord, at
Tenant's expense, shall have the right, but not the obligation, to join and
participate in any legal proceedings or actions initiated in connection with
any claims arising out of the storage, generation, use, release and/or
disposal by Tenant or its agents, employees, contractors, licensees or
invitees of Hazardous Materials on, under, from or about the Premises and/or
the Site.
(e) If the presence of any Hazardous Materials on, under, from or
about the Premises and/or the Site caused or permitted by Tenant or its
agents, employees, contractors, licensees or invitees results in (i) injury
to any person, (ii) injury to or any contamination of the Premises and/or the
Site, or (iii) injury to or contamination of any real or personal property
wherever situated, Tenant, at its expense, shall promptly take all actions
necessary to return the Premises, the Site and any other affected real or
personal property, owned by Landlord to the condition existing prior to the
introduction of such Hazardous Materials and to remedy or repair any such
injury or contamination, including without limitation, any cleanup,
remediation, removal, disposal, neutralization or other treatment of any such
Hazardous Materials. Notwithstanding the foregoing, Tenant shall not, without
Landlord's prior written consent, take any remedial action in response to the
presence of any Hazardous Materials on, under or about the Premises, the Site
or any other affected real or personal property owned by Landlord or enter
into any similar agreement, consent, decree or other compromise with any
governmental agency with respect to any Hazardous Materials claims; provided
however, Landlord's prior written consent shall not be necessary in the event
that the presence of Hazardous Materials on, under or about the Premises, the
Site or any other affected real or personal property owned by Landlord (i)
imposes an immediate threat to the health, safety or welfare of any
individual or (ii) is of such a nature that an immediate remedial response is
necessary and it is not possible to obtain Landlord's consent before taking
such action. To the fullest extent permitted by law, Tenant shall indemnify,
hold harmless, protect and defend (with attorneys acceptable to Landlord)
Landlord and any successors to all or any portion of Landlord's interest in
the Premises, the Site and any other real or personal property owned by
Landlord from and against any and all liabilities, losses, damages,
diminution in value, judgments, fines, demands, claims, recoveries,
deficiencies, costs and expenses (including without limitation attorneys'
fees, court costs and other professional expenses), whether foreseeable or
unforeseeable, arising directly or indirectly out of the use, generation,
storage, treatment, release, on or off-site disposal or transportation of
Hazardous Materials on, into, from, under or about the Premises, the Site and
any other real or personal property owned by Landlord caused or permitted by
Tenant, its agents, employees, contractors, licensees or invitees,
specifically including without
8.
<PAGE>
limitation the cost of any required or necessary, repair, restoration,
cleanup or detoxification of the Premises, the Site and any other real or
personal property, owned by Landlord, and the preparation of any closure or
other required plans, whether or not such action is required or necessary
during the Term or after the expiration of this Lease. If Landlord at any
time discovers that Tenant or its agents, employees, contractors, licensees
or invitees may have caused or permitted the release of a Hazardous Material
on, under, from or about the Premises, the Site or any other real or personal
property owned by Landlord, Tenant shall, at Landlord's request, immediately
prepare and submit to Landlord a comprehensive plan, subject to Landlord's
approval, specifying the actions to be taken by Tenant to return the
Premises, the Site or any other real or personal property owned by Landlord
to the condition existing prior to the introduction of such Hazardous
Materials. Upon Landlord's approval of such cleanup plan, Tenant shall, at
its expense, and without limitation of any rights and remedies of Landlord
under this Lease or at law or in equity, immediately implement such plan and
proceed to cleanup such Hazardous Materials in accordance with all applicable
laws and as required by such plan and this Lease. The provisions of this
subsection (e) shall expressly survive the expiration or sooner termination
of this Lease.
(f) Landlord hereby discloses to Tenant, and Tenant hereby
acknowledges, certain facts relating to Hazardous Materials at the Project
known by Landlord to exist as of the date of this Lease, as more particularly
described in EXHIBIT C attached hereto. Tenant shall have no liability or
responsibility with respect to the Hazardous Materials facts described in
EXHIBIT C, nor with respect to any Hazardous Materials which were not caused
or permitted by Tenant, its agents, employees, contractors, licensees or
invitees. Landlord shall take responsibility, at its sole cost and expense,
for any governmentally-ordered clean-up, remediation, removal, disposal,
neutralization or other treatment of Hazardous Materials conditions described
in this Section 5.3(f). The foregoing obligation on the part of Landlord
shall include the reasonable costs (including, without limitation, reasonable
attorney's fees) of defending Tenant (with attorneys reasonably acceptable to
Tenant) from and against any legal action or proceeding instituted by any
governmental agency in connection with such clean-up, remediation, removal,
disposal, neutralization or other treatment of such conditions, provided that
Tenant promptly tenders such defense to Landlord. Tenant agrees to notify
its agents, employees, contractors, licensees, and invitees of any exposure
or potential exposure to Hazardous Materials at the Premises that Landlord
brings to Tenant's attention.
SECTION 5.4 In the event of any foreclosure of a mortgage or deed of
trust encumbering the Building and/or the Project, the obligations on the
part of Landlord contained in Section 5.3(f) above shall be personal to
Landlord and shall not be binding on nor inure against any lender acquiring
the Building and/or the Project by foreclosure of its mortgage or deed of
trust or deed in lieu of foreclosure, or any successor in interest to such
lender.
ARTICLE VI
SERVICES
SECTION 6.1 UTILITIES AND SERVICES. Tenant shall be responsible for
and shall pay promptly, directly to the appropriate supplier, all charges for
water, gas, electricity, sewer, heat, light, power, telephone, refuse pickup,
janitorial service, interior landscape maintenance and all other utilities,
materials and services furnished directly to Tenant or the Premises or used
by Tenant in, on or about the Premises during the Term, together with any
taxes thereon. Landlord shall not be liable for damages or otherwise for any
failure or interruption of any utility or other service furnished to the
Premises, and no such failure or interruption shall be deemed an eviction or
entitle Tenant to terminate this Lease or withhold or abate any rent due
hereunder. Landlord shall at all reasonable times have free access to all
electrical and mechanical installations of Landlord.
SECTION 6.2 PARKING. Tenant shall be entitled to the vehicle parking
spaces on the Site which are designated by Landlord for parking. Tenant
shall not permit or allow any vehicles that belong to or are controlled by
Tenant or Tenant's employees, suppliers, shippers, Customers or invitees to
be loaded, unloaded or parked in areas other than those designated by
Landlord for such activities. If Tenant permits or allows any of the
prohibited activities described above, then Landlord shall have the right,
without notice, in addition to such other rights and remedies that Landlord
may have, to remove or tow away the vehicle involved and charge the costs to
Tenant. Parking shall be limited to striped parking stalls, and no parking
shall be permitted in any driveways, access ways or in any similar area.
Nothing contained in this Lease shall be deemed to create liability upon
Landlord for any damage to motor vehicles of visitors or employees, for any
loss of property from within those motor vehicles, or for
9.
<PAGE>
any injury to Tenant, its visitors or employees, unless ultimately determined
to be caused by the sole active negligence or willful misconduct of Landlord,
its agents, servants and employees. Landlord shall have the right to
establish, and from time to time amend, and to enforce against all users all
reasonable rules and regulations (including the designation of areas for
employee parking) that Landlord may deem necessary and advisable for the
proper and efficient operation and maintenance of parking. Landlord shall
have the right to construct, maintain and operate lighting facilities within
the parking areas; to change the area, level, location and arrangement of the
parking areas and improvements therein; and to do and perform such other acts
in and to the parking areas and improvements therein as, in the use of good
business judgment, Landlord shall determine to be advisable. Parking areas
shall be used only for parking vehicles. Washing, waxing, cleaning or
servicing of vehicles, or the storage of vehicles for 24-hour periods, is
prohibited unless otherwise authorized by Landlord. Tenant shall be liable
for any damage to the parking areas caused by Tenant or Tenant's employees,
suppliers, shippers, customers or invitees, including without limitation
damage from excess oil leakage. Tenant shall have no right to install any
fixtures, equipment or personal property in the parking areas.
ARTICLE VII
MAINTAINING THE PREMISES
SECTION 7.1 TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole
expense shall comply with all applicable laws and governmental regulations
governing the Premises and make all repairs necessary to keep the Premises in
the condition as existed on the Commencement Date (or on any later date that
the improvements may have been installed), excepting ordinary wear and tear,
including without limitation the electrical and mechanical systems, any air
conditioning, ventilating or heating equipment which serves the Premises, all
walls, glass, windows, doors, door closures, hardware, fixtures, electrical,
plumbing, fire extinguisher equipment and other equipment. Any damage or
deterioration of the Premises shall not be deemed ordinary wear and tear if
the same could have been prevented by good maintenance practices by Tenant.
As part of its maintenance obligations hereunder, Tenant shall, at Landlord's
request, provide Landlord with copies of all maintenance schedules, reports
and notices prepared by, for or on behalf of Tenant. Tenant shall obtain
preventive maintenance contracts from a licensed heating and air conditioning
contractor to provide for regular inspection and maintenance of the heating,
ventilating and air conditioning systems servicing the Premises, all subject
to Landlord's approval. All repairs shall be at least equal in quality to
the original work, shall be made only by a licensed contractor approved in
writing in advance by Landlord and shall be made only at the time or times
approved by Landlord. Any contractor utilized by Tenant shall be subject to
Landlord's standard requirements for contractors, as modified from time to
time. Landlord shall have the right at all times to inspect Tenant's
maintenance of all equipment (including without limitation air conditioning,
ventilating and heating equipment), and may impose reasonable restrictions
and requirements with respect to repairs, as provided in Section 7.3, and the
provisions of Section 7.4 shall apply to all repairs. Alternatively, Landlord
may elect to make any repair or maintenance required hereunder on behalf of
Tenant and at Tenant's expense, and Tenant shall promptly reimburse Landlord
for all costs incurred upon submission of an invoice.
SECTION 7.2 LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section 7.1
and Article XI, Landlord shall provide service, maintenance and repair with
respect to the roof, foundations, and footings of the Building, all
landscaping, walkways, parking areas, exterior lighting of the Site, and the
exterior surfaces of the exterior walls of the Building, except that Tenant
at its expense shall make all repairs which Landlord deems reasonably
necessary as a result of the act or negligence of Tenant, its agents,
employees, invitees, subtenants or contractors. Landlord shall have the
right to employ or designate any reputable person or firm, including any
employee or agent of Landlord or any of Landlord's affiliates or divisions,
to perform any service, repair or maintenance function. Landlord need not
make any other improvements or repairs except as specifically required under
this Lease, and nothing contained in this Section shall limit Landlord's
right to reimbursement from Tenant for maintenance, repair costs and
replacement costs as provided elsewhere in this Lease. Tenant understands
that it shall not make repairs at Landlord's expense or by rental offset.
Tenant further understands that Landlord shall not be required to make any
repairs to the roof, foundations or footings unless and until Tenant has
notified Landlord in writing of the need for such repair and Landlord shall
have a reasonable period of time thereafter to commence and complete said
repair, if warranted. Except for Landlord's repair and/or replacement
obligations contained in Sections 2.2 and 2.4 of this Lease, all costs of any
maintenance and repairs on the part of Landlord provided hereunder shall be
considered part of Building Costs.
10.
<PAGE>
SECTION 7.3 ALTERATIONS. Tenant shall make no alterations, additions
or improvements to the Premises without the prior written consent of
Landlord, which consent may be given or withheld in Landlord's sole
discretion. Notwithstanding the foregoing, Landlord shall not unreasonably
withhold its consent to any alterations, additions or improvements to the
Premises which cost less than One Dollar ($1.00) per square foot of the
improved portions of the Premises (excluding warehouse square footage) and do
not (i) affect the exterior of the Building or outside areas (or be visible
from adjoining sites), or (ii) affect or penetrate any of the structural
portions of the Building, including but not limited to the roof, or (iii)
require any change to the basic floor plan of the Premises, any change to any
structural or mechanical systems of the Premises, or any governmental permit
as a prerequisite to the construction thereof, or (iv) interfere in any
manner with the proper functioning of or Landlord's access to any mechanical,
electrical, plumbing or HVAC systems, facilities or equipment located in or
serving the Building, or (v) diminish the value of the Premises. Landlord
may impose, as a condition to its consent, any requirements that Landlord in
its discretion may deem reasonable or desirable, including but not limited to
a requirement that all work be covered by a lien and completion bond
satisfactory to Landlord and requirements as to the manner, time, and
contractor for performance of the work. Tenant shall obtain all required
permits for the work and shall perform the work in compliance with all
applicable laws, regulations and ordinances, all covenants, conditions and
restrictions affecting the Premises, and the Rules and Regulations (hereafter
defined). If any governmental entity requires, as a condition to any
proposed alterations, additions or improvements to the Premises by Tenant,
that improvements be made to the outside areas, and if Landlord consents to
such improvements to the outside areas, then Tenant shall, at Tenant's sole
expense, make such required improvements to the outside areas in such manner,
utilizing such materials, and with such contractors (including, if required
by Landlord, Landlord's contractors) as Landlord may require in its sole
discretion. Under no circumstances shall Tenant make any improvement which
incorporates any Hazardous Materials, including without limitation
asbestos-containing construction materials into the Premises. Any request
for Landlord's consent shall be made in writing and shall contain
architectural plans describing the work in detail reasonably satisfactory to
Landlord. Unless Landlord otherwise agrees in writing, all alterations,
additions or improvements affixed to the Premises (excluding moveable trade
fixtures and furniture) shall become the property of Landlord and shall be
surrendered with the Premises at the end of the Term, except that Landlord
may, as provided in the next succeeding paragraph of this Section 7.3,
require Tenant to remove by the Expiration Date, or sooner termination date
of this Lease, all or any alterations, decorations, fixtures, additions,
improvements and the like installed either by Tenant or by Landlord at
Tenant's request and to repair any damage to the Premises arising from that
removal. Except as otherwise provided in this Lease or in any Exhibit to
this Lease, should Landlord make any alteration or improvement to the
Premises for Tenant, Landlord shall be entitled to prompt reimbursement from
Tenant for all costs incurred.
As of the Expiration Date or earlier termination of the Term, Landlord
shall have the right to require Tenant to remove any alterations, additions
or improvements made by Tenant to the Premises, whether or not Landlord's
consent was required therefor. Notwithstanding the foregoing, if at the time
of requesting Landlord's consent to any such alterations, improvements or
additions to the Premises, Tenant shall request in writing whether or not
Landlord shall require the removal thereof as of the Expiration Date or
earlier termination of this Lease, then Landlord's right to require Tenant to
so remove such alterations, improvements or additions shall be exercised, if
at all, at the time of Landlord's consent thereto. Any such removal by
Tenant shall be subject to the provisions of Section 15.3 of this Lease.
SECTION 7.4 MECHANIC'S LIENS. Tenant shall keep the Premises free
from any liens arising out of any work performed, materials furnished, or
obligations incurred by or for Tenant. Upon request by Landlord, Tenant
shall promptly cause any such lien to be released by posting a bond in
accordance with California Civil Code Section 3143 or any successor statute.
In the event that Tenant shall not, within thirty (30) days following the
imposition of any lien, cause the lien to be released of record by payment or
posting or a proper bond, Landlord shall have, in addition to all other
available remedies, the right to cause the lien to be released by any means
it deems proper, including payment of or defense against the claim giving
rise to the lien. All expenses so incurred by Landlord, including Landlord's
attorneys' fees, and any consequential or other damages incurred by Landlord
arising out of such lien, shall be reimbursed by Tenant promptly following
Landlord's demand, together with interest from the date of payment by
Landlord at the maximum rate permitted by law until paid. Tenant shall give
Landlord no less than twenty (20) days' prior notice in writing before
commencing construction of any kind on the Premises so that Landlord may post
and maintain notices of nonresponsibility on the Premises.
11.
<PAGE>
SECTION 7.5 ENTRY AND INSPECTION. Landlord shall at all reasonable
times, upon written or oral notice (except in emergencies, when no notice
shall be required) have the right to enter the Premises to inspect them, to
supply services in accordance with this Lease, to protect the interests of
Landlord in the Premises, and to submit the Premises to prospective or actual
purchasers or encumbrance holders (or, during the last one hundred and eighty
(180) days of the Term or when an uncured Tenant default exists, to
prospective tenants), all without being deemed to have caused an eviction of
Tenant and without abatement of rent except as provided elsewhere in this
Lease. Except in cases of emergency, Landlord, at Tenant's election, shall
be accompanied by Tenant's representative in connection with any such entry.
Landlord shall have the right, if desired, to retain a key which unlocks all
of the doors in the Premises, excluding Tenant's vaults and safes, and
Landlord shall have the right to use any and all means which Landlord may
deem proper to open the doors in an emergency in order to obtain entry to the
Premises, and any entry to the Premises obtained by Landlord shall not under
any circumstances be deemed to be a forcible or unlawful entry into, or a
detainer of, the Premises, or any eviction of Tenant from the Premises.
ARTICLE VIII
TAXES AND ASSESSMENTS ON TENANT'S PROPERTY
Tenant shall be liable for and shall pay, at least ten (10) days before
delinquency, all taxes and assessments levied against all personal property
of Tenant located in the Premises, and against any alterations, additions or
like improvements made to the Premises by or on behalf of Tenant. When
possible Tenant shall cause its personal property and alterations to be
assessed and billed separately from the real property of which the Premises
form a part. If any taxes on Tenant's personal property and/or alterations
are levied against Landlord or Landlord's property and if Landlord pays the
same, or if the assessed value of Landlord's property is increased by the
inclusion of a value placed upon the personal property and/or alterations of
Tenant and if Landlord pays the taxes based upon the increased assessment,
Tenant shall pay to Landlord the taxes so levied against Landlord or the
proportion of the taxes resulting from the increase in the assessment. In
calculating what portion of any tax bill which is assessed against Landlord
separately, or Landlord and Tenant jointly, is attributable to Tenant's
alterations and personal property, Landlord's reasonable determination shall
be conclusive.
ARTICLE IX
ASSIGNMENT AND SUBLETTING
SECTION 9.1 RIGHTS OF PARTIES.
(a) Notwithstanding any provision of this Lease to the contrary,
Tenant will not, either voluntarily or by operation of law, assign, sublet,
encumber, or otherwise transfer all or any part of Tenant's interest in this
lease, or permit the Premises to be occupied by anyone other than Tenant,
without Landlord's prior written consent, which consent shall not
unreasonably be withheld in accordance with the provisions of Section 9.1(b).
No assignment (whether voluntary, involuntary or by operation of law) and no
subletting shall be valid or effective without Landlord's prior written
consent and, at Landlord's election, any such assignment or subletting or
attempted assignment or subletting shall constitute a material default of
this Lease. Landlord shall not be deemed to have given its consent to any
assignment or subletting by any other course of action, including its
acceptance of any name for listing in the Building directory. To the extent
not prohibited by provisions of the Bankruptcy Code, 11 U.S.C. Section 101
et seq. (the "Bankruptcy Code"), including Section 365(f)(1), Tenant on
behalf of itself and its creditors, administrators and assigns waives the
applicability of Section 365(e) of the Bankruptcy Code unless the proposed
assignee of the Trustee for the estate of the bankrupt meets Landlord's
standard for consent as set forth in Section 9.1(b) of this Lease. If this
Lease is assigned to any person or entity pursuant to the provisions of the
Bankruptcy Code, any and all monies or other considerations to be delivered
in connection with the assignment shall be delivered to Landlord, shall be
and remain the exclusive property of Landlord and shall not constitute
property of Tenant or of the estate of Tenant within the meaning of the
Bankruptcy Code. Any person or entity to which this Lease is assigned
pursuant to the provisions of the Bankruptcy Code shall be deemed to have
assumed all of the obligations arising under this Lease on and after the date
of the assignment, and shall upon demand execute and deliver to Landlord an
instrument confirming that assumption.
12.
<PAGE>
(b) If Tenant desires to transfer an interest in this Lease, it
shall first notify Landlord of its desire and shall submit in writing to
Landlord: (i) the name and address of the proposed transferee; (ii) the
nature of any proposed subtenant's or assignee's business to be carried on in
the Premises; (iii) the terms and provisions of any proposed sublease or
assignment, including a copy of the proposed assignment or sublease form;
(iv) evidence of insurance of the proposed assignee or subtenant complying
with the requirements of Exhibit D hereto; (v) a completed Environmental
Questionnaire from the proposed assignee or subtenant; and (vi) any other
information requested by Landlord and reasonably related to the transfer.
Except as provided in Subsection (e) of this Section, Landlord shall not
unreasonably withhold its consent, provided: (1) the use of the Premises will
be consistent with the provisions of this Lease; (2) the proposed assignee or
subtenant has not been required by any prior landlord, lender or governmental
authority to take remedial action in connection with Hazardous Materials
contaminating a property arising out of the proposed assignee's or
subtenant's actions or use of the property in question and is not subject to
any enforcement order issued by any governmental authority in connection with
the use, disposal or storage of a Hazardous Material; (3) at Landlord's
election, insurance requirements shall be brought into conformity with
Landlord's then current leasing practice; (4) any proposed subtenant or
assignee demonstrates that it is financially responsible by submission to
Landlord of all reasonable information as Landlord may request concerning the
proposed subtenant or assignee, including, but not limited to, a balance
sheet of the proposed subtenant or assignee as or a date within ninety (90)
days of the request for Landlord's consent and statements of income or profit
and loss of the proposed subtenant or assignee for the two-year period
preceding the request for Landlord's consent, and/or a certification signed
by the proposed subtenant or assignee that it has not been evicted or been in
arrears in rent at any other leased premises for the 3-year period preceding
the request for Landlord's consent; (5) any proposed subtenant or assignee
demonstrates to Landlord's reasonable satisfaction a record of successful
experience in business; and (6) the proposed transfer will not impose
additional burdens or adverse tax effects on Landlord. If Tenant has any
exterior sign rights under this Lease, such rights are personal to Tenant and
may not be assigned or transferred to any assignee of this Lease or subtenant
of the Premises without Landlord's prior written consent, which may be
withheld in Landlord's sole and absolute discretion.
If Landlord consents to the proposed transfer, Tenant may within ninety
(90) days after the date of the consent effect the transfer upon the terms
described in the information furnished to Landlord; provided that any
material change in the terms shall be subject to Landlord's consent as set
forth in this Section. Landlord shall approve or disapprove any requested
transfer within fifteen (15) business days following receipt of Tenant's
written request, the information set forth above, and the fee set forth below.
(c) Notwithstanding the provisions of Subsection (b) above, in
lieu of consenting to a proposed assignment of the Lease or to any proposed
subletting of the entire floor area of the Premises for more than fifty
percent (50%) of the then-remaining Term of this Lease, Landlord may elect to
(i) sublease the Premises or take an assignment of Tenant's interest in this
Lease, upon the same terms as offered to such proposed subtenant or assignee
(excluding terms relating to the purchase of personal property, the use of
Tenant's name or the continuation of Tenant's business), or (ii) terminate
this Lease effective on the date that such proposed sublease or assignment
would have become effective, Landlord may thereafter, at its option, assign
or re-let any space so recaptured to any third party, including without
limitation the proposed transferee of Tenant.
(d) Tenant agrees that fifty percent (50%) of any amounts paid by
the assignee or subtenant, however described, in excess of (i) the Basic Rent
payable by Tenant hereunder, or in the case or a sublease or a portion of the
Premises, in excess of the Basic Rent reasonably allocable to such portion,
plus (ii) Tenant's direct out-of-pocket costs which Tenant certifies to
Landlord have been paid to provide occupancy related services to such
assignee or subtenant of a nature commonly provided by landlords of similar
space, shall be the property of Landlord and such amounts shall be payable
directly to Landlord by the assignee or subtenant or, at Landlord's option,
by Tenant. At Landlord's request, a written agreement shall be entered into
by and among Tenant, Landlord and the proposed assignee or subtenant
confirming the requirements of this subsection.
(e) Tenant shall pay to Landlord a fee of Five Hundred Dollars
($500.00) if and when any transfer hereunder is requested by Tenant. Such
fee is hereby acknowledged as a reasonable amount to reimburse Landlord for
its costs of review and evaluation or a proposed assignee/sublessee, and
Landlord shall not be obligated to commence such review and evaluation unless
and until such fee is paid.
13.
<PAGE>
SECTION 9.2 EFFECT OF TRANSFER. No subletting or assignment, even
with the consent of Landlord, shall relieve Tenant of its obligation to pay
rent and to perform all its other obligations under this Lease. Moreover,
Tenant shall indemnify and hold Landlord harmless, as provided in Section
10.3, for any act or omission by an assignee or subtenant. Each assignee,
other than Landlord, shall be deemed to assume all obligations of Tenant
under this Lease and shall be liable jointly and severally with Tenant for
the payment of all rent, and for the due performance of all of Tenant's
obligations, under this Lease. No transfer shall be binding on Landlord
unless any document memorializing the transfer is delivered to Landlord and
both the assignee/subtenant and Tenant deliver to Landlord an executed
consent to transfer instrument prepared by Landlord and consistent with the
requirements of this Article. The acceptance by Landlord of any payment due
under this Lease from any other person shall not be deemed to be a waiver by
Landlord of any provision of this Lease or to be a consent to any transfer.
Consent by Landlord to one or more transfers shall not operate as a waiver or
estoppel to the future enforcement by Landlord of its rights under this Lease.
SECTION 9.3 SUBLEASE REQUIREMENTS. The following terms and conditions
shall apply to any subletting by Tenant of all or any part of the Premises
and shall be deemed included in each sublease:
(a) Each and every provision contained in this Lease (other than
with respect to the payment of rent hereunder) is incorporated by reference
into and made a part of such sublease, with "Landlord" hereunder meaning the
sublandlord therein and "Tenant" hereunder meaning the subtenant therein.
(b) Tenant hereby irrevocably assigns to Landlord all of Tenant's
interest in all rentals and income arising from any sublease of the Premises,
and Landlord may collect such rent and income and apply same toward Tenant's
obligations under this Lease; provided, however, that until a default occurs
in the performance of Tenant's obligations under this Lease, Tenant shall
have the right to receive and collect the sublease rentals. Landlord shall
not, by reason of this assignment or the collection of sublease rentals, be
deemed liable to the subtenant for the performance of any of Tenant's
obligations under the sublease. Tenant hereby irrevocably authorizes and
directs any subtenant, upon receipt of a written notice from Landlord stating
that an uncured default exists in the performance of Tenant's obligations
under this Lease, to pay to Landlord all sums then and thereafter due under
the sublease. Tenant agrees that the subtenant may rely on that notice
without any duty of further inquiry and notwithstanding any notice or claim
by Tenant to the contrary. Tenant shall have no right or claim against the
subtenant or Landlord for any rentals so paid to Landlord.
(c) In the event of the termination of this Lease, Landlord may,
at its sole option, take over Tenant's entire interest in any sublease and,
upon notice from Landlord, the subtenant shall attorn to Landlord. In no
event, however, shall Landlord be liable for any previous act or omission by
Tenant under the sublease or for the return of any advance rental payments or
deposits under the sublease that have not been actually delivered to
Landlord, nor shall Landlord be bound by any sublease modification executed
without Landlord's consent or for any advance rental payment by the subtenant
in excess of one month's rent. The general provisions of this Lease,
including without limitation those pertaining to insurance and
indemnification, shall be deemed incorporated by reference into the sublease
despite the termination of this Lease.
SECTION 9.4 CERTAIN TRANSFERS. The sale of all or substantially all
of Tenant's assets (other than bulk sales in the ordinary course of business)
or, if Tenant is a corporation, an unincorporated association, or a
partnership, the transfer, assignment or hypothecation of any stock or
interest in such corporation, association, or partnership in the aggregate of
twenty-five percent (25%) (except for publicly traded shares of stock
constituting a transfer of twenty-five percent (25%) or more in the
aggregate, so long as no change in the controlling interest of Tenant occurs
as a result thereof) shall be deemed an assignment within the meaning and
provisions of this Article. Notwithstanding the foregoing, Landlord's
consent shall not be required for the assignment of this Lease as a result of
a merger by Tenant with or into another entity, so long as (i) the net worth
of the successor entity after such merger is at least equal to the greater of
the net worth of Tenant as of the execution of this Lease by Landlord or the
net worth of Tenant immediately prior to the date of such merger, evidence of
which, satisfactory to Landlord, shall be presented to Landlord prior to such
merger, (ii) Tenant shall provide to Landlord, prior to such merger, written
notice of such merger and such assignment documentation and other information
as Landlord may request in connection therewith, and (iii) all of the other
terms and requirements of this Article shall apply with respect to such
assignment.
14.
<PAGE>
ARTICLE X
INSURANCE AND INDEMNITY
SECTION 10.1 TENANT'S INSURANCE. Tenant, at its sole cost and expense,
shall provide and maintain in effect tile insurance described in Exhibit D.
Evidence of that insurance must be delivered to Landlord prior to the
Commencement Date.
SECTION 10.2 LANDLORD'S INSURANCE. Landlord may, at its election,
provide any or all of the following types of insurance, with or without
deductible and in amounts and coverages as may be determined by Landlord in
its discretion: "all risk" property insurance, subject to standard
exclusions, covering the Building, and such other risks as Landlord or its
mortgagees may from time to time deem appropriate, including leasehold
improvements made by Landlord, and commercial general liability coverage.
Landlord shall not be required to carry insurance of any kind on Tenant's
property, including leasehold improvements, trade fixtures, furnishings,
equipment, plate glass, signs and all other items of personal property, and
shall not be obligated to repair or replace that property should damage
occur. All proceeds of insurance maintained by Landlord upon the Building
shall be the property of Landlord, whether or not Landlord is obligated to or
elects to make any repairs. At Landlord's option, Landlord may self-insure
all or any portion of the risks for which Landlord elects to provide
insurance hereunder.
SECTION 10.3 TENANT'S INDEMNITY. To the fullest extent permitted by
law, and except to the extent of the sole active negligence of Landlord, its
employees or authorized agents, Tenant shall defend, indemnify, protect, save
and hold harmless Landlord, its agents, and any and all affiliates of
Landlord, including, without limitation, any corporations or other entities
controlling, controlled by or under common control with Landlord, from and
against any and all claims, liabilities, costs or expenses arising either
before or after the Commencement Date from Tenant's use or occupancy of the
Premises or the Building, or from the conduct of its business, or from any
activity, work, or thing done, permitted or suffered by Tenant or its agents,
employees, invitees or licensees in or about the Premises or the Building, or
from any default in the performance of any obligation on Tenant's part to be
performed under this Lease, or from any act or negligence of Tenant or its
agents, employees, visitors, patrons, guests, invitees or licensees.
Landlord may, at its option, require Tenant to assume Landlord's defense in
any action covered by this Section through counsel satisfactory to Landlord.
The provisions of this Section shall expressly survive the expiration or
sooner termination of this Lease.
SECTION 10.4 LANDLORD'S NONLIABILITY. Except to the extent of the sole
active negligence of Landlord, its employees or authorized agents, Landlord
shall not be liable to Tenant, its employees, agents and invitees, and Tenant
hereby waives all claims against Landlord for loss of or damage to any
property or personal injury, or any other loss, cost, damage, injury or
liability whatsoever resulting from fire, explosion, falling plaster, steam,
gas, electricity, water or rain which may leak or flow from or into any part
of the Premises or from the breakage, leakage, obstruction or other defects
of the pipes, sprinklers, wires, appliances, plumbing, air conditioning,
electrical works or other fixtures in the Building, whether the damage or
injury results from conditions arising in the Premises or in other portions
of the Building. It is understood that any such condition may require the
temporary evacuation or closure of all or a portion of the Building.
Notwithstanding any provision of this Lease to the contrary, including,
without limitation, the negligence of Landlord, its employees and/or agents,
Landlord shall in no event be liable to Tenant, its employees, agents, and
invitees, and Tenant hereby waives all claims against Landlord, for loss or
interruption of Tenant's business or income (including, without limitation,
any consequential damages and lost profit or opportunity costs), or any other
loss, cost, damage, injury or liability resulting from, but not limited to,
Acts of God (except with respect to restoration obligations pursuant to
Article XI below), acts of civil disobedience or insurrection, acts or
omissions (criminal or otherwise) of any third parties (other than Landlord's
employees or authorized agents), including without limitation, any other
tenants within the Project or their agents, employees, contractors, guests or
invitees. Except as provided in Sections 11.1 and 12.1 below, there shall be
no abatement of rent and no liability of Landlord by reason of any injury to
or interference with Tenant's business (including without limitation
consequential damages and lost profit or opportunity costs) arising from the
making of any repairs, alterations or improvements to any portion of the
Building, including repairs to the Premises, nor shall any related activity
by Landlord constitute an actual or constructive eviction; provided, however,
that in making repairs, alterations or improvements, Landlord shall interfere
as little as reasonably practicable with the conduct of Tenant's business in
the Premises. Neither Landlord nor its agents shall be liable for
interference
15.
<PAGE>
with light or other similar intangible interests. Tenant shall immediately
notify Landlord in case of fire or accident in the Premises or the Building
and of defects in any improvements or equipment.
SECTION 10.5 WAIVER OF SUBROGATION. Landlord and Tenant each hereby
waives all rights of recovery against the other and the other's agents on
account of loss and damage occasioned to the property of such waiving party
to the extent only that such loss or damage is required to be insured against
under any "all risk" property insurance policies required by this Article X;
provided however, that (i) the foregoing waiver shall not apply to the extent
of Tenant's obligations to pay deductibles under any such policies and this
Lease, and (ii) if any loss is due to the act, omission or negligence or
willful misconduct of Tenant or its agents, employees, contractors, guests or
invitees, Tenant's liability insurance shall be primary and shall cover all
losses and damages prior to any other insurance hereunder. By this waiver it
is the intent of the parties that neither Landlord nor Tenant shall be liable
to any insurance company (by way of subrogation or otherwise) insuring the
other party for any loss or damage insured against under any "all risk"
property insurance policies required by this Article, even though such loss
or damage might be occasioned by the negligence of such party, its agents,
employees, contractors, guests or invitees. The provisions of this Section
shall not limit the indemnification provisions elsewhere contained in this
Lease.
ARTICLE XI
DAMAGE OR DESTRUCTION
SECTION 11.1 RESTORATION.
(a) If the Building is damaged, Landlord shall repair that damage
as soon as reasonably possible, at its expense, unless: (i) Landlord
reasonably determines that the cost of repair is not covered by Landlord's
fire and extended coverage insurance plus such additional amounts Tenant
elects, at its option, to contribute, excluding however the deductible (for
which Tenant shall be responsible for Tenant's proportionate share); (ii)
Landlord reasonably determines that the Premises cannot, with reasonable
diligence, be fully repaired by Landlord (or cannot be safely repaired
because of the presence of hazardous factors, including without limitation
Hazardous Materials, earthquake faults, and other similar dangers) within two
hundred seventy (270) days after the date of the damage; (iii) an event of
default by Tenant has occurred and is continuing at the time of such damage;
or (iv) the damage occurs during the final twelve (12) months of the Term.
Should Landlord elect not to repair the damage for one of the preceding
reasons, Landlord shall so notify Tenant in writing within sixty (60) days
after the damage occurs and this Lease shall terminate as of the date of that
notice.
(b) Unless Landlord elects to terminate this Lease in accordance
with subsection (a) above, this Lease shall continue in effect for the
remainder of the Term; provided that so long as Tenant is not in default
under this Lease, if the damage is so extensive that Landlord reasonably
determines that the Premises cannot, with reasonable diligence, be repaired
by Landlord (or cannot be safely repaired because of the presence of
hazardous factors, earthquake faults, and other similar dangers) so as to
allow Tenant's substantial use and enjoyment of the Premises within two
hundred seventy (270) days after the date of damage, then Tenant may elect to
terminate this Lease by written notice to Landlord within the sixty (60) day
period stated in subsection (a).
(c) Commencing on the date of any damage to the Building, and
ending on the sooner of the date the damage is repaired or the date this
Lease is terminated, the rental to be paid under this Lease shall be abated
in the same proportion that the floor area of the Building that is rendered
unusable by the damage from time to time bears to the total floor area of the
Building, but only to the extent that any business interruption insurance
proceeds are received by Landlord therefor from Tenant's insurance described
in Exhibit D.
(d) Notwithstanding the provisions of subsections (a), (b) and (c)
of this Section, and subject to the provisions of Section 10.5 above, the
cost of any repairs shall be borne by Tenant, and Tenant shall not be
entitled to rental abatement or termination rights, if the damage is due to
the fault or neglect of Tenant or its employees, subtenants, invitees or
representatives. In addition, the provisions of this Section shall not be
deemed to require Landlord to repair any improvements or fixtures that Tenant
is obligated to repair or insure pursuant to any other provision of this
Lease.
16.
<PAGE>
(e) Tenant shall fully cooperate with Landlord in removing
Tenant's personal property and any debris from the Premises to facilitate all
inspections of the Premises and the making of any repairs. Notwithstanding
anything to the contrary contained in this Lease, if Landlord in good faith
believes there is a risk of injury to persons or damage to property from
entry into the Building or Premises following any damage or destruction
thereto, Landlord may restrict entry into the Building or the Premises by
Tenant, its employees, agents and contractors in a non-discriminatory manner,
without being deemed to have violated Tenant's rights of quiet enjoyment to,
or made an unlawful detainer of, or evicted Tenant from, the Premises. Upon
request, Landlord shall consult with tenant to determine if there are safe
methods of entry into the Building or the Premises solely in order to allow
Tenant to retrieve files, data in computers, and necessary inventory, subject
however to all indemnities and waivers of liability from Tenant to Landlord
contained in this Lease and any additional indemnities and waivers of
liability which Landlord may require.
SECTION 11.2 LEASE GOVERNS. Tenant agrees that the provisions of this
Lease, including without limitation Section 11.1, shall govern any damage or
destruction and shall accordingly supersede any contrary statute or rule of
law.
ARTICLE XII
EMINENT DOMAIN
SECTION 12.1 TOTAL OR PARTIAL TAKING. If all or a material portion of
the Premises is taken by any lawful authority by exercise of the right of
eminent domain, or sold to prevent a taking, either Tenant or Landlord may
terminate this Lease effective as of the date possession is required to be
surrendered to the authority. In the event title to a portion of the
Premises is taken or sold in lieu of taking, and if Landlord elects to
restore the Premises in such a way as to alter the Premises materially,
either party may terminate this Lease, by written notice to the other party,
effective on the date of vesting of title. In the event neither party has
elected to terminate this Lease as provided above, then Landlord shall
promptly, after receipt of a sufficient condemnation award, proceed to
restore the Premises to substantially their condition prior to the taking,
and a proportionate allowance shall be made to Tenant for the rent
corresponding to the time during which, and to the pan of the Premises of
which, Tenant is deprived on account of the taking and restoration. In the
event of a taking, Landlord shall be entitled to the entire amount of the
condemnation award without deduction for any estate or interest of Tenant;
provided that nothing in this Section shall be deemed to give Landlord any
interest in, or prevent Tenant from seeking any award against the taking
authority for, the taking of personal property and fixtures belonging to
Tenant or for relocation or business interruption expenses recoverable from
the taking authority.
SECTION 12.2 TEMPORARY TAKING. No temporary taking of the Premises
shall terminate this Lease or give Tenant any right to abatement of rent, and
any award specifically attributable to a temporary taking of the Premises
shall belong entirely to Tenant. A temporary taking shall be deemed to be a
taking of the use or occupancy of the Premises for a period of not to exceed
one hundred eighty (180) days.
SECTION 12.3 TAKING OF PARKING AREA. In the event there shall be a
taking of the parking area such that Landlord can no longer provide
sufficient parking to comply with this Lease, Landlord may substitute
reasonably equivalent parking in a location reasonably close to the Building;
provided that if Landlord fails to make that substitution within ninety (90)
days following the taking and if the taking materially impairs Tenant's use
and enjoyment of the Premises, Tenant may, at its option, terminate this
Lease by written notice to Landlord. If this Lease is not so terminated by
Tenant, there shall be no abatement of rent and this Lease shall continue in
effect.
ARTICLE XIII
SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS
SECTION 13.1 SUBORDINATION. At the option of Landlord, this Lease
shall be either superior or subordinate to all ground or underlying leases,
mortgages and deeds of trust, if any, which may hereafter affect the
Premises, and to all renewals, modifications, consolidations, replacements
and extensions thereof; provided, that so long as Tenant is not in default
under this Lease, this Lease shall not be terminated or Tenant's quiet
enjoyment of
17.
<PAGE>
the Premises is disturbed in the event of termination of any such ground or
underlying lease, or the foreclosure of any such mortgage or deed of trust,
to which Tenant has subordinated this Lease pursuant to this Section. In the
event of a termination or foreclosure, Tenant shall become a tenant of and
attorn to the successor-in-interest to Landlord upon the same terms and
conditions as are contained in this Lease, and shall execute any instrument
reasonably required by Landlord's successor for that purpose. Tenant shall
also, upon written request of Landlord, execute and deliver all instruments
as may be required from time to time to subordinate the rights of Tenant
under this Lease to any ground or underlying lease or to the lien of any
mortgage or deed of trust (provided that such instruments include the
nondisturbance and attornment provisions set forth above), or, if requested
by Landlord, to subordinate, in whole or in part, any ground or underlying
lease or the lien of any mortgage or deed of trust to this Lease.
SECTION 13.2 ESTOPPEL CERTIFICATE.
(a) Tenant shall, at any time upon not less than ten (10) days
prior written notice from Landlord, execute, acknowledge and deliver to
Landlord, in any form that Landlord may reasonably require, a statement in
writing (i) certifying that this Lease is unmodified and in full force and
effect (or, if modified, stating the nature of the modification and
certifying that this Lease, as modified, is in full force and effect) and the
dates to which the rental, additional rent and other charges have been paid
in advance, if any, and (ii) acknowledging that, to Tenant's knowledge, there
are no uncured defaults on the part of Landlord, or specifying each default
if any are claimed, and (iii) setting forth all further information that
Landlord may reasonably require. Tenant's statement may be relied upon by
any prospective purchaser or encumbrancer of the Premises.
(b) Notwithstanding any other rights and remedies of Landlord,
Tenant's failure to deliver any estoppel statement within the provided time
shall be conclusive upon Tenant that (i) this Lease is in full force and
effect, without modification except as may be represented by Landlord, (ii)
there are no uncured defaults in Landlord's performance, and (iii) not more
than one month's rental has been paid in advance.
SECTION 13.3 FINANCIALS.
(a) Tenant shall deliver to Landlord, prior to the execution of
this Lease and thereafter at any time upon Landlord's request, Tenant's
current tax returns and financial statements, certified true, accurate and
complete by the chief financial officer of Tenant, including a balance sheet
and profit and loss statement for the most recent prior year (collectively,
the "Statements"), which Statements shall accurately and completely reflect
the financial condition of Tenant. Landlord agrees that it will keep the
Statements confidential, except that Landlord shall have the right to deliver
the same to any proposed purchaser or encumbrancer of the Premises.
Notwithstanding the foregoing, so long as Tenant is a publicly-traded
corporation whose stock is traded on a nationally recognized exchange or on
NASDAQ, the "Statements" shall consist of Tenant's most recently publicly
disclosed financial statements.
(b) Tenant acknowledges that Landlord is relying on the Statements
in its determination to enter into this Lease, and Tenant represents to
Landlord, which representation shall be deemed made on the date of this Lease
and again on the Commencement Date, that no material change in the financial
condition of Tenant, as reflected in the Statements, has occurred since the
date Tenant delivered the Statements to Landlord. The Statements are
represented and warranted by Tenant to be correct and to accurately and fully
reflect Tenant's true financial condition as of the date of submission by any
Statements to Landlord.
ARTICLE XIV
DEFAULTS AND REMEDIES
SECTION 14.1 TENANT'S DEFAULTS. In addition to any other event of
default set forth in this Lease, the occurrence of any one or more of the
following events shall constitute a default by Tenant:
(a) The failure by Tenant to make any payment of rent or
additional rent required to be made by Tenant, as and when due, where the
failure continues for a period of three (3) days after written notice from
18.
<PAGE>
Landlord to Tenant; provided, however, that any such notice shall be in lieu
of, and not in addition to, any notice required under California Code of
Civil Procedure Section 1161 and 1161(a) as amended. For purposes of these
default and remedies provisions, the term "additional rent" shall be deemed
to include all amounts of any type whatsoever other than Basic Rent to be
paid by Tenant pursuant to the terms of this Lease.
(b) Assignment, sublease, encumbrance or other transfer of the
Lease by Tenant, either voluntarily or by operation of law, whether by
judgment, execution, transfer by intestacy or testacy, or other means,
without the prior written consent of Landlord.
(c) The discovery by Landlord that any financial statement
provided by Tenant, or by any affiliate, successor or guarantor of Tenant,
was materially false.
(d) The failure of Tenant to timely and fully provide any
subordination agreement, estoppel certificate or financial statements in
accordance with the requirements of Article XIII.
(e) The failure or inability by Tenant to observe or perform any
of the express or implied covenants or provisions of this Lease to be
observed or performed by Tenant, other than as specified in any other
subsection of this Section, where the failure continues for a period of
thirty (30) days after written notice from Landlord to Tenant or such shorter
period as is specified in any other provision of this Lease; provided,
however, that any such notice shall be in lieu of, and not in addition to,
any notice required under California Code of Civil Procedure Section 1161 and
1161(a) as amended. However, if the nature of the failure is such that more
than thirty (30) days are reasonably required for its cure, then Tenant shall
not be deemed to be in default if Tenant commences the cure within thirty
(30) days, and thereafter diligently pursues the cure to completion.
(f) (i) The making by Tenant of any general assignment for the
benefit of creditors; (ii) the filing by or against Tenant or a petition to
have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have
debts discharged or a petition for reorganization or arrangement under any
law relating to bankruptcy (unless, in the case or a petition filed against
Tenant, the same is dismissed within thirty (30) days); (iii) the appointment
of a trustee or receiver to take possession of substantially all of Tenant's
assets located at the Premises or of Tenant's interest in this Lease, if
possession is not restored to Tenant within thirty (30) days; (iv) the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where the seizure is not discharged within thirty (30) days; or (v)
Tenant's convening of a meeting of its creditors for the purpose of effecting
a moratorium upon or composition of its debts. Landlord shall not be deemed
to have knowledge of any event described in this subsection unless
notification in writing is received by Landlord, nor shall there be any
presumption attributable to Landlord of Tenant's insolvency. In the event
that any provision of this subsection is contrary to applicable law, the
provision shall be of no force or effect.
SECTION 14.2 LANDLORD'S REMEDIES.
(a) In the event of any default by Tenant, or in the event of the
abandonment of the Premises by Tenant, then in addition to any other remedies
available to Landlord, Landlord may exercise the following remedies:
(i) Landlord may terminate Tenant's right to possession of
the Premises by any lawful means, in which case this Lease shall terminate
and Tenant shall immediately surrender possession of the Premises to
Landlord. Such termination shall not affect any accrued obligations of Tenant
under this Lease. Upon termination, Landlord shall have the right to reenter
the Premises and remove all persons and property. Landlord shall also be
entitled to recover from Tenant:
1. The worth at the time of award of the unpaid rent
and additional rent which had been earned at the time of termination;
2. The worth at the time of award of the amount by
which the unpaid rent and additional rent which would have been earned after
termination until the time of award exceeds the amount of such loss that
Tenant proves could have been reasonably avoided;
19.
<PAGE>
3. The worth at the time of award of the amount by
which the unpaid rent and additional rent for the balance of the Term after
the time of award exceeds the amount of such loss that Tenant proves could be
reasonably avoided;
4. Any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under this Lease or which in the ordinary course of things would
be likely to result from Tenant's default, including, but not limited to, the
cost of recovering possession of the Premises, refurbishment of the Premises,
marketing costs, commissions and other expenses of reletting, including
necessary, repair, the unamortized portion of any tenant improvements and
brokerage commissions funded by Landlord in connection with this Lease,
reasonable attorneys' fees, and any other reasonable costs; and
5. At Landlord's election, all other amounts in
addition to or in lieu of the foregoing as may be permitted by law. The term
"rent" as used in this Lease shall be deemed to mean the Basic Rent and all
other sums required to be paid by Tenant to Landlord pursuant to the terms of
this Lease. Any sum, other than Basic Rent, shall be computed on the basis
of the average monthly amount accruing during the twenty-four (24) month
period immediately prior to default, except that if it becomes necessary to
compute such rental before the twenty-four (24) month period has occurred,
then the computation shall be on the basis of the average monthly amount
during the shorter period. As used in subparagraphs (1) and (2) above, the
"worth at the time of award" shall be computed by allowing interest at the
rate often percent (10%) per annum. As used in subparagraph (3) above, the
"worth at the time of award" shall be computed by discounting the amount at
the discount rate of the Federal Reserve Bank of San Francisco at the time of
award plus one percent (1%).
(ii) Landlord may elect not to terminate Tenant's right to
possession of the Premises, in which event Landlord may continue to enforce
all of its rights and remedies under this Lease, including the right to
collect all rent as it becomes due. Efforts by the Landlord to maintain,
preserve or relet the Premises, or the appointment or a receiver to protect
the Landlord's interests under this Lease, shall not constitute a termination
of the Tenant's right to possession of the Premises. In the event that
Landlord elects to avail itself of the remedy provided by this subsection
(ii), Landlord shall not unreasonably withhold its consent to an assignment
or subletting of the Premises subject to the reasonable standards for
Landlord's consent as are contained in this Lease.
(b) Landlord shall be under no obligation to observe or perform
any covenant of this Lease on its part to be observed or performed which
accrues after the date of any default by Tenant unless and until the default
is cured by Tenant, it being understood and agreed that the performance by
Landlord of its obligations under this Lease are expressly conditioned upon
Tenant's full and timely performance of its obligations under this Lease.
The various rights and remedies reserved to Landlord in this Lease or
otherwise shall be cumulative and, except as otherwise provided by California
law, Landlord may pursue any or all of its rights and remedies at the same
time.
(c) No delay or omission of Landlord to exercise any right or
remedy shall be construed as a waiver of the right or remedy or of any
default by Tenant. The acceptance by Landlord of rent shall not be a (i)
waiver of any preceding breach or default by Tenant of any provision of this
Lease, other than the failure of Tenant to pay the particular rent accepted,
regardless of Landlord's knowledge of the preceding breach or default at the
time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise
any remedy available to Landlord by virtue of the breach or default. The
acceptance of any payment from a debtor in possession, a trustee, a receiver
or any other person acting on behalf of Tenant or Tenant's estate shall not
waive or cure a default under Section 14.1. No payment by Tenant or receipt
by Landlord of a lesser amount than the rent required by this Lease shall be
deemed to be other than a partial payment on account of the earliest due
stipulated rent, nor shall any endorsement or statement on any check or
letter be deemed an accord and satisfaction and Landlord shall accept the
check or payment without prejudice to Landlord's right to recover the balance
of the rent or pursue any other remedy available to it. No act or thing done
by Landlord or Landlord's agents during the Term shall be deemed an
acceptance of a surrender of the Premises, and no agreement to accept a
surrender shall be valid unless in writing and signed by Landlord. No
employee of Landlord or of Landlord's agents shall have any power to accept
the keys to the Premises prior to the termination of this Lease, and the
delivery of the keys to any employee shall not operate as a termination of
the Lease or a surrender of the Premises.
20.
<PAGE>
SECTION 14.3 LATE PAYMENTS.
(a) Any rent due under this Lease that is not received by Landlord
within five (5) days of the date when due shall bear interest at the maximum
rate permitted by law from the date due until fully paid. The payment of
interest shall not cure any default by Tenant under this Lease. In addition,
Tenant acknowledges that the late payment by Tenant to Landlord of rent will
cause Landlord to incur costs not contemplated by this Lease, the exact
amount of which will be extremely difficult and impracticable to ascertain.
Those costs may include, but are not limited to, administrative, processing
and accounting charges, and late charges which may be imposed on Landlord by
the terms of any ground lease, mortgage or trust deed covering the Premises.
Accordingly, if any rent due from Tenant shall not be received by Landlord or
Landlord's designee within five (5) days after the date due, then Tenant
shall pay to Landlord, in addition to the interest provided above, a late
charge in a sum equal to the greater of five percent (5%) of the amount
overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment.
Acceptance of a late charge by Landlord shall not constitute a waiver of
Tenant's default with respect to the overdue amount, nor shall it prevent
Landlord from exercising any of its other rights and remedies.
(b) Following each second consecutive installment of rent that is
not paid within five (5) days following notice of nonpayment from Landlord.
Landlord shall have the option (i) to require that beginning with the first
payment of rent next due, rent shall no longer be paid in monthly
installments but shall be payable quarterly three (3) months in advance
and/or (ii) to require that Tenant increase the amount, if any, of the
Security Deposit by one hundred percent (100%). Should Tenant deliver to
Landlord, at any time during the Term, two (2) or more insufficient cheeks,
the Landlord may require that all monies then and thereafter due from Tenant
be paid to Landlord by cashier's check.
SECTION 14.4 RIGHT OF LANDLORD TO PERFORM. All covenants and
agreements to be performed by Tenant under this Lease shall be performed at
Tenant's sole cost and expense and without any abatement of rent or right of
set-off. If Tenant fails to pay any sum of money, other than rent, or fails
to perform any other act on its part to be performed under this Lease, and
the failure continues beyond any applicable grace period set forth in Section
14.1, then in addition to any other available remedies, Landlord may, at its
election make the payment or perform the other act on Tenant's part.
Landlord's election to make the payment or perform the act on Tenant's part
shall not give rise to any responsibility of Landlord to continue making the
same or similar payments or performing the same or similar acts. Tenant
shall, promptly upon demand by Landlord, reimburse Landlord for all sums paid
by Landlord and all necessary incidental costs, together with interest at the
maximum rate permitted by law from the date of the payment by Landlord.
Landlord shall have the same rights and remedies if Tenant fails to pay those
amounts as Landlord would have in the event of a default by Tenant in the
payment of rent.
SECTION 14.5 DEFAULT BY LANDLORD. Landlord shall not be deemed to be
in default in the performance of any obligation under this Lease unless and
until it has failed to perform the obligation within thirty (30) days after
written notice by Tenant to Landlord specifying in reasonable detail the
nature and extent of the failure; provided, however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are required
for its performance, then Landlord shall not he deemed to be in default if it
commences performance within the thirty (30) day period and thereafter
diligently pursues the cure to completion.
SECTION 14.6 EXPENSES AND LEGAL FEES. All sums reasonably incurred by
Landlord in connection with any event of default by Tenant under this Lease
or holding over of possession by Tenant after the expiration or earlier
termination of this Lease, including without limitation all costs, expenses
and actual accountants, appraisers, attorneys and other professional fees,
and any collection agency or other collection charges, shall be due and
payable by Tenant to Landlord on demand, and shall bear interest at the rate
of ten percent (10%) per annum. Should either Landlord or Tenant bring any
action in connection with this Lease, the prevailing party shall be entitled
to recover as a part of the action its reasonable attorneys' fees, and all
other costs. The prevailing party for the purpose of this paragraph shall be
determined by the trier of the facts.
SECTION 14.7 WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH
ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS
CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES
HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY
JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO
AGAINST THE OTHER
21.
<PAGE>
(AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR
AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY
CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR
ANY CLAIM OF INJURY OR DAMAGE.
SECTION 14.8 SATISFACTION OF JUDGMENT. The obligations of Landlord do
not constitute the personal obligations of the individual partners, trustees,
directors, officers or shareholders of Landlord or its constituent partners.
Should Tenant recover a money judgment against Landlord, such judgment shall
be satisfied only out of the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord
in the Building and out of the rent or other income from such property
receivable by Landlord or out of consideration received by Landlord from the
sale or other disposition of all or any part of Landlord's right, title or
interest in the Building, and no action for any deficiency may be sought or
obtained by Tenant.
SECTION 14.9 LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim, demand
or right of any kind by Tenant which is based upon or arises in connection
with this Lease shall be barred unless Tenant commences an action thereon
within twelve (12) months after the date that the act, omission, event or
default upon which the claim, demand or right arises, has occurred.
ARTICLE XV
END OF TERM
SECTION 15.1 HOLDING OVER. This Lease shall terminate without further
notice upon the expiration of the Term, and any holding over by Tenant after
the expiration shall not constitute a renewal or extension of this Lease, or
give Tenant any rights under this Lease, except when in writing signed by
both parties. If Tenant holds over for any period after the expiration (or
earlier termination) of the Term without the prior written consent of
Landlord, such possession shall constitute a tenancy at sufferance only; such
holding over with the prior written consent of Landlord shall constitute a
month-to-month tenancy commencing on the first (1st) day following the
termination of this Lease. In either of such events, possession shall be
subject to all of the terms of this Lease, except that the monthly Basic Rent
shall be the greater of(a) one hundred fifty, percent (150%) of the Basic
Rent for the month immediately preceding the date of termination or (b) the
then currently scheduled Basic Rent for comparable space in the Building. If
Tenant fails to surrender the Premises upon the expiration of this Lease
despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord
harmless from all loss or liability, including without limitation, any claims
made by any succeeding tenant relating to such failure to surrender.
Acceptance by Landlord of rent after the termination shall not constitute a
consent to a holdover or result in a renewal of this Lease. The foregoing
provisions of this Section are in addition to and do not affect Landlord's
right of re-entry or any other rights of Landlord under this Lease or at law.
SECTION 15.2 MERGER ON TERMINATION. The voluntary or other surrender of
this Lease by Tenant, or a mutual termination of this Lease, shall terminate any
or all existing subleases unless Landlord, at its option, elects in writing to
treat the surrender or termination as an assignment to it of any or all
subleases affecting the Premises.
SECTION 15.3 SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the
Expiration Date or upon any earlier termination of this Lease, Tenant shall
quit and surrender possession of the Premises to Landlord in as good order,
condition and repair as when received or as hereafter may be improved by
Landlord or Tenant, reasonable wear and tear and repairs which are Landlord's
obligation excepted, and shall, without expense to Landlord, remove or cause
to be removed from the Premises all personal property and debris, except for
any items that Landlord may by written authorization allow to remain. Tenant
shall repair all damage to the Premises resulting from the removal, which
repair shall include the patching and filling of holes and repair of
structural damage, provided that Landlord may instead elect to repair any
structural damage at Tenant's expense. If Tenant shall fail to comply with
the provisions of this Section, Landlord may effect the removal and/or make
any repairs, and the cost to Landlord shall be additional rent payable by
Tenant upon demand. If Tenant fails to remove Tenant's personal property
from the Premises upon the expiration of the Term, Landlord may remove,
store, dispose of and/or retain
22.
<PAGE>
such personal property, at Landlord's option, in accordance with then
applicable laws, all at the expense of Tenant. If requested by Landlord,
Tenant shall execute, acknowledge and deliver to Landlord an instrument in
writing releasing and quitclaiming to Landlord all right, title and interest
of Tenant in the Premises.
ARTICLE XVI
PAYMENTS AND NOTICES
All sums payable by Tenant to Landlord shall be paid, without deduction
or offset, in lawful money of the United States to Landlord at its address
set forth in Item 12 of the Basic Lease Provisions, or at any other place as
Landlord may designate in writing. Unless this Lease expressly provides
otherwise, as for example in the payment of rent pursuant to Section 4.1, all
payments shall be due and payable within ten (10) days after demand. All
payments requiring proration shall be prorated on the basis of a thirty (30)
day month and a three hundred sixty (360) day year. Any notice, election,
demand, consent, approval or other communication to be given or other
document to be delivered by either party to the other may be delivered in
person or by courier or overnight delivery service to the other party, or may
be deposited in the United States mail, duly registered or certified, postage
prepaid, return receipt requested, and addressed to the other party at the
address set forth in Item 12 of the Basic Lease Provisions, or if to Tenant,
at that address or, from and after the Commencement Date, at the Premises
(whether or not Tenant has departed from, abandoned or vacated the Premises),
or may be delivered by telegram, telex or telecopy, provided that receipt
thereof is telephonically confirmed. Either party may, by written notice to
the other, served in the manner provided in this Article, designate a
different address. If any notice or other document is sent by mail, it shall
be deemed served or delivered twenty-four (24) hours after mailing. If more
than one person or entity is named as Tenant under this Lease, service of any
notice upon any one of them shall be deemed as service upon all of them.
ARTICLE XVII
RULES AND REGULATIONS
Tenant agrees to observe faithfully and comply strictly with the Rules
and Regulations, attached as Exhibit E, and any reasonable and
nondiscriminatory amendments, modifications and/or additions as may be
adopted and published by written notice to tenants by Landlord for the
safety, care, security, good order, or cleanliness of the Premises. Landlord
shall not be liable to Tenant for any violation of the Rules and Regulations
or the breach of any covenant or condition in any lease by any other tenant
or such tenant's agents, employees, contractors, guests or invitees. One or
more waivers by Landlord of any breach of the Rules and Regulations by Tenant
or by any other tenant(s) shall not be a waiver of any subsequent breach of
that rule or any other. Tenant's failure to keep and observe the Rules and
Regulations shall constitute a default under this Lease. In the case of any
conflict between the Rules and Regulations and this Lease, this Lease shall
be controlling.
ARTICLE XVIII
BROKER'S COMMISSION
The parties recognize as the broker(s) who negotiated this Lease the
firm(s), if any, whose name(s) is (are) stated in item 10 of the Basic Lease
Provisions, and agree that Landlord shall be responsible for the payment of
brokerage commissions to those broker(s) unless otherwise provided in this
Lease. Tenant warrants that it has had no dealings with any other real
estate broker or agent in connection with the negotiation of this Lease, and
Tenant agrees to indemnify and hold Landlord harmless from any cost, expense
or liability (including reasonable attorneys' fees) for any compensation,
commissions or charges claimed by any other real estate broker or agent
employed or claiming to represent or to have been employed by Tenant in
connection with the negotiation of this Lease. The foregoing agreement
shall survive the termination of this Lease.
ARTICLE XIX
TRANSFER OF LANDLORD'S INTEREST
23.
<PAGE>
In the event of any transfer of Landlord's interest in the Premises, the
transferor shall be automatically relieved of all obligations on the part of
Landlord accruing under this Lease from and after the date of the transfer,
provided that any funds held by the transferor in which Tenant has an
interest shall be turned over, subject to that interest, to the transferee
and Tenant is notified of the transfer as required by law. No holder or a
mortgage and/or deed of trust to which this Lease is or may be subordinate,
and no landlord under a so-called sale-leaseback, shall be responsible in
connection with the Security Deposit, unless the mortgagee or holder of the
deed of trust or the landlord actually receives the Security Deposit. It is
intended that the covenants and obligations contained in this Lease on the
part of Landlord shall, subject to the foregoing, be binding on Landlord, its
successors and assigns, only during and in respect to their respective
successive periods of ownership.
ARTICLE XX
INTERPRETATION
SECTION 20.1 GENDER AND NUMBER. Whenever the context of this Lease
requires, the words "Landlord" and "Tenant" shall include the plural as well
as the singular, and words used in neuter, masculine or feminine genders
shall include the others.
SECTION 20.2 HEADINGS. The captions and headings of the articles and
sections of this Lease are for convenience only, are not a part of this Lease
and shall have no effect upon its construction or interpretation.
SECTION 20.3 JOINT AND SEVERAL LIABILITY. If more than one person or
entity is named as Tenant, the obligations imposed upon each shall be joint
and several and the act of or notice from, or notice or refund to, or the
signature of, any one or more of them shall be binding on all of them with
respect to the tenancy of this Lease, including, but not limited to, any
renewal, extension, termination or modification of this Lease.
SECTION 20.4 SUCCESSORS. Subject to Articles IX and XIX, all rights
and liabilities given to or imposed upon Landlord and Tenant shall extend to
and bind their respective heirs, executors, administrators, successors and
assigns. Nothing contained in this Section is intended, or shall be
construed, to grant to any person other than Landlord and Tenant and their
successors and assigns any rights or remedies under this Lease.
SECTION 20.5 TIME OF ESSENCE. Time is of the essence with respect to
the performance of every provision of this Lease.
SECTION 20.6 CONTROLLING LAW. This Lease shall be governed by and
interpreted in accordance with the laws of the State of California.
SECTION 20.7 SEVERABILITY. If any term or provision of this Lease, the
deletion of which would not adversely affect the receipt of any material
benefit by either party or the deletion of which is consented to by the party
adversely affected, shall be held invalid or unenforceable to any extent, the
remainder of this Lease shall not be affected and each term and provision of
this Lease shall be valid and enforceable to the fullest extent permitted by
law.
SECTION 20.8 WAIVER AND CUMULATIVE REMEDIES. One or more waivers by
Landlord or Tenant of any breach of any term, covenant or condition contained
in this Lease shall not be a waiver of any subsequent breach of the same or
any other term, covenant or condition. Consent to any act by one of the
parties shall not be deemed to render unnecessary, the obtaining of that
party's consent to any subsequent act. No breach by Tenant of this Lease
shall be deemed to have been waived by Landlord unless the waiver is in a
writing signed by Landlord. The rights and remedies of Landlord under this
Lease shall be cumulative and in addition to any and all other rights and
remedies which Landlord may have.
SECTION 20.9 INABILITY TO PERFORM. In the event that either party
shall be delayed or hindered in or prevented from the performance of any work
or in performing any act required under this Lease by reason of any cause
beyond the reasonable control of that party, then the performance of the work
or the doing of the act shall be excused for the period of the delay and the
time for performance shall be extended for a period equivalent to the
24.
<PAGE>
period of the delay. The provisions of this Section shall not operate to
excuse Tenant from the prompt payment of rent or from the timely performance
of any other obligation under this Lease within Tenant's reasonable control.
SECTION 20.10 ENTIRE AGREEMENT. This Lease and its exhibits and other
attachments cover in full each and every agreement of every kind between the
parties concerning the Premises and the Building, and all preliminary
negotiations, oral agreements, understandings and/or practices, except those
contained in this Lease, are superseded and of no further effect. Tenant
waives its rights to rely on any representations or promises made by Landlord
or others which are not contained in this Lease. No verbal agreement or
implied covenant shall be held to modify the provisions of this Lease, any
statute, law, or custom to the contrary notwithstanding.
SECTION 20.11 QUIET ENJOYMENT. Upon the observance and performance of
all the covenants, terms and conditions on Tenant's part to be observed and
performed, and subject to the other provisions of this Lease. Tenant shall
peaceably and quietly hold and enjoy the Premises for the Term without
hindrance or interruption by Landlord or any other person claiming by or
through Landlord.
SECTION 20.12 SURVIVAL. All covenants of Landlord or Tenant which
reasonably would be intended to survive the expiration or sooner termination
of this Lease, including without limitation any warranty or indemnity
hereunder, shall so survive and continue to be binding upon and inure to the
benefit of the respective parties and their successors and assigns.
ARTICLE XXI
EXECUTION AND RECORDING
SECTION 21.1 COUNTERPARTS. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all of which
shall be one and the same agreement.
SECTION 21.2 CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a
corporation or partnership, each individual executing this Lease on behalf of
the corporation or partnership represents and warrants that he is duly
authorized to execute and deliver this Lease on behalf of the corporation or
partnership, and that this Lease is binding upon the corporation or
partnership in accordance with its terms. Tenant shall, at Landlord's
request, deliver a certified copy of its board of directors' resolution or
partnership agreement or certificate authorizing or evidencing the execution
of this Lease.
SECTION 21.3 EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of
this Lease to Tenant shall be for examination purposes only, and shall not
constitute an offer to or option for Tenant to lease the Premises. Execution
of this Lease by Tenant and its return to Landlord shall not be binding upon
Landlord, notwithstanding any time interval, until Landlord has in fact
executed and delivered this Lease to Tenant, it being intended that this
Lease shall only become effective upon execution by Landlord and delivery of
a fully executed counterpart to Tenant.
SECTION 21.4 RECORDING. Tenant shall not record this Lease without the
prior written consent of Landlord. Tenant, upon the request of Landlord,
shall execute and acknowledge a "short form" memorandum of this Lease for
recording purposes.
SECTION 21.5 AMENDMENTS. No amendment or termination of this Lease
shall be effective unless in writing signed by authorized signatories of
Tenant and Landlord, or by their respective successors in interest. No
actions, policies, oral or informal arrangements, business dealings or other
course of conduct by or between the parties shall be deemed to modify, this
Lease in any respect.
SECTION 21.6 EXECUTED COPY. Any fully executed photocopy or similar
reproduction of this Lease shall be deemed an original for all purposes.
SECTION 21.7 ATTACHMENTS. All exhibits, amendments, riders and addenda
attached to this Lease are hereby incorporated into and made a part of this
Lease.
25.
<PAGE>
ARTICLE XXII
MISCELLANEOUS
SECTION 22.1 NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and
agrees that the terms of this Lease are confidential and constitute
proprietary information of Landlord. Disclosure of the terms could adversely
affect the ability of Landlord to negotiate other leases and impair
Landlord's relationship with other tenants. Accordingly, Tenant agrees that
it, and its partners, officers, directors, employees and attorneys, shall not
intentionally and voluntarily disclose the terms and conditions of this Lease
to any other tenant or apparent prospective tenant of the Landlord, either
directly or indirectly, without the prior written consent of Landlord.
provided, however, that Tenant may disclose the terms to prospective
subtenants or assignees under this Lease.
SECTION 22.2 GUARANTY. As a condition to the execution of this Lease
by Landlord, the obligations, covenants and performance of the Tenant as
herein provided shall be guaranteed in writing by the Guarantor(s) listed in
Item 7 of the Basic Lease Provisions, if any, on a form of guaranty provided
by Landlord.
SECTION 22.3 CHANGES REQUESTED BY LENDER. If, in connection with
obtaining financing for the Building, the lender shall request reasonable
modifications in this Lease as a condition to the financing, Tenant will not
unreasonably withhold or delay its consent, provided that the modifications
do not materially increase the obligations of Tenant or materially and
adversely affect the leasehold interest created by this Lease.
SECTION 22.4 MORTGAGEE PROTECTION. No act or failure to act on the
part of Landlord which would otherwise entitle Tenant to be relieved of its
obligations hereunder or to terminate this Lease shall result in such a
release or termination unless (a) Tenant has given notice by registered or
certified mail to any beneficiary or a deed of trust or mortgage covering the
Premises whose address has been furnished to Tenant and (b) such beneficiary
is afforded a reasonable opportunity to cure the default by Landlord (which
in no event shall be less than sixty (60) days), including, if necessary to
effect the cure, time to obtain possession of the Premises by power of sale
or judicial foreclosure provided that such foreclosure remedy is diligently
pursued. Tenant agrees that each beneficiary or a deed of trust or mortgage
covering the Premises is an express third party beneficiary hereof, Tenant
shall have no right or claim for the collection of any deposit from such
beneficiary or from any purchaser at a foreclosure sale unless such
beneficiary or purchaser shall have actually received and not refunded the
deposit, and Tenant shall comply with any written directions by any
beneficiary to pay rent due hereunder directly to such beneficiary without
determining whether an event of default exists under such beneficiary's deed
of trust.
SECTION 22.5 COVENANTS AND CONDITIONS. All of the provisions of this
Lease shall be construed to be conditions as well as covenants as though the
words specifically expressing or imparting covenants and conditions were used
in each separate provision.
SECTION 22.6 SECURITY MEASURES. Tenant hereby acknowledges that
Landlord shall have no obligation whatsoever to provide guard service or
other security measures for the benefit of the Premises. Tenant assumes all
responsibility for the protection of Tenant, its agents, invitees and
property from acts of third parties, Nothing herein contained shall prevent
Landlord, at its sole option, from providing security protection for the
Premises or any part thereof, in which event the cost thereof shall be
included within the definition of Building Costs.
SECTION 22.7 EXPIRATION OF EXISTING LEASE. It is understood that
Tenant is presently leasing the Premises pursuant to a Lease Agreement dated
March 5, 1996 executed by Landlord's predecessor-in-interest, Aetna Life
Insurance Company, (the "Existing Lease"). The parties agree that the
Existing Lease shall expire in accordance with its terms as &the day
preceding the Commencement Date of this Lease, provided that such termination
shall not relieve Tenant of (a) any accrued obligation or liability under the
Existing Lease as of said termination date, or (b) any obligation under the
Existing Lease which was reasonably intended to survive the expiration or
termination thereof.
SECTION 22.8 JAMS.
26.
<PAGE>
(a) All claims or disputes between Landlord and Tenant arising out
of, or relating to the Lease which either party is expressly authorized by a
provision hereof to submit to arbitration, shall be decided by the
JAMS/ENDISPUTE, or its successor, in San Jose, California ("JAMS"), unless
the parties mutually agree otherwise. Within ten (10) business days
following submission to JAMS, JAMS shall designate three arbitrators and each
party may, within five (5) business days thereafter, veto one of the three
persons so designated. If two different designated arbitrators have been
vetoed, the third arbitrator shall hear and decide the matter. Any
arbitration pursuant to this Section 22.8 shall be decided within thirty (30)
days of submission of JAMS. The decision of the arbitrator shall be final and
binding on the parties. All costs associated with arbitration shall be
awarded to the prevailing party as determined by the arbitrator.
(b) Notice of the demand for arbitration by either party to the
Lease shall be filed in writing with the other party to the Lease and with
JAMS and shall be made within a reasonable time after the dispute has arisen.
The award rendered by the arbitrators shall be final, and judgment may be
entered upon it in accordance with applicable law in any court having
jurisdiction thereof. Except by written consent of the person or entity
sought to be joined, no arbitration arising out of or relating to the Lease
shall include, by consolidation, joinder or in any other manner, any person
or entity not a party to the Lease under which such arbitration is filed
unless (1) such person or entity is substantially involved in a common
question of fact or law, (2) the presence of such person or entity is
required if complete relief is to be accorded in the arbitration, or (3) the
interest or responsibility of such person or entity, in the matter is not
insubstantial.
(c) The agreement herein among the parties to the Lease and any
other written agreement to arbitrate referred to herein shall be specifically
enforceable under prevailing law.
LANDLORD TENANT:
THE IRVINE COMPANY SILICON STORAGE TECHNOLOGY, INC.
a California corporation
By: /s/ Robert E. Williams, Jr. By: /s/ Bing Yeh
--------------------------------- -----------------------------------
Robert E. Williams, Jr., Name: Bing Yeh
President --------------------------
Irvine Industrial Company, Title: President and Chief
A division of The Irvine Executive Officer
Company -------------------------
By: Nancy E. Trujillo By: /s/ Jeffrey L. Garon
--------------------------------- -----------------------------------
Nancy E. Trujillo Name: Jeffrey L. Garon
Assistant Secretary --------------------------
Title: Vice President,
Chief Finance Officer
-------------------------
27.
<PAGE>
AGREEMENT
THIS AGREEMENT is entered into as of the Effective Date, between SAMSUNG
ELECTRONIC CO. LTD. with a principal place of business located at San #24
Nongseo-Ri, Kiheung-Eup Yongin-City, Kyungki-Do, KOREA 449-900 ("SEC"), and
SILICON STORAGE TECHNOLOGY, INC. located at 1171 Sonora Court, Sunnyvale,
California, U.S.A. ("SST").
WHEREAS, SST has designed and developed SST Technology (as defined hereinafter),
WHEREAS, SST is the owner of SST Intellectual Property Rights (as defined
hereinafter),
WHEREAS, SEC desires to obtain from SST a non-exclusive, personal,
non-transferable, world-wide license to use, make, sell, and distribute the
products containing SST Technology for design of Embedded Products (as
defined hereinafter); SST agrees to grant to SEC such nonexclusive,
world-wide license to SEC in accordance with the terms and conditions set
forth in this Agreement,
WHEREAS, SST's grant of right to use SST Technology by SEC's ASIC customers
shall be limited to design of the Embedded Product (as defined hereinafter)
by SEC for such ASIC customers for manufacture by SEC, and such right
prohibit transfer of technology, or any part of SST Intellectual Property
Rights to any third party,
WHEREAS, SST desires to purchase from SEC high density NAND flash memory IC
and SEC desires to supply SST with such products.
WHEREAS, SST desires to obtain foundry capacity for SST Products (as defined
hereinafter) and SEC agrees to provide such capacity to SST.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.0 "SST Technology" shall mean [ * ], including but not limited
to [ * ],
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
1.
<PAGE>
[ * ].
1.1 In the evolution of the product designs and the manufacturing
process that incorporate elements of the SST Technology, there may
be modifications made, after the execution of this Agreement,
which are improvements of the original SST Technology. These
incremental improvements or modifications made to the SST
Technology by SEC, shall be known as "SEC Improvement."
1.2 In the evolution of the product designs and the manufacturing
process that incorporate elements of the SST Technology, there may
be modifications made, after the execution of this Agreement,
which are improvements of the original SST Technology. These
incremental improvements or modifications made to the SST
Technology by SST, shall be known as "SST Improvement."
1.3 SEC Improvement and SST Improvement shall be collectively called
"Improvements."
1.4 The "Embedded Product" shall mean a product having one or more
Flash Cells which was designed by SEC or its authorized
subcontractor under non-disclosure agreement with SEC to safeguard
SST, for SEC or according to the SEC's customer specification, and
incorporate substantial elements of the SST Technology and its
improvements. This product shall not include memory only
products, i.e. the sole purpose or function of which is for the
storage and retrieval of data or information and used as
standalone memory products. Embedded Product shall be ASIC or
microcontroller type product with SST Technology presented to the
SEC customers only in a form of specifications. GDSII layout data
base, circuit designs, schematics and related data of SST
Technology shall not be disclosed to Embedded Product customers'
nor to SEC Subcontractors' SEC agrees to enter into a non-
disclosure agreement with ASIC customers, to maintain in
confidence the SST Intellectual Property Rights. The right to
enforce the non-disclosure agreement is assigned to SST. The
percentage of the Flash Area relative to Embedded Product area
shall not exceed [ * ]
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
2.
<PAGE>
[ * ].
1.5 The "SST Product" shall mean standalone memory products or a logic
product with embedded SST Technology designed by SST or for SST by
a third party incorporating SST Technology, or an Embedded Product
designed for SST by SEC.
1.6 "Flash Cell" shall mean a nonvolatile memory cell for storage of
single bit based upon the SST Technology.
1.7 "Flash Area" shall mean the total area of the embedded SST
Technology. The Flash Area shall include Flash Cell array,
addressing, decoding, sensing, charge pump, and all related
circuits required for the operation of the embedded block.
1.8 "SST Intellectual Property Rights" shall mean all patents,
copyrights, mask work rights, and trade secrets subsisting in or
covering the SST Technology, which are owned by SST or to which
SST has the right to grant the rights and license granted herein,
now or hereafter during the term of the Agreement. SST
Intellectual Property Rights include, but is not limited to,
patents covering Flash Cells and memory circuits, and methods of
operation and manufacturing thereof, mask work rights in the
layout of the Flash Cells and memory circuits, copyrights in the
net list, and confidential information in cell design layout,
design rules, and process flow architecture.
1.9 "Selling Price" shall mean actual price billed to end-user
customer by SEC for Embedded Product sold less amount for
authorized returned material. This price is different from list
price, marketing and sales quoted price, etc. which may not be the
actual price billed to the customer.
1.10 "Proprietary Information" shall mean any information controlled by
a party hereto identified as proprietary and/or confidential and
disclosed to the other party according to this Agreement. Written
Proprietary Information shall be clearly marked "CONFIDENTIAL" or
"PROPRIETARY". All oral disclosures of Proprietary Information
shall be identified as such prior to disclosure and confirmed
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
3.
<PAGE>
in writing, or email, by the disclosing party within thirty (30)
days of the oral disclosure. In case of disagreement, the
receiving party must make a written objection thereto within
thirty (30) days after receipt of the information. The
Proprietary Information shall not include information that: (1) is
now or subsequently in the public domain or otherwise becomes
available to the public other than by breach of this Agreement by
the receiving party; (2) has been rightfully in the receiving
party's possession prior to receipt from the disclosing party with
the receiving party having the burden of proof; (3) is rightfully
received by the receiving party from a third party; or (4) is
independently developed by the receiving party without use of any
proprietary information or trade secrets of disclosure with the
receiving party having the burden of proof.
1.11 "Effective Date" shall mean either the date when this Agreement is
signed by both parties, or the date when SEC and SST receive all
necessary approvals for this Agreement from their respective
governments, whichever is later.
1.12 "Subsidiary (ies)" shall mean any corporation, company or other
entity controlled by, controlling, or under common control with,
either party hereto. As used herein, the term "control" means
ownership or control, direct or indirect, now or hereafter during
the term of this Agreement, of more than fifty percent (50%) of
the outstanding shares of interest entitled to vote for the
election of directors (other than any shares or stock whose voting
rights are subject to restriction) of such corporation, company or
other entity. Any corporation, company or other entity which
would at any time be a Subsidiary of SST or SEC, as the case may
be, by reason of the foregoing shall be considered a Subsidiary
for the purpose of this Agreement only so long as such control
exists. A list of Subsidiary(ies) is attached in Exhibit "C"
hereto.
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
4.
<PAGE>
ARTICLE II
GRANT
2.0 Subject to the terms and conditions of this Agreement, and during
the term of such Agreement SST grants SEC and SEC's Subsidiary
under SST Intellectual Property Rights, a world wide, non-
exclusive, personal, non-transferable license and right (without
the right to sublicense) to design (for itself or for its
customers) and have designed by SEC Subcontractors Embedded
Products, manufacture at SEC owned wafer manufacturing plants such
designed Embedded Products, sell the manufactured Embedded
Products. Use of the license granted herein, shall not constitute
a right to sublicense the technology to any party for
manufacturing of Embedded Products, or any other products using
SST Technology outside of SEC's foundry sites.
2.1 In consideration of the license set forth in paragraph 2.0, SEC
shall pay license fee and royalty described in Article (III). In
further consideration of the license granted herewith, [ * ] as
described in paragraph 4.0 and [ * ] as described in
paragraph 4.1.
2.2 SEC shall not use a minimum Flash Cell size for its Embedded
Products less than the minimum Flash Cell size used in SST Product
manufactured at SEC. The number of Flash Cells in each Embedded
Product shall not exceed [ * ] unless a waiver letter is
obtained from SST. [ * ].
2.3 SEC further agrees to assume responsibility for material costs of
developing [ * ] SST Technologies, including [ * ].
2.4 This agreement is only for [ * ] generation of SST Technology.
For development and licensing of technology geometry below [ * ],
both parties shall negotiate in good faith to reach a separate
agreement.
2.5 SST and SEC shall negotiate in good faith the right
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
5.
<PAGE>
for SEC to provide foundry capacity for licensees of SST
Technology [ * ].
2.6 SEC shall [ * ] provide SST with layout design data base,
schematics of circuit designs, specifications of SST Technology
embedded ASIC blocks, and provide documentation relating to SEC
Improvements as soon as possible, in order to keep SST informed of
latest SST Technology based blocks for Embedded Products and to
allow SST to use such material in SST Products.
2.7 Both parties agree that the objective of establishing SST
Technology for both [ * ] geometry would be to yield similar
design rules and device specification to allow SST to keep the
same design (GDSII data base) manufactured at both SEC and SST's
other foundries. If any process incompatibility should develop
that would cause the original working design to require
modifications, SEC has agreed to make process changes necessary to
make the same design manufacturable at SEC, without any added cost
to SST.
2.8 Both Parties agree to negotiate, in good faith, extending the
relationship to include [ * ].
2.9 SST shall provide-SEC with the deliverables and technical
assistance as specified in Exhibits A and B.
ARTICLE III
LICENSE FEE AND ROYALTY
3.0 SEC shall pay SST a license fee of [ * ] total, net of taxes
from Korean government, in two equal payments of [ * ] each.
The first payment shall be due upon signing the Agreement and
clearance from Korean government, which is not expected to take
more than thirty (30) days. The second payment shall be due upon
meeting certain milestone described in Exhibit "A". Unless
otherwise specified, payment will be due and payable
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
6.
<PAGE>
by SEC within thirty (30) days after the satisfaction of the
applicable milestone and the receipt of the corresponding invoice
from SST.
3.1 SEC shall pay SST a royalty for the licenses granted herein, which
royalty shall be a certain percentage of Selling Price of any
Embedded Product sold by SEC, in accordance with the schedule
below;
A) [ * ]
B) [ * ]
3.2 In the event that as a result of embedding high density of SST
Technology in Embedded Products a significant direct competition
to SST's memory product business is created, both parties agree to
negotiate in good faith for reaching an equitable solution.
3.3 Royalty payments shall be made semi-annually within thirty (30)
days after close of each calendar six months, and shall be
accompanied by a report setting [ * ]. In connection with this
royalty, the sales records of SEC shall be available for
inspection by SST's internal or independent auditors during usual
business hours for the sole purpose of verifying said reports at
SST's expenses provided such audit takes place during normal
business hours. In the event any such audit shall disclose that
such-royalty has been underpaid by more than [ * ] SEC shall
bear the cost of that audit.
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
7.
<PAGE>
ARTICLE IV
FOUNDRY AND MASS STORAGE
In consideration of the license granted herein, the following relationships
shall be established between SST and SEC:
4.0 SEC shall provide guaranteed wafer foundry capacity for SST
Products in accordance with schedule below.
[ * ] [ * ] [ * ] [ * ] [ * ]
------------------------------------------------------------------
[ * ] [ * ] [ * ] [ * ] [ * ]
[ * ] [ * ] [ * ] [ * ] [ * ]
[ * ]
SEC further agrees to [ * ] .
[ * ].
4.1 [ * ].
ARTICLE V
CROSS LICENSE
5.0 Title to all intellectual property rights relating to SST
Improvements under this Agreement shall be owned by SST, and all
expenses incurred in obtaining and maintaining such rights shall
be borne by SST.
5.1 SEC will receive, as soon as possible, updated SST Improvement and
improvements that SST is entitled to grant from other licensing
agreements associated with the SST Technology without additional
fee or royalty. SST and SST's Subsidiaries will receive a paid
up, unrestricted license including the right to
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
8.
<PAGE>
grant sublicenses to all SEC Improvement.
5.2 Title to all intellectual property rights relating to SEC
Improvements under this Agreement shall be owned by SEC, and all
expenses incurred in obtaining and maintaining such rights shall
be borne by SEC. Subject to the limitation on SEC's sublicense
under the Agreement, either party has the right to license such
SEC Improvement to third parties. In case SEC elects not to seek
or maintain legal protection for any such invention or improvement
in any particular country or territory, SST shall have the right
to seek protection at its sole expenses and for its sole benefit
and shall have full control over the prosecution and maintenance
thereof, provided that SST shall grant to SEC [ * ].
ARTICLE VI
WARRANTY
6.0 SST warrants and represents that it has the right and authority to
convey and grant the license as set forth herein.
6.1 SST represents that the SST Technology including the deliverables
provided hereunder to SEC is, and shall be kept accurate, updated
technology available to SST.
6.2 SST represents that to the best of its knowledge the SST
Technology provided by SST under this Agreement does not infringe
upon any third party's patents, copyrights, or trade secrets and
that it has not been duly notified by any patent holders of any
assertion of patent infringement by using SST Technology, [ * ].
6.3 SST agrees to indemnify, hold harmless and defend SEC from and
against any and all equitable actions, damages, costs and expenses
incurred by SEC in connection with a claim which, if true, would
constitute a breach of SST's warranty set forth
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
9.
<PAGE>
under Sub-Section 6.0 hereof, provided SST has been given prompt
notification and reasonable assistance from SEC, and SST has sole
control over legal action. [ * ] under the law of the United
States or any copyright, trade secret right of the United States
or any other jurisdiction, SST may, at its sole option and expense
(up to the limit set forth in paragraph 6.4 hereof), procure for
SEC the right to continued use of SST Technology as provided
hereunder, or modify the allegedly infringing item such that it is
no longer infringing, or replace the allegedly infringing item,
within sixty (60) days after adjudication, provided however, that
such equitable actions, damages, cost and expense is not incurred
by SEC Technology.
6.4 Neither party shall be liable to the other for any incidental,
indirect or consequential damages arising out of or in connection
with this Agreement. In no event shall either party be liable to
the other for damages, in the aggregate, greater than [ * ].
Furthermore, SEC agrees to hold SST harmless from any-cause of
action arising out of, as a result of, or in connection with, any
dispute between SEC and its customers, except to the extent such
dispute arises from a breach by SST of its contractual obligation
to SEC under this Agreement, including a breach by SST of its
warranty under Sub-Section 6.0, and provided that SST fulfills its
obligation under Sub-Section 6.3.
6.5 SEC shall provide SST with SEC's standard warranties on NAND flash
memory and Embedded Products sold to SST. Such warranties shall
include, warranty that the NAND product is free from infringement
of patents under the laws of the United States, or copyright,
trade secret right of any party in the United States or any other
jurisdiction. SEC further warrants that if any third party asks
SST for royalty for the compensation of using such third party's
patents alleging the infringement by the NAND flash memory
integrated circuits sold by SEC to SST, SEC shall be responsible
for such royalty.
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
10.
<PAGE>
Above warranty is limited to the NAND flash memory integrated
circuits only provided by SEC. In the event SEC flash memory
integrated circuits provided by SEC to SST are combined with other
products such as controller which is not provided by SEC, SEC is
not responsible for the patent claims or legal actions based on
patent infringement by any third party [ * ] relating to such
combination. In any event SEC's whole responsibility shall not
exceed prices of such NAND flash memory integrated circuits paid
by SST to SEC.
6.6 SEC agrees to indemnify, hold harmless and defend SST from and
against any and all equitable actions, damages, costs and expenses
incurred by SST in connection with the design of the Embedded
Product, the manufacturing of the Embedded Product, the sale of
the Embedded Product and the use thereof by SEC customers,
provided however, that such equitable actions, damages, cost and
expense is not incurred by breach of SST Technology.
6.7 SEC agrees to indemnify, hold harmless and defend SST from and
against any and all equitable actions, damages, costs and expenses
incurred by SST in connection with a claim which, if true, would
constitute a breach of SEC's warranty set forth under
Sub-Sections 6.5 hereof, provided SEC has been given prompt
notification and reasonable assistance from SST, and SEC has sole
control over the legal action.
ARTICLE VII
TERM AND TERMINATION
7.0 This Agreement shall remain in full force and effect for [ * ]
years from the Effective Date, unless earlier terminated as
provided elsewhere herein. Both parties shall negotiate in good
faith for renewed terms and conditions at least six (6) months
prior to the expiration of this Agreement. If neither of the
parties hereto gives six (6) months prior notice before the
expiration date of this Agreement, then this Agreement shall be
extended for one (1) year each time. Upon termination, all
tangible Proprietary Information shall be returned
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
11.
<PAGE>
or destroyed according to the instruction of the disclosing party.
7.1 This Agreement may be terminated by either party if the other
party (1) breaches any material provision of this Agreement and
does not cure or remedy such breach within thirty (30) days after
receipt of the notice of breach from the other party; (2) becomes
the subject of a voluntary or involuntary petition in bankruptcy
or any proceeding relating to insolvency, receivership,
liquidation, or composition for the benefit of creditors if such
petition or proceeding is not dismissed with prejudice within
sixty (60) days after filing. Termination of this Agreement shall
be effective 30 days after issuance of a written notice of
termination to the other party by the non-defaulting party. In
the event SST becomes bankrupt, or a trustee is otherwise
appointed for SST, SEC shall have the right to maintain the rights
and licenses provided for in this Agreement, provided it continues
to make the royalty payments provided for herein.
7.2 After effective termination of this Agreement by either party in
accordance with Section VII hereof, SEC shall cease and desist all
use of the license except for the performance of its obligations
to customers, which are incurred before termination of this
Agreement. The obligation and duties of both parties under this
Agreement for existing products at the time of termination shall
survive the termination of this Agreement.
7.3 Upon the breach by either party to this Agreement of any provision
of this Agreement, the non-breaching party shall have the right to
pursue all available remedies at law or in equity it may elect, in
order to obtain the benefits provided pursuant to this Agreement,
or to obtain adequate resource or compensation.
7.4 The termination of the license granted under this Agreement, by
expiration or otherwise, shall not release one party from any of
its obligations or liabilities therefore incurred, or rescind or
give any rights to rescind, anything done or any payment
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
12.
<PAGE>
made or other consideration given theretofore to the other party
under this Agreement, provided that SEC will have such rights,
under such license, after any such termination or expiration, as
are necessary for SEC to (a) supply replacement products for any
defective Embedded Product units sold by SEC on or prior to the
date of such termination or expiration, and (b) supply Embedded
Products under, and pursuant to the terms of, commitments of SEC
to third parties, for a period of one year thereafter, and (c)
dispose of inventory of Embedded Products under SEC's control as
of the date of such termination or expiration. In no event shall
SEC have the right to commit to supply Embedded Products to new
product design, for the purpose of sub-paragraph(c) herein, new
product designs do not include products which have been taped out,
masking plates have been made for them, and such proof of
existence is provided by SEC to SST no later than thirty (30) days
after termination of the Agreement. SEC will provide SST a
statement of inventory at this point in time, as well as an
estimate of time required to dispose of said inventory. SEC shall
cause to be issued an irrevocable letter of credit issued by a
commercial bank equal to the amount of royalty based upon the
inventory. SEC will fulfill all royalty obligations for material
described in (a), (b) and (c). No failure or delay on the part of
non-breaching party in exercising its right to terminate for any
one or more default shall be construed to prejudice its rights of
termination for such or for any other or subsequent default.
7.5 The provisions of [ * ] shall survive any termination or
expiration of this Agreement for any reason.
ARTICLE VIII
MISCELLANEOUS
8.0 SEC and SST shall schedule management review meetings twice a year
to assess the progress of the relationship, deal with any
unresolved problems, and develop strategic plans for continued
joint effort. Specific areas of discussion are to include: [ * ]
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
13.
<PAGE>
[ * ]; 6) other topics as required and proposed by either party
toward the continued achievement of the business objectives
represented by this Agreement.
8.1 SEC shall put a label or writing which reads "This product
incorporates SuperFlash-Registered Trademark- technology licensed
from Silicon Storage Technology, Inc. (SST)," for all Embedded
Products sold by SEC, having font, size and layout solely
determined by SEC but shall be readable with a naked eye of a
typical person, at a prominent location on the data sheet, product
brochure and promotion material of all Embedded Products.
8.2 Neither party shall be responsible for any failure to perform
under this Agreement if such failure is caused by unforeseen
circumstances or due to causes beyond its control, including but
not limited to acts of God, riot, labor stoppages, acts of civil
and military authorities, fire, floods or accidents.
8.3 This Agreement shall be governed by and construed in accordance
with the laws of the state of California. In the event of any
dispute arising out of or in connection with this Agreement which
cannot be amicably settled by the parties hereto, the parties
agree to submit any such dispute to binding arbitration to be
conducted in California in accordance with the then prevailing
rules for the commercial arbitration of American Arbitration
Association, and the decision of the arbitration panel shall be
final and binding and may be entered as a judgment by a court of
competent jurisdiction. All information relating to or disclosed
by any party in connection with the arbitration shall be treated
by the parties and the arbitration panel as confidential
information and no disclosure of such information shall be made by
either party or the arbitration panel without the prior written
consent of the disclosing party. Each party shall equally bear
the cost of the arbitration.
8.4 No modification, alteration or amendment of this Agreement shall
be effective unless in writing and duly signed by both parties.
The terms and
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
14.
<PAGE>
conditions of this Agreement constitutes the entire agreement and
understanding of the parties with respect to the subject matter
hereof, and supersede all previous communication, agreement,
understanding, whether oral or written, between the parties
regarding the same.
8.5 No waiver of any breach or failure by either party to enforce any
provision of this Agreement shall be deemed a waiver of any other
or subsequent breach or a waiver of future enforcement of that or
any other provision.
8.6 Neither party can assign this Agreement without the prior written
consent of the other party.
8.7 This Agreement shall not be construed as creating a partnership
between the parties hereto or to create any other form of legal
association which would impose liability upon one party for the
act or failure to act of the other party.
8.8 No remedy conferred by any of the specific provisions of this
Agreement is intended to be exclusive of any other remedy, and
each and every remedy shall be cumulative and shall be in addition
to every other remedy given hereunder or now or hereafter existing
at law or in equity or by statue or otherwise. The election of
one or more remedies by either party shall not constitute a waiver
of the right to pursue other available remedies.
8.9 If any clause or provision of this Agreement is declared illegal,
invalid or unenforceable under present or future laws effective
during the term hereof, it is the intention of the parties hereto
that the remainder of this Agreement shall not be affected hereby
and shall remain in force and effect.
8.10 The parties understand and acknowledge the violation of the
respective covenants and agreements contained herein may cause the
other irreparable harm and damage, which may not be recovered by
law, and each agrees that the other's remedies for a breach hereof
may be in equity by way of injunctive relief, as well as for
damages and any other relief available
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
15.
<PAGE>
to the non-breaching party, whether in law or in equity.
8.11 SEC agrees to comply with all laws relating to export control with
regard to all goods and information transferred by SST to SEC
hereunder, including but not limited to the information
transferred pursuant to Exhibit "A" hereof, and agrees to hold SST
harmless and indemnify it from any breach thereof. SST agrees to
comply with all laws relating to export control with regard to all
goods and information transferred by SEC to SST hereunder,
including but not limited to the information relating to the SEC
Improvement, and agrees to hold SEC harmless and indemnify it from
any breach thereof.
8.12 Any notice between the parities shall be made, by fax or mail, to
the correspondent as follows:
to SEC:
[ * ]
Address: [ * ]
[ * ]
Telephone: [ * ]
Fax: [ * ]
to SST:
[ * ]
Address: [ * ]
Telephone: [ * ]
Fax: [ * ]
ARTICLE IX
PROPRIETARY INFORMATION
9.0 Except that SEC exercises its license and rights hereunder, both
parties agree to maintain Proprietary Information in confidence,
not to make use thereof other than for the performance of this
Agreement, to release it only to employees or SEC customers who
have a reasonable need to know the same, and not to release or
disclose it to any third party, without the prior written consent
of the disclosing party.
9.1 All Proprietary Information and any copies thereof
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
16.
<PAGE>
shall remain the property of the disclosing party. Upon
expiration or termination of this Agreement, the receiving party
shall return the original and all copies of tangible Proprietary
Information at the request of the disclosing party.
9.2 This Section shall survive the termination or expiration of this
Agreement for a period of five (5) years.
9.3 The terms and conditions of the Non-disclosure Agreement dated
July 10, 1997 between the parties shall remain effective. In the
event the terms and conditions conflicts with this Agreement, this
Agreement shall prevail.
IN WITNESS WHEREOF, the parties have caused this Letter of Intent to be executed
by respective duly authorized representatives as the date and year hereinabove
written above.
Signed:
SAMSUNG ELECTRONIC CO. LTD. SILICON STORAGE TECHNOLOGY, INC.
By: /s/ illegible By: /s/ Bing Yeh
------------------------------------ ----------------------------------
Title: General Manager of Asia Business Title: President and CEO
--------------------------------- -------------------------------
Date: March 19, 1998 Date: March 19, 1998
---------------------------------- --------------------------------
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
17.
<PAGE>
EXHIBIT "A"
[ * ]
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
<PAGE>
EXHIBIT "B"
A) At SEC's request and subject to agreement of the parties on a mutually
convenient date, SST will provide an initial technical consultation to SEC at
SEC's facility, to be attended by appropriate engineering teams for each
company, and designed to provide an overview of the SST Technology. [ * ].
B) [ * ];
a. [ * ]
b. [ * ]
c. [ * ]
d. [ * ]
e. [ * ]
f. [ * ]
g. [ * ]
h. [ * ]
i. [ * ]
j. [ * ]
k. [ * ]
l. [ * ]
(c) Beginning with the manufacturing release for the Embedded Product, SST
shall provide [*] at SST or SEC (to be agreed by working groups) free of charge.
Additional consultation, if required, shall be billed by SST to SEC on the basis
of [ * ].
Each party will bear the expenses of its travel to the other's facility incurred
in the course of such additional technical supporting and training.
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
<PAGE>
EXHIBIT "C"
List of SEC Subsidiaries:
1. None Listed
2.
3.
4.
5.
List of SST Subsidiaries
1. None Listed
2.
3.
4.
5.
- -------------------
*Certain confidential information contained in this document, marked by
brackets, has been omitted and filed separately with the Securities Exchange
Commission pursuant to rule 24B-2 of the Securities Exchange Act of 1934, as
amended.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-83981) and Form S-8 (No. 0-26944) of Silicon
Storage Technology, Inc. of our report dated January 17, 2000, except for
Note 4, which is as of February 24, 2000, relating to the financial statements,
which appears in this Form 10-K. We also consent to the incorporation by
reference of our report dated January 17, 2000 relating to the financial
statement schedule, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
February 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEETS AND THE CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS FOUND IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,223
<SECURITIES> 0
<RECEIVABLES> 39,393
<ALLOWANCES> 535
<INVENTORY> 29,766
<CURRENT-ASSETS> 73,188
<PP&E> 15,990
<DEPRECIATION> 4,859
<TOTAL-ASSETS> 88,806
<CURRENT-LIABILITIES> 47,345
<BONDS> 0
0
0
<COMMON> 60,570
<OTHER-SE> (19,555)
<TOTAL-LIABILITY-AND-EQUITY> 88,806
<SALES> 118,242
<TOTAL-REVENUES> 124,794
<CGS> 94,652
<TOTAL-COSTS> 129,238
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> (3,928)
<INCOME-TAX> 88
<INCOME-CONTINUING> (4,016)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,016)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
