<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-20470
Integrated Process Equipment Corp.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
Delaware 77-0296222
<S> <C>
(State or other jurisdiction of incorporation or organization) (I.R.S. employer identification no.)
911 Bern Court, San Jose, California 95112
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code (408) 436-2170
Former name, former address and former fiscal year, if
changed since last report.
Indicate by (X) whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of February 12, 1997, 456,650 shares of Class A Common Stock and
14,776,522 shares of Common Stock of the registrant were outstanding.
Page 1 of 31
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1996 1996
--------- ---------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11,325 $ 36,953
Accounts receivable 34,089 35,258
Inventories 23,437 29,540
Prepaid expenses 946 1,219
Deferred income taxes 5,175 13,646
Net assets of discontinued operations 29,719 3,920
--------- ---------
Total current assets 104,691 120,536
--------- ---------
Property, plant and equipment, net 50,225 23,301
Intangible assets, net 15,135 13,108
Deferred income taxes 13,175 17,928
Other assets 1,475 1,601
--------- ---------
$ 184,701 $ 176,474
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 2,056 $ 221
Current portion of long-term debt 1,886 2,219
Accounts payable 11,961 11,510
Accrued liabilities 17,708 30,555
--------- ---------
Total current liabilities 33,611 44,505
Long-term debt, less current portion 22,753 17,860
--------- ---------
Total liabilities 56,364 62,365
--------- ---------
Stockholders' equity:
Preferred stock, $ .01 par value per share. Nonvoting, authorized 2,000,000 shares:
Series B-1 cumulative preferred stock. Authorized 21,478 shares, issued and outstanding
20,941 shares at June 30, 1996, 15,572 shares at December 31, 1996. Liquidation
preference of $1,450 -- --
Series B-2 cumulative preferred stock. Authorized 21,478 shares, issued and outstanding
20,941 shares. Liquidation preference of $1,950 -- --
Series B-3 cumulative preferred stock. Authorized 21,478 shares, issued and outstanding
21,210 shares. Liquidation preference of $1,975 -- --
Series C convertible preferred stock. Authorized 100,000 shares, issued and outstanding
100,000 shares at December 31, 1996 -- 1
Common stock, $.01 par value per share. Authorized 50,000,000 shares; one vote per share;
issued and outstanding 14,238,406 shares at June 30, 1996 and 14,442,050 at December 31, 1996 142 144
Class A common stock, $.01 par value per share. Authorized 3,500,000 shares, four votes per
share; issued and outstanding 521,650 shares 5 5
Additional paid-in capital 151,730 178,118
Accumulated deficit (23,546) (64,190)
Foreign currency translation adjustment 6 31
--------- ---------
Total stockholders' equity 128,337 114,109
--------- ---------
$ 184,701 $ 176,474
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 36,810 $ 35,662 $ 66,974 $ 65,069
Cost of goods sold 21,063 20,480 37,284 39,523
-------- -------- -------- --------
Gross margin 15,747 15,182 29,690 25,546
-------- -------- -------- --------
Operating expenses:
Research and development 3,482 5,443 6,326 11,950
Purchased research and development 36,961 -- 36,961 --
Selling, general and administrative 6,394 6,812 11,209 13,117
Program discontinuance charge -- 17,601 -- 17,601
-------- -------- -------- --------
Total operating expenses 46,837 29,856 54,496 42,668
-------- -------- -------- --------
Operating loss (31,090) (14,674) (24,806) (17,122)
Other income (expense):
Interest income 329 94 1,155 203
Interest expense (96) (601) (245) (1,173)
Other, net 116 192 181 259
-------- -------- -------- --------
Total other income (expense) 349 (315) 1,091 (711)
-------- -------- -------- --------
Loss from continuing operations before
income taxes (30,741) (14,989) (23,715) (17,833)
Income tax benefit (12,014) (4,964) (9,448) (6,149)
-------- -------- -------- --------
Net loss from continuing operations (18,727) (10,025) (14,267) (11,684)
Discontinued operations:
Loss from operations of IPEC Clean, Inc., net of taxes (219) (1,896) (1,167) (3,614)
Loss on disposal of IPEC Clean, Inc., net of taxes -- (24,950) -- (24,950)
-------- -------- -------- --------
Net loss from discontinued operations (219) (26,846) (1,167) (28,564)
-------- -------- -------- --------
Net loss (18,946) (36,871) (15,434) (40,248)
Cumulative dividend on preferred stock (90) (81) (399) (162)
-------- -------- -------- --------
Net loss attributable to common stockholders $(19,036) $(36,952) $(15,833) $(40,410)
======== ======== ======== ========
Loss per common share:
From continuing operations $ (1.30) $ (.68) $ (1.02) $ (.80)
From discontinued operations (.02) (1.80) (.08) (1.92)
-------- -------- -------- --------
Loss per common share $ (1.32) $ (2.48) $ (1.10) $ (2.72)
======== ======== ======== ========
Shares used in per share calculation 14,425 14,916 14,310 14,851
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX-MONTH PERIOD ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Series B Series C
Preferred Stock Convertible Preferred Stock Common Stock
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1996 63,092 $ -- -- $- 14,238,406 $142
Net loss -- -- -- - -- --
Retirement of Series B-1
Preferred Stock (5,369) -- -- - -- --
Issuance of Warrants -- -- -- - -- --
Exercise of Stock Options
(including tax benefits of $324) -- -- -- - 151,007 2
Employee Stock Purchase Plan -- -- -- - 52,637 --
Issuance of Series C Preferred Stock
(less costs of $1,570) -- -- 100,000 1 -- --
Cumulative translation adjustment -- -- -- - -- --
Dividends Paid -- -- -- - -- --
------- ---- ------- -- ---------- ----
Balance at December 31, 1996 57,723 $ -- 100,000 $1 14,442,050 $144
======= ==== ======= == ========== ====
</TABLE>
<TABLE>
<CAPTION>
Foreign
Class A Additional Currency
Common Stock Paid-In Accumulated Translation
Shares Amount Capital Deficit Adjustment
------ ------ ------- ------- ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 521,650 $5 $ 151,730 $(23,546) $ 6
Net loss -- - -- (40,248) --
Retirement of Series B-1
Preferred Stock -- - (500) -- --
Issuance of Warrants -- - 848 -- --
Exercise of Stock Options
(including tax benefits of $324) -- - 1,913 -- --
Employee Stock Purchase Plan -- - 698 -- --
Issuance of Series C Preferred Stock
(less costs of $1,570) -- - 23,429 -- --
Cumulative translation adjustment -- - -- -- 25
Dividends Paid -- - -- (396) --
------- -- --------- -------- ---
Balance at December 31, 1996 521,650 $5 $ 178,118 $(64,190) $31
======= == ========= ======== ===
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
Cash flows from operating activities: 1995 1996
-------- --------
<S> <C> <C>
Net income (loss) $(15,434) $(40,248)
Adjustments to reconcile net loss to net
cash used in operating activities:
Purchased research and development 36,961 -
Program discontinuance charge - 17,601
Less on disposal of IPEC Clean, Inc., net of taxes - 24,950
Depreciation and amortization 1,640 6,704
Deferred tax benefit (12,097) (12,900)
Acquisition adjustments - (865)
Costs of warrants issued - 848
Changes in assets and liabilities:
(Increase) in accounts receivable (6,647) (1,252)
(Increase) decrease in inventories 3,493 (15,104)
(Increase) in prepaid expenses and other assets (1,590) (399)
Increase (decrease) in accounts payable 1,233 (451)
Increase in accrued liabilities 280 8,347
(Increase) decrease in net assets of discontinued operations (7,975) 849
-------- --------
Net cash used in operating activities (136) (11,920)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (19,658) (343)
Proceeds from sale of property and equipment - 20,417
Purchase of subsidiaries, net of cash acquired (23,593) -
-------- --------
Net cash provided by (used in) investing activities (43,251) 20,074
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt 10,000 4,407
Repayment of long-term debt (3,520) (10,719)
Repayment of notes payable - (1,259)
Repayment of capital leases (44) (303)
Payment of preferred stock dividends (351) (396)
Net proceeds from issuance of Series C preferred stock - 23,430
Net proceeds from issuance of common stock
and warrants 2,562 2,289
-------- --------
Net cash provided by financing activities 8,647 17,449
-------- --------
Effect of exchange rate changes on cash - 25
-------- --------
Net increase (decrease) in cash and cash equivalents (34,740) 25,628
Cash and cash equivalents, beginning of period 65,790 11,325
-------- --------
Cash and cash equivalents, end of period $ 31,050 $ 36,953
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 423 $ 1,339
======== ========
Cash paid for taxes during the period $ 2,906 $ -
======== ========
Supplemental disclosure of noncash activities:
Release from escrow (retirement) of Class B 6% cumulative
convertible preferred stock issued for the Westech acquisition $ 2,000 $ (500)
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PREPARATION:
The accompanying condensed consolidated financial statements at
December 31, 1996 and for the three month and six month periods ended December
31, 1995 and December 31, 1996 are unaudited; however, in the opinion of the
management of Integrated Process Equipment Corp. ("IPEC") and subsidiaries (the
"Company"), such statements include all adjustments (consisting solely of normal
recurring accruals) necessary for the fair statement of the information
presented therein. The condensed consolidated balance sheet as of June 30, 1996
was derived from the audited financial statements at such date.
As more fully described in the following notes to condensed
consolidated financial statements, the Company announced its strategic decision
to focus on chemical mechanical planarization (CMP) and CMP-related products and
discontinue the operations of IPEC Clean, Inc. during the second quarter of
fiscal 1997. Prior period financial statements have been restated to reflect the
discontinuation of IPEC Clean, Inc.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
condensed consolidated financial statements and these notes do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. Accordingly, these statements should be read in
conjunction with the Company's annual financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended June 30,
1996.
Results of operations for interim periods are not necessarily
indicative of those to be achieved for full fiscal years.
ESTIMATES IN 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,
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.
ORGANIZATION:
Westech Systems, Inc.:
On September 3, 1993, IPEC acquired Westech Systems, Inc. ("Westech"),
a privately owned company engaged in manufacturing chemical mechanical
planarization equipment for the semiconductor
6
<PAGE> 7
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
industry. Westech was renamed IPEC Planar Phoenix, Inc. On January 1, 1997, IPEC
Planar Phoenix was renamed IPEC Planar, Inc.
Acquisition of Athens Corp.:
On November 22, 1994, the Company acquired approximately 94% of the
outstanding common stock of Athens Corp. ("Athens"), a privately owned company
engaged in manufacturing wet process reprocessing systems for the semiconductor
industry. The purchase price consisted of 1,095,695 shares of the Company's
common stock. The Company acquired the remaining 6% in the first quarter of
fiscal 1996 in exchange for 211,670 shares of the Company's common stock. The
name of Athens has subsequently been changed to IPEC Clean, Inc. ("IPEC Clean").
The operations of IPEC Clean were discontinued in the second quarter of fiscal
1997.
Acquisition of GAARD Automation, Inc.:
On October 30, 1995, the Company acquired all of the outstanding common
stock of GAARD Automation, Inc. ("GAARD"), a privately owned company that has
developed and sells an advanced high throughput CMP system for metal
planarization. GAARD also designs and manufactures custom flexible automation
systems used outside the semiconductor industry. The name of GAARD has
subsequently been changed to IPEC Planar Portland, Inc. On January 1, 1997, IPEC
Planar Portland was merged into IPEC Planar, Inc.
Acquisition of Precision Materials:
On December 29, 1995, the Company's subsidiary IPEC Precision, Inc.
("Precision") acquired substantially all of the assets constituting the
Precision Materials Operation of Hughes Danbury Optical Systems, Inc. (HDOS).
Precision is engaged in the design, manufacture, and sale of precision
equipment, based on proprietary plasma assisted chemical etching and metrology
technologies, for use in the production of advanced semiconductor wafers and
devices, and provides wafer processing services that use such proprietary
technology and equipment.
The aforementioned acquisitions have all been accounted for as
purchases and, accordingly, the condensed consolidated financial statements
include the results of operations from the respective dates of acquisition.
Pro forma financial information:
Pro forma summary of consolidated operations (excluding charges for
purchased in-process research and development), assuming the acquisitions of
GAARD and Precision had taken place on July 1, 1995 is as follows (in thousands,
except per share amounts):
7
<PAGE> 8
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, 1995 December 31, 1995
----------------- -----------------
<S> <C> <C>
Revenues $ 38,821 $ 75,123
Net income from continuing operations $ 3,698 $ 7,807
Net loss from discontinued operations $ ( 219 ) $ ( 1,167 )
Net income per common share
from continuing operations $ .26 $ .55
Net loss per common share
from discontinued operations $ ( .02 ) $ ( .08 )
</TABLE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Income (loss) per share of common stock:
Net income (loss) per common share is computed by dividing net income
(loss) less dividends on convertible preferred stock by the weighted average
number of common shares outstanding during the period, plus, when their effect
is dilutive, common stock equivalents consisting of certain shares subject to
stock options and warrants.
New Accounting Standards:
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. The Company has adopted
Statement 121 in the first quarter of 1997, and the impact of adoption was not
material.
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock Based Compensation" (SFAS 123). Under the provisions of SFAS 123,
companies can elect to account for stock-based compensation plans using a
fair-value based method or continue measuring compensation expense for those
plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123 requires
that companies electing to continue using the intrinsic value method must make
pro forma disclosures of net income and earnings per share as if the fair value
method had been applied. The Company has continued to account for stock-based
compensation using the intrinsic value method which will not have an impact on
the Company's results of operations or financial position.
8
<PAGE> 9
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INVENTORIES:
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
------------- -----------------
(Unaudited)
<S> <C> <C>
Raw materials $14,318 $ 24,081
Work in process 10,165 15,705
Finished goods 906 1,238
-------- ---------
25,389 41,024
Less inventory obsolescence reserve ( 1,952) ( 11,484 )
-------- ---------
$23,437 $ 29,540
======== =========
</TABLE>
DISCONTINUED OPERATIONS
In the second quarter of fiscal 1997, the Company announced its
decision to focus its resources on the manufacturing of CMP and CMP-related
equipment. As a result of this decision, the Company has adopted a plan for the
disposition by sale of IPEC Clean within the next twelve months.
IPEC Clean has been accounted for as a discontinued operation, and
accordingly its operations are segregated for all periods presented in the
accompanying statements of operations. Revenue, related losses and income tax
benefits associated with the discontinued operation for the three and six month
periods ended December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1995 1996 1995 1996
---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C>
Revenue $ 11,168 $ 1,998 $ 19,016 $ 4,609
======== ======= ======== =======
Loss from operations (184) (2,891) (1,546) (5,495)
Income tax expense (benefit) 35 ( 995) (379) (1,881)
-------- -------- -------- -------
Loss from operations $ (219) $(1,896) $ (1,167) $(3,614)
======== ======= ======== =======
</TABLE>
The effective income tax benefit rate for discontinued operations differs from
the Company's Federal statutory rate (34%) primarily as a result of
nondeductible amortization of intangible assets.
9
<PAGE> 10
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded a pre-tax charge amounting to $27.2 million to
write down intangible assets, accounts receivable, inventory, equipment and
other assets to estimated net realizable value and to record additional
liabilities in the second quarter of fiscal 1997. A charge amounting to $3
million was also recorded to reflect the estimated phase out costs associated
with IPEC Clean. This charge is included in accrued liabilities at December 31,
1996 in the accompanying condensed consolidated balance sheet. The tax benefit
associated with these charges amounted to $5.2 million.
The net assets of the discontinued operation have been reclassified
from the June 30, 1996 audited financial statement presentation and are
summarized in the accompanying condensed consolidated balance sheets as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1996
------------- -----------------
(in thousands)
<S> <C> <C>
Current assets $ 19,234 $ 9,179
Property, plant and equipment, net 2,430 372
Intangible assets 12,911 ---
Other assets 2,127 581
Current liabilities ( 6,895) ( 6,212)
Long-term debt ( 88) ---
---------- ---------
$ 29,719 $ 3,920
========== =========
</TABLE>
PROGRAM DISCONTINUANCE CHARGE:
In the second quarter of fiscal 1997, the Company recorded a pre-tax
nonrecurring charge of $17.6 million, primarily related to write downs of
inventories of $9 million, property, plant and equipment of $4.1 million due to
discontinuance of the Avanti 672 product development program and noncancellable
purchase orders of $4.5 million included in accrued liabilities.
PREFERRED STOCK:
During the six months ended December 31, 1996, 5,370 shares of B-1
Preferred Stock were released from escrow to the selling shareholders of Westech
(including a director) upon settlement of the purchase price of Westech, now
known as IPEC Planar, Inc. In accordance with the escrow settlement, the
remaining 5,369 shares of the B-1 preferred stock held in escrow were retired.
In the second quarter of fiscal 1997 the Company sold 100,000 shares of
newly issued Series C convertible preferred stock for $25 million. The Series C
convertible preferred stock is convertible, at the holder's option, into shares
of the Company's common stock on or after January 31, 1997 and will
automatically convert into common stock on December 31, 2002. Each share of
Series C convertible preferred stock is convertible at a premium over an average
of the volume weighted average daily
10
<PAGE> 11
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
market prices of the common stock. The number of shares of common stock to be
issued upon conversion will vary based on future stock price movements. At
January 31, 1997, the Series C convertible preferred stock was convertible into
approximately 1.2 million shares of the Company's common stock.
In connection with the issuance of the Series C convertible preferred
stock, the holder was granted a warrant to acquire up to 456,000 shares of the
Company's common stock. The warrant may generally be exercised from and after
June 16, 1998 until December 16, 2002 at an exercise price of $24.567 per share.
SALE/LEASEBACK:
The Company completed an $18.7 million sale/leaseback transaction of
its Phoenix manufacturing and administrative facility in the second quarter of
fiscal 1997. The Company leased back the facility for an initial fifteen year
term with two five year renewal options. Proceeds from the transaction were used
to repay a $10 million term loan with a bank. Annual rental payments will vary
but will range between $2.1 million and $2.3 million over the next five years.
LOAN AGREEMENT:
The Company entered into a loan agreement in April 1996 with a bank.
Under the terms of the agreement, the Company received a $10 million term loan
and a $30 million revolving loan facility to provide working capital for general
corporate purposes. The $10 million term loan was repaid in the second quarter
of fiscal 1997. The borrowing base for the revolving loan facility consists of
eighty percent of eligible accounts receivable as defined by the agreement.
The facility bears interest at the Company's option at the prime rate
or LIBOR plus 2.75%. The revolving loan facility matures in April 1997 with
options to renew the facility annually for a two year period which the Bank must
approve. If the revolving credit facility expires, the Company is obligated to
repay the outstanding balance in eight equal quarterly payments of principal
plus interest. The revolving loan facility is secured by a blanket first lien on
all assets of the Company and its subsidiaries.
The terms of the loan agreement include various covenants, which, among
other things, include maintenance of certain financial ratios, limits on the
amount of dividends that can be paid to common stockholders and acquisitions of
treasury stock. At December 31, 1996 the Company was in compliance with all
covenants of the agreement.
11
<PAGE> 12
INTEGRATED PROCESS EQUIPMENT CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONTINGENCIES AND COMMITMENTS:
Concentration of credit risk:
The Company sells products and services to customers, primarily
semiconductor manufacturers, and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses. At December 31, 1996, accounts receivable of
the Company's largest customer amounted to $14 million.
12
<PAGE> 13
PART I -- FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and in the audited Financial Statements and Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in the Company's Annual Report on Form 10-K for the year ended June
30, 1996.
IPEC is a Delaware corporation organized in December 1991 and is the
successor by merger to a California corporation of the same name that was
incorporated in October 1989. The Company is primarily engaged in designing,
manufacturing, marketing and servicing equipment for the semiconductor
manufacturing industry.
In connection with the acquisitions described in the notes to condensed
consolidated financial statements under "Organization," in the second quarter of
fiscal 1996, the Company reorganized its business into three divisions. IPEC
Planar, the Company's CMP division, consists of the Company's IPEC Planar
Phoenix operation, (formerly named Westech) and the IPEC Planar Portland
operation (formerly named GAARD). IPEC Clean consists of the former Athens
Corporation and produces on site wet ultra high purity chemical reprocessing
systems, chemical distribution systems and cleaning systems that can be marketed
as stand alone products or clustered with Planar's CMP systems. IPEC Precision
consists of the Precision Materials Operation acquired from HDOS and is engaged
in manufacturing of advanced plasma assisted chemical etching equipment and
metrology equipment for use primarily in manufacturing of silicon wafers and
semiconductor devices.
As more fully described in the notes to the condensed consolidated
financial statements, in the second quarter of fiscal 1997 the Company announced
its decision to discontinue the operations of IPEC Clean. Losses from IPEC
Clean's operations have been reported separately. The discontinuation resulted
in a $1.9 million charge for the quarter. Financial information from prior
periods contained in this section have been restated to reflect the
discontinuation of IPEC Clean. As a result, dollar amounts, percentages, and
percentages of revenues contained in this Quarterly Report may differ from those
presented in Quarterly Reports for prior periods.
The Company's revenue is derived from the sale of products, related
spare parts and service. In accordance with generally accepted accounting
principles, the Company recognizes revenue when a product is shipped. Revenue
from spare part sales or service is recognized when shipped or upon completion
of service.
The Company's gross margins may vary due to many factors, and are
especially dependent on direct versus indirect sales, product mix and domestic
versus international sales. The Company sells directly in the United States and
such sales have higher gross margins than indirect international sales. Thus,
gross margins in any period may not be indicative of margins for future periods.
See "Factors Affecting Operating Results--International Sales."
13
<PAGE> 14
This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, which are subject to the
"safe harbor" created by that section. These forward-looking statements include,
but are not limited to, statements concerning future revenues, operating
margins, expenses, dividend and tax rates, and access to equity or debt
financing. The Company's actual future results could differ materially from
those projected in the forward-looking statements. Some factors which could
cause future actual results to differ materially from the Company's recent
results or those projected in the forward-looking statements are described in
"Factors Affecting Operating Results" below. The Company assumes no obligation
to update the forward-looking statements or such factors.
- Continued on next page -
14
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the results of
operations for the Company expressed as a percentage of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1995 1996 1995 1996
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 57.2 % 57.4 % 55.7 % 60.7 %
---- ----- ---- -----
Gross margin 42.8 % 42.6 % 44.3 % 39.3 %
---- ----- ---- -----
Operating expenses:
Research and development 9.4 % 15.2 % 9.4 % 18.4 %
Purchased research and development 100.5 % - 55.2 % -
Selling, general and administrative 17.4 % 19.1 % 16.7 % 20.2 %
Program discontinuance charge - 49.4 % - 27.0 %
---- ----- ---- -----
Total operating expenses 127.2 % 83.7 % 81.3 % 65.6 %
---- ----- ---- -----
Operating loss (84.4)% (41.1)% (37.0)% (26.3)%
Other income (expense):
Interest income .9 % .3 % 1.7 % .3 %
Interest expense (.2)% (1.7)% (.4)% (1.8)%
Other, net .3 % .5 % .3 % .4 %
---- ----- ---- -----
Total other income (expense) 1.0 % (.9)% 1.6 % (1.1)%
---- ----- ---- -----
Loss from continuing operations before income taxes (83.4)% (42.0)% (35.4)% (27.4)%
Income tax benefit (32.6)% (13.9)% (14.1)% (9.4)%
---- ----- ---- -----
Net loss from continuing operations (50.8)% (28.1)% (21.3)% (18.0)%
Discontinued operations:
Loss from operations of IPEC Clean, Inc., net of taxes (.6)% (5.3)% (1.7)% (5.6)%
Loss on disposal of IPEC Clean, Inc., net of taxes (70.0)% - (38.3)%
---- ----- ---- -----
Net loss from discontinued operations (.6)% (75.3)% (1.7)% (43.9)%
---- ----- ---- -----
Net loss (51.4)% (103.4)% (23.0)% (61.9)%
Cumulative dividend on preferred stock (.2)% (.2)% (.6)% (.2)%
---- ----- ---- -----
Net loss attributable to common stockholders (51.6)% (103.6)% (23.6)% (62.1)%
==== ===== ==== =====
</TABLE>
QUARTER ENDED DECEMBER 31, 1996 COMPARED TO QUARTER ENDED DECEMBER 31, 1995
Revenue for the second fiscal quarter ended December 31, 1996 decreased
3% to $35.7 million from $36.8 million in the quarter ended December 31, 1995.
This decrease was primarily attributable to the current industry slowdown. The
Company expects that revenue for the year ending June 30, 1997 will be below the
$148.7 of revenue reported for the year ended June 30, 1996.
15
<PAGE> 16
The gross margin percentage for the second quarter of fiscal 1997 was
42.6% of revenue, compared to a gross margin percentage of 42.8% of revenue in
the second quarter of fiscal 1996. The Company's gross margins are impacted by a
number of factors such as product mix, material costs and the level of
international sales, which result in greater sales discounts and lower gross
margins. Gross margins in future periods may be higher or lower than those in
the second quarter of fiscal 1997 depending on such factors.
Research and development costs increased to $5.4 million in the second
quarter of fiscal 1997 from $3.5 million in the second quarter of fiscal 1996,
primarily due to development of the Company's AvantGAARD 676 high-throughput CMP
tool. The increase in these costs also involved $.8 million of research and
development expenses incurred at IPEC Precision, which was acquired in December
1995, for the development of proprietary plasma assisted chemical etching and
metrology technologies.
Selling, general and administrative expenses increased to $6.8 million
in the second quarter of fiscal 1997 from $6.4 million in the second quarter of
fiscal 1996. The absolute dollar increase is primarily attributable to
incremental selling, general and administrative expenses incurred at IPEC
Precision. Higher depreciation, amortization and overhead charges have also
resulted from the IPEC Planar Portland and IPEC Precision acquisitions. These
expenses have been partially offset by work force reductions in the first and
second quarters of fiscal 1997 which reduced salary expense at IPEC Planar and
IPEC Precision by approximately $200 thousand per quarter.
The Company has demonstrated that the AvantGAARD 676 tool can be used
for both metal and oxide planarization, resulting in a decision to focus solely
on the AvantGAARD 676 as the next generation CMP tool. Accordingly, the Company
is repositioning the Avanti 672 for the wafer polishing market and in the second
quarter incurred a $17.6 million program discontinuance charge from write downs
of inventory and assets relating to the Company's program of developing the
Avanti 672 as a CMP tool. The Company incurred a charge of $37 million for
purchased in-process research and development in the second quarter of fiscal
1996 as a result of the acquisitions of IPEC Planar Portland and IPEC Precision.
Interest income decreased from $.3 million in the second quarter of
fiscal 1996 to $.1 million in the second quarter of fiscal 1997 as a result of
lower cash and cash equivalent balances in the second quarter of fiscal 1997.
Higher balances in the second quarter of fiscal 1996 resulted from the exercise
of the Company's Class B warrants in the fourth quarter of fiscal 1995 that
realized proceeds of $63.2 million. Cash generated from the Series C convertible
preferred stock financing and the sale/leaseback of the Phoenix manufacturing
and administrative facility, discussed in the "Liquidity and Capital Resources"
section below, were completed in December 1996 and had no significant effect on
interest income or expense. Interest expense increased from $.1 million in the
second quarter of fiscal 1996 to $.6 million in the second quarter of fiscal
1997 as a result of increased borrowings.
As a result of the Company's decision to focus on CMP and CMP-related
products, the Company has decided to divest the operations of IPEC Clean by the
end of fiscal 1997. There can be no assurance that this divestiture will occur
in fiscal 1997. The operating results of IPEC Clean have been segregated from
the continuing operations of the Company and reported separately as discontinued
operations for all periods presented. The loss from operations of IPEC Clean
increased from $.2 million in the second
16
<PAGE> 17
quarter of fiscal 1996 to $1.9 million in the second quarter of fiscal 1997,
primarily due to lower levels of business activity at IPEC Clean in the current
fiscal year. An estimated loss on disposal of IPEC Clean, net of taxes,
amounting to $25 million was recorded in the second quarter of fiscal 1997. The
charge relates primarily to adjustments of intangible assets, equipment,
inventory, accounts receivable and other assets to net realizable value and to
record additional liabilities.
The net loss attributable to common stockholders, inclusive of all
charges, in the second quarter of fiscal 1997 amounted to $37 million, or $2.48
per share on 14.9 million weighted shares outstanding. This compares to the net
loss attributable to common stockholders in the second quarter of fiscal 1996 of
$19 million, or $1.32 per share, based on 14.4 million weighted shares
outstanding.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED TO SIX MONTHS ENDED DECEMBER 31,
1995
Revenue for the six months ended December 31, 1996 was $65 million
compared to $67 million for the six months ended December 31, 1995. This 3%
decrease is primarily attributable to the current industry slow down.
Gross margins amounted to $25.5 million or 39.3% of revenue for the six
months ended December 31, 1996 compared to $29.7 million or 44.3% of revenue for
the six months ended December 31, 1995. This decrease is primarily attributable
to the allocation of higher levels of customer service expenditures across lower
revenue, costs associated with repositioning of the Avanti 672 for wafer
polishing in the first half of fiscal 1997 and a higher percentage of sales
through international distributors.
Gross margin during the first six months of fiscal 1997 was also
adversely affected by a $.8 million increase in cost of goods sold related to
warrants issued to a major customer in connection with an agreement permitting
the Company to accelerate certain deliveries in the first, second and third
quarters of fiscal 1997. During the first six months of fiscal 1997 the customer
accelerated orders under this agreement which accounted for approximately 19% of
revenue. The charge in a quarter is based on the market value of the warrant
shares on the date of the agreement and the incremental number of warrant shares
issued in the quarter. There can be no assurance that the Company can obtain
additional orders from other customers for shipments in fiscal 1998 to replace
orders shifted to fiscal 1997.
Research and development costs increased from $6.3 million in the first
six months of fiscal 1996 to $12 million in the first six months of fiscal 1997,
primarily due to development of the Company's AvantGAARD 676 and Avanti 672 high
throughput CMP tools. The Avanti 672 program was discontinued in the second
quarter of fiscal 1997. Additional incremental costs amounting to $2 million
were incurred at IPEC Precision, which was acquired in December 1995, for the
development of proprietary plasma assisted chemical etching and metrology
technology.
Selling, general and administrative expenses increased from $11.2
million in the first six months of fiscal 1996 to $13.1 million in the first six
months of fiscal 1997. This increase was primarily due to additional
depreciation, amortization and higher overhead resulting from acquisitions in
the first half of fiscal 1996. Selling, general and administrative expenses for
the first six months of fiscal 1997 were
17
<PAGE> 18
offset in part by a $.9 million benefit resulting from adjustments for both the
fiscal 1994 Westech and fiscal 1996 GAARD acquisitions.
The first six months of fiscal 1997 reflect a $17.6 million program
discontinuance charge relating to the Avanti 672 development program. The first
six months of fiscal 1996 reflect a $37 million charge for purchased in-process
research and development costs described above.
Interest income decreased from $1.1 million in the first six months of
fiscal 1996 to $.2 million in the first six months of fiscal 1997 as a result of
lower average cash and cash equivalent balances in fiscal 1997. Higher balances
resulted from the exercise of the Company's Class B warrants in the fourth
quarter of fiscal 1995 described above. Interest expense increased from $.2
million in the first six months of fiscal 1996 to $1.2 million in the first six
months of fiscal 1997 as a result of increased borrowings.
The loss from continuing operations before income taxes amounted to
$23.7 million and $17.8 million for the six month periods of fiscal 1996 and
1997, respectively. Income tax benefits amounted to $9.4 million and $6.1
million for the six month periods of fiscal 1996 and 1997, or effective tax
benefit rates of 39% and 34%, respectively. The lower benefit rate for the
fiscal 1997 six month period results primarily from adjustments of deferred tax
balances and state tax accruals.
Losses from discontinued operations of IPEC Clean, described above,
amounted to $1.2 million and $28.6 million for the six month periods of fiscal
1996 and 1997, respectively. This resulted in net losses attributable to common
stockholders of $15.8 million and $40.4 million or $1.10 and $2.72 per share of
common stock for the six month periods of fiscal 1996 and 1997, respectively
based on 14.3 million and 14.9 million weighted average shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity include cash and cash
equivalents of $37 million at December 31, 1996. At December 31, 1996, $14.2
million was outstanding under the revolving loan facility. It is estimated that
an additional $1.6 million was available under the revolving loan facility for
borrowings at December 31, 1996 based on eligible accounts receivable which can
be used to collateralize such borrowings.
During the second quarter of fiscal 1997 the Company issued 100,000
shares of newly issued Series C convertible preferred stock in exchange for $25
million. During the second quarter, the Company also completed a sale/leaseback
of its 150,000 square foot Phoenix manufacturing and administrative facility.
The facility was sold for $18.7 million and leased back to the Company for an
initial fifteen year term and two five year renewal options. Proceeds from these
financings were used to repay a $10 million term loan and for working capital
purposes.
The Company believes that its cash and cash equivalents will be
sufficient to fund the Company's operations through the end of fiscal 1997.
Additional new debt or equity financing may be required in fiscal 1998 to fund
the Company's operations. There can be no assurance that such additional
financing will be available when needed or if available, will be on satisfactory
terms. In order
18
<PAGE> 19
to raise capital, the Company may issue debt or equity securities senior to the
outstanding Common Stock and may incur substantial dilution.
FACTORS AFFECTING OPERATING RESULTS
Limited Operating History with Annual and Quarterly Losses. Prior to
the Company's acquisition of Westech in fiscal 1994, the Company did not have
significant revenue. The Company had a net loss in fiscal 1994 and fiscal 1996
of $8.9 million and $10.7 million, respectively. The Company had a net loss of
$3.4 million in the first quarter of fiscal 1997. The Company had a net loss of
$37.0 million in the second quarter of fiscal 1997, due in part to one-time
charges of $42.6 million in the quarter. Operating results for future periods
are subject to numerous uncertainties, and there can be no assurance that the
Company will be profitable in fiscal 1997 or on a quarterly basis.
Operating Results Subject to Quarterly Fluctuations for Varied Reasons.
The Company's operating results are subject to quarterly fluctuations due to a
variety of factors, including industry-wide changes in the demand for
semiconductors or for semiconductor production equipment; the timing of
significant shipments and delays or cancellations or postponement of orders;
acceptance of the Company's products; the gain or loss of significant customers;
competitive pressures; availability and costs of components from the Company's
suppliers; the timing of product announcements and introductions by the Company,
its customers or its competitors; the timing and structure of acquisitions and
dispositions or spin-offs; changes in the mix of products sold; the level of
international sales, which have lower margins than domestic sales; delayed or
canceled construction of wafer fabrication facilities by customers; research and
development expenses associated with new product introductions; market
acceptance of new or enhanced versions of the Company's and its customers'
products; reductions in personnel and the sufficiency of capital resources to
support operations at current levels. The Company cannot assure that it will be
able to anticipate or respond timely to changes in any of the factors listed
above.
The Company has experienced adverse effects from some of these factors
in the past and may experience them in the future. For example, the Company's
results in fiscal 1994 were adversely impacted by an engineering redesign of its
372M CMP product. In the second quarters of fiscal 1995 and 1996, the Company
had losses due to nonrecurring charges associated with the Athens, GAARD and
HDOS acquisitions. The Company had a loss in the first quarter of fiscal 1997,
primarily because IPEC Clean and IPEC Precision manufactured products and
incurred operating expenses based on sales plans which were not achieved, and to
a lesser degree due to increased cost of goods sold arising from warrants issued
to a major customer as described below. While the Company has attempted to
reduce its operating expenses, due to industry conditions, there can be no
assurance that the Company will be profitable in future quarters. The Company
incurred a net loss in the second quarter of fiscal 1997, primarily due to a
$25.0 million charge for estimated losses on disposal of IPEC Clean and a $17.6
million charge for asset write downs due to discontinuation of the Company's
Avanti 672 product development effort. If current industry conditions continue,
the Company expects that revenue for fiscal 1997 will be below the $148.7
million of revenue recorded in fiscal 1996.
19
<PAGE> 20
Results of operations in any period should not be considered indicative
of the results to be expected for future periods. Fluctuations in operating
results may also result in fluctuations in the price of the Company's Common
Stock.
The Timing of Significant Shipments, Delays or Cancellation or
Postponement of Orders Can Impact Quarterly Results. The Company derives most of
its revenue from the sale of products in a price range from $100,000 to
$1,300,000 per unit and the sale of a clustered system can be priced much
higher. As a result, the timing of individual shipments can have a significant
impact on the Company's results of operations for a particular period. The
Company has previously experienced order and delivery delays and cancellations
which caused the Company to miss its quarterly revenue and profit projections
and there can be no assurance that the Company can avoid such order and delivery
delays in the future. Significant shipments by IPEC Precision are not expected
before the fourth quarter of fiscal 1997. A significant portion of the Company's
operating expenses are relatively fixed in nature and planned expenditures are
based in part on anticipated orders. Ongoing expenditures for product
development and engineering make it difficult to reduce expenses in a particular
quarter if the Company's sales goals for the quarter are not met. Any inability
to reduce spending quickly enough to mitigate any revenue shortfall would
magnify the adverse impact of the revenue shortfall on the Company's results of
operations.
Fiscal 1997 Cost of Goods Sold Will Increase Due to Issuance of
Warrants. The Company's fiscal 1997 operating results will also be affected by
the Company's exercise of its right to cause a significant customer to
accelerate planned orders and the issuance to the customer of additional
warrants to purchase IPEC Common Stock. During the first quarter of fiscal 1997,
the customer agreed to accelerate certain orders into the first three quarters
of fiscal 1997. The Company committed to issue, during the first three quarters
of fiscal 1997, warrants to purchase an aggregate minimum of 155,000 shares and
an aggregate maximum of 250,000 shares of Common Stock. Costs associated with
the aggregate minimum purchase of 155,000 shares were incurred in the first
quarter of fiscal 1997, resulting in a $657,000 increase in cost of goods sold.
Costs associated with an additional 45,000 shares were incurred in the second
quarter of fiscal 1997 resulting in a $191,000 increase in cost of goods sold.
The number of warrant shares to be issued depends on the extent to which the
Company accelerates shipments to the customer. Should additional orders be
accelerated into the third quarter, the Company could incur costs for the
remaining 50,000 shares resulting in a $211,000 increase in cost of goods sold.
To the extent orders are accelerated during fiscal 1997, this may reduce
shipments anticipated for fiscal 1998. There can be no assurance that the
Company can obtain replacement orders for shipment in fiscal 1998.
The Company Depends on Small Number of Major Customers. A small
number of customers account for a significant percentage of the Company's sales
volume and revenue. In fiscal 1995, Intel, IBM and Motorola represented 16%, 24%
and 16%, respectively, of the Company's revenue. In fiscal 1996, Intel and IBM
represented 35% and 11% of the Company's revenue, respectively. In the first six
months of fiscal 1997, Intel represented 45% of the Company's revenue. The
Company anticipates that its revenue will continue to depend on a limited number
of major customers, although the companies considered major customers and the
percentage of the Company's revenue represented by each major customer may vary
from quarter to quarter. The loss of a major customer or any material reduction
in orders by such customers, including reductions due to market or competitive
conditions, would have a
20
<PAGE> 21
material adverse effect on the Company's business, financial condition and
results of operations. The Company's future success depends in part upon its
ability to obtain orders from new customers, as well as the financial condition
of its customers and the general economy.
The Company Depends on Sales of its Existing CMP Equipment and Products
under Development. The Company derives virtually all of its revenue from sales
by IPEC Planar. Semiconductor manufacturing equipment and processes are subject
to rapid technological changes and product obsolescence. Sales of certain of the
Company's products generally depend on new facility construction projects and
facility upgrades. The Company's strategy depends in part on developing and
introducing products which lower the semiconductor manufacturer's cost of
ownership, which involves a number of factors, including product acquisition and
operating expenses, throughput, reliability, footprint and wafer yields. The
Company believes that its future success will depend in part upon its ability to
develop and enhance its existing products and develop new products to meet such
anticipated technological changes.
The Company's future results are highly dependent on market acceptance
of the Company's AvantGAARD 676, which is designed to be a high-throughput metal
and oxide CMP tool. IPEC Precision has been developing its Plasma Jet wafer
etching tool. Semiconductor equipment companies often experience delays in
completing advanced products. In the past the Company has experienced delays in
developing new CMP tools and processes and the Plasma Jet tool. The Company
cannot assure that any product in development will be completed as scheduled or
that completed products will be commercially adopted.
If any of the Company's products currently under development are not
commercialized in a timely manner, the Company could be required to write off
inventory and other assets related to the development project. The Company
incurred a $17.6 million asset write-off in the second quarter of fiscal 1997
for discontinuance of the Avanti 672 product development program. To the extent
products developed by the Company are based upon anticipated changes in
semiconductor production technologies, sales for such products may be adversely
affected if other technology becomes accepted in the industry.
The Company is attempting to market product bays and, with other
companies, to develop "performance optimized production systems" ("POPS"). The
Company may need access to certain products manufactured by IPEC Clean for
product bays or POPS. Due to the early stage of efforts to dispose of IPEC
Clean, the Company cannot predict whether the Company will continue to have
access to these products.
The Company May be Adversely Affected by Intensely Competitive Market
in Which it Participates. The semiconductor equipment industry is an intensely
competitive market. The Company believes that direct domestic and international
competition in CMP polisher systems and clustered CMP polisher and cleaning
systems is likely to increase substantially. The Company is aware of a number of
companies currently marketing CMP systems that directly compete with the
Company's systems. Competition is increasing significantly in the market for
high throughput planarization systems. In December 1995 Applied Materials, Inc.
announced a CMP system for oxide that has not yet been commercially accepted,
but which would compete directly with the Company's CMP product offerings.
21
<PAGE> 22
The Company is aware that other capital equipment manufacturers not currently
involved in the development of CMP systems may also attempt to enter and develop
products for this market or to develop alternative technologies which may reduce
the need for the Company's products.
The trend towards consolidation in the semiconductor equipment industry
has made it increasingly important to have the financial resources necessary to
compete effectively across a broad range of product offerings, to fund customer
service and support on a world-wide basis and to invest in both product and
process research and development. Certain current and potential competitors have
substantially greater financial resources, name recognition and more extensive
engineering, manufacturing, marketing and customer service and support
capabilities than the Company. The Company expects its current competitors to
continue to improve the design and performance of their existing products and
processes, and to introduce new products and processes with improved price and
performance characteristics. New product introductions or product announcements
by the Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's existing products. Moreover, increased competitive
pressure could lead to intensified price based competition, which could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
The Company Is Subject to Risks Associated with International Sales.
International sales accounted for approximately 18% and 28% of the Company's
revenue in fiscal 1995 and 1996, respectively. International sales were
approximately 37% of revenue in the first six months of fiscal 1997.
International sales may carry lower gross margins than domestic sales. The
Company expects that international sales will continue to account for a
significant portion of its revenue in future periods. International sales are
subject to certain inherent risks including tariffs, embargoes and other trade
barriers, staffing and operating foreign sales and service operations, managing
distributors and collecting accounts receivable. The Company is also subject to
risks associated with regulations relating to the import and export of high
technology products. The export of the Company's products to certain countries
is limited by law. The Company cannot predict whether quotas, duties, taxes or
other charges or restrictions upon the importation or exportation of the
Company's products in the future will be implemented by the United States or any
other country.
Fluctuations in currency exchange rates could cause the Company's
products to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in that country. While
the Company's sales are currently denominated only in U.S. dollars, future
international activity may result in foreign currency denominated sales. Gains
and losses on the conversion to U.S. dollars of accounts receivable and accounts
payable arising from international operations may contribute to fluctuations in
the Company's results of operations.
The Company's Strategy Relies on Increased Penetration of the Asian
Market. The Company believes that its future success will depend in part upon
continued acceptance of its products by Asian semiconductor manufacturers. This
market segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies to
penetrate. Asian manufacturers may develop alternative techniques, or may
enhance existing techniques such as spin-on glass and deposited glass, to
achieve acceptable yields for DRAMs and other integrated circuits involving
three or more metal layers and line widths at or below 0.5 micron. The Company
currently
22
<PAGE> 23
sells its products in Asian countries through distributors. If the Company
determines to develop a direct presence in these markets, particularly Japan,
such decision would require the allocation of substantial management and
financial resources, may adversely affect the Company's relationship with its
current distributors, and would increase a number of risks related to
international sales as described above.
The Semiconductor Industry Is Cyclical, Causing Fluctuations in the
Company's Results. The Company's business depends upon capital expenditures by
manufacturers of semiconductor devices, primarily for the opening of new or
expansion of existing fabrication facilities which, in turn, depends upon the
current and anticipated market demand for semiconductor devices and products
utilizing such devices. The semiconductor industry is highly cyclical and has
experienced significant overall growth in recent years, which has resulted in
growth in the semiconductor capital equipment industry. However, the
semiconductor industry is currently experiencing a downturn, which could have a
severe adverse effect on the industry's demand for semiconductor processing
equipment. In certain instances, industry downturns have lasted for extended
periods of time. There can be no assurance that past growth in the semiconductor
and semiconductor capital equipment industries, or the resulting growth in the
Company's business, can be sustained in the future or that the recent downturn
in the market will not continue.
The Company's planned operations assume that a significant portion of
new orders will result from demand from semiconductor manufacturers building or
expanding fabrication facilities for advanced multi-level semiconductor devices
with design requirements of 0.5 micron and below, and there can be no assurance
that such demand will exist.
Acquisitions May Adversely Affect Operating Results. The Company's
growth in annual revenues from fiscal 1994 through fiscal 1996 has resulted not
only from expansion of its core CMP business, but also from acquisitions in
fiscal 1994, 1995 and 1996. The Company's expansion through acquisitions has
resulted in significantly higher operating expenses, particularly because the
Company's strategy has been to initially operate each acquired business
independently, resulting in separate marketing, customer support and
administrative functions. The companies acquired had not operated profitably
before their acquisition by IPEC. IPEC Precision has not yet achieved
significant revenue from shipments of production equipment.
Future Acquisitions and Dispositions May Require Significant Resources
and Adversely Affect Results. The Company's strategy is to obtain additional
wafer fabrication technologies and may involve, in part, acquisitions of
products, technologies or businesses from third parties. In addition, the
Company may make additional acquisitions to obtain additional distribution
capacity in specified geographic markets. An acquisition could absorb
substantial cash resources, require the Company to incur or assume debt
obligations, or involve the issuance of additional Common Stock which could
dilute the Company's outstanding Common Stock. An acquisition which is accounted
for as a purchase, like the acquisitions of Westech, Athens, GAARD or the
Precision Materials Operation of HDOS, could involve significant one-time
non-cash write-offs, or could involve the amortization of goodwill over a number
of years, which would adversely affect earnings in those years. An acquired
entity may have unknown liabilities, and its business may not achieve the
results anticipated at the time of the acquisition.
23
<PAGE> 24
The Company may dispose of or spin off portions of its businesses which
the Company determines are not complementary to its strategy. The Company
intends to dispose of IPEC Clean by the end of fiscal 1997, but discussions with
potential acquirers are at an early stage. The financial impact of any
disposition of IPEC Clean cannot currently be predicted. Any acquisition or
disposition could absorb significant management time and could adversely affect
the Company's business, financial condition and results of operations.
The Industry Has Not Broadly Accepted the Company's Products. The CMP
process is in an early stage of implementation and has not yet been broadly
adopted by semiconductor manufacturers for volume production. Most major
semiconductor manufacturers are beginning to introduce the CMP process only for
pilot line production of integrated circuits with three or more metal layers and
line widths at or less than 0.5 micron. Only a limited number of semiconductor
manufacturers are producing commercial quantities of integrated circuits with
these characteristics using CMP machines. To date, the Company's products have
been used primarily in the manufacture of advanced semiconductor logic and
memory devices.
Similarly, IPEC Precision's products are based on technologies which
have not been adopted by the semiconductor manufacturing industry, and there can
be no assurance that customers will accept these products, or that these
products can be sold profitably or in volume.
The Company May Need to Raise Capital on Unfavorable Terms. The Company
believes that its cash and cash equivalents are sufficient to support its
operation through fiscal 1997. Additional new debt or equity financing may be
required in fiscal 1998 to fund the Company's operations. There can be no
assurance that such additional financing will be available when needed or, if
available, will be on satisfactory terms. In order to raise capital, the Company
may issue debt or equity securities senior to the outstanding Common Stock, and
may incur substantial dilution. The failure to obtain additional financing when
needed on satisfactory terms would also hinder the Company's ability to make
continued capital investments.
The Company Would be Adversely Affected if Suppliers Could Not Deliver
Goods and Services. The Company relies on a limited number of independent
manufacturers to provide certain components in assemblies made to the Company's
specifications and use in the Company's products. In the event that the
Company's subcontractors were to experience financial, operational, production
or quality assurance difficulties that resulted in the reduction or interruption
of supply to the Company, the Company's business, financial condition and
results of operations would be materially adversely affected. In addition, the
Company purchases certain key components from qualified vendors for which
alternative qualified sources are not currently available. Any prolonged
inability to obtain adequate amounts of qualified components would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company Depends on Proprietary Technology and Protection is
Uncertain. The Company's success depends in significant part on the proprietary
nature of its technology. Patents issued to the Company may not provide the
Company with meaningful advantages. Patents issued to the Company may be
challenged. The two initial patents relating to the Company's single wafer
planarization system products are scheduled to expire in 1997. In 1993, the
technology covered by these
24
<PAGE> 25
patents currently forming the basis of the CMP process and used in the Company's
primary products was licensed on a royalty-free basis to a competitor pursuant
to a settlement arrangement in which the Company also incurred settlement
obligations aggregating $1.4 million, of which $125,000 remained outstanding at
December 31, 1996. The Company currently has no patents with respect to its acid
reprocessing technology outside the United States. To the extent that a
competitor of the Company is able to reproduce or otherwise capitalize on the
Company's technology prior to the issuance of a patent, it may be difficult or
impossible for the Company to obtain necessary intellectual property protection
in the United States or other countries where such competitor conducts its
operations. Moreover, the laws of foreign countries may not protect the
Company's intellectual property to the same extent as do the laws of the United
States.
The Company also relies on trade secrets and proprietary technology
that it seeks to protect, in part, through confidentiality agreements with
employees and other parties. These agreements may be breached. The Company may
not have adequate remedies for any breach. The Company's trade secrets may
become known to or independently developed by others.
The Company Is Subject to Infringement Claims. In the future the
Company may receive notice of claims of infringement of other parties'
proprietary rights. If any Company equipment is found to infringe a patent, a
court may grant an injunction to prevent making, selling or using the equipment
in the applicable country. The Company may seek to obtain a license of such
third party's intellectual property rights, which may not be available under
reasonable terms or at all. Expensive and time-consuming litigation may be
necessary to enforce patents issued to the Company, to protect trade secrets or
know-how owned by the Company, to defend the Company against claimed
infringement of the rights of others and to determine the scope and validity of
proprietary rights of others.
The Company Has Significant License Agreements. The Company also has
entered into significant agreements that provide for the escrow, licensing and
royalty payment of the Company's technology to various third parties. The
Company manufactures the AvantGAARD 676 under a license from a volume
manufacturer of advanced microprocessors. The Company has escrowed technical
data sufficient to permit such manufacturer to manufacture the Company's
AvantGAARD 676 for release if the Company does not meet certain criteria
regarding product or spare part delivery schedules to the manufacturer. If the
data is released from escrow, the manufacturer could manufacture the AvantGAARD
676 or have the AvantGAARD 676 manufactured by others for its use. The escrow
terminates in October 1998.
The Company Is Exposed to Product Liability and Environmental
Regulations. The nature of the Company's business exposes it to product
liability claims, as well as the risk that harmful substances will escape into
the workplace and the environment and cause damage or injuries. For example, in
June 1995 and again in July 1996, an acid reprocessor malfunctioned and caused
sulfuric acid to escape from its quartz cylinder container. In these instances
no acid escaped from the compartment containing the quartz cylinder and no
damage to the manufacturing facility resulted. The Company's products could
malfunction in the future and damage a customer's facilities. The Company and
its customers are subject to stringent federal, state and local regulations
governing the storage, use, discharge and disposal of toxic, volatile or
otherwise hazardous chemicals used in their manufacturing operations. Current or
future regulations could require the Company or its customers to make
substantial expenditures for
25
<PAGE> 26
preventive or remedial action, reduction of chemical exposure or waste treatment
or disposal. To the extent that the Company's strategy to provide integrated
on-site wet chemical management services to its customers is successful, the
Company faces increased risks with respect to environmental and occupational
health and safety liabilities.
The Company Depends on its Key Personnel. The Company's future success
is dependent upon its ability to attract and retain qualified management,
technical, sales and support personnel. The competition for such personnel is
intense. The loss of certain key people or the Company's inability to attract
and retain new key employees could have a material adverse effect on the
Company's business, financial condition and results of operations. During July
and October 1996, the Company effected reductions in its work force to reduce
its expenses and may do so in the future. Repeated layoffs could adversely
affect the retention of employees, and could adversely affect the Company's
ability to hire new personnel if industry conditions improve and the Company's
volume of production increases. Personnel terminations at IPEC Precision
included technical personnel, who could be difficult to replace if IPEC
Precision successfully markets its products and requires additional engineering
staff to support customers. The Company's announcement that it intends to
discontinue IPEC Clean's operations could adversely affect retention of IPEC
Clean personnel. If key employees depart IPEC Clean, this could adversely affect
IPEC Clean's operations, which in turn could adversely affect the Company's
ability to sell or otherwise dispose of IPEC Clean.
Stock Price is Volatile. The Company's Common Stock has experienced
substantial price volatility and such volatility may occur in the future,
particularly as a result of quarter to quarter variations in the actual or
anticipated financial results of the Company or of other companies in the
semiconductor industry, or in the markets served by the Company, or
announcements by the Company or its competitors regarding new product
introductions. In addition, the stock market has experienced extreme price and
volume fluctuations that have affected the market price of many technology
companies' stocks in particular and that have often been unrelated or
disproportionate to the operating performance of these companies. These factors
may adversely affect the market price of the Common Stock.
26
<PAGE> 27
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, 3,500,000 shares of Class A Common Stock, and 2,000,000 shares of
Preferred Stock. 21,478, 21,478 and 21,478 shares of Preferred Stock have been
designated Series B-1, B-2 and B-3 Preferred Stock, respectively. 100,000 shares
of Preferred Stock have been designated as Series C Preferred Stock.
COMMON STOCK AND CLASS A COMMON STOCK
The rights of the holders of the Common Stock and the Class A Common
Stock are essentially identical, except that: (i) the holders of the Common
Stock are entitled to one vote per share, and holders of Class A Common Stock
are entitled to four votes per share with respect to all matters on which
holders of the Company's Common Stock are entitled to vote, (ii) if stock
dividends, splits, distributions, reverse splits, combinations, reclassification
of shares, or other recapitalizations (collectively, "recapitalizations") are
declared or effected, such recapitalizations shall be effected in a like manner
with respect to the Common Stock and the Class A Common Stock except that
payments in shares of capital stock shall be paid in Common Stock with respect
to Common Stock and Class A Common Stock with respect to Class A Common Stock,
and (iii) shares of Class A Common Stock are convertible into Common Stock at
the option of the holder at any time on a share-for-share basis.
Shares of Class A Common Stock are automatically converted into shares
of Common Stock upon their transfer to any person other than the following
transferees (the "Permitted Transferees"): (a) the spouse, lineal descendants or
adopted children ("Family Members"); (b) a trust for the sole benefit of Family
Members; (c) a partnership or a corporation wholly owned by Class A Common
Stockholders and their Family Members; and (d) any other Class A Common
Stockholders. Class A Common Stock held by a partnership or a corporation may be
transferred to its partners or stockholders existing at the time a transferor
acquired its Class A Common Stock or if such Partner or stockholder is a
Permitted Transferee. There is no trading market for the Class A Common Stock.
Subject to the preferences of the Preferred Stock, holders of the
Common Stock and Class A Common Stock have equal ratable rights to dividends
from funds legally available therefor, when, as and if declared by the Board of
Directors and are entitled to share ratably, as a single class, in all of the
assets of the Company available for distribution to holders of shares of Common
Stock and Class A Common Stock upon the liquidation, dissolution or winding up
of the affairs of the Company. Holders of Common Stock do not have preemptive,
subscription or conversion rights. There are no redemption or sinking fund
provisions for the benefit of the Common Stock or Class A Common Stock in the
Company's Certificate of Incorporation.
PREFERRED STOCK
The Preferred Stock may be issued in series, and shares of each series
will have such rights and preferences as are fixed by the Board in the
resolutions authorizing the issuance of that particular series. In designating
any series of Preferred Stock, the Board may, without further action by the
holders of
27
<PAGE> 28
Common Stock, fix the number of shares constituting that series and fix the
dividend rights, dividend rate, conversion rights, voting rights (which may be
greater or lesser than the voting rights of the Common Stock), rights and terms
of redemption (including any sinking fund provisions), and the liquidation
preferences of the series of Preferred Stock.
The holders of the Series B-1, B-2 and B-3 Preferred Stock have no
voting rights except as required by law or in connection with an amendment of
the Certificate of Incorporation of the Company which may adversely affect their
preferences, rights, powers or privileges. The holders of the Series B-1, B-2
and B-3 Preferred Stock are entitled to an annual cumulative dividend of $5.59
per share, accruing from September 3, 1993, payable on each December 31 and June
30, beginning on June 30, 1994, June 30, 1995 and June 30, 1996 for the Series
B-1, B-2 and B-3 Preferred, respectively. Upon the dissolution or liquidation of
the Company, the holder of each share of Series B-1, B-2 and B-3 Preferred Stock
shall be entitled to payment of $93.12 before the holders of the Common Stock or
Class A Common Stock (or any other series of Preferred Stock which is junior to
the Series B Preferred Stock on dissolution or liquidation) receive any payment.
Each share of Series B-1 and B-2 Preferred Stock is convertible into 12.54 and
11.41 shares of Common Stock, respectively. Each share of Series B-3 Preferred
Stock is convertible into 15 shares of Common Stock. The conversion rate on the
Series B Preferred Stock would be adjusted in the event of a stock dividend,
stock split, combination or reclassification of the Common Stock. The Series B
Preferred Stock has certain anti-dilution rights upon certain issuances of
rights or warrants and distributions of indebtedness on the Common Stock. The
Series B-1, B-2 and B-3 Preferred Stock is not subject to redemption.
The holders of Series C Preferred Stock have no voting rights except as
required by law or in connection with an amendment of the Certificate of
Incorporation of the Company which may adversely affect their preferences,
rights, powers or privileges. The holders of Series C Preferred Stock are not
entitled to any dividends. Upon liquidation or dissolution of the Company, the
holders of Series C Preferred Stock are entitled to receive $250.00 per share
before any payment is made or set apart for the holders of Common Stock or any
other series or class of stock of the Company ranking junior to the Series C
Preferred Stock. The Series C Preferred Stock is convertible at the holder's
option into shares of Common Stock and will automatically convert into Common
Stock on December 31, 2002. Each share of Series C Preferred Stock is
convertible at the lesser of (i) a 1% premium over the average of the volume
weighted average daily market prices of the Common Stock over a 40-day pricing
period, or (ii) a 15% premium over the average of the volume weighted average
daily market prices of the Common Stock during the first 5 days of the 40-day
pricing period. The number of shares of Common Stock to be issued upon
conversion will vary based on future stock price movements. The conversion rate
on the Series C Preferred Stock would be adjusted proportionately in the event
of a stock dividend, stock split, combination or reclassification of the Common
Stock.
If at any time the conversion of the Series C Preferred Stock would
cause the number of shares of Common Stock held by the holder of Series C
Preferred Stock to exceed 19.9% of the number of shares of Common Stock
outstanding on December 16, 1996, and such circumstances would require the
approval of the holders of Common Stock pursuant to the rules of the Nasdaq
National Market (or such other exchanges or other interdealer quotation system
on which Common Stock is then listed or quoted), then no more Series C Preferred
Stock can be converted by the holder until the Company's stockholders approve
the issuance of Common Stock which would allow the Company to issue additional
shares of
28
<PAGE> 29
Common Stock to the holder above the 19.9% limit. If the necessary stockholder
approval is not obtained within a specific time, the Company must either
repurchase the unconvertible Series C Preferred Stock or convert them into a
note with interest at 15% per year. In addition, if at any time the number of
authorized but unissued shares of Common Stock is not sufficient to effect the
conversion of all the then outstanding shares of the Series C Preferred Stock
and the Company fails to eliminate this deficiency within a specified time, the
Company must either repurchase the unconvertible Series C Preferred Stock or
convert the shares into a note with interest at 15% per year.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) An annual meeting of stockholders of the Company was held on
November 21, 1996.
(b) The name of each director elected at the meeting is as
follows: Harold C. Baldauf, Sanjeev R. Chitre, Roger D.
Emerick, William J. Freschi, Kenneth Levy, and Roger D.
McDaniel.
(c) The matters voted upon and the results of the voting were as
follows:
(1) The following six persons were elected as Directors
at the annual meeting pursuant to the following vote:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C> <C>
Harold C. Baldauf 10,374,667 204,889
Sanjeev R. Chitre 10,362,867 216,689
Roger D. Emerick 10,376,167 203,389
William J. Freschi 10,375,167 204,389
Kenneth Levy 10,375,367 204,189
Roger D. McDaniel 10,323,267 256,289
</TABLE>
(2) The appointment of KPMG Peat Marwick, LLP as the
independent auditors of the Company was ratified at
the annual meeting pursuant to the following vote:
<TABLE>
<CAPTION>
<S> <C> <C>
Votes For: 10,413,407
Votes Against: 54,499
Votes Abstaining: 111,650
Broker Non-Votes: ---
</TABLE>
29
<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Exhibits
10.1 Lease Agreement between Seldin Properties and
Integrated Process Equipment Corporation, dated
December 26, 1996.
(b) Reports on Form 8-K:
A report on Form 8-K was filed on December 30, 1996 reporting
(under Item 5) with respect to the issuance of $25 million of
newly issued Series C Convertible Preferred Stock and a
warrant to acquire up to 456,000 shares of the Registrant's
common stock.
</TABLE>
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant duly caused this amendment to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: February , 1997 INTEGRATED PROCESS EQUIPMENT CORP.
AND SUBSIDIARIES
By: /s/ John S. Hodgson
----------------------------------
John S. Hodgson
Vice President
and Chief Financial Officer
31
<PAGE> 1
EXHIBIT 10.1
LEASE AGREEMENT
between
SELDIN PROPERTIES
and
INTEGRATED PROCESS EQUIPMENT CORPORATION
Dated December 26, 1996
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. Demise of Premises............................................................................ 1
2. Definitions................................................................................... 1
3. Title and Condition........................................................................... 5
4. Use of Leased Premises; Quiet Enjoyment....................................................... 7
5. Term.......................................................................................... 8
6. Rent; Security Deposit........................................................................ 9
7. Net Lease; Non-Terminability.................................................................. 11
8. Payment of Impositions; Compliance with Legal Requirements and Insurance Requirements......... 12
9. Liens; Recording and Title.................................................................... 14
10. Indemnification............................................................................... 14
11. Maintenance and Repair........................................................................ 15
12. Alterations................................................................................... 16
13. Condemnation.................................................................................. 17
14. Insurance..................................................................................... 21
16. Subordination to Financing.................................................................... 26
17. Assignment, Subleasing and Vacating........................................................... 27
18. Permitted Contests............................................................................ 29
19. Conditional Limitations; Default Provisions................................................... 30
20. Additional Rights of Landlord................................................................. 33
21. Notices....................................................................................... 34
22. Estoppel Certificates......................................................................... 35
23. Surrender and Holding Over.................................................................... 35
24. Risk of Loss.................................................................................. 36
25. No Merger of Title............................................................................ 36
</TABLE>
i
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
26. Landlord's Liability.......................................................................... 37
27. Hazardous Substances.......................................................................... 37
28. Entry by Landlord............................................................................. 38
29. Financial Statements.......................................................................... 39
30. Broker........................................................................................ 39
31. Additional Provisions Regarding Use........................................................... 39
32. Landlord's Right to Take Action............................................................... 39
33. Miscellaneous................................................................................. 40
</TABLE>
ii
<PAGE> 4
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
INDEX OF EXHIBITS AND SCHEDULES
<S> <C>
Exhibit A - Leased Premises
Exhibit B - Permitted Encumbrances
Exhibit C - Rent Schedule
Exhibit D - Memorandum of Lease
Exhibit E - Purchase Offer Computation
Schedule I - Schedule of Air Compressors
</TABLE>
iii
<PAGE> 5
THIS LEASE AGREEMENT is made this 26th day of December, 1996, by and
between Seldin Properties, a Nebraska partnership ("Landlord") and Integrated
Process Equipment Corporation, a Delaware corporation ("Tenant").
In consideration of the rents and covenants herein stipulated to be
paid and performed, Landlord and Tenant hereby covenant and agree as follows:
1. Demise of Premises. Landlord hereby demises and lets to Tenant and
Tenant hereby takes and leases from Landlord for the term and upon the
provisions hereinafter specified the following described property (collectively,
the "Leased Premises"):
(a) the real property described in Exhibit "A" attached hereto
and made a part hereof together with the easements, rights and appurtenances
thereunto belonging (collectively the "Land"); and
(b) the buildings, structures and other improvements
constructed and to be constructed on the Land (collectively, the
"Improvements").
2. Definitions. For all purposes of this Lease, except as otherwise
expressly provided the terms defined in this Section have the meanings assigned
to them in this Section, and include the plural as well as the singular.
"Act" means the Comprehensive Environmental Response,
Compensation, and Liability Act, (42. U.S.C. Section 9601 et seq.), as
amended.
"Additional Rent" has the meaning given to it in Section 6(b).
"Adjoining Property" means all sidewalks and curbs adjoining
any of the Leased Premises.
"Alteration" means any or all changes, additions,
improvements, demolitions, reconstructions or replacements of any of
the Improvements, both interior or exterior, ordinary and
extraordinary.
"Assignment" means any Assignment of Rents and Landlord's
Interest in Leases hereafter executed from Landlord to Lender (which
may be contained in a Mortgage).
"Basic Rent" has the meaning given to it in Section 6(a).
"Basic Rent Payment Dates" has the meaning given to it in
Section 6(a).
"Commencement Date" has the meaning given to it in Section 5.
"Condemnation" means a Taking and/or a Requisition as the
context requires.
1
<PAGE> 6
"CPI" means the Consumer Price Index for All Urban Consumers,
All Items, U.S. City Average (1982-1984 = 100), published by the United
States Department of Labor, Bureau of Labor Statistics, together with
any successor rate selected by Landlord in its reasonable discretion in
the event the foregoing is no longer published.
"Default" has the meaning given to it in Section 19(d).
"Default Rate" has the meaning given to it in Section 6(b).
"Deposit Increase Date" has the meaning given to it in Section
6(c).
"Environmental Laws" means collectively the Act and any other
present or future law, ordinance, rule or regulation of any local,
county, state or federal authority having jurisdiction over the Leased
Premises or any portion thereof or its use, including but not limited
to: (a) the Federal Water Pollution Control Act (33 U.S.C. Section 1317
et seq.), as amended; (b) the Federal Resource Conservation and
Recovery Act (42 U.S.C. Section 6901 et seq.), as amended; (c) the
Toxic Substance Control Act (15 U.S.C. Section 2601 et seq.), as
amended; and (d) the Clean Air Act (42 U.S.C. Section 7401 et seq.) as
amended.
"Event of Default" has the meaning given to it in Section
19(a).
"Hazardous Substance" means any hazardous or toxic material or
substance or waste which is defined by those or similar terms and is
regulated as such under Environmental Laws.
"Improvements" has the meaning given to it in Section 1(b).
"Insurance Requirement" means any one or more of the terms of
each insurance policy required to be carried by Tenant under this Lease
and the requirements of the issuer of such policy, and whenever Tenant
shall be engaged in making any Alteration or Alterations, repairs or
construction work of any kind (collectively "Work"), the term
"Insurance Requirement" is also deemed to include a requirement that
(i) all insurance policies shall contain an endorsement referring to
such Work and (ii) Tenant shall obtain or cause its contractors and
subcontractors to obtain workmen's compensation insurance covering all
persons respectively employed by such parties in connection with the
Work, and with respect to whom death or bodily injury claims could be
asserted against Landlord or the Leased Premises.
2
<PAGE> 7
"Land" has the meaning given to it in Section 1(a).
"Law" means any constitution, statute or rule of law, whether
federal, state or local.
"Lease" means this Lease Agreement, as the same may hereafter
be amended, modified or extended from time to time.
"Leased Premises" has the meaning given to it in Section 1.
"Legal Requirement" means any one or more of all present and
future laws, codes, ordinances, orders, judgments, decrees,
injunctions, rules, regulations and requirements, even if unforeseen or
extraordinary, of every governmental or quasi-governmental authority or
agency (but excluding those which by their terms are not applicable to
and do not impose any obligation on Tenant, Landlord or the Leased
Premises as a result of some grandfather clause or similar provision)
and all covenants, restrictions and conditions now or hereafter of
record which may be applicable to Tenant, to Landlord or to any of the
Leased Premises, or to the use, manner of use, occupancy, possession,
operation, maintenance, Alteration, repair or reconstruction of any of
the Leased Premises, even if compliance therewith (i) necessitates
structural changes or improvements or results in interference with the
use or enjoyment of any of the Leased Premises or (ii) requires Tenant
to carry insurance other than as required by the provisions of this
Lease.
"Lender" means an entity which makes a Loan to Landlord,
secured by a Mortgage and evidenced by a Note, or such Lender's
successors and assigns thereof.
"Loan" means a loan made by a Lender to Landlord secured by a
Mortgage and evidenced by a Note.
"Mortgage" means a mortgage or similar security instrument
hereafter executed covering the Leased Premises by Landlord in favor of
Lender.
"Net Award" means the entire award payable to Landlord by
reason of a Condemnation, less any expenses reasonably incurred by
Landlord in collecting such award.
"Net Proceeds" means the entire proceeds of any insurance
required under Section 14 less any expenses reasonably incurred by
Landlord in collecting such proceeds.
3
<PAGE> 8
"Note" means a promissory note hereafter executed from
Landlord to Lender, which Note will be secured by a Mortgage and an
Assignment.
"Permitted Encumbrances" means those covenants, restrictions,
reservations, liens, conditions, encroachments, easements listed on
Exhibit "B" attached hereto and any other matters of title existing on
the Commencement Date.
"Purchase Offer" has the meaning given to it in Section 13(b).
"Purchase Price" has the meaning given to it in Section 13(d).
"Requisition" means any temporary Condemnation or confiscation
of the use or occupancy of any of the Leased Premises by any
governmental or quasi-governmental authority, civil or military,
whether pursuant to an agreement with such governmental or
quasi-governmental authority in settlement of or under threat of any
such requisition or confiscation, or otherwise.
"State" means the State of Arizona, being the state in which
the Leased Premises are situated.
"Taking" means any taking of any portion of the Leased
Premises in or by Condemnation or other eminent domain proceedings
pursuant to any Law, general or special, or by reason of any agreement
with any condemnor in settlement of or under threat of any such
Condemnation or other eminent domain proceedings or by any other means,
or any de facto Condemnation.
"Term" has the meaning given to it in Section 5.
"Termination Date" has the meaning given to it in Section
13(b).
"Trade Fixtures" means (a) all fixtures, equipment and other
items of personal property which are owned by Tenant and used in the
operation of the business conducted on the Leased Premises and (b)
without limiting the foregoing, (i) all kitchen fixtures, (ii) the
reverse osmosis deionizers (including without limitation the three
demineralizing beds and three CDI's), (iii) the nitrogen generation
system, (iv) those air compressors specifically listed on Schedule I
attached hereto and made a part hereof, (v) any and all telephone
systems (except for cables and wires permanently installed), (vi) any
and all computer network systems, and (vii) any and all fitness
equipment.
"UCC" means the Uniform Commercial Code as enacted from time
to time under the Laws of the State.
4
<PAGE> 9
3. Title and Condition.
(a) The Leased Premises are demised and let subject to (i) the
rights of parties in possession, if any, and the existing state of title of the
Leased Premises, including without limitation the Permitted Encumbrances, as of
the commencement of the Term, (ii) any state of facts which an accurate survey
or physical inspection of the Leased Premises might show, (iii) all Legal
Requirements (including without limitation applicable building codes and zoning
ordinances), Insurance Requirements and existing contracts, including without
limitation any existing violation of any of the foregoing, and (iv) the
condition of the Leased Premises as of the commencement of the Term, including
without limitation any existing conditions relating to Hazardous Substances,
without representation or warranty by Landlord; it being understood and agreed,
however, that the recital of the Permitted Encumbrances herein shall not be
construed as a revival of any thereof which for any reason may have expired.
(b) Tenant acknowledges that the Leased Premises are in good
condition and repair at the inception of this Lease, the interior improvements
thereof having been constructed on behalf of Tenant by a contractor of its
choice. LANDLORD HAS NOT MADE AND WILL NOT MAKE ANY INSPECTION OF ANY OF THE
LEASED PREMISES, AND LANDLORD LEASES AND WILL LEASE AND TENANT TAKES AND WILL
TAKE THE LEASED PREMISES "AS IS", AND TENANT ACKNOWLEDGES THAT LANDLORD (WHETHER
ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND WILL NOT
MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR REPRESENTATION,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED PREMISES, INCLUDING
WITHOUT LIMITATION ANY WARRANTY OR REPRESENTATION AS TO ITS SUITABILITY OR
FITNESS FOR USE OR PURPOSE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR
PURPOSE, AS TO THE QUALITY OF THE MATERIAL, CONSTRUCTION OR WORKMANSHIP THEREIN,
LATENT OR PATENT, AS TO LANDLORD'S TITLE THERETO, OR AS TO VALUE, COMPLIANCE
WITH SPECIFICATIONS, LOCATION, USE, CONDITION, MERCHANTABILITY, QUALITY,
DESCRIPTION, DURABILITY OR OPERATION, IT BEING AGREED THAT ALL RISKS INCIDENT
THERETO ARE TO BE BORNE SOLELY BY TENANT. TENANT ACKNOWLEDGES THAT THE LEASED
PREMISES ARE OF ITS SELECTION AND TO ITS SPECIFICATIONS, AND THAT THE LEASED
PREMISES HAVE BEEN INSPECTED BY TENANT AND ARE SATISFACTORY TO IT.
5
<PAGE> 10
IN THE EVENT OF ANY DEFECT OR DEFICIENCY IN ANY OF THE LEASED PREMISES OF ANY
NATURE, WHETHER PATENT OR LATENT, LANDLORD SHALL NOT HAVE ANY RESPONSIBILITY OR
LIABILITY WHATSOEVER WITH RESPECT THERETO, INCLUDING WITHOUT LIMITATION FOR ANY
INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION STRICT
LIABILITY IN TORT) AND TENANT HEREBY RELEASES LANDLORD FROM ANY RESPONSIBILITY
OR LIABILITY RELATING TO ANY CONDITIONS WHATSOEVER RESPECTING THE CONDITION OF
THE LEASED PREMISES EXCEPT AS CAUSED BY LANDLORD'S NEGLIGENCE OR WILFUL
MISCONDUCT. THE PROVISIONS OF THIS SECTION 3(b) HAVE BEEN NEGOTIATED, AND THE
FOREGOING PROVISIONS ARE INTENDED TO BE A COMPLETE EXCLUSION, RELEASE AND
NEGATION OF ANY REPRESENTATIONS OR WARRANTIES BY LANDLORD, EXPRESS OR IMPLIED,
WITH RESPECT TO ANY OF THE LEASED PREMISES, ARISING PURSUANT TO THE UCC OR ANY
OTHER LAW NOW OR HEREAFTER IN EFFECT OR OTHERWISE.
(c) Tenant represents to Landlord that Tenant has examined the
title to the Leased Premises prior to the execution and delivery of this Lease
and has found the same to be satisfactory for the purposes contemplated hereby
and acknowledges that title is in Landlord and that Tenant has only the right of
possession and use of the Leased Premises as provided in this Lease.
(d) Landlord hereby assigns, without recourse or warranty
whatsoever, to Tenant, the right to enforce all warranties, guaranties and
indemnities, if any, express or implied, and similar rights, if any, which
Landlord may or may not have against any manufacturer, seller, engineer,
contractor or builder in connection with the Leased Premises, including, but not
limited to, any rights and remedies existing under contract or pursuant to the
UCC. Such assignment shall remain in effect so long as no Event of Default
exists hereunder or until the termination of this Lease, whereupon any interest
so assigned hereunder to Tenant shall be deemed automatically reassigned to
Landlord without further act or deed. Landlord shall also retain the right to
enforce any such warranty, guaranty, or indemnity. Landlord hereby agrees to
execute and deliver at Tenant's expense such further documents as Tenant may
reasonably request (and which in the good faith judgment of Landlord, do not
adversely affect Landlord), in order that Tenant may have the full benefit of
the assignment effected or intended to be effected by this Section 3(d).
6
<PAGE> 11
(e) Landlord agrees to enter into with Tenant, at Tenant's
expense, such easements, covenants or restrictions for utilities, parking or
other matters as necessary for operation of the Leased Premises as requested by
Tenant, subject to Landlord's approval thereof, not to be unreasonably withheld.
(f) Tenant and Landlord agree that their relationship is that
of Landlord and Tenant, and there is no intention by either party that this
Lease Agreement be construed as a loan, partnership or joint venture. Tenant
represents to Landlord that it engaged legal counsel to review this Agreement,
and understands fully the rights and duties of a Tenant pursuant to this
Agreement, and in this connection, Tenant, with advice of legal counsel, waives
any rights to raise any defenses to an action by Landlord to enforce the terms
of this Lease Agreement, that would portray (or bring an action that would
assert) this Lease Agreement as a loan, partnership or joint venture or any
other arrangement other than a Lease.
4. Use of Leased Premises; Quiet Enjoyment.
(a) The Leased Premises may be used (i) in the same manner as
Tenant's use and purpose as of the Commencement Date, or a use related thereto,
or (ii) for any other legal purpose upon Landlord's prior written consent (not
to be unreasonably withheld), in either case subject to the provisions of
Section 17. Tenant acknowledges and agrees that it shall be reasonable for
Landlord to object to the use of the Leased Premises, or any portion thereof, if
(among other things) such use (a) creates a detrimental environmental effect or
increases environmental risks to the Leased Premises or liability risks to
Landlord, (b) creates or requires material and adverse modifications to the
physical structure of any portion of the Leased Premises, (c) will materially
lessen the fair market value of the Leased Premises, or (d) materially and
adversely changes the primary character of the Leased Premises. In no event
shall the Leased Premises be used for any purpose which would otherwise violate
any of the provisions of this Lease, including but not limited to, Legal
Requirements, Insurance Requirements or other recorded covenants, restrictions
or agreements applicable to the Leased Premises.
(b) Tenant shall not permit any unlawful occupation, business
or trade to be conducted on any of the Leased Premises or any use to be made
thereof contrary to applicable Legal Requirements or Insurance Requirements.
Tenant shall not use, occupy or permit any of the Leased Premises to be used or
occupied, nor do or permit anything to be done in or on any of the Leased
Premises, in a manner which
7
<PAGE> 12
would (i) violate any certificate of occupancy or equivalent certificate
affecting any of the Leased Premises, (ii) make void or voidable any insurance
then in effect with respect to any of the Leased Premises, (iii) affect in any
manner the ability of Tenant to obtain fire or other insurance which Tenant is
required to furnish hereunder, (iv) cause any injury or damage to any of the
Improvements, ordinary wear and tear excepted, or (v) constitute a public or
private nuisance or waste.
(c) Subject to all of the provisions of this Lease, including
but not limited to the provisions of Section 3 and Section 7(b), so long as no
Event of Default exists hereunder, Landlord covenants to do no act to disturb
the peaceful and quiet occupation and enjoyment of the Leased Premises by
Tenant, provided that Landlord may enter upon and examine any of the Leased
Premises at reasonable times (except in the case of emergencies, when Landlord
may access the Leased Premises at any time) and exercise any rights and
privileges granted to Landlord under the provisions of this Lease or provided
by Law.
5. Term. Subject to the provisions hereof, Tenant shall have and hold
the Leased Premises for an initial term (the "Term") commencing on December 26,
1996 (the "Commencement Date" and ending on December 31, 2011. Provided this
Lease shall not have been terminated pursuant to any provision of this Lease,
including but not limited to Section 19, Tenant shall have the option to extend
the Term for two (2) renewal terms of five (5) years each, by giving written
notice to Landlord in writing at least twelve (12) months, but not more than
eighteen (18) months, prior to the expiration of the then-current term. Any
option granted to Tenant to extend the Term hereunder for any of the two renewal
terms of five (5) years each is on the condition that at the time of the
exercise of the option and at the time of the commencement date of each such
renewal term, no Event of Default shall exist. In the absence of giving of such
notice to renew by Tenant to Landlord, the Term shall be automatically
terminated at the end of the then-current Term. Any such extension or renewal of
the Term (also referred to as the "Term") shall be subject to and shall continue
in full force and effect all the provisions of this Lease. In the event that
Tenant does not exercise its option to renew or to further renew the Term as
hereinabove provided, then Landlord shall have the right during the remainder of
the Term then in effect to (i) advertise the availability of the Leased Premises
for sale or for reletting and to erect upon the Leased Premises signs indicating
such availability (provided that such signs do not unreasonably interfere with
the use of the Leased Premises by Tenant), and (ii) show the Leased Premises to
prospective
8
<PAGE> 13
purchasers, lenders or tenants at such reasonable times during normal business
hours as Landlord may select. If Tenant shall fail to timely give such notice of
its irrevocable election to exercise any renewal option, then Tenant's right to
exercise such option and all options with regard to subsequent extensions or
renewals of the Term shall expire and be null and void.
Tenant shall remove all Trade Fixtures by the expiration or earlier
termination of this Lease and shall repair any damage occasioned by the removal
of the Trade Fixtures. If the Trade Fixtures are not removed by this time, at
the option of Landlord such Trade Fixtures may be deemed abandoned and become
the property of Landlord without any further action and Landlord may remove some
or all of such Trade Fixtures and dispose of them as Landlord deems appropriate,
all at the cost and expense of Tenant.
6. Rent; Security Deposit.
(a) Tenant shall pay to Landlord, as annual rent during the
Term, the amounts determined in accordance with the schedule set forth in
Exhibit "C" attached hereto made a part hereof ("Basic Rent"), commencing on the
first day of the first month next following the Commencement Date and continuing
on the same day of each month thereafter during the Term (the said days being
called the "Basic Rent Payment Dates"), and shall pay the same at Landlord's
address set forth below, or at such other place as Landlord from time to time
may designate to Tenant in writing, in funds which at the time of such payment
shall be legal tender for the payment of public or private debts in the United
States of America. Pro rata Basic Rent shall be due for the period from the
Commencement Date through the first day of the month next following the
Commencement Date computed as set forth in Exhibit "C" and shall be paid in
advance on the Commencement Date, but if the Commencement Date shall occur on
the first day of a calendar month, full monthly installment of Basic Rent shall
be paid on the Commencement Date.
(b) Tenant shall pay and discharge when the same shall become
due, as additional rent, all other amounts, liabilities and obligations which
Tenant assumes or agrees to pay or discharge pursuant to this Lease, together
with every fine, penalty, interest and cost which may be added for nonpayment or
late payment thereof. In the event of any failure by Tenant to pay or discharge
any of the foregoing, Landlord shall have all rights, powers and remedies
provided herein, by Law or otherwise, in the event of nonpayment of Basic Rent.
Tenant shall also pay to Landlord on demand, as additional rent, interest, at
the rate of interest
9
<PAGE> 14
equal to the "prime rate" of interest charged by Wells Fargo Bank at its offices
in Phoenix, Arizona (or, if unavailable, any successor rate or bank chosen by
Landlord in its reasonable discretion) plus five percent (5.0%) per annum (the
"Default Rate"), on all overdue installments of Basic Rent from and after the
expiration of any applicable grace period(s) provided in Section 19(d) of this
Lease, and on all overdue amounts of additional rent relating to obligations
which Landlord shall have paid on behalf of Tenant, from the date of payment
thereof, until paid in full. In addition, Tenant shall pay to Landlord, on
account of each overdue installment of Basic Rent, the sum of $1,000 to
compensate Landlord for its administrative and collection costs associated with
such overdue installment. All the foregoing additional rent referred to in this
Section 6(b)is herein sometimes called "Additional Rent". Landlord shall comply
with the requirements of Section 19(d) regarding notice and grace periods prior
to the imposition of the Additional Rent charges of this Section 6(b).
(c) Tenant has deposited, and Landlord acknowledges receipt
of, a security deposit (herein the "Security Deposit") in the amount of $250,000
as security for Tenant's payment and performance of its obligations hereunder.
During the existence of an Event of Default, Landlord may apply the Security
Deposit for the payment of any amount due Landlord hereunder and Tenant shall
promptly deposit moneys with Landlord sufficient to restore said Security
Deposit to the full amount required by this Lease. Until the Deposit Increase
Date described below, the Security Deposit shall be held in the form of United
States Treasury instruments having a maturity date of not less than one year;
interest accruing thereon shall be drawn down within ninety (90) days following
the end of each Lease year and promptly distributed 50.0% to Landlord and
(unless an Event of Default shall have occurred and be continuing) 50.0% to
Tenant. From and after the Deposit Increase Date, the Security Deposit shall not
be commingled with Landlord's general funds and shall be held in a
federally-insured or -guaranteed financial institution, in an interest-bearing
account accruing for Landlord's benefit. On or before December 31, 2001 (the
"Deposit Increase Date"), Tenant shall deposit a sum sufficient to increase the
Security Deposit to the amount of $350,000, and on and after that date the
Security Deposit shall be deemed to mean such increased amount. Landlord shall,
within ten (10) business days after the expiration or earlier termination of the
Term, return to Tenant that portion of the Security Deposit not used or applied
by Landlord.
10
<PAGE> 15
7. Net Lease; Non-Terminability.
(a) This is an absolutely net Lease to Landlord. Tenant and
Landlord agree that the Basic Rent, Additional Rent and all other sums payable
hereunder by Tenant shall be paid without notice or demand, and without setoff,
counterclaim, recoupment, abatement, suspension, deferment, diminution,
deduction, reduction or defense and shall be an absolutely net return to
Landlord. Tenant shall pay all costs and expenses relating to the Leased
Premises and the business carried on therein, unless otherwise expressly
provided in this Lease. Any amount or obligation herein relating to the Leased
Premises which is not expressly declared to be that of Landlord shall be deemed
to be an obligation of Tenant to be performed by Tenant at Tenant's sole cost
and expense.
(b) This Lease shall not terminate and Tenant shall not have
any right to terminate this Lease during the Term except as otherwise expressly
provided in Section 13. Tenant shall not be entitled to any setoff,
counterclaim, recoupment, abatement, suspension, deferment, diminution,
deduction, reduction or defense of or to Basic Rent, Additional Rent or any
other sums payable under this Lease except as otherwise expressly provided in
Section 13. The obligations of Tenant under this Lease shall not be affected by
any interference with Tenant's use of any of the Leased Premises for any reason,
including without limitation the following: (i) any damage to or destruction of
any of the Leased Premises by any cause whatsoever, (ii) any Condemnation, (iii)
the prohibition, limitation or restriction of Tenant's use of any of the Leased
Premises under applicable Law, (iv) any latent or other defect in, or any theft
or loss of any of the Leased Premises or (v) any other cause, whether similar or
dissimilar to the foregoing, including without limitation any default, breach,
act or omission of Landlord (any present or future Law to the contrary
notwithstanding). It is the intention of the parties hereto that the obligations
of Tenant hereunder shall be separate and independent covenants and agreements,
and the Basic Rent, Additional Rent and all other sums payable by Tenant
hereunder shall continue to be payable in all events and that all of the
obligations of Tenant hereunder shall continue unaffected, unless the
requirement to pay or perform the same shall have been terminated pursuant to
Section 13. Notwithstanding anything to the contrary contained in this Section ,
Tenant retains a separate and independent right to sue Landlord for among other
things any act or failure to act in connection herewith;
11
<PAGE> 16
provided, however, any judgment in favor of Tenant shall not abate Basic Rent,
Additional Rent and all other sums payable by Tenant hereunder or terminate
Tenant's obligations hereunder.
(c) Tenant agrees that it shall remain obligated under this
Lease in accordance with its provisions and that, except as otherwise expressly
provided in Section 13, it shall not take any action to terminate, rescind or
avoid this Lease, notwithstanding (i) the bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution, winding-up
or other proceeding affecting Landlord, (ii) the exercise of any remedy,
including foreclosure, under the Mortgage, or (iii) any action with respect to
this Lease (including without limitation the disaffirmance hereof) which may be
taken by Landlord under the Federal Bankruptcy Code or by any trustee, receiver
or liquidator of Landlord or by any court under the Federal Bankruptcy Code or
otherwise.
(d) Tenant waives all rights which may now or hereafter be
conferred by Law (i) to quit, terminate or surrender this Lease or any of the
Leased Premises, and (ii) to any setoff, counterclaim, recoupment, abatement,
suspension, deferment, diminution, deduction, reduction or defense of or to
Basic Rent, Additional Rent or any other sums payable under this Lease, in
either case except as otherwise expressly provided in Section 13.
(e) Notwithstanding anything to the contrary contained in this
Lease, Tenant retains a separate and independent right to sue Landlord;
provided, however, that any judgment in favor of Tenant shall not abate Basic
Rent, Additional Rent and all other sums payable by Tenant hereunder or
terminate Tenant's obligations hereunder.
8. Payment of Impositions; Compliance with Legal Requirements and
Insurance Requirements.
(a) Subject to the provisions of Section 18 relating to
contests, Tenant shall, before interest or penalties are due thereon, pay and
discharge (i) all taxes, assessments (including without limitation assessments
for benefits from public works or improvements, whether or not begun or
completed prior to the commencement of the term of this Lease and whether or not
to be completed within said term, if the same are due during the term of this
Lease), levies, fees, water and sewer rents and charges, and all other
governmental charges of every kind, general and special, ordinary and
extraordinary, whether or not the same shall have been within the express
contemplation of the parties hereto, together with any interest and penalties
12
<PAGE> 17
thereon, which are, at any time, imposed or levied upon or assessed against (A)
the Leased Premises or any part thereof, (B) any Basic Rent, any Additional Rent
reserved or payable hereunder, (C) this Lease or the leasehold estate hereby
created or which arise in respect of the operation, possession, occupancy or use
of the Premises; (ii) any gross receipts or similar taxes imposed or levied
upon, assessed against or measured by the Basic Rent, Additional Rent or any
other sums payable by Tenant hereunder or levied upon or assessed against the
Leased Premises; (iii) all sales and use taxes which may be levied or assessed
against or payable by Landlord or Tenant on account of the acquisition, leasing
or use of the Leased Premises or any portion thereto; and (iv) all charges for
water, gas, light, heat, telephone, electricity, power and other utilities and
services rendered or used on or about the Leased Premises (collectively the
"Impositions"). Upon written request from Landlord, Tenant shall within thirty
(30) days thereafter furnish paid receipts or other evidence that the
Impositions are not delinquent.
Nothing in this Section shall obligate Tenant to pay federal,
state or local (i) franchise, capital stock or similar taxes, if any, of
Landlord, (ii) income, excess profits or similar taxes, if any, of Landlord,
determined on the basis of its net income, or (iii) any estate, inheritance,
succession, gift, capital levy or similar tax unless the taxes referred to in
clauses (i) and (ii) above are in addition to or in lieu of or a substitute for
any other tax or assessment upon or with respect to any of the Leased Premises
which, if such other tax or assessment were in effect at the commencement of the
Term, would be payable by Tenant. In the event that any assessment against any
of the Leased Premises may be paid in installments, Tenant shall have the option
to pay such assessment in installments; and in such event, Tenant shall be
liable only for those installments which become due and payable during or are
allocable to the Term. Tenant shall prepare and file all tax reports required by
governmental authorities which relate to the Impositions. Tenant shall deliver
to Landlord, within twenty (20) days of receipt thereof, copies of all
settlements and notices pertaining to the Impositions which may be issued by any
governmental authority and receipts for payments of all Impositions made during
each calendar year of the Term, within thirty days after payment.
(b) Tenant, at its cost and expense, shall promptly comply
with and conform to and cause the Leased Premises to comply with and conform to
all of the Legal Requirements and Insurance Requirements, subject to the
provisions of Section 18.
13
<PAGE> 18
9. Liens; Recording and Title.
(a) Tenant shall not, directly or indirectly, create or permit
to be created or to remain, and shall promptly discharge at its expense, any
lien, encumbrance or charge on any of the Leased Premises, on the Basic Rent,
Additional Rent or on any other sums payable by Tenant under this Lease, other
than the Mortgage, the Assignment, the Permitted Encumbrances and any mortgage,
lien, encumbrance or other charge created by or resulting from any act or
omission by Landlord, not resulting from a default by Tenant hereunder. NOTICE
IS HEREBY GIVEN THAT LANDLORD SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR
MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT, OR TO ANYONE HOLDING ANY OF
THE LEASED PREMISES THROUGH OR UNDER TENANT, AND THAT NO MECHANIC'S OR OTHER
LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE
INTEREST OF LANDLORD IN AND TO ANY OF THE LEASED PREMISES. This notice shall be
included in the memorandum of this Lease to be filed pursuant to Section 33(l).
(b) Upon demand by Landlord, Tenant shall execute, deliver and
record, file or register from time to time all such instruments as may be
required by any present or future Law in order to evidence the respective
interest of Landlord and Tenant in any of the Leased Premises, and shall cause a
memorandum of this Lease, and any supplement hereto or to such other instrument,
if any, as may be appropriate, to be recorded, filed or registered and
re-recorded, refiled or re-registered in such manner and in such places as may
be required by any present or future Law in order to give public notice and
protect the validity of this Lease. In the event of any discrepancy between the
provisions of said recorded memorandum of this Lease or any other recorded
instrument referring to this Lease and the provisions of this Lease, the
provisions of this Lease shall prevail.
(c) Nothing in this Lease and no action or inaction by
Landlord shall be deemed or construed to mean that Landlord has granted to
Tenant any right, power or permission to do any act or to make any agreement
which may create, give rise to, or be the foundation for, any right, title,
interest or lien in or upon the estate of Landlord in any of the Leased
Premises.
10. Indemnification. Tenant agrees to defend, pay, protect, indemnify,
save and hold harmless Landlord for, from and against any and all liabilities,
losses, damages, penalties, costs, expenses (including
14
<PAGE> 19
without limitation reasonable attorneys' fees and expenses), causes of action,
suits, claims, demands or judgments of any nature whatsoever, howsoever caused,
arising from or relating to (a) any of the Leased Premises or Adjoining Property
or the use, non-use, occupancy, condition, design, construction, maintenance,
repair or rebuilding of any of the Leased Premises or Adjoining Property, and
any injury to or death of any person or persons or any loss of or damage to any
property, real or personal, in any manner arising therefrom connected therewith
or occurring thereon, whether or not Landlord has or should have knowledge or
notice of the defect or conditions, if any, causing or contributing to said
injury, death, loss, damage or other claim, (b) any violation by Tenant of any
provision of this Lease, of any contract or agreement to which Tenant is a
party, including but not limited to any violation of any Insurance Requirement
or Legal Requirement or Permitted Encumbrance, or (c) any other cause not
resulting from the negligence or wilful misconduct of Landlord or its officers,
directors, employees or others in privity of contract in connection with the
Leased Premises or this Lease. In case any proceeding is brought against
Landlord by reason of any such claim, Tenant covenants upon notice from Landlord
to resist or defend Landlord in such action, with the expenses of such defense
paid by Tenant, and Landlord will cooperate and assist in the defense of such
action or proceeding if reasonably requested so to do by Tenant. The obligations
of Tenant under this Section 10 shall survive any termination of this Lease.
11. Maintenance and Repair.
(a) Tenant acknowledges that it has received the Leased
Premises in good condition, repair and appearance. Tenant agrees that, at its
expense, Tenant shall at all times, including without limitation any Requisition
period, put, keep and maintain the Leased Premises, including, without
limitation, the roof, landscaping, walls and structural components of the Leased
Premises, and the Adjoining Property, and any altered, rebuilt, additional or
substituted buildings, structures or other improvements, in good repair and
appearance, except for ordinary wear and tear, and shall promptly make all
repairs and replacements (substantially equivalent in quality and workmanship to
the original work) of every kind and nature, whether foreseen or unforeseen,
structural or non-structural, which may be required to be made upon or in
connection with any of the Leased Premises in order to keep and maintain the
Leased Premises in compliance with all Legal Requirements and Insurance
Requirements and in as good repair and appearance as they were originally,
15
<PAGE> 20
except for ordinary wear and tear. Tenant shall do or cause others to do all
shoring of the Leased Premises or Adjoining Property or of foundations and walls
of the Improvements and every other act necessary or appropriate for
preservation and safety thereof, by reason of or in connection with any
excavation or other building operation upon any of the Leased Premises or
Adjoining Property, whether or not Landlord shall, by reason of any Legal
Requirements or Insurance Requirements, be required to take such action or be
liable for failure to do so. Landlord shall not be required to make any repair,
whether foreseen or unforeseen, or to maintain any of the Leased Premises or
Adjoining Property in any way, and Tenant hereby expressly waives the right to
make repairs at the expense of Landlord, which right may be provided for in any
Law now or hereafter in effect. Tenant shall, in all events, make all repairs
promptly upon written notice from Landlord, and all repairs shall be in a good,
proper and workmanlike manner.
(b) In the event that any Improvement now or hereafter
constructed encroaches upon any property, street or right-of-way adjoining any
of the Leased Premises or Adjoining Property, violates any Legal Requirements,
Insurance Requirements or the provisions of any restrictive covenant affecting
any of the Leased Premises, hinders or obstructs any easement or right-of-way to
which any of the Leased Premises is subject, or impairs the rights of others in,
to or under any of the foregoing, then, promptly after written request of
Landlord, Tenant shall either (i) obtain valid and effective waivers or
settlements of all claims, liabilities and damages resulting from each such
encroachment, violation, hindrance, obstruction or impairment, whether the same
shall affect Landlord, Tenant or both, or (ii) take such action as shall be
necessary to remove such encroachment, violation, hindrance, obstruction or
impairment including, if necessary, an Alteration. Any such repair or Alteration
shall be made in conformity with the applicable provisions of Section 12.
12. Alterations. Except as otherwise expressly provided in this Section
12, Tenant shall not make any Alterations which would tend to impair the value
of the Leased Premises, or the usefulness or structural integrity thereof,
without Landlord's written consent, not to be unreasonably withheld.
Notwithstanding the above, Tenant may make non-structural Alterations without
the prior written consent of Landlord. In the event that Landlord gives its
prior written consent to any Alterations, or if such consent is not required,
Tenant agrees that in connection with any Alteration (a) the value of the Leased
Premises shall not be lessened by any such Alteration, or its usefulness or
structural integrity impaired, (b) the Alteration shall not change the general
16
<PAGE> 21
character of the Improvements, or materially reduce the useable square footage
of the Improvements, (c) all such Alterations shall be performed in a good and
workmanlike manner, and shall be expeditiously completed in compliance with all
Legal Requirements, (d) all work done in connection with any such Alteration
shall comply with all Insurance Requirements, (e) Tenant shall promptly pay all
costs and expenses of any such Alteration, and shall discharge all liens filed
against any of the Leased Premises arising out of the same, (f) Tenant shall
procure and pay for all permits and licenses required in connection with any
such Alteration, (g) all such Alterations shall be the property of Landlord and
shall be subject to this Lease, (h) Alterations may only be performed if Tenant
is otherwise in compliance with terms and conditions of this Lease; and (i) all
Alterations shall be made (except in the case of any Alteration the estimated
cost of which in any one instance does not exceed $75,000) under the supervision
of an Arizona licensed architect or engineer, reasonably satisfactory to
Landlord, in accordance with detailed plans and specifications approved by
Landlord, approval not to be unreasonably withheld.
13. Condemnation.
(a) Subject to the rights of Tenant set forth in this Section
13, Tenant hereby irrevocably assigns to Landlord any award or payment to which
Tenant may be or become entitled with respect to the Taking of the Leased
Premises or any part thereof, by Condemnation or other eminent domain
proceedings pursuant to any Law, general or special, or by reason of the
temporary Taking of the use or occupancy of the Leased Premises or any part
thereof, by any governmental authority, civil or military, whether the same
shall be paid or payable in respect of Tenant's leasehold interest hereunder or
otherwise. Landlord shall be entitled to participate in any such proceeding and
the expenses thereof (including without limitation reasonable attorneys' fees
and expenses) shall be paid by Tenant. Nothing in this Lease shall be deemed to
(i) assign to Landlord any award or payment on account of Tenant's Trade
Fixtures, or Tenant's other tangible personal property, moving expenses and
similar claims, if available, to the extent Tenant shall have a right to make a
separate claim therefor against the condemnor or (ii) impair Tenant's right to
any such award or payment so long as such claim is not based upon the value of
Tenant's leasehold interest.
(b) If during the term of this Lease (i) the entire Leased
Premises shall be taken by or on account of any actual or threatened
Condemnation or other eminent domain proceeding pursuant to any law,
17
<PAGE> 22
general or special or (ii) if 25% or more of the Improvements or 25% or more of
the Land is taken and said Taking renders the remaining Leased Premises
uneconomic for the continued use or occupancy in the business of Tenant in the
reasonable business judgment of Tenant's board of directors, then Tenant shall
deliver a Purchase Offer (the "Purchase Offer") to Landlord specifying a
termination date (the "Termination Date") occurring not less than ninety (90)
nor more than one hundred eighty (180) days after the delivery of such Purchase
Offer and this Lease shall continue in full force and effect without any
abatement of rent, notwithstanding any Taking, until the Termination Date. The
Purchase Offer shall be accompanied by Tenant's certificate stating that the
conditions set forth in either clause (i) or (ii) of this Section 13(b) have
been fulfilled. If the conditions set forth in clause (i) or (ii) of this
Section 13(b) are fulfilled and if Tenant shall have failed to deliver a
Purchase Offer as required above, Tenant conclusively shall be presumed to have
made a Purchase Offer on a date which is seventy-five (75) days after any such
Taking (or such later date as is agreed to in writing by Landlord), and in the
event Tenant is so presumed to have made a Purchase Offer, the Termination Date
shall be deemed to be one hundred twenty (120) days after such Purchaser Offer
is presumed to have been made; but nothing in this sentence shall relieve Tenant
of its obligation actually to deliver such Purchase Offer.
(c) If during the Term (i) a portion of the Leased Premises
shall be taken by condemnation or other eminent domain proceedings, which Taking
is not sufficient to require that Tenant give a Purchase Offer or (ii) the use
or occupancy of the Leased Premises or any part thereof shall be temporarily
taken by any governmental authority; then this Lease shall continue in full
effect without abatement or reduction of Basic Rent, Additional Rent or other
sums payable by Tenant hereunder notwithstanding such partial or temporary
Taking. Tenant shall, promptly after any such temporary Taking ceases, at its
expense, repair any damage caused thereby in conformity with the applicable
requirements of Section 12 so that, thereafter, the Leased Premises shall be, as
nearly as commercially and reasonably possible, in a condition as good as the
condition thereof immediately prior to such Taking. In the event of any such
partial Taking, Landlord shall make the Net Award available to Tenant to make
such repair but, if such Net Award shall be in excess of $75,000, only against
certificates of Tenant delivered to Landlord from time to time as such work or
repair progresses, each such certificate describing the work or repair for which
Tenant is requesting payment and the cost incurred
18
<PAGE> 23
by Tenant in connection therewith and stating that Tenant has not theretofore
received payment for such work. Any Net Award remaining after such repairs have
been made shall be delivered to Landlord and shall not reduce Tenant's
obligation to pay Basic Rent hereunder. In the event of such temporary
Requisition, Tenant shall be entitled to receive the entire Net Award payable by
reason of such temporary Requisition or portion of such temporary Requisition
occurring during the term hereof. If the cost of any repairs required to be made
by Tenant pursuant to this Section 13 shall exceed the amount of the Net Award,
the deficiency shall be paid by Tenant. Notwithstanding anything in this Section
13 to the contrary, during any period of time when there continues to exist an
Event of Default, Landlord, in the exercise of its sole and absolute discretion,
shall have the right to receive any payments pursuant to this Section 13(c) and
to apply the same toward payment of any delinquent Basic Rent or Additional Rent
then due and owing to Landlord under this Lease until such Event of Default is
cured.
(d) Landlord may reject any Purchase Offer but must do so not
later than the thirtieth (30th) day prior to the Termination Date or the
purchase date specified in such Purchase Offer, whereupon this Lease shall
terminate on such date (except with respect to obligations and liabilities of
Tenant under this Lease, actual or contingent, which have arisen on or prior to
such termination), upon payment by Tenant of the Basic Rent, Additional Rent and
all other sums then due and payable hereunder to and including the date of
termination without offset or deduction for any reason. Upon a purchase of the
Leased Premises pursuant to Section 13(c) and the payment to Landlord of the
amount determined in accordance with Exhibit "E" attached hereto and made a part
hereof (the "Purchase Price"), Landlord shall convey the Leased Premises and all
its right, title and interest in and to the Net Award, (whether or not such Net
Award shall have been received by Landlord) to Tenant or its designee.
(e) Any minor Condemnation or Taking of the Leased Premises
for the construction or maintenance of streets or highways shall not be
considered a Condemnation or Taking for purposes of this Section 13 so long as
the Leased Premises shall not be materially or adversely affected, ingress and
egress for the remainder of the Leased Premises shall be adequate for the
business of Tenant and the provisions of any Mortgage relating thereto shall be
complied with. Tenant agrees that it will notify Landlord of any such
Condemnation or Taking.
19
<PAGE> 24
(f) If the Leased Premises or any part thereof shall be
purchased by Tenant pursuant to any provision of this Lease, Landlord need not
transfer and convey to Tenant or its designee any better title thereto than
existed on the date of the commencement of this Lease. Tenant shall accept such
title, subject, to such liens, encumbrances, charges, exceptions and
restrictions on, against or relating to the Leased Premises (including without
limitation those arising pursuant to the terms of this Lease) and to all
applicable laws, regulations and ordinances, but free of the Mortgage and all
other mortgages, liens, encumbrances, charges, exceptions and restrictions which
shall have been created by acts of Landlord. Notwithstanding the thirty-day time
limit in Section 13(d), Landlord's inability to deliver such title in such
condition on the date fixed for any such purchase shall be deemed to be
Landlord's rejection of the Purchase Offer pursuant to Section 13(d) as of and
effective on such date.
(g) On the date fixed for any such purchase, Tenant shall pay
to Landlord, at any place within the United States of America designated by
Landlord, the Purchase Price as determined pursuant to Exhibit "E", together
with all installments of Basic Rent and all other sums then due under this Lease
and unpaid to and including the date of purchase without offset or deduction for
any reason, and Landlord shall deliver to Tenant a special warranty deed
conveying title to the Leased Premises of the character described in Section
13(f) above and describing the Leased Premises or portion thereof being sold and
conveying the title thereto, together with such instruments as shall be
necessary to transfer to Tenant or its designee any other property then required
to be transferred by Landlord pursuant to this Lease. Tenant shall pay all
reasonable charges incident to such conveyance and transfer, including without
limitation counsel fees, escrow fees, recording fees, title insurance premiums
and all applicable federal, state and local taxes (other than any income or
franchise taxes levied upon or assessed against Landlord) which may be incurred
or imposed by reason of such conveyance and transfer.
(h) Upon the completion of such purchase, but not prior
thereto (whether or not any delay in the compilation of, or the failure to
complete such purchase shall be the fault of Landlord), this Lease and all
obligations hereunder (including without limitation the obligations to pay Basic
Rent and Additional Rent) shall terminate, except with respect to (i)
obligations and liabilities of Tenant, actual or contingent, under this Lease
which arose on or prior to such date of purchase or (ii) those obligations
contained in Section 10.
20
<PAGE> 25
14. Insurance.
(a) Tenant shall maintain, or cause to be maintained, at its
sole cost and expense the following insurance on the Leased Premises:
(i) Property insurance against loss or damage to the
Improvements under a so-called "all-risk" policy or policies of
insurance (special form), which may contain such exclusions as may be
reasonably acceptable to Landlord, in amounts to prevent Landlord or
Tenant from becoming a co-insurer under the applicable policies, and in
any event in amounts not less than the actual replacement cost of the
Improvements (excluding footings and foundations and other parts of the
Improvements which are not insurable) but not less than the full
insurable replacement value of the Improvements, and as determined from
time to time, but not more frequently than once in any 12-month
period, by the insurer or insurers. Such policies shall contain a
replacement cost endorsement. Notwithstanding anything to the contrary
in this Section 14, (i) that portion of the property insurance covering
loss or damage on account of floods shall have a limit of $5,000,000,
and (ii) Tenant shall not be required to obtain or maintain insurance
against loss or damage on account of earthquakes.
(ii) Comprehensive general public liability insurance
against claims for bodily injury, death or property damage occurring
on, in or about any of the Leased Premises or the Adjoining Property,
which insurance shall be written on a so-called "occurrence basis", and
shall provide minimum protection with a combined single limit in an
amount not less than the greater of (x) Twenty-Five Million Dollars
($25,000,000) (or in such increased limits from time to time to reflect
declines in the purchasing power of the dollar as Landlord may
reasonably request) or (y) the aggregate amount of such insurance
carried by Tenant, for bodily injury, death and property damage in any
one occurrence. Tenant shall be required to increase its insurance
limits from time to time as may be reasonably required by Lender or as
may reasonably required by Landlord consistent with coverage on
properties similarly constructed, occupied and maintained. In no event
shall the limits of such insurance be considered as limiting the
liability of Tenant under this Lease.
(iii) Workers' compensation insurance covering all
persons employed in connection with any work done on or about any of
the Leased Premises for which claims for death
21
<PAGE> 26
or bodily injury could be asserted against Landlord, Tenant or the
Leased Premises in compliance with statutory law and employer's
liability insurance with a limit of not less than $200,000 per employee
and $1,000,000 per occurrence.
(iv) Insurance against loss or damage from explosion
of any steam or pressure boilers or similar apparatus located in or
about the Improvements in an amount not less than Five Million Dollars
($5,000,000);
(v) Rental insurance against loss of rental income
under a loss of rents insurance policy covering risk of loss due to the
occurrence of any of the hazards insured against under Tenant's fire
and extended insurance on the building, in an amount sufficient to
prevent Landlord from becoming a co-insurer but in any event, in an
amount sufficient to pay for one (1) year the rent payable under this
Lease. All proceeds received by Landlord will be credited as received
against the rent due.
(vi) Builders risk insurance insuring perils covered
by the causes of loss special form (all risk) shall be purchased for
the value of any Alteration and/or additions made to the Leased
Premises when the work is not insured under Tenant's property insurance
policy.
(vii) Such additional and/or other insurance with
respect to the Leased Premises as Landlord may, from time to time,
reasonably require or which Lender may, from time to time, reasonably
require, so long as such other insurance is in such amounts and of a
type as at the time is customarily carried with respect to improvements
similar in character, location and use to the Improvements then
comprising the Leased Premises.
(b) The insurance required by this Section 14 shall be written
and maintained by one or more companies having an insurance company claims
paying rating equal to or stronger than "A-9" by A.M. Best Company, or a similar
rating by a nationally-recognized rating agency. Insurers shall be approved by
Landlord and authorized to do an insurance business in the State and domiciled
in the United States. The insurance policies (i) shall be for a term of not less
than one year, (ii) shall be in amounts sufficient at all times to satisfy any
co-insurance requirements thereof, and (iii) shall (except for the workers'
compensation insurance referred to in Section 14(a)(iii) name Landlord and any
Lender as additional named insured parties and/or loss
22
<PAGE> 27
payees, as applicable, as their respective interests may appear. If said
insurance or any part thereof shall expire, be withdrawn, become void by breach
of any condition thereof by Tenant or become void or unsafe by reason of the
failure or impairment of the capital of any insurer, or if for any other
reasonable cause said insurance shall become unsatisfactory to Landlord, Tenant
shall immediately obtain new or additional insurance satisfactory to Landlord.
Insurance required under this Section 14 shall be primary and not contributing
to any insurance available to Landlord and Landlord's insurance shall be in
excess thereto.
(c) Each insurance policy referred to in Sections 14(a)(i),
14(a)(ii) and 14(a)(iv) shall contain standard noncontributory mortgagee clauses
in favor of any Lender. Each policy shall provide that it may not be canceled
except after thirty (30) days prior written notice to Landlord and any Lender.
Each policy shall also provide that any loss otherwise payable thereunder shall
be payable notwithstanding (i) any act or omission of Landlord or Tenant which
might, absent such provision, result in a forfeiture of all or a part of such
insurance payment, (ii) the occupation or use of any of the Leased Premises for
purposes more hazardous than permitted by the provisions of such policy or (iii)
any foreclosure or other action or proceeding taken by any Lender pursuant to
any provision of the Mortgage upon the happening of an event of default therein.
(d) Tenant shall pay as they become due all premiums for the
insurance required by this Section 14, shall renew or replace each policy, and
shall deliver to Landlord or Lender the existing policy and such renewal or
replacement policy at least ten (10) days prior to the expiration date of each
policy and if any such policy be delivered to Lender, Tenant shall deliver to
Landlord a certificate of such policy. In the event of Tenant's failure to
comply with any of the foregoing requirements of this Section 14 and following
the notice and cure periods set forth in this Lease, Landlord shall be entitled
to procure such insurance. Any sums expended by Landlord in procuring such
insurance shall be Additional Rent and shall be immediately repaid by Tenant.
(e) Anything in this Section 14 to the contrary
notwithstanding, any insurance which Tenant is required to obtain pursuant to
Section 14(a) may be carried under a so-called "blanket" policy or policies
covering other properties or liabilities of Tenant, provided that such blanket
policy or policies otherwise comply with the provisions of this Section 14. In
the event any such insurance is carried under a blanket policy, Tenant shall
deliver to Landlord and Lender a certified copy of those provisions of the
blanket
23
<PAGE> 28
policy that pertain to the Leased Premises to evidence the issuance and
effectiveness of the policy, the amount and character of the coverage with
respect to the Leased Premises and the presence in the policy of provisions of
the character required in the above Sections of this Section 14.
(f) (i) Insurance claims by reason of damage to or destruction
of any portion of the Leased Premises shall be adjusted by Tenant;
provided, however, that although Tenant shall make the final decision
with respect to any such adjustment, Tenant shall, promptly after such
damage or destruction, advise Landlord and Lender of such occurrences
and consult with Landlord and Lender throughout the process of
adjusting any such claim, and provided further that both Landlord and
Lender are fully advised as to all matters on a current basis. Landlord
shall not be required to prosecute any claim against, or to contact any
settlement proposed by, an insurer. Tenant may, at its expense,
prosecute any such claim or contest any such settlement in the name of
Landlord, Tenant or both, and Landlord will join therein at Tenant's
written request upon the receipt by Landlord of an indemnity from
Tenant against all reasonable costs, liabilities and expenses in
connection therewith.
(ii) Subject to the provisions of Section 15, Net
Proceeds shall be made available from Landlord and/or Lender to Tenant,
but, if such Net Proceeds shall be in excess of $75,000, only against
certificates of Tenant delivered to Landlord from time to time as such
work or repair progresses, each such certificate describing the work or
repair for which Tenant is requesting payment and the cost incurred by
Tenant in connection therewith and stating that Tenant has not
theretofore received payment for such work and has sufficient funds
remaining to complete the work free of liens or claims. Any Net
Proceeds remaining after Tenant has repaired the Leased Premises in
conformity with the applicable requirements of Section 12 shall be
delivered to Tenant.
(g) In the event Tenant does not purchase the insurance
required by this Lease or keep the same in full force and effect, Landlord may,
but shall not be obligated, to purchase the necessary insurance and pay the
premium. Tenant shall repay to Landlord, as Additional Rent, the amount so paid
promptly upon demand. In addition, Landlord may recover from Tenant and Tenant
agrees to pay, as Additional Rent, any and all expenses (including reasonable
attorneys' fees) and damages which Landlord may sustain by reason of the failure
of Tenant to obtain and maintain such insurance.
24
<PAGE> 29
(h) Landlord or Lender shall not be limited in the proof of
any damages which Landlord or Lender may claim against Tenant arising out of or
by reason of Tenant's failure to provide and keep in force insurance, as
provided in this Section 14, to the amount of the insurance premium or premiums
not paid or incurred by Tenant and which would have been payable under such
insurance; but Landlord and Lender shall also be entitled to recover as damages
for such breach, the uninsured amount of any loss, to the extent of any
deficiency in the insurance required by this Section 14 and damages, costs and
expenses of suit suffered or incurred by reason of or damage to, or destruction
of, the Leased Premises, occurring during any period when Tenant may have failed
or neglected to obtain the insurance required by this Section 14. Tenant shall
indemnify and hold harmless Landlord and Lender for any liability incurred by
Landlord or Lender arising out of any deductible for any insurance required by
this Section 14.
15. Casualty.
(a) If a part of the Leased Premises shall be damaged or
destroyed by casualty, and if the estimated cost of rebuilding, replacing and
repairing the same shall exceed $75,000, Tenant shall promptly notify Landlord
thereof; and (whether or not such estimated cost shall exceed $75,000) Tenant
shall, with reasonable promptness and diligence, rebuild, replace and repair any
damage or destruction to the Leased Premises, at its expense, in conformity with
the requirements of Section 12 in such manner as to restore the same to the same
condition, as nearly as possible, as existed prior to such casualty and there
shall be no abatement of Basic Rent or Additional Rent. If the cost of any
repairs required to be made by Tenant pursuant to this Section 15(a) shall
exceed the amount of the Net Proceeds, the deficiency shall be paid by Tenant.
Any Net Proceeds remaining after such repairs have been made shall be delivered
to Tenant.
(b) Notwithstanding anything in Section 14 or this Section 15
to the contrary, during any period of time when there continues to exist an
Event of Default, Landlord, in the exercise of its sole and absolute discretion,
shall have the right to receive any insurance proceeds from any casualty and to
apply the same toward payment of any delinquent Basic Rent or Additional Rent
then due and owing to Landlord under this Lease until such Event of Default is
cured.
(c) In no event may Tenant abate payment of Basic Rent unless
Landlord is receiving rental loss or other insurance payments sufficient to
offset such abatement.
25
<PAGE> 30
16. Subordination to Financing.
(a) Tenant agrees that this Lease shall at all times be
subject and subordinate to the lien of any Mortgage, and Tenant agrees, upon
demand, without cost, to promptly execute instruments as may be required to
further effectuate or confirm such subordination, provided such instruments
provide for the non-disturbance of Tenant's occupancy hereunder and Tenant's
attornment, and otherwise are in form and content reasonably acceptable to
Tenant. So long as Tenant shall faithfully discharge the obligations on its part
to be kept and performed under the terms of this Lease, then Tenant's tenancy
shall not be disturbed, nor shall this Lease be affected by any default under
such Mortgage, and in the event of a foreclosure or other enforcement of any
such Mortgage, or sale in lieu thereof, the purchaser at such foreclosure sale
shall be bound to Tenant for the term of this Lease and any extensions thereof,
the rights of Tenant hereunder shall expressly survive, and this Lease shall in
all respects continue in full force and effect so long as Tenant fully performs
all of its obligations hereunder. Tenant shall not be named as a party defendant
in any such foreclosure suit.
(b) Notwithstanding the provisions of Section 16(a), the
holder of the Mortgage to which this Lease is subject and subordinate, as
provided in said Section 16(a), shall have the right, at its sole option, at any
time, to subordinate and subject the Mortgage, in whole or in part, to this
Lease by recording a unilateral declaration to such effect.
(c) At any time prior to the expiration of the Term, Tenant
agrees, at the election and upon demand of Landlord or its successors or
assigns, or of the holder of the Mortgage on the Leased Premises, to attorn,
from time to time, to any such owner or holder, upon the then executory terms
and conditions of this Lease, for the remainder of the Term originally demised
in this Lease and for any renewal Term, provided that such owner or holder as
the case may be, shall then be entitled to possession of the Leased Premises
subject to the provisions of this Lease. The provisions of this Section 16(c)
shall inure to the benefit of any such owner or holder, shall apply
notwithstanding that, as a matter of Law, this Lease may terminate upon the
foreclosure of the Mortgage, shall be self-operative upon any such demand, and
no further instrument shall be required to give effect to said provisions. Upon
demand of any such owner or holder, Tenant agrees to promptly execute, from time
to time, instruments in confirmation of the foregoing provisions of this Section
16(c), satisfactory to any such owner or holder and to Tenant acknowledging such
attornment
26
<PAGE> 31
and setting forth the terms and conditions of its tenancy. Nothing contained in
this Section 16(c) shall be construed to impair any right otherwise exercisable
by any such owner or holder.
(d) Tenant agrees that, if requested by Landlord, Tenant shall
promptly, without charge, enter into (i) a subordination, non-disturbance and
attornment agreement reasonably requested by Lender and in form and content
reasonably acceptable to Tenant and (ii) an agreement with any holder of the
Mortgage whereby Tenant shall agree for the benefit of the holder of the
Mortgage that Tenant will not, without in each case the prior written consent of
such holder, (1) amend, modify, cancel or surrender the term of this Lease
except as expressly permitted by Section 13 of this Lease, or enter into any
agreement with Landlord so to do, or (2) pay any installment of Basic Rent more
than one (1) month in advance of the due date thereof or otherwise than in the
manner provided for in this Lease.
(e) Tenant agrees that it will give notice to any holder of a
first Mortgage encumbering the Leased Premises, provided that Tenant has been
notified in writing of the name and address of such Mortgage holder, of any
defaults of Landlord or other circumstances which would entitle Tenant to
terminate this Lease or abate the rental payable hereunder, specifying the
nature of the default by Landlord, and thereupon the holder of the Mortgage
shall have the right, but not the obligation, to cure any such default by
Landlord. Tenant shall afford the Mortgage holder thirty (30) days after such
notice to cure such default and a reasonable period of time in addition thereto
if circumstances are such that said default cannot be reasonably cured within
such 30-day period. No such Lender shall, upon assuming title to the Leased
Premises, be liable for any act or omission of any prior landlord (including
Landlord), be subject to any offsets or defenses which Tenant may have against
any prior landlord, or be bound by any rent or additional rent paid for more
than the then-current period plus one (1) additional month's Basic Rent to any
prior landlord. Nothing herein shall be construed to be in conflict with the
provisions of Section 7.
17. Assignment, Subleasing and Vacating. The Leased Premises may be
assigned or sublet by Tenant in whole or in part only with the consent of
Landlord, not to be unreasonably withheld. The bases for withholding consent
include, but is not limited to: (i) an unsatisfactory credit history and/or a
showing of unsatisfactory financial responsibility of the proposed transferee;
(ii) the business reputation of the proposed transferee is not in accordance
with generally acceptable commercial standards; (iii) the use of the Leased
27
<PAGE> 32
Premises would be a violation of Section 4(a); (iv) the managerial and
operational skills of proposed transferee are not at least as good as those of
existing Tenant; (v) the use of the Leased Premises violates any other
agreements affecting the Leased Premises the Landlord, or other tenants; and
(vi) the transfer and/or the use of the Leased Premises would be contrary to
public policy or statute. Within thirty (30) days after Tenant gives Landlord
notice of assignment and/or sublease, said assignment shall be deemed approved
by Landlord if Landlord fails to give written notice of disapproval thereof with
specific reasons for such disapproval. Notwithstanding any assignment or
subletting, Tenant shall continue to remain liable and responsible for the
payment of the Basic Rent and Additional Rent and the performance of all its
other obligations under this Lease. Any payments of rent by such subtenant or
sublessee in excess of the Basic Rent payable hereunder shall be shared in the
ratio of 50% to Tenant and 50% to Landlord.
Each sublease of any of the Leased Premises shall be subject
and subordinate to the provisions of this Lease. No assignment or sublease made
as permitted by this Section 17 or otherwise shall affect or reduce any of the
obligations of Tenant hereunder, and all such obligations shall continue in full
force and effect as obligations of a principal and not as obligations of a
guarantor, as if no assignment or sublease had been made. No assignment or
sublease shall impose any obligations on Landlord under this Lease. No
assignment or sublease shall be valid unless, in the case of an assignment,
Tenant shall, within ten (10) days after the execution and delivery of any such
assignment, deliver to Landlord (a) a duplicate original of such assignment in
recordable form and (b) an agreement executed and acknowledged by the assignee
in recordable form wherein the assignee shall agree to assume and agree to
observe and perform all of the terms and provisions of this Lease on the part of
Tenant to be observed and performed, and, in the case of a sublease, Tenant
shall, within ten (10) days after the execution and delivery of such sublease,
deliver to Landlord a duplicate original of such sublease. Notwithstanding
anything to the contrary contained herein, any change in ownership or control of
Tenant shall not be deemed to be an assignment or sublet hereof.
Upon the occurrence of an Event of Default under this Lease,
Landlord shall have the right to collect and enjoy all rents and other sums of
money payable under any sublease of any of the Leased Premises, and Tenant
hereby irrevocably and unconditionally assigns such rents and money to Landlord,
which assignment may be exercised upon and after (but not before) the occurrence
of an Event of Default. Tenant
28
<PAGE> 33
shall not mortgage or pledge this Lease without Landlord's express written
consent, which may not be unreasonably withheld, and any such mortgage or pledge
made in violation of this Section 17 shall be void.
Landlord may from time to time freely assign its interest hereunder.
Upon such assignment and following written notice to Tenant thereof, Landlord
shall be discharged from any further obligation or liability hereunder;
provided, however, that Landlord shall be discharged from its obligations with
respect to the Security Deposit only upon the written acknowledgement by such
assignee to Tenant of such assignee's actual receipt of or obligation to assume
responsibility for the Security Deposit.
18. Permitted Contests. After prior written notice to Landlord, Tenant
shall not be required to (a) pay any Imposition, (b) comply with any Legal
Requirement, (c) discharge or remove any lien referred to in Section 9 or
Section 12, or (d) take any action with respect to any encroachment, violation,
hindrance, obstruction or impairment referred to in Section 11(b), so long as
Tenant shall contest, in good faith and at its expense, the existence, the
amount or the validity thereof, the amount of the damages caused thereby, or the
extent of its or Landlord's liability therefor, by appropriate proceedings which
shall operate during the pendency thereof to prevent (A) the collection of, or
other realization upon, the Imposition or lien so contested, (B) the sale,
forfeiture or loss of any of the Leased Premises, any Basic Rent or any
Additional Rent to satisfy the same or to pay any damages caused by the
violation of any such Legal Requirement or by any such encroachment, violation,
hindrance, obstruction or impairment, (C) any interference with the use or
occupancy of any of the Leased Premises, (D) any interference with the payment
of any Basic Rent or any Additional Rent, (E) the cancellation of any fire or
other insurance policy, and (F) Landlord would not be in danger of civil or
criminal liability or sanctions for failure so to pay or perform. Tenant shall
provide Landlord security satisfactory in the sole opinion of Landlord assuring
the payment, compliance, discharge, removal or other action, including without
limitation all reasonable costs, attorneys' fees, interest and penalties, in the
event that the contest is unsuccessful. While any such proceedings are pending
and the required security is held by Landlord, Landlord shall not have the right
to pay, remove or cause to be discharged the Imposition or lien thereby being
contested unless any one or more of the conditions in subdivisions (A) through
(F) shall not be prevented during the pendency of the contest. Tenant further
agrees that each such contest shall be promptly and diligently prosecuted to a
final conclusion, except that Tenant shall, so long as all of the
29
<PAGE> 34
conditions of the first sentence of this Section 18 are at all times complied
with, have the right to attempt to settle or compromise such contest through
negotiations. Tenant shall pay and save Landlord and Lender harmless for, from
and against any and all losses, judgments, decrees and costs (including without
limitation all reasonable attorneys' fees and expenses) in connection with any
such contest and shall, promptly after the final determination of such contest,
fully pay and discharge the amounts which shall be levied, assessed, charged or
imposed or be determined to be payable therein or in connection therewith,
together with all penalties, fines, interest, costs and expenses thereof or in
connection therewith, and perform all acts the performance of which shall be
ordered or decreed as a result thereof.
19. Conditional Limitations; Default Provisions.
(a) The occurrence of any one or more of the following shall
constitute an "Event of Default" under this Lease: (i) a failure by Tenant to
make (regardless of the pendency of any bankruptcy, reorganization,
receivership, insolvency or other proceedings, in law, in equity or before any
administrative tribunal, which had or might have the effect of preventing Tenant
from complying with the provisions of this Lease) any payment of Basic Rent,
Additional Rent or other sum herein required to be paid by Tenant; (ii) a
failure by Tenant to duly perform and observe, or a violation or breach of any
other provision hereof; (iii) any representation or warranty made by Tenant
herein which proves at any time to be incorrect, in any material respect; (iv)
Tenant shall (A) voluntarily be adjudicated a bankrupt or insolvent, (B) seek or
consent to the appointment of a receiver or trustee for itself or for any of the
Leased Premises, (C) file a petition seeking relief under the bankruptcy or
other similar Laws of the United States, any state or any jurisdiction, (D) make
a general assignment for the benefit of creditors, or (E) be unable to pay its
debts as they mature; (v) a court shall enter an order, judgment or decree
appointing, with the consent of Tenant, a receiver or trustee for it or for any
of the Leased Premises or approving a petition filed against Tenant which seeks
relief under the bankruptcy or other similar Laws of the United States, any
state or any jurisdiction, and such order, judgment or decree shall remain in
force, undischarged or unstayed, sixty days after it is entered; (vi) Tenant
shall be liquidated or dissolved or shall begin proceedings towards its
liquidation or dissolution; or (vii) the estate or interest of Tenant in any of
the Leased Premises shall be levied upon or attached in any proceeding and such
estate or
30
<PAGE> 35
interest is about to be sold or transferred or such process shall not be vacated
or discharged within sixty days after such levy or attachment.
(b) If an Event of Default shall have occurred and be
continuing, Landlord shall have the right at its sole option, then or at any
time thereafter, to do any one or more of the following without demand upon or
notice to Tenant:
(i) Landlord may give Tenant notice of Landlord's
intention to terminate this Lease on a date specified in such notice.
Upon the date therein specified, the Term and the estate hereby granted
and all rights of Tenant hereunder shall expire and terminate as if
such date were the date hereinbefore fixed for the expiration of the
Term, but Tenant shall remain liable for all its obligations hereunder
through such date, including its liability for Basic Rent and
Additional Rent as hereinafter provided.
(ii) Landlord may, whether or not the Term of this
Lease shall have been terminated pursuant to Section 19(b)(i) above,
(A) give Tenant notice to surrender any of the Leased Premises to
Landlord immediately or on a date specified in such notice, at which
time Tenant shall surrender and deliver possession of the Leased
Premises to Landlord or (B) reenter and repossess any of the Leased
Premises by force, summary proceedings, ejectment or any other means
or procedure. Upon or at any time after taking possession of any of
the Leased Premises, Landlord may remove any persons or property
therefrom. Landlord shall be under no liability for or by reason of
any such entry, repossession or removal. No such entry or repossession
shall be construed as an election by Landlord to terminate this Lease
unless Landlord gives a written notice of such intention to Tenant
pursuant to Section 19(b)(i) above.
(iii) After repossession of any of the Leased Premises
pursuant to Section 19(b)(ii) above, whether or not this Lease shall
have been terminated pursuant to Section 19(b)(i)above, Landlord shall
have the right to relet the Leased Premises or any part thereof to such
tenant or tenants for such term or terms (which may be greater or less
than the period which would otherwise have constituted the balance of
the Term) for such rent, on such conditions (which, if commercially
reasonable to do so, may include concessions or free rent) and for such
uses as Landlord, in its
31
<PAGE> 36
absolute discretion, may determine; and Landlord may collect and
receive any rents payable by reason of such reletting, provided
Landlord has made a good faith effort to mitigate its damages.
(iv) Landlord may exercise any other right or remedy
now or hereafter existing by Law or in equity.
(v) To continue this Lease in effect for so long as
Landlord does not terminate Tenant's right to possession of
the Leased Premises and to reinforce all of Landlord's rights
under this Lease and recover all Basic Rent, Additional Rent
and other sums payable hereunder as the same become due.
(c) No expiration or termination of this Lease pursuant to
Section 19(b)(i) or any other provision of this Lease, by operation of Law,
repossession of the Leased Premises pursuant to Section 19(b)(ii) or otherwise,
or reletting of any of the Leased Premises pursuant to Section 19(b)(iii), shall
relieve Tenant of any liabilities and obligations hereunder, including the
liability for Basic and Additional Rent, all of which shall survive such
expiration, termination, repossession or reletting.
In the event of any expiration or termination of this Lease or
repossession of any of the Leased Premises by reason of the occurrence of an
Event of Default, Tenant shall pay to Landlord Basic Rent, Additional Rent and
all other sums required to be paid by Tenant to and including the date of such
expiration, termination or repossession and, thereafter, Tenant shall, until the
end of what would have been the Term in the absence of such expiration,
termination or repossession, and whether or not any of the Leased Premises shall
have been relet, be liable to Landlord for and shall pay to Landlord as
liquidated and agreed current damages (but discounted at an appropriate discount
rate to its current value) (i) Basic Rent, Additional Rent and all other sums
which would be payable under this Lease by Tenant in the absence of such
expiration, termination or repossession, less (ii) the net proceeds, if any, of
any reletting pursuant to Section 19(b)(iii), after deducting from such proceeds
all of Landlord's expenses in connection with such reletting (including all
repossession costs, brokerage commissions, legal expenses, attorneys' fees,
employees' expenses, costs of Alterations and expenses of preparation for
reletting). Tenant hereby agrees to be and remain liable for all sums aforesaid,
and Landlord may recover such damages from Tenant and institute and maintain
successive actions or legal proceedings against Tenant for the recovery of such
damages. Nothing herein contained shall
32
<PAGE> 37
be deemed to require Landlord to wait to begin such action or other legal
proceedings until the date when the Term would have expired by limitation had
there been no such Event of Default.
(d) Before an Event of Default shall exist under Section 19 or
any other Section hereof by reason of an Event of Default under Section 19(a),
Landlord shall have given Tenant written notice of any failure by Tenant or
occurrence of any event specified in said Section 19(a)(any such failure or
occurrence being referred to in this Lease as a "Default") and Tenant shall have
failed to cure the Default within the applicable grace period stated below. If
the cure consists of payment of money or furnishing of insurance coverages
required in Section 14, the applicable grace period shall be five business days
(5) from the date on which the notice is given. If the cure consists of
something other than payment of money (except the failure to provide insurance),
the applicable grace period shall be thirty (30) days from the date on which the
notice is given, or such longer time as reasonably necessary to cure the
Default, provided that Tenant shall commence to cure the Default within said
thirty (30) day period and actively, diligently and in good faith proceed with
continued curing of the Default until it shall be fully cured.
20. Additional Rights of Landlord and Tenant.
(a) No right or remedy herein conferred upon or reserved to a
party hereof is intended to be exclusive of any other right or remedy and every
right and remedy shall be cumulative and in addition to any other right or
remedy contained in this Lease. No delay or failure by a party hereof to enforce
its rights hereunder shall be construed as a waiver, modification or
relinquishment thereof. In addition to the other remedies provided in this
Lease, each party shall be entitled, to the extent permitted by applicable Law,
to injunctive relief in case of the violation or attempted or threatened
violation of any of the provisions of this Lease, or to specific performance of
any of the provisions of this Lease.
(b) In the event of any action between the parties hereto by
reason of an alleged breach or default of this Lease, in addition to any other
rights or remedies provided by Law the prevailing party shall be entitled to
recover from the other party its costs and expenses in connection thereof,
including without limitation attorneys' fees, expenses and expert witness fees.
(c) Tenant hereby waives and surrenders for itself and all
those claiming by, through or under it, including without limitation creditors
of all kinds, (i) any right or privilege which it or any of them
33
<PAGE> 38
may have under any present or future Law to redeem the Leased Premises or to
have a continuance of this Lease for the Term hereby demised after termination
of Tenant's right of occupancy or after termination of the Term of this Lease as
herein provided, (ii) the benefits of any present or future Law which exempts
property from liability for debt or for distress for rent.
21. Notices. All notices, demands, requests, consents, approvals,
offers, statements and other instruments or communications or permitted to be
given pursuant to the provisions of this Lease shall be in writing and shall be
deemed to have been given for all purposes when deposited (i) with an overnight
courier service, (ii) with a personal messenger or (iii) in the United States
mail by registered or certified mail, return receipt requested, postage prepaid,
in any case addressed to the other party at its address stated below:
Tenant: Integrated Process Equipment Corporation
4717 East Hilton Avenue
Phoenix, Arizona 85034
Attention: John S. Hodgson
with a copy to: Quarles & Brady
One East Camelback Road, Suite 400
Phoenix, Arizona 85012-1649
Attention: Roger K. Spencer, Esq.
Landlord: Seldin Properties
c/o Seldin Development & Management
13057 West Center Road
Omaha, Nebraska 68144-3790
Attention: Millard R. Seldin & Theodore M. Seldin
with a copy to: Santin, Poli, Ball & Simms, P.L.C.
2999 North 44th Street
Phoenix, Arizona 85018
Attention: Peter G. Santin, Esq.
34
<PAGE> 39
For the purposes of this Section 21, any party may substitute its address by
giving fifteen days' written notice to the other party in the manner provided
above.
22. Estoppel Certificates. Landlord and Tenant shall, at any time and
from time to time, upon not less than fifteen (15) days' prior written request
by the other, execute, acknowledge and deliver to the other a statement in
writing, executed by a duly authorized representative of Landlord or Tenant as
the case may be certifying (a) that this Lease is unmodified and in full effect
(or, if there have been modifications, that this Lease is in full effect as
modified, setting forth such modifications), (b) the dates to which Basic Rent,
payable hereunder has been paid, (c) that to the current actual knowledge of the
signer of such certificate no Default by either Landlord or Tenant exists
hereunder or specifying each such Default of which the signer may have
knowledge; and (d) with respect to a certificate signed on behalf of Tenant,
that to the knowledge of the signer of such certificate, there are no
proceedings pending or threatened against Tenant before or by any court or
administrative agency which if adversely decided would materially and adversely
affect the financial condition and operations of Tenant or if any such
proceedings are pending or threatened to said signer's knowledge, specifying and
describing the same. It is intended that any such statements may be relied upon
by Lender, the recipient of such statements or their assignees or by any
prospective purchaser or Lender of the Leased Premises.
23. Surrender and Holding Over. Upon the expiration or earlier
termination of this Lease, Tenant shall peaceably leave and surrender the Leased
Premises (except as to any portion thereof with respect to which this Lease has
previously terminated) to Landlord in the same condition in which the Leased
Premises were originally received from Landlord at the commencement of this
Lease, except as to any repair or Alteration as permitted or required by any
provision of this Lease, and except for ordinary wear and tear. Tenant shall
remove from the Leased Premises on or prior to such expiration or earlier
termination Tenant's Trade Fixtures and other personal property which are owned
by Tenant or third parties other than Landlord, and Tenant at its expense shall,
on or prior to such expiration or earlier Termination, repair any damage caused
by such removal. Tenant's Trade Fixtures and other personal property not removed
within fifteen (15) days following the end of the Term or within thirty (30)
days after the earlier termination of the Term for any reason whatsoever shall
become the property of Landlord, and Landlord may thereafter cause such property
35
<PAGE> 40
to be removed from the Leased Premises. The cost of removing and disposing of
such property and repairing any damage to any of the Leased Premises caused by
such removal shall be borne by Tenant. Landlord shall not in any manner or to
any extent be obligated to reimburse Tenant for any property which becomes the
property of Landlord as a result of such expiration or earlier termination.
Tenant shall not commit waste of the Leased Premises.
Any holding over by Tenant of the Leased Premises following
the expiration or earlier termination of the Term of this Lease or any
extensions thereof, with the consent of Landlord, shall operate and be construed
as tenancy from month to month only, at one hundred and fifty percent (150.0%)
of the Basic Rent reserved herein and otherwise upon the same terms and
conditions as contained in this Lease. Notwithstanding the foregoing, any
holding over shall entitle Landlord, in addition to collecting such increased
Basic Rent, to all rights and remedies provided by Law or in equity, including
the remedies of Section 19(b).
24. Risk of Loss. The risk of loss or enjoyment and beneficial use of
any of the Leased Premises in consequence of the damage or destruction thereof
by fire, the elements, casualties, thefts, riots, wars or otherwise, or in
consequence of foreclosure, attachments, levies or executions (other than by
Landlord and those claiming from, through or under Landlord) is assumed by
Tenant, and Landlord shall in no event be answerable or accountable therefor.
Except as otherwise specifically provided in Section 13 of this Lease, none of
the events mentioned in this Section 24 shall entitle Tenant to any abatement of
Basic Rent or Additional Rent or otherwise affect any of the obligations of
Tenant hereunder.
25. No Merger of Title. There shall be no merger of this Lease nor of
the leasehold estate created by this Lease with the fee estate in or ownership
of any of the Leased Premises by reason of the fact that the same person,
corporation, firm or other entity may acquire or hold or own, directly or
indirectly, (a) this Lease or the leasehold estate created by this Lease or any
interest in this Lease or in such leasehold estate and (b) the fee estate or
ownership of any of the Leased Premises or any interest in such fee ownership.
No such merger shall occur unless and until all persons, corporations, firms and
other entities having any interest in (a) this Lease or the leasehold estate
created by this Lease and (b) the fee estate in or ownership of the Leased
Premises or any part thereof sought to be merged shall join in a written
instrument effecting such merger and shall duly record the same.
36
<PAGE> 41
26. Landlord's Liability. Anything contained herein to the contrary
notwithstanding, any claim based on or in respect of any liability of Landlord
under this Lease shall be enforced only against the Leased Premises and not
against any other assets, properties or funds of Landlord or any director,
officer, general partner, limited partner, employee or agent of Landlord or any
legal representative, heir, estate, successor or assign of any thereof.
The term "Landlord" as used in this Lease so far as covenants
or obligations on the part of Landlord are concerned, shall be limited to mean
and include only the owner or owners of the Leased Premises or holder of the
Mortgage in possession at the time in question of the Leased Premises and in the
event of any transfer or transfers of the title of the Leased Premises, Landlord
herein named (and in case of any subsequent transfers or conveyances, the then
grantor) shall be automatically freed and relieved from and after the date of
such transfer and conveyance of all personal liability as resets the performance
of any covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed.
27. Hazardous Substances. Tenant represents and warrants that it will
not on or about the Leased Premises, make, treat, generate, store or dispose of
any Hazardous Substances except in strict compliance with all Environmental
Laws, and Tenant represents and warrants that it will at all times strictly
comply with all Environmental Laws. To the extent required by applicable
Environmental Laws, at the termination of its tenancy hereunder Tenant shall
remove any Hazardous Substances whether now or hereafter existing on the Leased
Premises and whether or not arising out of or in any manner connected with
Tenant's occupancy of the Leased Premises during the initial Term or any
additional Term hereof. Tenant shall and hereby does agree to defend, indemnify
and hold Landlord, its officers, directors, shareholders and employees harmless
for, from and against any and all loss, damage, expenses, fees, claims, costs,
and liabilities, including, but not limited to, attorneys' fees and costs of
litigation, arising out of or in any manner connected with the "release" or
"threatened release" of or failure to remove, as required by this Section 27,
Hazardous Substances from the Leased Premises or any portion or portions
thereof, now or hereafter existing and whether or not arising out of or in any
manner connected with Tenant's occupancy of the Leased Premises during the
initial Term or any additional Term, except as such Hazardous Substances were
introduced by or caused to be introduced by
37
<PAGE> 42
Landlord, Lender or their respective officers, directors, employees or others in
privity of contract in connection with the Leased Premises or this Lease.
At the end of the Term, Tenant shall furnish to Landlord an
environmental report from an environmental consultant acceptable to Landlord in
its reasonable discretion evidencing that the Leased Premises are not in
violation of Environmental Laws. Such report shall be at Landlord's expense,
unless Tenant shall have previously violated Environmental Laws or such report
discloses a violation thereof. In addition, from time to time during the Term
Landlord may conduct such investigations or studies with respect to the Leased
Premises and Environmental Laws as it may reasonably desire to ascertain
compliance with Environmental Laws; the cost of any such report shall be at
Landlord's expense unless such report discloses a violation of Environmental
Laws.
Tenant shall notify Landlord and Lender in writing of any Hazardous
Substance that exists on or is discharged from or onto the Leased Premises
(whether originating thereon or migrating to the Leased Premises from other
property) in violation of any Environmental Law within ten (10) days after
Tenant first has knowledge of such violation. In addition, on the Commencement
Date, and annually thereafter, Tenant shall provide a written list of any
Hazardous Substance that exists on or is discharged from or onto the Leased
Premises together with relevant Material Data Safety Sheets to the extent in
Tenant's possession.
Tenant's obligations and liabilities under this Section shall survive
the expiration of this Lease.
28. Entry by Landlord. Landlord and its authorized representatives
shall have the right to enter the Leased Premises at all reasonable times (a)
for the purpose of inspecting the same or for the purpose of doing any work
under Section 32, and may take all such action thereon as may be necessary or
appropriate for any such purpose (but nothing contained in this Lease or
otherwise shall create or imply any duty upon the part of Landlord to make any
such inspection or do any such work), and (b) for the purpose of showing the
Leased Premises to prospective purchasers and mortgagees and, at any time within
12 months prior to the expiration of the term of this Lease for the purpose of
showing the same to prospective tenants. No such entry shall constitute an
eviction of Tenant.
38
<PAGE> 43
29. Financial Statements. Tenant shall furnish to Landlord Tenant's
most recent publicly filed annual and quarterly reports within twenty (20) days
of filing thereof with the United States Securities and Exchange Commission.
30. Broker. Landlord and Tenant represent and warrant to each other
that neither party negotiated with any broker in connection with this Lease and
that this Lease was negotiated directly by Landlord and Tenant. Each party
covenants to indemnify and hold harmless the other party for any loss caused by
the breach of the foregoing representation and warranty.
31. Additional Provisions Regarding Use.
(a) Tenant shall continuously use and occupy the Leased
Premises during the first five (5) years of the Term.
(b) Tenant shall be solely responsible for security at, in and
on the Leased Premises and Landlord shall have no responsibility or liability
for any loss or damage therefor unless the same is caused by the gross
negligence or wilful misconduct of Landlord or its officers, directors,
employees or others in privity of contract in connection with the Leased
Premises or this Lease.
(c) Landlord shall not be liable to Tenant by reason of any
interruption of utilities or other services provided to the Leased Premises
unless such interruption is caused by the gross negligence or wilful misconduct
of Landlord or its officers, directors, employees or others in privity of
contract in connection with the Leased Premises or this Lease.
32. Landlord's Right to Take Action. Subject to Tenant's right to
receive notice of such violation or default and opportunity to cure as expressly
provided in this Lease, if Tenant shall have violated or be in default under any
provision of this Lease, Landlord may do whatever is necessary to cure such
violation or default for the account of and/or in the name of, and at the
expense of, Tenant. All sums so paid by Landlord and all costs and expenses
(including, without limitation, reasonable attorneys' fees and expenses) so
incurred, together with interest thereon at the Default Rate from the date of
payment or incurring the expense, shall constitute Additional Rent payable by
Tenant under this Lease and shall be paid by Tenant to Landlord on demand.
39
<PAGE> 44
33. Miscellaneous.
(a) The Section headings in this Lease are used only for
convenience in finding the subject matters and are not part of this Lease or to
be used in determining the intent of the parties or otherwise interpreting this
Lease.
(b) References to a "Section" or "section" when used without
further attribution refer to the particular section of this Lease.
(c) For the purpose of any Law that construes the
interpretation of this Lease against the drafter thereof, neither party hereto
shall be deemed to be the "drafter" of this Lease. In addition, the following
words and phrases shall have the following meanings: (i) "including" shall mean
"including but not limited to"; (ii) "provisions" shall mean "provisions, terms,
agreements, covenants and/or conditions"; (iii) "lien" shall mean "lien, charge,
encumbrance, title retention agreement, pledge, security interest, mortgage
and/or deed of trust"; (iv) "obligation" shall mean "obligation, duty,
agreement, liability, covenant or condition"; (v) "any of the Leased Premises"
shall mean "the Leased Premises or any part thereof or interest therein"; and
(6) "any of the Improvements" shall mean "the Improvements or any part thereof
or interest therein".
(d) Except as otherwise expressly set forth in this Lease,
this Lease is solely for the benefit of Landlord and Tenant; there are no other
intended third party beneficiaries hereof.
(e) This Lease may be modified, amended, discharged or waived
only by an agreement in writing specifically referring to this Lease and signed
by the party against whom enforcement of any such modification, amendment,
discharge or waiver is sought.
(f) The covenants of this Lease shall run with the Land and
bind Tenant and Landlord as applicable and their respective successors and
assigns and all present and subsequent encumbrances and subtenants of any of the
Leased Premises, and shall inure to the benefit of and bind Landlord and Tenant
as applicable and their respective successors and assigns.
(g) In the event any one or more of the provisions contained
in this Lease shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Lease but this Lease shall be
construed as if such invalid, illegal or unenforceable provision had never been
contained herein.
40
<PAGE> 45
(h) This Lease will be simultaneously executed in
counterparts, each of which when so executed and delivered shall constitute an
original, fully enforceable counterpart for all purposes.
(i) This Lease shall be governed by and construed according to
the Laws of the State of Arizona.
(j) Time shall be of the essence of this Agreement and each
and every term and condition hereof.
(k) The exhibits and schedules attached to this Agreement
and/or described in this Lease are incorporated herein and shall be considered a
part of this Lease for the purposes stated herein.
(l) A memorandum of this Lease, in form and content
substantially similar to Exhibit "D", shall be recorded in the office of the
Maricopa County, Arizona Recorder's Office immediately upon the execution and
delivery of this Lease.
(m) Tenant shall diligently pursue and obtain an Aquifer
Protection Permit ("APP") from the Arizona Department of Environmental Quality
("ADEQ") with regard to the use of the below grade, concrete solids separator
(the "Separator") located on the Land, or obtain a determination from ADEQ that
an APP is not necessary. Alternatively, Tenant may, but without the obligation
to do so, supply Landlord with a letter from Tenant's legal counsel stating
among other matters that, in such counsel's opinion, Tenant's operation and use
of the Separator does not require an APP and acknowledging Landlord's reliance
on such letter.
[SIGNATURE PAGE FOLLOWS]
41
<PAGE> 46
IN WITNESS WHEREOF, Landlord and Tenant have caused this instrument to
be executed as of the day and year first above written.
LANDLORD: TENANT:
SELDIN PROPERTIES INTEGRATED PROCESS EQUIPMENT
CORPORATION
By: /s/ Millard R. Seldin By: /s/ John S. Hodgson
---------------------- ------------------------
Name: Millard R. Seldin Name: John S. Hodgson
Title: General Partner Title: Vice President and
Chief Financial Officer
42
<PAGE> 47
EXHIBIT "A" TO LEASE
Legal Description of Leased Premises
The Leased Premises are located in Maricopa County, Arizona, and is
legally described as follows:
Parcel No. 1:
Lots 6, 7 and 8, RIO SALADO GATEWAY CENTER, according to Book 267 of
Maps, page 34, records of Maricopa County, Arizona.
Parcel No. 2:
That portion of Lot 9, RIO SALADO GATEWAY CENTER, according to Book 267
of Maps, page 34, records of Maricopa County, Arizona, described as
follows:
BEGINNING at the Northeast corner of said Lot 9;
thence South 00(degree) 14' 14" West along the East line of
said Lot 9 a distance of 447.45 feet to the South line of said
RIO SALADO GATEWAY CENTER;
thence North 89(degree) 45' 46" West (basis of bearings) along
said South line 55.66 feet to the East right-of-way line of
the proposed 47th Street roadway;
thence North 00(degree) 14' 19" East along the said East
right-of-way line 427.44 feet;
thence North 45(degree) 14' 16" East 28.28 feet to the South
right-of-way line of Hilton Avenue as depicted on said RIO
SALADO GATEWAY CENTER;
thence South 89(degree) 45' 46" East along said South
right-of-way line 35.65 feet to the Northeast corner of said
Lot 9 and the POINT OF BEGINNING.
<PAGE> 48
EXHIBIT "B" TO LEASE
Permitted Encumbrances
1. Reservations contained in the patent from the United States of
America, reading as follows:
SUBJECT to any vested and accrued water rights for
mining, agricultural, manufacturing, or other purposes, and
rights to ditches and reservoirs used in connection with such
water rights as may be recognized and acknowledged by the
local customs, laws and decisions of courts, and also subject
to the right of the proprietor of a vein or lode to extract
and remove his ore therefrom, should the same be found to
penetrated or intersect the premises hereby granted, as
provided by law; and any other reservation as set forth in the
statutes under which said patent was issued.
2. The rights of the United States of America, the State of Arizona
and/or the public to any portion of the Land lying within the bed, or former
bed, of any water course, as that term is defined under the Law of the State of
Arizona.
3. Restrictions, conditions and regulations governing use of
groundwater by reason of the inclusion of said land within Phoenix Active
Management Area, pursuant to Arizona Revised Statutes Section 45-101 et seq.
4. Water rights, claims or title to water, and agreements, covenants,
conditions or rights incident thereto, whether or not shown by the public
records.
5. Taxes and assessments collectible by the Maricopa County Treasurer
constituting a lien payable but not yet due.
6. Easement and rights incident thereto, as set forth in those certain
Right of Way Easements each dated December 21, 1962, recorded with the Maricopa
County Recorder in Docket 4432, Page 454 and Docket 4437, Page 427,
respectively.
7. Easements, restrictions, reservations and conditions as shown on the
plat recorded in Book 267 of Maps, Page 34.
8. Restrictions, conditions, covenants, reservations, including but not
limited to any recitals creating easements, liabilities, obligations or party
walls, omitting, if any, from the above, any restrictions based on race, color,
religion or national origin contained in that certain Declaration of
Restrictions for Rio Salado Gateway Center dated May 16, 1984, recorded with the
Maricopa County Recorder as Document Number 84-217129, and that certain First
Amendment to Declaration of Restrictions for Rio Salado Gateway Center dated May
16, 1984, recorded with the Maricopa County Recorder as Document Number
84-311463.
9. Easements as shown on the plat recorded in Book 305 of Maps, Page
28.
10. Easement and rights incident thereto, as set forth in that certain
Underground Power Easement dated June 9, 1995, recorded with the Maricopa County
Recorder as Document Number 95-0352382.
11. This Lease.
<PAGE> 49
EXHIBIT "C" TO LEASE
Rent Schedule
The Basic Rent for the first Lease year, being the period of December
26, 1996 through December 31, 1997, shall be in the annual amount of $2,057,000,
payable in monthly installments each in the amount of $171,416.67. The Basic
Rent for each subsequent period of January 1 through December 31 shall be in an
annual amount increasing by (a) the amount of $51,425.00 plus any make-up
adjustment as set forth below, or (b) in the event that the percentage increase
in the CPI for the preceding Lease year is less than one percent (1.0%), the
amount of $20,570.00 (1.0%).
The make-up adjustment for any given year shall be averaged on a
sum-of-the-years basis throughout the term of this Lease, but shall not exceed a
cumulative average increase of $51,425. For example, assuming the following CPI
increases:
End of first Lease year, 0.50%;
End of second Lease year, 4.0%; and
End of third Lease year, 4.0%;
then the increase for each Lease year would be as follows:
Basic Rent for the second Lease year would increase by 1.0%;
Basic Rent for the third Lease year would increase by 4.0%; and
Basic Rent for the fourth Lease year would increase by 2.50%.
Notwithstanding anything to the foregoing, all increases shall be based
upon the Basic Rent for the first Lease year; accordingly, increases in the
Basic Rent shall not be compounded.
Basic Rent for the first year of any period of extension or renewal of
the Term shall be the market rate of rent at the time of each respective renewal
or extension; provided, however, that such Basic Rent shall in no event be any
less than the Basic Rent in effect for the Lease year immediately preceding such
extension or renewal period. Basic Rent for each subsequent year of any period
of extension or renewal shall increase pursuant to the formula set forth above
and otherwise applicable during the initial Term hereof.
<PAGE> 50
The schedule of Basic Rent, on an annual basis, assuming the maximum
increase each year and no extension or renewal of the initial Term, is as
follows:
<TABLE>
<CAPTION>
Lease Year Annual Basic Rent
---------- -----------------
<S> <C>
1 $2,057,000
2 $2,108,425
3 $2,159,850
4 $2,211,275
5 $2,262,700
6 $2,314,125
7 $2,365,550
8 $2,416,975
9 $2,468,400
10 $2,519,825
11 $2,571,250
12 $2,622,675
13 $2,674,100
14 $2,725,525
15 $2,776,950
</TABLE>
C-2
<PAGE> 51
EXHIBIT "D" TO LEASE
Form of Memorandum of Lease
After recording, return to:
Peter G. Santin, Esq.
Santin, Poli, Ball & Simms, P.L.C.
2999 North 44th Street
Phoenix, Arizona 85018
MEMORANDUM OF LEASE AGREEMENT
STATE OF ARIZONA Section
Section
COUNTY OF MARICOPA Section
THIS MEMORANDUM OF LEASE is made as of December 26, 1996, between
SELDIN PROPERTIES, a Nebraska partnership ("Landlord"), whose address is 13057
West Center Road, Omaha, Nebraska 68144-3790, Attn: Millard R. Seldin, and
INTEGRATED PROCESS EQUIPMENT CORPORATION ("Tenant"), having an address of 4717
East Hilton Avenue, Phoenix, Arizona 85034, Attn: John S. Hodgson.
W I T N E S S E T H:
(1) Landlord as of this day hereby leases unto Tenant the land and
improvements situated on that certain tract of land legally described on Exhibit
"A" attached hereto (the "Premises") pursuant to the terms of that certain Lease
of even date hereto (the "Lease"). The terms and conditions of the Lease are
incorporated herein by reference.
(2) The Lease sets forth the above names and addresses of the parties
thereto.
(3) The term of the Lease commences on the date hereof and expires at
midnight on December 31, 2011.
(4) Tenant has a right to extend the term of the Lease for two (2)
successive periods of five (5) years each. The maximum date to which the Lease
may be extended is December 31, 2021. Tenant's rights of extension are
exercisable as set forth in the Lease. Failure to exercise any of the foregoing
rights to extend the term of the Lease shall render null and void the subsequent
right or rights to extend the term.
(5) Notice is hereby given that Landlord shall not be liable for any
labor, services or materials furnished or to be furnished to Tenant, or to
anyone holding any of the Premises through or under Tenant, and that no
mechanic's liens for such labor, services or materials shall attach to or affect
the interest of Landlord in and to any of the Premises.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 52
IN WITNESS WHEREOF, the parties have caused this Memorandum of Lease to be
executed by their duly authorized representatives the day and year first above
written.
INTEGRATED PROCESS EQUIPMENT
CORPORATION
By:
----------------------------------
Name: John S. Hodgson
Title: Vice President and Chief Financial Officer
SELDIN PROPERTIES
By:
----------------------------------
Name: Millard R. Seldin
Title: General Partner
STATE OF ARIZONA Section
Section
COUNTY OF Maricopa Section
The foregoing instrument was acknowledged before me this _____ day of
December, 1996, by John S. Hodgson, Vice President and Chief Financial Officer
of INTEGRATED PROCESS EQUIPMENT CORPORATION, a Delaware corporation, on behalf
of said corporation.
------------------------
Notary Public in and for
The State of Arizona
STATE OF ______________ Section
Section
COUNTY OF ______________ Section
The foregoing instrument was acknowledged before me this day of
December, 1996, by Millard R. Seldin, general partner of SELDIN PROPERTIES, a
Nebraska partnership, on behalf of said general partnership.
---------------------------
Notary Public in and for
The State of ___________
D-2
<PAGE> 53
EXHIBIT "E" TO LEASE
Purchase Offer Computation
The "Purchase Price" means the fair market value of the Leased
Premises (excluding Trade Fixtures) as of the date of receipt of notice
of the Taking, as established by an independent appraisal prepared by
an MAI-certified commercial appraiser agreed upon by Landlord and
Tenant. If no such agreement can be made, each party shall select an
MAI-certified commercial appraiser, and such appraisers shall select a
third MAI-certified commercial appraiser who shall conduct such
independent appraisal. In any event, Landlord and Tenant shall each pay
one-half of the cost of such appraisal.
<PAGE> 54
SCHEDULE "I"
Schedule of Air Compressors
1. 75 h.p. Sollaire Serial Number 003-74391
2. I.R. Air Dryer Serial Number 72P5766
3. 100 h.p. Sollaire Serial Number ___________
4. Sollaire Air Dryer Serial Number 003-01105
5. Kaeser-SK19 Air Compressor and Dryer Serial Number 3333-1-9105-27K
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 36,953
<SECURITIES> 0
<RECEIVABLES> 35,258
<ALLOWANCES> 0
<INVENTORY> 29,540
<CURRENT-ASSETS> 120,536
<PP&E> 31,958
<DEPRECIATION> 8,657
<TOTAL-ASSETS> 176,474
<CURRENT-LIABILITIES> 44,505
<BONDS> 20,300
0
1
<COMMON> 149
<OTHER-SE> 113,959
<TOTAL-LIABILITY-AND-EQUITY> 176,474
<SALES> 35,662
<TOTAL-REVENUES> 35,662
<CGS> 20,480
<TOTAL-COSTS> 12,255
<OTHER-EXPENSES> 17,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 601
<INCOME-PRETAX> (14,989)
<INCOME-TAX> (4,964)
<INCOME-CONTINUING> (10,025)
<DISCONTINUED> (26,846)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (36,871)
<EPS-PRIMARY> (2.48)
<EPS-DILUTED> (2.48)
</TABLE>
