<PAGE>
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 January 31, 1998
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 0-22366
CREDENCE SYSTEMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-2878499
(State or other jurisdiction) (IRS Employer
of incorporation or organization) Identification No.)
215 FOURIER AVE., FREMONT, CALIFORNIA 94539
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (510) 657-7400
________________________________________________________________________________
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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 [_]
APPLICABLE ONLY TO CORPORATE ISSUERS:
At February 2, 1998, there were 21,614,279 shares of the Registrant's
common stock, $0.001 par value per share outstanding.
________________________________________________________________________________
<PAGE>
CREDENCE SYSTEMS CORPORATION
<TABLE>
<CAPTION>
INDEX PAGE NO.
----- --------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements...................................................... 3
Condensed Consolidated Balance Sheets..................................... 3
Condensed Consolidated Income Statements.................................. 4
Condensed Consolidated Statements of Cash Flows........................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 7
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................... 20
Item 2. Changes in Securities..................................................... 20
Item 3. Defaults Upon Senior Securities........................................... 20
Item 4. Submission of Matters to a Vote of Securityholders........................ 20
Item 5. Other Information......................................................... 20
Item 6. Exhibits and Reports on Form 8-K.......................................... 20
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997/A/
--------------- ---------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 88,667 $132,761
Restricted cash................................... 7,206 10,002
Short-term investments............................ 62,608 35,013
Accounts receivable, net.......................... 62,103 55,246
Inventories....................................... 48,761 42,125
Other current assets.............................. 14,552 13,001
----------- ----------
Total current assets............................ 283,897 288,148
Long-term investments............................... 17,396 8,561
Property and equipment, net......................... 44,497 43,050
Other assets........................................ 17,442 18,382
----------- ----------
Total assets.................................... $363,232 $358,141
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 14,386 $ 13,182
Accrued liabilities............................... 23,454 20,346
Income taxes payable.............................. 6,476 4,284
----------- ----------
Total current liabilities....................... 44,316 37,812
Convertible subordinated notes...................... 115,000 115,000
Minority interest................................... 366 418
Stockholders' equity................................ 203,550 204,911
----------- ----------
Total liabilities and stockholders' equity...... $363,232 $358,141
=========== ==========
</TABLE>
See accompanying notes.
a) Derived from the audited consolidated balance sheet included in the
Company's Form 10-K for the year ended October 31, 1997.
3
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
-----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net sales............................................ $82,375 $40,261
Cost of goods sold................................... 35,438 19,439
-------------- --------------
Gross margin......................................... 46,937 20,822
Operating expenses:
Research and development.......................... 13,491 8,806
Selling, general and administrative............... 20,308 11,431
-------------- --------------
Total operating expenses...................... 33,799 20,237
-------------- --------------
Operating income..................................... 13,138 585
Interest income and other expenses, net.............. 958 1,027
-------------- --------------
Income before income taxes........................... 14,096 1,612
Income taxes......................................... 4,934 558
Minority interest.................................... (29) -
-------------- --------------
Net income........................................... $ 9,191 $ 1,054
============== ==============
Net income per share
Basic............................................ $0.42 $0.05
============== ==============
Diluted.......................................... $0.41 $0.05
============== ==============
Number of shares used in computing per share amount
Basic............................................ 21,864 21,733
============== ==============
Diluted.......................................... 22,415 22,215
============== ==============
</TABLE>
See accompanying notes.
4
<PAGE>
CREDENCE SYSTEMS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................................................... $ 9,191 $ 1,054
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................ 4,326 2,821
(Gain) loss on disposal of property and equipment............................ - (26)
Minority interest 29 -
Changes in operating assets and liabilities:
Restricted cash, accounts receivable, inventories and other current assets. (13,581) (5,196)
Accounts payable, accrued liabilities and income taxes payable............. 7,072 (6,768)
-------------- ---------------
Net cash provided (used) by operating activities......................... 7,037 (8,115)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities...................................... (58,420) (13,360)
Maturities of available-for-sale short-term investments......................... 20,990 19,135
Sales of available-for-sale securities.......................................... 1,000 7,397
Acquisition of property and equipment........................................... (3,431) (3,355)
Other assets.................................................................... (69) (1,738)
Proceeds from sale of property and equipment.................................... - 243
-------------- ---------------
Net cash (used) provided in investing activities......................... (39,930) 8,322
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock........................................................ 1,594 816
Repurchase of common stock...................................................... (12,795) -
-------------- ---------------
Net cash (used for) provided by financing activities..................... (11,201) 816
-------------- ---------------
Net increase (decrease) in cash and cash equivalents............................... (44,094) 1,023
Cash and cash equivalents at beginning of period................................... 132,761 48,649
--------------- ---------------
Cash and cash equivalents at end of period......................................... $ 88,667 $ 49,672
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid................................................................... $ -- $ --
Income taxes paid............................................................... $ 2,063 $ 648
NONCASH INVESTING ACTIVITIES:
Net transfers of inventory to property and equipment............................ $ 1,333 $ 4,198
NONCASH FINANCING ACTIVITIES:
Income tax benefit from stock option exercises.................................. $ 649 $ 149
</TABLE>
See accompanying notes.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. QUARTERLY FINANCIAL STATEMENTS
The condensed consolidated financial statements and related notes for the
three months ended January 31, 1998 and 1997 are unaudited but include all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the financial
position and results of operations of the Company for the interim periods. The
results of operations for the three months ended January 31, 1998 and 1997 were
not necessarily indicative of the operating results to be expected for the full
fiscal year. The information included in this report should be read in
conjunction with the Company's audited consolidated financial statements and
notes thereto for the fiscal year ended October 31, 1997 included in the Annual
Report on Form 10-K and the additional risk factors, including, without
limitation, risks relating to fluctuations in operating results, rapid
technological change, importance of timely product introduction, risks of
delays, limited system sales, backlog, cyclicality of semiconductor industry,
expansion of operations, management of growth, sole or limited sources of
supply, reliance on subcontractors, highly competitive industry, dependence on
key customers, lengthy sales cycle, dependence on key personnel, management
changes, international sales, proprietary rights, acquisitions, future capital
needs and volatility of stock price, as set forth in this Report. Any party
interested in reviewing these publicly available documents should write to the
Chief Financial Officer of the Company.
USE OF ESTIMATES - The preparation of the accompanying unaudited
consolidated condensed financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.
2. INVENTORIES
Inventories are stated at the lower of standard cost (which approximates
first-in, first-out cost) or market. Inventories consist of the following (in
thousands):
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Raw materials................................................. $26,269 $24,862
Work-in-process............................................... 17,407 14,173
Finished goods................................................ 5,085 3,090
-------------- --------------
$48,761 $42,125
============== ==============
</TABLE>
3. NET INCOME PER SHARE
The Company has adopted Statement of Financial Accounting Standards No.128
"Earnings Per Share" (SFAS 128) beginning in the first quarter of fiscal 1998.
Accordingly, net income per share (basic) is based upon the weighted average
number of common shares outstanding during the period. Net income per share
(diluted) is based upon the weighted average number of common and dilutive
potential common shares outstanding during the period. The Company's
convertible subordinated notes are not dilutive potential common shares and,
accordingly, were excluded from the calculation of net income per share
(diluted). Options to purchase 926,127 shares at an average price of $29.84 per
share were outstanding at January 31, 1998 but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares and, therefore,
the effect would be antidilutive. All earnings per share amounts for all periods
have been presented and where necessary, restated to conform to SFAS 128
requirements. The following table sets forth the computation of basic and
dilutive earnings per share (in thousands):
6
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
----------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share-
net income $ 9,191 $ 1,054
-------------- --------------
Denominator:
Denominator for basic earnings per share-
weighted-average shares 21,864 21,733
Effect of dilutive securities-employee stock options 551 482
-------------- --------------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions 22,415 22,215
-------------- --------------
Basic earnings per share $ 0.42 $ 0.05
============== ==============
Diluted earnings per share $ 0.41 $ 0.05
============== ==============
</TABLE>
4. CONTINGENCIES
The Company is involved in various claims arising in the ordinary course of
business, none of which, in the opinion of management, if determined adversely
against the Company, will have a material adverse effect on the Company's
business, financial condition or results of operations.
5. COMMITMENTS
The Company currently has an agreement with Summit Design, Inc. to purchase
product licenses through 1999. The remaining commitment under this agreement as
of January 31, 1998 is approximately $7 million. Restricted cash represents cash
in escrow related to the remaining purchase commitments under this agreement.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion may contain predictions, estimates and other
forward-looking statements that involve a number of risks and uncertainties.
While this discussion represents the Company's current judgment on the future
direction of the business, such risks and uncertainties could cause actual
results to differ materially from any future performance suggested herein.
Factors that could cause actual results to differ are identified throughout the
discussion below, as well as the section entitled "Risk Factors" below, and
elsewhere in this report. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements which
may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.
The following table sets forth items from the Condensed Consolidated Income
Statements as a percentage of net sales for the periods indicated:
7
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net sales................................................. 100.0% 100.0%
Cost of goods sold........................................ 43.0 48.3
----- -----
Gross margin.............................................. 57.0 51.7
Operating expenses
Research and development................................ 16.4 21.9
Selling, general, and administrative.................... 24.7 28.4
----- -----
Operating expenses........................................ 41.1 50.3
----- -----
Operating income.......................................... 15.9 1.4
Interest income and other expenses, net................... 1.2 2.6
----- -----
Income before income taxes................................ 17.1 4.0
Income taxes.............................................. 5.9 1.4
----- -----
Net income................................................ 11.2% 2.6%
===== =====
</TABLE>
RESULTS OF OPERATIONS
NET SALES
Net sales consist of revenues from systems sales, spare parts sales,
maintenance contracts and software sales. Net sales were $82.4 million for the
first quarter of fiscal 1998, representing an increase of 104.6% over the
comparable period of fiscal 1997. This increase was due primarily to increased
worldwide demand for semiconductor automatic test equipment, particularly in the
Asia Pacific region. International net sales accounted for approximately 67.1%
of the total net sales for the first quarter of fiscal 1998, compared to
approximately 75.3% for the comparable period a year ago. The decrease in
international sales as a percentage of sales resulted primarily from decreased
demand in Europe, partially offset by increases in the Asia Pacific region. The
Company's international sales of its products and spare parts and its service
revenues are denominated primarily in United States dollars.
GROSS MARGIN
The Company's gross margin has been and will continue to be affected by a
variety of factors, including manufacturing efficiencies, pricing by competitors
or suppliers, new product introductions, product sales mix, production volume,
customization and reconfiguration of systems, international and domestic sales
mix and field service margins. Gross margin was 57.0% for the first quarter of
fiscal 1998, compared with 51.7% for the first quarter of fiscal 1997. The
increase in gross margin as a percent of sales was due to increases in the
efficiency of the production process, as well as higher manufacturing and
shipping volumes which spread fixed production costs over a greater number of
systems. Gross margin in the first quarter of fiscal 1997 was negatively
impacted by reserves taken for slow moving inventory resulting from accelerated
new product introductions.
RESEARCH AND DEVELOPMENT
Research and development expenses were $13.5 million in the first quarter
of fiscal 1998, an increase of $4.7 million or 53.2% over the same period of
fiscal 1997. This increase, in absolute dollars, reflected the Company's
continued development work on new products and product enhancements. As a
percentage of net sales, research and development expenses were 16.4% for the
first quarter of fiscal 1998, down from 21.9% in the first quarter of fiscal
1997. The decrease in these expenses as a percentage of net sales is
attributable primarily to the significant increase in net sales in the first
quarter of fiscal 1998 as compared with the comparable period of fiscal 1997.
The Company currently intends to continue to invest significant resources in the
development of new products and enhancements for the foreseeable future.
Accordingly, the Company expects these expenses to remain relatively flat in
absolute dollars for the remainder of fiscal 1998.
8
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $20.3 million in the
first quarter of fiscal 1998, representing an $8.9 million or 77.7% increase
from the comparable period of fiscal 1997. The increase from the prior period is
primarily due to increased commissions payable on higher sales and higher
marketing, sales, and administrative overhead expenses to support the Company's
increased business levels. As a percentage of net sales, selling, general and
administrative expenses were 24.7% for the first quarter of fiscal 1998,
compared with 28.4% for the corresponding period in fiscal 1997. This decrease
as a percentage of net sales is attributable primarily to the significant
increase in net sales in the first quarter of fiscal 1998 as compared with the
comparable period of fiscal 1997. The Company expects selling, general and
administrative expenses for the remainder of fiscal 1998 to remain flat in
absolute dollars.
INTEREST INCOME AND OTHER EXPENSES, NET
The Company generated net interest income and other expenses of $1.0
million for the first quarter of fiscal 1998, as compared to $1.0 million for
the first quarter of fiscal 1997.
INCOME TAXES
The Company's provision for income taxes for the first quarter of fiscal
1998 and fiscal 1997 is computed based on the projected annualized effective tax
rate of 35.0% and 34.5% respectfully, applied to fiscal year-to-date book
income. The projected effective tax rate for both fiscal 1998 and fiscal 1997 is
expected to be less than the combined federal and state statutory rate due
primarily to the projected benefit of the Company's foreign sales corporation.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided (used) by operating activities was $7.0 million and
($8.1) million for the three months ended January 31, 1998 and 1997,
respectively. Net cash flows provided by operating activities for the first
quarter of 1998 resulted primarily from net income of $9.2 million,
depreciation and amortization of $4.3 million and increases in accounts payable,
accrued liabilities and income taxes payable of $7.1 million, partially offset
by increases in restricted cash, accounts receivable, inventories and other
current liabilities of $13.6 million. Net cash flows used by operating
activities in the first quarter of 1997 were primarily attributable to an
increase in inventory, some of which was transferred to property and equipment
($4.2 million), and reductions in accounts payable, accrued liabilities and
income taxes payable. Investing activities (used) provided net cash of ($39.9
million) and $8.3 million for the three months ended January 31, 1998 and 1997,
respectively. In the first three months of fiscal 1998, the Company used cash to
purchase a net increase of $27.6 million in short-term investments and $8.8
million in long-term investments while also purchasing $3.4 million of property
and equipment. Net cash (used for) provided by financing activities was ($11.2
million) and $0.8 million for the three months ended January 31, 1998 and 1997,
respectively. The use of cash in the first quarter of fiscal 1998 was primarily
due to the Company repurchasing 500,000 of its shares of common stock at a cost
of approximately $12.8 million. The purpose of the repurchase was to offset
potential future dilution resulting from increases in the Company's stock option
plan and employee stock purchase plan.
As of January 31, 1998, the Company had working capital of approximately
$239.6 million, including cash and short-term investments of $151.3 million,
$62.1 million of accounts receivable and $48.8 million of inventories. The
Company expects accounts receivable to continue to represent a significant
portion of working capital. The Company believes that because of the relatively
long manufacturing cycles of many of its testers and the new products it has and
plans to continue to introduce, investments in inventories will also continue to
represent a significant portion of working capital. Significant investments in
accounts receivable and inventories may subject the Company to increased risks
which could materially adversely affect the Company's business, financial
condition and results of operations. Total current liabilities of $37.8 million
as of October 31, 1997 increased to $44.3 million as of January 31, 1998. The
$6.5 million increase was due primarily to increases in accounts payable by $1.2
million, accrued liabilities by $3.1 million, and income taxes payable by $2.2
million.
9
<PAGE>
The Company's principal sources of liquidity as of January 31, 1998
consisted of approximately $88.7 million of cash and cash equivalents, short-
term investments of $62.6 million and $20.0 million available under the
Company's unsecured working capital line of credit expiring on July 24, 1998. In
addition, the Company has $17.4 million of long-term investments. As of January
31, 1998, no amounts were outstanding under the unsecured line of credit.
Additionally, as of January 31, 1998, the Company has operating leases for
facilities and test and other equipment totaling approximately $19.2 million
through 2006.
The Company is currently in the process of assessing and testing the
software components of its products for year 2000 compliance. The Company does
not believe that its products contain undetected errors or defects associated
with year 2000 date functions that may result in material costs to the Company,
including repair costs and costs incurred in litigation due to any such defects,
however there can be no assurance that such errors or defects do not exist. Many
commentators have stated that a significant amount of litigation will arise out
of year 2000 compliance issues. Because of the unprecedented nature of such
litigation, there can be no assurance that the Company will not be materially
adversely affected by claims related to year 2000 compliance.
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal operating systems, which are
composed predominately of third party software and hardware technology.
RISK FACTORS
The Company's results of operations are affected by a variety of factors,
including the following:
FLUCTUATIONS IN OPERATING RESULTS
The Company's operating results have in the past fluctuated significantly
and will in the future fluctuate significantly, due to a variety of factors. The
Company's operating performance from the first quarter of fiscal 1993 through
the third quarter of fiscal 1996 produced sequential quarter-to-quarter growth
in both net sales and net income. In the fourth quarter of fiscal 1996, however,
net sales decreased 34% from the third quarter of fiscal 1996 and 17% from the
fourth quarter of fiscal 1995. Net income for the fourth quarter of fiscal 1996
decreased 63% from the third quarter of fiscal 1996 and 55% from the fourth
quarter of fiscal 1995. In the first quarter of fiscal 1997, net sales decreased
9% from the fourth quarter of fiscal 1996 and decreased 34% from the first
quarter of fiscal 1996. Net income for the first quarter of fiscal 1997
decreased 75% from the fourth quarter of fiscal 1996 and decreased 90% from the
first quarter of fiscal 1996. In the second quarter of fiscal 1997, net sales
increased 8% from the first quarter of fiscal 1997 and decreased 35% from the
second quarter of fiscal 1996. Net income for the second quarter of fiscal 1997
increased 212% from the first quarter of fiscal 1997 and decreased 71% from the
second quarter of fiscal 1996. The Company's third quarter fiscal 1997 net sales
increased 18% from the second quarter of fiscal 1997 and decreased 24% from the
third quarter of fiscal 1996. The third quarter of fiscal 1997 reflected a net
loss due to a pre-tax charge for in process research and development related to
an acquisition. Without the charge, third quarter net income would have been up
35% from the second quarter of fiscal 1997 and down 62% from the third quarter
of fiscal 1996. In the fourth quarter of fiscal 1997, net sales were up 36% over
the third quarter of fiscal 1997 and 57% over the fourth quarter of fiscal 1996.
Net income for the fourth quarter of fiscal 1997 increased 69% from the fourth
quarter of fiscal 1996 and represented a significant increase over the third
quarter of 1997 in which the Company incurred a loss of $0.9 million, which
included a charge of $6.0 million for acquisition related in-process research
and development. In the first quarter of fiscal 1998, net sales increased 19%
over the fourth quarter of fiscal 1997 and 105% over the first quarter of fiscal
1997. Net income for the first quarter of fiscal 1998 increased 27% from the
fourth quarter of fiscal 1997 and 772% from the first quarter of fiscal 1997.
The decreases were due primarily to a significant weakness in the ATE market
which materially adversely affected the Company's business, financial condition
and results of operations and several other companies in the semiconductor
equipment industry. Although the ATE industry returned to a capacity expansion
mode in fiscal 1997, resulting in sequential increases in revenues during the
second, third, and fourth quarters of fiscal 1997 and the first quarter of
fiscal 1998, there can be no assurance that it will continue to expand in
subsequent quarters. The factors that have caused and will continue to cause the
Company's results to fluctuate include the timing of new product announcements
and releases by the Company or its competitors, market acceptance of new
products and enhanced
10
<PAGE>
versions of the Company's products, manufacturing inefficiencies associated with
the start up of new products, changes in pricing and payment terms and cycles by
the Company, its competitors, customers or suppliers, manufacturing capacity,
the ability to volume produce systems and meet customer requirements, inventory
obsolescence and writeoffs (which the Company has experienced), patterns of
capital spending by customers, delays, cancellations or reschedulings of orders
due to customer financial difficulties or otherwise, changes in overhead
absorption levels due to changes in the number of systems manufactured, the
timing and shipment of orders, availability of components, subassemblies and
services, expenses associated with acquisitions and alliances, product
discounts, customization and reconfiguration of systems, product reliability,
the proportion of direct sales and sales through third parties, including
distributors and original equipment manufacturers, the mix of products sold, the
length of manufacturing and sales cycles, cyclicality or downturns in the
semiconductor market and the markets served by the Company's customers, natural
disasters, political and economic instability, regulatory changes and outbreaks
of hostilities. The Company presently intends to introduce many new products and
product enhancements in the future, which will affect its operating results,
financial condition and business. The Company's gross margins on system sales
have varied significantly, and will continue to vary significantly based on a
variety of factors, including manufacturing efficiencies, pricing by competitors
or suppliers, product sales mix, reserves, production volume, new product
introductions, product reliability, the rate of capacity utilization,
customization and reconfiguration of systems, international and domestic sales
mix and field service margins. In addition, new and enhanced products typically
have lower gross margins in the early stages of commercial introduction and
production. While the Company has recorded and continues to record allowances
for estimated sales returns and uncollectible accounts, there can be no
assurance that such estimates regarding allowances will be adequate.
LIMITED SYSTEMS SALES; BACKLOG
The Company derives a substantial portion of its net sales from the sale of
a relatively small number of systems that typically range in price from $350,000
to $3.6 million, excluding the EPRO memory products, for which the price range
is typically below $50,000. As a result, the timing of recognition of revenue
from a single transaction could have a significant impact on the Company's net
sales and operating results for a particular period. The Company's net sales and
operating results for a particular period could be materially adversely affected
if an anticipated order for even one system is not received in time to permit
shipment during that period. The Company's backlog at the beginning of a quarter
typically does not include all orders necessary to achieve the Company's sales
objectives for that quarter. In addition, orders in backlog are subject to
cancellation, delay, deferral or rescheduling by a customer with limited or no
penalties. Consequently, the Company's net sales and operating results for a
quarter have in the past and will in the future depend upon the Company
obtaining orders for systems to be shipped in the same quarter that the order is
received. Furthermore, products generating most of the Company's net sales
continue to be shipped near the end of each quarter. Accordingly, the failure to
receive an anticipated order or a delay or rescheduling in a shipment near the
end of a particular period due, for example, to an order cancellation, a delay
by a customer, manufacturing, technical, reliability or other difficulties,
including difficulties relating to customization and reconfiguration of systems,
a delay in the supply of components, subassemblies or services or a delay due to
competitive or economic factors, may cause net sales in a particular period to
fall significantly below the Company's expectations, which could have a material
adverse effect upon the Company's business, financial condition or results of
operations. The relatively long manufacturing cycle of many of its testers has
caused and could continue to cause future shipments of such products to be
delayed from one quarter to the next, which could materially adversely affect
the Company's business, financial condition or results of operations.
Furthermore, announcements by the Company or its competitors of new products and
technologies could cause customers to defer or cancel purchases of the Company's
existing systems, which could also have a material adverse effect on the
Company's business, financial condition or results of operations. The impact of
these and other factors on the Company's sales and operating results in any
future period cannot be forecasted with certainty. In addition, the need for
continued significant expenditures for research and development, marketing and
other expenses for new products, capital equipment purchases and worldwide
training and customer service and support, among other factors, will make it
difficult for the Company to reduce its significant fixed expenses in a
particular period if the Company's net sales goals for such period are not met.
Accordingly, there can be no assurance that the Company will be profitable or
that it will not again sustain losses in future periods. Due to all of the
foregoing factors, it is likely that in some future quarter the Company's
operating results will be below the expectations of public market analysts and
investors, as they were in fiscal 1997. In such event, the price of the
Company's Common Stock may be materially adversely affected.
11
<PAGE>
CYCLICALITY OF SEMICONDUCTOR INDUSTRY
The Company's business and results of operations depend in significant part
upon the capital expenditures of manufacturers of semiconductors and companies
which specialize in contract packaging and/or testing of semiconductors,
including manufacturers and contractors that are opening new or expanding
existing fabrication facilities, or upgrading existing equipment, which in turn
depend upon the current and anticipated market demand for semiconductors and
products incorporating semiconductors. Historically and recently, the
semiconductor industry has been highly cyclical with recurring periods of
oversupply, which often have had a severe effect on the semiconductor industry's
demand for test equipment, including the systems manufactured and marketed by
the Company. The Company believes that the markets for newer generations of
semiconductors will also be subject to similar fluctuations. The Company has in
the past experienced shipment delays, delays in commitments and purchase order
restructurings by several of its customers and anticipates that this may
continue to occur in the future. Accordingly, the Company can give no assurance
that it will be able to achieve or maintain its current or prior level of sales
or rate of growth. Through the first three quarters of 1997, the Company's net
sales, gross margins and net income were significantly below the net sales,
gross margins and net income, respectively, of the comparable prior year's
quarterly results. In the fourth quarter of 1997 and the first quarter of 1998,
the Company's net sales and net income were significantly above the net sales
and net income of the fourth quarter of 1996 and the first quarter of 1997,
respectively; however there can be no assurance that they will continue to
exceed prior year amounts in future quarters. The Company anticipates that a
significant portion of new orders may depend upon demand from semiconductor
device manufacturers building or expanding fabrication facilities and new device
testing requirements that are not addressable by currently installed test
equipment, and there can be no assurance that such demand will develop to a
significant degree, or at all. In addition, any factor adversely affecting the
semiconductor industry or particular segments within the semiconductor industry
may adversely affect the Company's business, financial condition or results of
operations. Therefore, there can be no assurance that the Company's operating
results will not continue to be materially adversely affected if downturns or
slowdowns in the semiconductor industry continue or occur again in the future.
Company net sales to the Asia Pacific region accounted for approximately 63%,
66%, 58%, and 45% of total net sales in the first quarter of fiscal 1998, and
fiscal years 1997, 1996, and 1995, and thus are subject to the risk of economic
instability in that region that might materially adversely affect the demand for
the Company's products. Although the current economic instability in the Asia
Pacific region has not materially adversely affected the Company's order
backlog, balance sheet, or results of operations, there can be no assurance that
it will not in the future.
MANAGEMENT OF FLUCTUATIONS IN OPERATING RESULTS
The Company has over the last several years experienced significant
fluctuations in its operating results. Since 1993, the Company has overall
significantly increased the scale of its operations to support increased sales
levels and has expanded its operations to address critical infrastructure and
other requirements, including the hiring of additional personnel, significant
investments in research and development to support product development, the
March 1995 acquisition of EPRO, the Company's establishment of a joint venture
with Innotech, Inc., the Company's acquisition in July 1997 of the assets and
certain liabilities of Test Systems Strategies, Inc. ("TSSI") and the Company's
acquisition in August 1997 of a software product line from Zycad Corporation
("Zycad"). However, the Company has during certain historical periods,
particularly in the last fiscal year, experienced revenue declines and
reductions in its operations.
Fluctuations in the Company's sales and operations have placed a
considerable strain on its management, financial, manufacturing and other
resources. In order to effectively deal with the changes brought on by the
cyclical nature of the industry, the Company has been required to implement and
improve a variety of highly flexible operating, financial and other systems,
procedures and controls capable of expanding or contracting consistent with the
Company's business. There can be no assurance that any existing or new systems,
procedures or controls will be adequate to support fluctuations in the Company's
operations or that its systems, procedures and controls will be designed,
implemented or improved in a cost effective and timely manner. Any failure to
implement, improve and expand or contract such systems, procedures and controls
in an efficient manner at a pace consistent with the Company's business could
have a material adverse effect on the Company's business, financial condition or
results of operations.
12
<PAGE>
EXPANSION OF OPERATIONS
Currently, the Company is devoting and will continue to devote significant
resources to the development of new products and technologies. During 1998, the
Company is conducting evaluations of these new products and will continue to
invest significant additional resources in plant and equipment, leased
facilities, inventory, personnel and other costs, to begin or prepare to begin
production of these products and to provide the marketing, administration and
after-sales service and support, if any, required to service and support these
new products. Accordingly, there can be no assurance that gross profit margin
and inventory levels will not be adversely impacted in the future by start-up
costs associated with the initial production and installation of these new
product lines. These start-up costs include, but are not limited to, additional
manufacturing overhead, additional inventory and warranty reserve requirements
and the creation of after-sales service and support organizations. Additionally,
there can be no assurance that operating expenses will not increase, relative to
sales, as a result of adding additional marketing and administrative personnel,
among other costs, to support the Company's additional products. If the Company
is unable to achieve significantly increased net sales or its sales fall below
expectations, the Company's operating results will be materially adversely
affected. There can be no assurance that net sales will increase or remain at
recent levels or that any new products will be successfully commercialized.
LIMITED SOURCES OF SUPPLY; RELIANCE ON SUBCONTRACTORS
Certain components, subassemblies and services necessary for the
manufacture of the Company's testers are obtained from a limited group of
suppliers. The Company does not maintain long-term supply agreements with most
of its vendors and purchases most of its components and subassemblies through
individual purchase orders. The manufacture of certain of the Company's
components and subassemblies is an extremely complex process. The Company also
relies on outside vendors to manufacture certain components and subassemblies
and to provide certain services. The Company has recently experienced and
continues to experience significant reliability, quality and timeliness problems
with several critical components. In addition, the Company and certain of its
subcontractors periodically experience significant shortages and delays in
delivery of various components and subassemblies. There can be no assurance that
these or other problems will not continue to occur in the future with these or
the Company's other suppliers or outside subcontractors. The Company's reliance
on a limited group of suppliers and the Company's reliance on outside
subcontractors involve several risks, including a potential inability to obtain
an adequate supply of required components, subassemblies and services and
reduced control over the price, timely delivery, reliability and quality of
components, subassemblies and services. Shortages, delays, disruptions or
terminations of the sources for these components and subassemblies has delayed
and could continue to delay shipments of the Company's systems and could have a
material adverse effect on the Company's business, financial condition or
results of operations. Any continuing inability to obtain adequate yields or
timely deliveries or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture such components internally
could have a material adverse effect on the Company's business, financial
condition or results of operations. Such delays, shortages and disruptions would
also damage relationships with current and prospective customers and could allow
competitors to penetrate such customer accounts. There can be no assurance that
the Company's internal manufacturing capacity and that of its suppliers and
subcontractors will be sufficient to meet customer requirements.
HIGHLY COMPETITIVE INDUSTRY
The automatic test equipment ("ATE") industry is intensely competitive.
Because of the substantial investment required to develop test application
software and interfaces, the Company believes that once a semiconductor
manufacturer has selected a particular ATE vendor's tester, the semiconductor
manufacturer is likely to use that tester for a majority of its testing
requirements for the market life of that semiconductor and, to the extent
possible, subsequent generations of similar products. As a result, once an ATE
customer chooses a system for the testing of a particular device, it is
difficult for competing vendors to achieve significant ATE sales to such
customer for similar use. The inability of the Company to penetrate any large
ATE customer or achieve significant sales to any ATE customer could have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company faces substantial competition throughout the world, primarily
from ATE manufacturers located in the United States, Europe and Japan, as well
as several of the Company's customers. Many of the Company's competitors have
substantially greater financial and other resources with which to pursue
engineering, manufacturing,
13
<PAGE>
marketing and distribution of their products. Certain of the Company's
competitors have recently introduced or announced new products with certain
performance or price characteristics equal or superior to certain products
currently offered by the Company. The Company believes that if the ATE industry
continues to consolidate through strategic alliances or acquisitions, the
Company will continue to face significant additional competition from larger
competitors that may offer more complete product lines and services than the
Company. The Company's competitors are continuing to improve the performance of
their current products and to introduce new products, enhancements and new
technologies that provide improved cost of ownership and performance
characteristics. New product introductions by the Company's competitors could
continue to cause a decline in sales or loss of market acceptance of the
Company's existing products. Moreover, increased competitive pressure could
continue to lead to intensified price-based competition, which could materially
adversely affect the Company's business, financial condition or results of
operations. The Company has experienced and continues to experience significant
price competition in the sale of all of its testers. In addition, at the end of
a product life cycle and as competitors introduce more technologically advanced
products, pricing pressures typically become more intense as the Company has
experienced with sales of its older products. The Company believes that to be
competitive, it must continue to expend significant financial resources in order
to, among other items, invest in new product development and enhancements and to
maintain customer service and support centers worldwide. There can be no
assurance that the Company will be able to compete successfully in the future.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION
The ATE market is subject to rapid technological change and new product
introductions and enhancements and related software tools. The Company's ability
to be competitive in this market will depend in significant part upon its
ability to successfully develop and introduce new products and enhancements and
related software tools with greater features on a timely and cost-effective
basis, including the products under development acquired in the EPRO merger and
the TSSI and Zycad product line acquisitions. The Company's customers require
testers with additional features and higher performance and other capabilities.
The Company is therefore required to enhance the performance and other
capabilities of its existing systems and related software tools. Any success by
the Company in developing new and enhanced systems and related software tools
and new features to its existing systems depends upon a variety of factors,
including product selection, timely and efficient completion of product design,
timely and efficient implementation of manufacturing and assembly processes,
product performance and reliability in the field and effective sales and
marketing. Because new product development commitments must be made well in
advance of sales, new product decisions must anticipate both future demand and
the availability of technology to satisfy that demand. There can be no assurance
that the Company will be successful in selecting, developing, manufacturing and
marketing new products or enhancements and related software tools. The inability
of the Company to introduce new products and related software tools that
contribute significantly to net sales, gross margins and net income would have a
material adverse effect on the Company's business, financial condition or
results of operations. New product or technology introductions by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's existing products. In addition, new product introductions by the
Company may cause the Company's customers to curtail purchases of the older
products and delay new products purchases.
Significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such system. The Company has
in the past experienced and continues to experience significant delays in the
introduction, volume production and sales of its systems and related feature
enhancements, including new models within the digital, mixed-signal and non-
volatile memory product lines, due to technical, manufacturing, parts shortages,
component reliability and other difficulties and may continue to experience
similar delays in the future. As a result, certain of the Company's significant
customers have experienced significant delays in receiving and using certain of
the Company's testers in production. There can be no assurance that these or
additional difficulties will not continue to arise in the future with respect to
the Company's systems or that such delays will not materially adversely affect
customer relationships and future sales. Moreover, there can be no assurance
that the Company will not encounter these or other difficulties that could delay
future introductions or volume production or sales of its systems or
enhancements and related software tools. The Company has incurred and may
continue to incur substantial unanticipated costs to ensure the functionality
and reliability of its testers and to increase feature sets. If the Company's
systems continue to have reliability, quality or other problems, or the market
perceives certain of the Company's products to be feature deficient, reduced
orders, higher manufacturing costs, delays in collecting accounts receivable and
higher service, support and warranty expenses, or inventory write-offs, among
other items, could result. The Company's failure to have
14
<PAGE>
a competitive tester and related software tools available when required by a
semiconductor manufacturer could make it substantially more difficult for the
Company to sell testers to that manufacturer for a number of years. The Company
believes that the continued acceptance, volume production, timely delivery and
customer satisfaction of its newer digital, mixed signal and non-volatile memory
testers are of critical importance to its future financial results. As a result,
an inability to correct any technical, reliability, parts shortages or other
difficulties associated with the Company's systems or to manufacture and ship
the Company's systems on a timely basis to meet customer requirements could
damage relationships with current and prospective customers and would materially
adversely affect the Company's business, financial condition or results of
operations.
CUSTOMER CONCENTRATION; LENGTHY SALES CYCLE
One customer (a distributor) accounted for 27%, 30%, 25% and 17% of the
Company's net sales in the first quarter of fiscal 1998, and fiscal years 1997,
1996 and 1995, respectively. Another customer accounted for 14% of net sales in
the first quarter of fiscal 1998. Another customer accounted for 11% of net
sales in fiscal 1995. The loss of or any reduction in orders by this or any
other significant customer, including losses or reductions due to continuing or
other technical, manufacturing or reliability problems with the Company's
products, continued slowdowns in the semiconductor industry or in other
industries that manufacture products utilizing semiconductors could materially
adversely affect the Company's business, financial condition or results of
operations. The Company's ability to maintain or increase its sales levels in
the future will depend in significant part upon its ability to obtain orders
from existing and new customers and to manufacture systems on a timely and cost-
effective basis, the financial condition and success of its customers, general
economic conditions, and the Company's ability to meet increasingly stringent
customer performance and other requirements and shipment delivery dates. There
can be no assurance that the Company will be able to maintain or increase the
level of its net sales in the future or that the Company will be able to retain
existing customers or attract new ones.
Sales of the Company's systems depend in significant part upon the decision
of a semiconductor manufacturer to develop and manufacture new semiconductor
devices or to increase manufacturing capacity. As a result, sales of the
Company's testers are subject to a variety of factors outside of the Company's
control. In addition, the decision to purchase a tester generally involves a
significant commitment of capital, with the attendant delays frequently
associated with significant capital expenditures. For these and other reasons,
the Company's systems have lengthy sales cycles during which the Company may
expend substantial funds and management effort to secure a sale and subject the
Company to a number of significant risks.
ACQUISITIONS
The Company has developed in significant part through mergers and
acquisitions of other companies and businesses. Prior to its initial public
offering in 1993, the Company acquired two companies and the semiconductor test
division of Tektronix, Inc. In 1995, the Company acquired EPRO, a memory tester
company. In July 1997, the Company acquired the assets and assumed certain
liabilities of TSSI and, in August 1997, acquired the fault simulation and test
program development products from Zycad. The Company intends in the future to
pursue additional acquisitions of complementary product lines, technologies and
businesses. Any future acquisitions by the Company could result in potentially
dilutive issuances of equity securities, the incurrence of debt and contingent
liabilities, expenditures and reserves, and amortization expenses related to
goodwill and other intangible assets (which may exceed the benefits actually
derived from the acquisitions), which could materially adversely affect the
Company's business, financial condition or results of operations. The Company's
charge for in-process research and development for the TSSI asset acquisition
accounted for the Company's net loss for the third quarter of 1997. In addition,
acquisitions involve numerous other risks, including difficulties in the
assimilation of the operations, personnel, technologies and products of the
acquired companies, the diversion of management's attention from other business
concerns, risks of entering markets in which the Company has no or limited
direct prior experience, and the potential loss of key employees of the acquired
company. From time to time, the Company has engaged in and will continue to
engage in discussions with third parties concerning potential acquisitions of
product lines, technologies and businesses. In the event that such an
acquisition does occur, however, there can be no assurance as to the effect
thereof on the Company's business, financial condition or results of operations.
15
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's future operating results depend in significant part upon the
continued service of its key personnel, none of whom are bound by an employment
or non-competition agreement. The Company's future operating results also depend
in significant part upon its ability to attract and retain qualified management,
manufacturing, technical, engineering and marketing and sales and support
personnel. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. There may be only a limited number of persons with the requisite
skills to serve in these positions and it may be increasingly difficult for the
Company to hire such personnel over time. The loss of any key employee, the
failure of any key employee to perform in his or her current position, or the
Company's inability to attract and retain skilled employees, as needed, could
materially adversely affect the Company's business, financial condition or
results of operations.
INTERNATIONAL SALES
International sales accounted for approximately 67%, 70%, 67% and 55% of
total net sales for the first quarter of fiscal 1998 and fiscal years 1997, 1996
and 1995, respectively. As a result, the Company anticipates that international
sales will continue to account for a significant portion of total net sales in
the foreseeable future. These international sales will continue to be subject to
certain risks, including changes in regulatory requirements, tariffs and other
barriers, political and economic instability, an outbreak of hostilities,
integration of foreign operations of acquired businesses, foreign currency
exchange rate fluctuations, difficulties with distributors, joint venture
partners, original equipment manufacturers, foreign subsidiaries and branch
operations, potentially adverse tax consequences and the possibility of
difficulty in accounts receivable collection. The Company is also subject to the
risks associated with the imposition of legislation and regulations relating to
the import or export of semiconductor equipment. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions will be
implemented by the United States or any other country upon the importation or
exportation of the Company's products in the future. Any of these factors or the
adoption of restrictive policies could have a material adverse effect on the
Company's business, financial condition or results of operations. Company net
sales to the Asia Pacific region accounted for approximately 62%, 66%, 58%, and
45% of total net sales in the first quarter of fiscal 1998 and fiscal years
1997, 1996, and 1995, and thus are subject to the risk of economic instability
in that region that might materially adversely affect the demand for the
Company's products. Countries in the Asia Pacific region, including Japan, have
recently experienced weaknesses in their currency, banking and equity markets.
These weaknesses could adversely affect demand for the Company's products, the
availability and supply of product components to the Company, and ultimately the
Company's consolidated results of operations. Although the current economic
instability in the Asia Pacific region has not materially adversely affected the
Company's order backlog, balance sheet, or results of operations, there can be
no assurance that it will not in the future.
IMPORTANCE OF JAPANESE MARKET
To date, the Company has made limited sales of its systems to Japanese
semiconductor manufacturers. The Japanese semiconductor market is large,
represents a substantial percentage of the worldwide semiconductor manufacturing
capacity, and is difficult for foreign companies to penetrate. The Company may
be at a competitive disadvantage with respect to Japanese semiconductor capital
equipment suppliers that have been engaged for some time in collaborative
efforts with Japanese semiconductor manufacturers. The Company believes that the
Japanese companies with which it competes have a competitive advantage because
of their dominance of the Japanese market segment. The Company believes that
increased penetration of the Japanese market is important to its financial
results and intends to continue to invest significant resources in Japan in
order to meet this objective. As part of its strategy to penetrate the Japanese
market, the Company entered into a joint venture agreement with Innotech
Corporation, a local distributor of products, and set up a local subsidiary in
Japan. The Company believes that Innotech is an important element of its
strategy to increase its presence in Japan. If Innotech is not successful in
selling such systems or such agreement is terminated, the Company's strategy to
increase product sales into the Japanese market would be adversely affected. In
addition, in recent years, Japanese semiconductor manufacturers substantially
reduced their level of capital spending on new fabrication facilities and
equipment, thereby increasing competitive pressures in the Japanese market
segment. There can be no assurance, however, that the Company will be able to
achieve significant sales to, or will be able to compete successfully in, the
Japanese semiconductor market segment.
16
<PAGE>
PROPRIETARY RIGHTS
The Company attempts to protect its intellectual property rights through
patents, copyrights, trademarks, trade secrets and other measures, including
confidentiality agreements. There can be no assurance that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets and other
intellectual property rights or disclose such technology or that the Company can
meaningfully protect its trade secrets or other intellectual property rights.
There can be no assurance that patents owned by the Company will not be
invalidated, deemed unenforceable, circumvented or challenged, or that the
rights granted thereunder will provide competitive advantages to the Company or
that any of the Company's pending or future patent applications will be issued
with claims of the scope sought by the Company, if at all. Furthermore, there
can be no assurance that others will not develop similar products, duplicate the
Company's products or design around the patents owned by the Company. In
addition, there can be no assurance that foreign intellectual property laws or
the Company's agreements will protect the Company's intellectual property
rights. Failure to protect the Company's intellectual property rights could have
a material adverse effect upon the Company's business, financial condition or
results of operations. The Company has been involved in extensive, expensive and
time-consuming reviews of, and litigation concerning, patent infringement
claims. In addition, the Company has at times been notified of other claims that
it may be infringing intellectual property rights possessed by third parties and
expects to continue to receive notice of such claims in the future.
The European patent application relating to one of the proprietary CMOS
stabilization methods owned by the Company was abandoned by the prior owner
after the European patent examiner cited prior art. This prior art was not
referenced in the corresponding United States patent application. Based upon its
review to date of the cited prior art and the European examiner's objections,
and in part upon the advice of outside patent counsel to the Company, the
Company believes that such prior art is unlikely to affect the validity or scope
of the claims of the United States issued patent.
This prior art may, however, render invalid or significantly narrow the
scope of certain claims set forth in the United States patent covering another
of the Company's proprietary CMOS stabilization methods. The European examiner
referred to this prior art in the corresponding European patent application. The
European application was approved, but with narrower claims than the United
States patent. This prior art was not referenced in the corresponding United
States patent. Based in part upon the advice of outside patent counsel, and on
the Company's review of its current products, the Company believes that this
patent will continue to be valuable to the Company in preventing imitation of
the Company's products covered by this patent. Additionally, in mid-1992, a
third party suggested that certain claims set forth in this patent might be
invalid as a result of other alleged prior art. The Company believes, based in
part upon the advice of outside patent counsel, that the prior art alleged by
the third party is less relevant than the prior art referenced by the European
examiner. However, there can be no assurance that any of the aforementioned
prior art or other prior art will not be successfully asserted and used to
invalidate or narrow the scope of any claim of the United States patents or any
other patents or other patent applications of the Company.
On November 13, 1997, the Company requested the United States Patent and
Trademark Office to re-examine the subject United States patent in light of the
two prior art references. On January 7, 1998, the United States Patent and
Trademark Office responded by granting the Company's request for re-examination.
The case is presently pending in the United States Patent and Trademark Office.
Certain of the Company's customers have received notices of infringement
from Jerome Lemelson alleging that the manufacture of semiconductor products
and/or the equipment used to manufacture semiconductor products infringes
certain patents issued to such person. The Company was notified by a customer in
1990 and a different customer in late 1994 that the Company may be obligated to
defend or settle claims that the Company's products infringe such person's
patents, and, in the event it is subsequently determined that the customer
infringes such person's patents, such customer intends to seek reimbursement
from the Company for damages and other related expenses. There can be no
assurance that the Company will be successful in defending current or future
patent infringement claims or claims for indemnification resulting from
infringement claims. An award of damages,
17
<PAGE>
injunctive relief or expenditures by the Company of significant amounts in
defending any such action could materially adversely affect the Company's
business, financial condition or results of operations, regardless of the
outcome of any litigation. With respect to any claims, the Company may seek to
obtain a license under the third party's intellectual property rights. There can
be no assurance, however, that a license will be available on reasonable terms
or at all. The Company could decide, in the alternative, to continue to resort
to litigation to challenge such claims. Such challenges have been and could
continue to be extremely expensive and time consuming, and could materially
adversely affect the Company's business, financial condition or results of
operations, regardless of the outcome of any litigation.
FUTURE CAPITAL NEEDS
The development and manufacture of new ATE systems and enhancements are
highly capital intensive. In order to be competitive, the Company must make
significant investments in capital equipment, expansion of operations, systems,
procedures and controls, research and development and worldwide training,
customer service and support, among many other items. The Company expects that
cash on hand and cash equivalents, including restricted cash, short-term
investments, funds available under its bank line of credit, anticipated cash
flow from operations and equipment lease arrangements will satisfy its financing
requirements for at least the next 12 months.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21/st/ century dates from 20/th/ century dates. As a result,
computer systems and/or software used by many companies will need to be upgraded
to comply with such "Year 2000" requirements. Significant uncertainty exists
concerning the potential effects associated with such compliance. The Company is
currently in the process of assessing and testing the software components of its
products for year 2000 compliance. The Company does not believe that its
products contain undetected errors or defects associated with year 2000 date
functions that may result in material costs to the Company, including repair
costs and costs incurred in litigation due to any such defects, however there
can be no assurance that such errors or defects do not exist. Many commentators
have stated that a significant amount of litigation will arise out of year 2000
compliance issues. Because of the unprecedented nature of such litigation, there
can be no assurance that the Company will not be materially adversely affected
by claims related to year 2000 compliance.
Although the Company is not aware of any material operational issues or
costs associated with preparing its internal systems for the year 2000, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in the technology used in its internal operating systems, which are
composed predominately of third party software and hardware technology.
VOLATILITY OF STOCK PRICE
The Company believes that factors such as announcements of developments
related to the Company's business, fluctuations in the Company's financial
results, general conditions or developments in the semiconductor and capital
equipment industry and the general economy, sales of the Company's Common Stock
into the marketplace, announcements of technological innovations or new products
or enhancements by the Company or its competitors, developments in patents or
other intellectual property rights, developments in the Company's relationships
with its customers and suppliers, or a shortfall or changes in revenue, gross
margins or earnings or other financial results from analysts' expectations or an
outbreak of hostilities or natural disasters, could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially. In recent years the
stock market in general, and the market for shares of small capitalization
stocks in particular, including the Company, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. For example, in fiscal 1997, the price of the Company's
Common Stock has ranged from a high of $55.00 to a low of $13.75. There can be
no assurance that the market price of the Company's Common Stock will not
continue to experience significant fluctuations in the future, including
fluctuations that are unrelated to the Company's performance.
18
<PAGE>
LEVERAGE
In connection with the sale in September 1997 of Convertible Subordinated
Notes due 2002, the Company incurred $115 million of indebtedness which resulted
in a ratio of long-term debt to total capitalization at October 31, 1997 of
approximately 36%. As a result of this indebtedness, the Company's principal and
interest obligations has increased substantially. The degree to which the
Company is leveraged could materially adversely affect the Company's ability to
obtain financing for working capital, acquisitions or other purposes and could
make it more vulnerable to industry downturns and competitive pressures. The
Company's ability to meet its debt service obligations will be dependent upon
the Company's future performance, which will be subject to financial, business
and other factors affecting the operations of the Company, many of which are
beyond its control.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation, equity
incentive plans, Bylaws and Delaware law may discourage certain transactions
involving a change in control of the Company. In addition to the foregoing, the
Company's classified board of directors, the shareholdings of the Company's
officers, directors and persons or entities that may be deemed affiliates and
the ability of the Board of Directors to issue "blank check" preferred stock
without further stockholder approval could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock.
19
<PAGE>
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index on page 22.
(b) A report on Form 8-K was filed on December 4, 1997, reporting various
matters in response to Item 5 of Form 8-K.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as
amended, the registrant duly caused this Report to be signed on its behalf by
the undersigned thereunto duly authorized.
CREDENCE SYSTEMS CORPORATION
-------------------------------------
(Registrant)
March 17, 1998 /s/ JERRY BRUCE
-------------------------- -------------------------------------
Date Jerry Bruce
Vice President, Controller, Acting Chief
Financial Officer and Secretary
21
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ------
<S> <C>
10.25 Lease Agreement between the Company and Bedford Property Investors, Inc.
dated December 10, 1997
27.1 EDGAR Financial Data Schedule
</TABLE>
22
<PAGE>
EXHIBIT 10.25
[LETTERHEAD OF BEDFORD PROPERTY INVESTORS APPEARS HERE]
BUSINESS PARK NET LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
1. SALIENT LEASE TERMS................................................. 1
2. PREMISES............................................................ 2
3. TERM................................................................ 3
4. PRE-TERM POSSESSION................................................. 3
5. DELAY IN DELIVERY OF POSSESSION..................................... 4
6. MINIMUM RENT........................................................ 4
7. TAXES............................................................... 4
8. COMMON AREAS AND COMMON AREA COSTS.................................. 6
9. ASSIGNMENT AND SUBLETTING........................................... 8
10. PROPERTY INSURANCE.................................................. 12
11. LIABILITY INSURANCE................................................. 13
12 INSURANCE POLICY REQUIREMENTS....................................... 14
13. LESSEE INSURANCE DEFAULT............................................ 14
14. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION.................... 14
15. DESTRUCTION......................................................... 16
16. ACCORD AND SATISFACTION............................................. 17
17. SECURITY DEPOSIT.................................................... 17
18. USE................................................................. 18
19. COMPLIANCE WITH LAWS AND REGULATIONS................................ 18
20. UTILITIES........................................................... 24
21. ALTERATIONS......................................................... 25
22. MAINTENANCE AND REPAIRS............................................. 27
23. CONDEMNATION........................................................ 28
24. EMPLOYEE PARKING.................................................... 29
25. ABANDONMENT......................................................... 30
26. ENTRY BY LESSOR..................................................... 30
27. SIGNS............................................................... 30
28. DEFAULT............................................................. 30
29. REMEDIES UPON DEFAULT............................................... 31
30. FORFEITURE OF PROPERTY AND LESSOR'S LIEN............................ 33
31. SURRENDER OF LEASE.................................................. 34
32. LESSOR'S EXCULPATION................................................ 34
33. ATTORNEYS' FEES..................................................... 34
34. NOTICES............................................................. 35
35. SUBORDINATION....................................................... 35
36. ESTOPPEL CERTIFICATES............................................... 36
37. WAIVER.............................................................. 36
38. HOLDING OVER........................................................ 37
39. SUCCESSORS AND ASSIGNS.............................................. 37
40. TIME................................................................ 37
41. EFFECT OF LESSOR'S CONVEYANCE....................................... 37
42. TRANSFER OF SECURITY................................................ 37
43. CORPORATE AUTHORITY................................................. 37
44. WAIVER OF CALIFORNIA CODE SECTIONS.................................. 38
45. WASTE............................................................... 38
46. BANKRUPTCY.......................................................... 38
47. LATE CHARGES........................................................ 39
48. MORTGAGEE PROTECTION................................................ 40
49. MISCELLANEOUS PROVISIONS............................................ 40
</TABLE>
i
<PAGE>
BUSINESS PARK NET LEASE
1. SALIENT LEASE TERMS
THIS LEASE is dated for reference purposes only this 10th day of December, 1997.
1.1 RENT PAYMENT: Bedford Property Investors, Inc.
Lockbox # 73048 - Westinghouse
P.O. Box 60000
San Francisco, CA 94169-3048
1.2 PARTIES AND NOTICE ADDRESS: Lessor:
BEDFORD PROPERTY INVESTORS, INC.
270 Lafayette Circle
Lafayette, CA 94549
Lessee:
CREDENCE SYSTEMS CORPORATION
215 Fourier Avenue
Fremont, CA 94539
(If more than one party, then the
obligations here-under shall be joint
and several.)
(Section 49.12)
1.3 PREMISES: (A) Name and Location of Complex:
47513 Westinghouse Drive
Fremont, CA 94539
(B) Leased Premises:
47513 Westinghouse Drive, Suite number
to be determined,
Fremont, CA 94539, as further delineated
on Exhibit B attached hereto
(C) Approximately Thirty Five Thousand
One Hundred Thirty Two (35,132) square
feet.
(Section 2.2)
1.4 TERM: (A) Commencing upon March 1, 1998 (the
"Commencement Date")
(B) Eighty-Four (84) months
(Section 3.1)
1.5 RENT: (A) Minimum Rent:
Commencement Date-Month 12:
$43,212.36/month
Month 13-Month 24: $44,968.96/month
Month 25-Month 36: $46,725.56/month
Month 37-Month 48: $48,482.16/month
Month 49-Month 60: $50,238.76/month
Month 61-Month 72: $51,995.36/month
Month 73-Month 84: $53,751.96/month
(Section 6.1)
(B) Advance Rent: $43,213.00
(Section 6.2)
1.6 SECURITY DEPOSIT: None
(Section 17.1)
1.7 USE: Premises used solely for general offices
for engineering and other legal related
uses
(Section 18.1)
1.8 INITIAL PRO RATA %: 53.73%
(Section 8.3)
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
1
<PAGE>
1.9 DECLARATION OF RESTRICTIONS: Date of Recordation: July 11, 1980
Document Number: 80-117610
(Section 2.4)
1.10 CONTENTS: This Lease consists of:
Pages 1 through 30
Sections 1 through 49.17
Addenda: Option to Extend the Term
Exhibits:
A - Legal Description of Complex
B - Plan of Complex Showing Location of
Leased Premises
C - Construction Obligations
D - Acknowledgment of Commencement of
Term
E - Rules and Regulations
The above terms are incorporated in this Lease as indicated above and
referenced herein.
Definitions of the terms in this Lease appear in the following sections:
alterations, 21.2; Award, 23.1(c); bankruptcy event, 46.1; Building, 2.2;
Capital Costs, 8.4; Common Area Costs, 8.4; Common Areas, 8.1; Complex, 2.2;
Complex Insurance Premium, 10.3(a); Condemnation, 23.1(a); Condemnor, 23.1(d);
Date of taking, 23.1(b); debtor, 46.1(a); Decision Period, 23.4; employee
parking, 24.1; Environmental Laws, 19.3(a); Hazardous Materials, 19.3(a);
Hazardous Use, 19.3(b); HVAC, 22.2; Leased Premises, 2.2; Lines, 2.2; Minimum
Rent, 6.1; Nonterminating Party, 23.4; notice, 34.2; obligor, 34.3; person,
49.2; Plans, 21.2(b); pro rata %, 8.3; Real Property Taxes, or Taxes, 7.1; rent
or rental, 29.2(a); Rentable Area, 9.6; Report, 19.3(c); restrictions, 2.3;
Security Deposit, 6.2; tax bill, 7.4; Term, 1.4; Terminating Party, 23.4;
Termination Notice, 9.6; Transfer of the Leased Premises, or Transfer, 9.2;
uninsured property loss, 15.1; Usable Area, 9.6; Wetlands, 19.4; Wetlands Laws,
19.4; worth at the time of award, 29.2(b).
2. PREMISES
2.1 DEMISING CLAUSE.
Lessor hereby leases to Lessee, and Lessee hires from Lessor a portion of
the Complex as hereinafter defined.
2.2 DESCRIPTION.
The term "Complex" shall refer to that parcel of real property of which the
Leased Premises forms a part, together with the parcel or parcels in common
ownership therewith and contiguous thereto. The Complex is described with
particularity in Exhibit A attached hereto and made a part hereof by reference,
and described generally in Section 1.3(A) hereof The Complex contains, among
other things, communications, computer, audio and video, security and electrical
(other than electrical wiring terminating at or connected to Building standard
electrical outlets), cables, wires, duct work, sensors, switching equipment,
control boxes and related improvements at the Complex, Building or the Leased
Premises ("Lines"). The premises leased herein are described in Section 1.3(B)
and delineated on Exhibit B, which is attached hereto and made a part hereof by
reference, consisting of the approximate amount of square footage as specified
in Section 1.3(C) hereof (the "Leased Premises.") The term "Building" shall
refer to the Building in which the Leased Premises are located. Lessee
acknowledges that Lessor may change the shape, size, location, number and extent
of the improvements to any portion of the Complex (except for the interior of
the Leased Premises) without consent of Lessee and without affecting Lessee's
obligations hereunder. Lessor reserves the area beneath and above the Building
as well as the exterior thereof together with the right to install, maintain,
use, repair and replace pipes, ducts, conduits, wires, and structural elements
leading through the Leased Premises serving other parts of the Complex, so long
as such items are concealed by walls, flooring or ceilings. Such reservation in
no way affects the maintenance obligations imposed herein, nor shall such
reservation alter the parties' responsibilities and obligations set forth in
this Lease regarding "Hazardous Materials" (as defined in Section 19.3(a)
below).
2.3 COVENANTS, CONDITIONS AND RESTRICTIONS.
The parties agree that this Lease is subject to the effect of (a) any
covenants, conditions, restrictions, easements, mortgages or deeds of trust,
ground leases, rights of way of record, and any other matters or documents of
record; (b) any zoning laws of the city, county and state where the Complex is
situated; and (c) general and special taxes not delinquent. Lessee agrees that
as to its leasehold estate, Lessee and all persons in possession or holding
under Lessee will conform to and will not violate the terms of any covenants,
conditions or restrictions of record which may now or hereafter encumber the
property (hereinafter the "restrictions"). This Lease is subordinate to the
restrictions and any amendments or modifications thereto.
2.4 DECLARATION OF RESTRICTIONS.
The Leased Premises are subject to a Declaration of Restrictions as
referenced in Section 1.9 hereof.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
2
<PAGE>
3. TERM
3.1 COMMENCEMENT DATE.
The term of this Lease shall commence on the date specified in Section
1.4(A) hereof and shall be for the Term specified in Section 1.4(B) hereof, plus
any partial month at the commencement of the Term.
3.2 ACKNOWLEDGMENT OF COMMENCEMENT
After delivery of the Leased Premises to Lessee, Lessee shall execute a
written acknowledgment of the date of commencement in the form attached hereto
as Exhibit D and by this reference it shall be incorporated herein.
4. PRE-TERM POSSESSION
4.1 CONDITIONS OF ENTRY.
Lessor shall provided Lessee with access to the Leased Premises as soon as
reasonably possible following the full execution hereof, so that Lessee may
begin construction of the Tenant Improvements (as defined in Exhibit C hereto)
within the Leased Premises. Lessee may thereupon enter the Leased Premises for
such purposes at its own risk, to make such Tenant Improvements as Lessee shall
have the right to make and to install fixtures, supplies, inventory and other
property.
During the course of any pre-term possession, all terms and conditions of
this Lease, except for rent and commencement, shall apply, particularly with
reference to indemnity by Lessee of Lessor under Article 14 herein for all
occurrences within or about the Leased Premises.
5. DELAY IN DELIVERY OF POSSESSION
5.1 DELAY.
If Lessor, for any reason whatsoever, cannot deliver possession of the
Leased Premises to Lessee following the full execution hereof; this Lease shall
not be void or voidable, nor shall Lessor be liable for any loss or damage
resulting therefrom, but in that event, there shall be an abatement of rent
covering the period between the full execution of this Lease and the time when
Lessor can deliver possession. The Commencement Date and the Term shall be
extended by such delay for an equal period.
6. MINIMUM RENT
6.1 PAYMENT.
Lessee shall pay to Lessor at the address specified in Section 1.1 or at
such other place as Lessor may otherwise designate, as "Minimum Rent" for the
Leased Premises the amount specified in Section 1.5(A) hereof; payable in
advance on the first day of each month during the Term. If the Term commences on
other than the first day of a calendar month, the rent for the first partial
month shall be prorated accordingly.
All payments of Minimum Rent (including sums defined as rent in Section
29.2) shall be in lawful money of the United States, and payable without
deduction, setoff, offset, counterclaim, recoupment, notice or demand.
6.2 ADVANCE RENT.
The amount specified in Section 1.5(B) hereof is paid herewith to Lessor
upon execution of this Lease as advance rent, receipt of which is hereby
acknowledged, provided, however, that such amount shall be held by Lessor as a
"Security Deposit" pursuant to Section 17.1 hereof until it is applied by Lessor
to the first Minimum Rent due hereunder.
6.3 LATE PAYMENT.
If during any twelve (12) month period Lessee fails on more than one
occasion to make any payment of Minimum Rent to Lessor on the date when it is
due, then Lessor may, by giving written notice to Lessee, require that Lessee
pay the Minimum Rent to Lessor quarterly in advance.
7. TAXES
7.1 DEFINITION.
In this Article 7 the terms "Real Property Taxes" and "Taxes" are used
interchangeably. "Real Property Taxes" as used in this Lease shall include all
Real Property Taxes on the Building, the Complex, the land on which the Building
is situated, and the various estates in the Building and the land, including
this Lease, as well as all personal property taxes levied on the property used
in the operation of the Building or land, whether or not now customary or within
the
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
3
<PAGE>
contemplation of the parties to this Lease. "Taxes" also shall include the
reasonable cost to Lessor of contesting the amount, validity, or applicability
of any Taxes mentioned in this Section. Further included in the definition of
Taxes herein shall be general and special assessments, fees of every kind and
nature, commercial rental tax, levy, penalty or tax (other than inheritance or
estate taxes) imposed by any authority having the direct or indirect power to
tax, as against any legal or equitable interest of Lessor in the Leased Premises
or in the real property of which the Leased Premises are a part, as against
Lessor's right to rent or other income therefrom, or as against Lessor's
business of leasing the Leased Premises, any tax, fee, or charge with respect to
the possession, leasing, transfer of interest, operation, management,
maintenance, alteration, repair, use, or occupancy by Lessee, of the Leased
Premises or any portion thereof, the Building, or the Complex, or any tax
imposed in substitution, partially or totally, for any tax previously included
within the definition of Taxes herein, or any additional tax, the nature of
which may or may not have been previously included within the definition of
Taxes. The term "Real Property Taxes" or "Taxes" shall not include any tax which
may be levied upon or against the net income or profits of Lessor or its
successors or assigns.
7.2 ASSESSMENTS.
With respect to any general or special assessments which may be levied upon
or against the Leased Premises, the Building, the Complex, or the underlying
realty, or which may be evidenced by improvement or other bonds, and which may
be paid in annual or semi-annual installments, only the current amount of such
installment, prorated for any partial year, and statutory interest, shall be
included within the computation of Taxes for which Lessee is responsible
hereunder.
7.3 PRORATION.
Lessee shall pay, as additional rent to Lessor along with its monthly
payment of Minimum Rent hereunder, its estimated "pro rata share" (as defined
below) of all Real Property Taxes stated in the tax bill in which the Leased
Premises are included, including the parking and Common Areas, as well as the
improvements on all of said land, or otherwise arising under the provisions of
this Article, in accordance with Section 7.4, below. The term "tax bill" as used
herein shall mean the tax bill which includes the Leased Premises, or a group of
tax bills aggregated at the option of Lessor, so long as all such bills relate
to the Complex. "Pro rata share" is defined as that fraction the numerator of
which is the square footage in the Leased Premises and the denominator of which
is the net leasable area included within the tax bill.
7.4 ESTIMATED PAYMENTS.
Lessor shall estimate the amount of Taxes next due and collect from Lessee
on a monthly basis, along with Lessee's payment of Minimum Rent hereunder, the
amount of Lessee estimated pro rata share of Taxes. On or before March 1 of each
year during the Term, Lessor shall provide Lessee with a reconciliation of
Lessee's account with respect to such estimated Tax payments. In event it is
established upon such reconciliation that Lessee has not paid sufficient amount
in estimated Tax payments to cover its pro rata share for the year in question,
Lessee shall pay to Lessor the full amount of any such shortage within ten (10)
days of date of billing. If it is established that Lessee has made an
overpayment of its Tax obligation upon such reconciliation, Lessee shall
receive, at Lessor's option, either a credit applicable to the next ensuing
estimated tax payments, or a credit to a tax reserve account to be held by
Lessor for application to sums due in respect of reassessment or escape
assessments applicable to the period in question, but yet to be billed.
7.5 PERSONAL PROPERTY AND OTHER TAXES.
Lessee shall pay prior to delinquency all Taxes assessed against and levied
upon trade fixtures, furnishings, equipment and all other personal property of
Lessee contained in the Leased Premises or elsewhere. When possible, Lessee
shall cause such trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
Lessee shall also pay prior to delinquency all Taxes and other taxes in
connection with any testing, investigation, abatement, remediation, removal,
transportation and/or disposal of any Hazardous Materials by Lessee, its
employees, agents, representatives, contractors, invitees, subtenants and/or
assigns (or by Lessor, pursuant to any provision of this Lease granting to
Lessor the right to do any of the foregoing and to bill Lessee therefor). For
purposes of this Section 7.5, the terms "Taxes" and "taxes" shall include, but
not be limited to, any fees, charges, fines, penalties and costs (including,
without limitation, permit, approval or licensing fees, charges or costs). If
any of Lessee's said personal property shall be assessed with Lessor's real
property, or if any other Taxes or taxes which are payable by Lessee pursuant to
this Lease or otherwise are assessed against Lessor or Lessor's real property,
Lessee shall pay Lessor the Taxes and other taxes attributable to Lessee within
ten (10) days after receipt of a written statement setting forth the Taxes and
other taxes attributable to Lessee.
7.6 NET RENT.
It is the intention of Lessor and Lessee that the rental received by Lessor
be net of any Taxes of any sort to be paid by Lessor, subject to the exclusions
stated in Section 7.1. In the event it shall not be lawful for Lessee to
reimburse Lessor for any of the Taxes covered by this Article, the Minimum Rent
payable to Lessor under the terms of this Lease shall be increased by the amount
of the portion allocable to Lessee so as to net to Lessor the amount which would
have been receivable by Lessor if such tax had not been imposed.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
4
<PAGE>
8. COMMON AREAS AND COMMON AREA COSTS
8.1 DEFINITION OF COMMON AREAS.
The term "Common Areas" as used herein means all areas and facilities
outside the Leased Premises, within the exterior boundaries of the Complex, that
are provided and designated by Lessor from time to time for the general use and
convenience of Lessee and of other tenants of Lessor having the common use of
such areas, and their respective authorized representatives and invitees. Common
Areas include, without limitation, driveways, parking areas, sidewalks, and
landscaped areas, all as generally described on Exhibit B attached hereto.
Exhibit B is tentative and Lessor reserves the right to make alterations thereto
from time to time.
8.2 RIGHTS AND DUTIES OF LESSOR.
Lessor shall, in a manner it deems proper in its reasonable opinion,
maintain the Common Areas, establish and enforce reasonable rules and
regulations concerning such areas, close any of the Common Areas to whatever
extent required in the opinion of Lessor's counsel to prevent a dedication of
any of the Common Areas or the accrual of any rights of any person or of the
public to the Common Areas, close temporarily any of the Common Areas for
maintenance purposes, and make changes to the Common Areas including, without
limitation, changes in the location of driveways, entrances, exits, vehicular
parking spaces, parking area, the designation of areas for the exclusive use of
others, the direction of the flow of traffic or construction of additional
Buildings thereupon. Lessee hereby acknowledges that Lessor is under no
obligation to provide security for the Common Areas but may do so at its option.
8.3 PAYMENT BY LESSEE.
Lessee shall pay to Lessor, as additional rent along with its payment of
Minimum Rent hereunder, its monthly estimated "pro rata %" (as defined below) of
Common Area Costs as hereinafter defined, in accordance with Section 8.5, below.
Lessee's "pro rata %" shall be that fraction of Common Area Costs the numerator
of which is the number of square feet in the Leased Premises and the denominator
of which is the net leasable area of buildings in the Complex having the use of
the Common Areas. Lessee's initial pro rata % of Common Area Costs is stated in
Section 1.8. Notwithstanding the preceding provisions of this Section 8.3,
Lessee's pro rata % as to certain expenses included in Common Area Costs may be
calculated differently to yield a higher pro rata % for Lessee as to certain
expenses in the event Lessor permits other tenants or occupants in the Complex
to incur such expenses directly rather than have Lessor incur the expense in
common for the Complex. In such case Lessee's pro rata % of the applicable
expense shall be calculated as having as its denominator the net leasable area
of all premises in the Complex less the net leasable area of tenants who have
incurred such expense directly. Furthermore, in the event Lessee consumes
extraordinary amounts of any provided utility or other service as determined in
Lessor's good faith judgment, Lessee's pro rata % for such utility or service
may, at Lessor's election, be based on usage as opposed to square footage, that
is, Lessee's pro rata % of such a utility or service would be calculated as
having as its denominator the total usage of such utility or service in the
Complex (or Building as the case may be), and having as its numerator Lessee's
usage of such utility or service, as determined by Lessor in its sole good faith
judgment. in any case where Lessee, with Lessors consent, incurs such expenses
directly, Lessee's pro rata % of Common Area Costs will be calculated specially
so that expenses of the same character which are incurred by Lessor for the
benefit of other tenants in the Complex shall not be prorated to Lessee. If
repairs are required for systems exclusively serving the Leased Premises
(whether within or outside of said Leased Premises), Lessee shall pay one
hundred percent (100%) of such repair costs. Nothing herein shall imply that
Lessor will permit Lessee or any other tenant of the Complex to incur Common
Area Costs. Any such permission shall be in the sole discretion of Lessor, which
Lessor may grant or withhold in its arbitrary judgment.
8.4 DEFINITION OF COMMON AREA COSTS.
"Common Area Costs" means all sums (including "Capital Costs" as
hereinafter defined and to the extent stated herein) expended by Lessor, its
agents, contractors and employees for operating, maintaining, repairing,
replacing and administering of the Complex, including, without limitation,
painting the exterior walls of the buildings in the Complex, equipping, policing
and protecting, lighting, providing sanitation and sewer and other services,
insuring (including self-insurance and the payment of premiums and deductible
amounts under property and liability insurance policies), repairing, replacing
and maintaining the (i) Common Areas and (ii) all buildings and roofs within the
Complex, and (iii) all other areas, facilities and buildings, vertical
transportation facilities, retention ponds (if applicable), and any and all
facilities and improvements connecting the Complex to off-site buildings or
areas, which are used in connection with the maintenance and/or operation of;
and whether located within or outside of; the Complex; such costs and expenses
shall include, but shall not be limited to, the full cost of: illumination and
maintenance of Complex signs, whether located on or off the Complex; refuse
disposal, water, gas, sewage, electricity and other utilities (without
limitation), including any and all usage, service, hook up, connection,
availability and/or standby fees or charges pertaining to same, and including
all costs associated with the provision. maintenance and operation of any
central telephone service for the Complex and/or utility systems and/or Lines
for the Complex; the operation, maintenance, repair and replacement of all or
any part of the parking areas; snow removal, maintenance and operation of any
temporary or permanent utility, including a sewage disposal system, within or
without the Complex, together with hook up or connection fees and service
charges; compliance with rules, regulations and orders of governmental
authorities pertaining to air pollution control, including the cost of
monitoring air quality; maintenance for wooded areas, retention ponds, lakes and
shoreline areas (if applicable); cleaning, lighting, striping and landscaping;
curbs, gutters, sidewalks, drainage and irrigation ditches, conduits, pipes and
canals located on or adjacent to the Complex; premiums for liability, casualty,
and property
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
5
<PAGE>
insurance; personal property taxes; licensing fees and taxes, audit fees and
expenses; supplies; costs of complying with all governmental regulations, rules,
laws, ordinances and codes; cost, lease payment or depreciation of any
equipment, improvements or facilities used in the operation or maintenance of
the Common Areas or project areas; total compensation and benefits (including
premiums for workers' compensation or any other insurance or other retirement or
employee benefits, and including all costs incurred in providing such benefits)
paid to or on behalf of employees involved in the performance of the work
specified in this Section or employees otherwise providing services to tenants
or customers of the Complex; public transit or carpooling facilities; reserve
accounts established for the purchasing and/or replacement of equipment;
community association and/or property owner's association dues and assessments
which may be imposed upon Lessor by virtue of any recorded instrument affecting
title to the Complex; plus an allowance of five percent (5%) of such sums to
Lessor for an administrative/management fee. Common Area Costs shall also
include, without limitation, the repair and replacement, resurfacing and
repaving of any paved areas, curbs, gutters or other surfaces or areas within
the Complex, the repair and replacement of any equipment or facilities located
within or serving the Complex, and the cost of any capital repairs, replacements
or improvements made by Lessor to the Complex ("Capital Costs"). However,
certain Capital Costs (the "Restricted Capital Costs") shall be includable in
Common Area Costs each year only to the extent of that fraction allocable to the
year in question calculated by amortizing such Restricted Capital Costs over the
reasonably useful life of the improvement resulting therefrom, as determined by
Lessor, with interest on the unamortized balance at the higher of (i) ten
percent (10%) per annum; or (ii) the interest rate as may have been paid by
Lessor for the funds borrowed for the purpose of performing the work for which
the Restricted Capital Costs have been expended, but in no event to exceed the
highest rate permissible by law. The Restricted Capital Costs subject to such
amortization procedure are the following: (x) those costs for capital
improvements to the Complex of a type which do not normally recur more
frequently than every five(5) years in the normal course of operation and
maintenance of facilities such as the Complex (specifically excluding painting
of all or a portion of the Complex); (y) costs incurred for the purpose of
reducing other operating expenses or utility costs, from which Lessee can expect
a reduction in the amounts it would otherwise expend, or reimburse Lessor, and
(z) expenditures by Lessor that are required by governmental law, ordinance,
regulation or mandate, including, without limitation, any "Environmental Laws"
or "Wetlands Laws" (as such terms are defined in Article 19), which were not
applicable to the Complex at the time of the original construction.
Notwithstanding the foregoing, in no event shall Common Area Costs include
any costs incurred by Lessor in the maintenance, repair, or replacement of the
elements of the foundations, roof and exterior walls of the Building (as opposed
to roofing, sheathing or painting of such items, for example.)
8.5 ESTIMATED PAYMENTS.
Lessor shall estimate Lessee's pro rata % of Common Area Costs due in the
future from Lessee and shall collect from Lessee on a monthly basis, along with
Lessee's payment of Minimum Rent hereunder, the amount of Lessee's estimated pro
rata % of such costs. Lessor shall provide Lessee with a reconciliation of
Lessee's account at least annually, and if such reconciliation shall indicate
that Lessee's account is insufficient to satisfy Lessee's pro rata % of Common
Area Costs for the period estimated, Lessee shall immediately pay to Lessor any
deficiency. Any excess in such account indicated by the reconciliation shall be
credited to Lessee's account to reduce the estimated payments for the next
ensuing period.
8.6 REFUSE DISPOSAL.
Lessee shall arrange and pay for Refuse Disposal service at the Leased
Premises. Lessee shall pay Lessor, within ten (10) days of being billed
therefor, for the removal from the Leased Premises, the Building, or the
Complex, of any refuse or rubbish which Lessee shall fail to have removed.
9. ASSIGNMENT AND SUBLETTING
9.1 LEASE IS PERSONAL.
The purpose of this Lease is to transfer possession of the Leased Premises
to Lessee for Lessee's personal use in return for certain benefits, including
rent, to be transferred to the Lessor. Lessee's right to assign or sublet as
stated in this Article is subsidiary and incidental to the underlying purpose of
this Lease. Lessee acknowledges and agrees that it has entered into this Lease
in order to acquire the Leased Premises for its own personal use and not for the
purpose of obtaining the right to convey the leasehold to others.
9.2 "TRANSFER OF THE LEASED PREMISES" DEFINED.
The terms "Transfer of the Leased Premises" or "Transfer" as used herein
shall include any assignment of all or any part of this Lease (including
assignment by operation of law), subletting of all or any part of the Leased
Premises or transfer of possession, or granting of the right of possession or
contingent right of possession of all or any portion of the Leased Premises,
including without limitation, license, concession, mortgage, devise,
hypothecation, agency, franchise or management agreement, or suffering any other
person (the agents and servants of Lessee excepted) to occupy or use the Leased
Premises or any portion thereof If Lessee is a corporation which is not deemed a
public corporation, or is an unincorporated association or partnership, or
Lessee consists of more than one party, the transfer, assignment or
hypothecation of any stock or interest in such corporation, association,
partnership or ownership interest, in the aggregate in excess of twenty-five
percent (25%), shall be deemed a Transfer of the Leased Premises.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
6
<PAGE>
9.3 NO TRANSFER WITHOUT CONSENT.
Lessee shall not suffer a Transfer of the Leased Premises or any interest
therein, or any part thereof, or any right or privilege appurtenant thereto
without the prior written consent of Lessor, and a consent to one Transfer of
the Leased Premises shall not be deemed to be a consent to any subsequent
Transfer of the Leased Premises. Any Transfer of the Leased Premises without
such consent shall (i) be voidable, and (ii) terminate this Lease, in either
case, at the option of Lessor.
9.4 WHEN CONSENT GRANTED.
(a) The consent of Lessor to a Transfer may not be unreasonably
withheld, provided that it is agreed to be reasonable for Lessor to consider any
of the following reasons, which list is not exclusive, in electing to consent or
to deny consent:
(i) Financial strength of the proposed transferee is not at
least equal to that of Lessee at the time of execution of this Lease;
(ii) A proposed transferee whose occupation of the Leased
Premises would cause a diminution in the reputation of the Complex or the other
businesses located therein;
(iii) A proposed transferee whose impact on the common
facilities or the other occupants of the Complex would be disadvantageous;
(iv) A proposed transferee whose use presents a risk of
violation of Article 19;
(v) A proposed transferee whose occupancy will require a
variation in the terms of this Lease (for example, a variation in the use
clause) or which otherwise adversely affects any interest of Lessor;
(vi) Lessee agrees that its personal business skills and
philosophy were an important inducement to Lessor for entering into this Lease
agreement and that Lessor may reasonably object to the Transfer of the Leased
Premises to another whose proposed use, while permitted by the use clause of
this Lease, would involve a quality, manner or type of business skills different
from those of Lessee;
(vii) That the validity of the Transfer is conditioned on the
conformity of the Lessee and transferee with all provisions of this Lease at the
time of Transfer, including, without limitation, the requirement that there be
no uncured notices of default under the terms of this Lease; or
(viii) A proposed transferee who is or is likely to be, or
whose business is or is likely to be, subject to compliance with additional laws
or other governmental requirements beyond those to which Lessee or Lessee's
business is subject.
(b) Notwithstanding the foregoing, Lessee shall have the right,
without the consent of Lessor, but upon prior written notice to Lessor, to
assign this Lease to a company beneficially controlling, controlled by, or under
common control with, Lessee; further provided, however, that in the event that
at any time following such assignment, Lessee wishes to sell, mortgage, devise,
hypothecate or in any other manner whatsoever transfer any portion of the
ownership or beneficial control of the issued and outstanding shares in the
capital stock of such company, such transaction shall be deemed to constitute a
Transfer and shall be subject to all of the provisions of this Article 9 with
respect to a Transfer of the Premises, including, by specific reference, the
provisions of Section 9.8.
9.5 PROCEDURE FOR OBTAINING CONSENT.
(a) Lessor need not commence its review of any proposed Transfer, or
respond to any request by Lessee with respect to such, unless and until it has
received from Lessee adequate descriptive information concerning the transferee,
the business to be conducted by the transferee, the transferee's financial
capacity, and such other information as may reasonably be required in order to
form a prudent judgment as to the acceptability of the proposed Transfer,
including, without limitation, the following:
(i) The past two years' Federal Income Tax returns of the
proposed transferee (or in the alternative the past two years' audited annual
Balance Sheets and Profit and Loss statements, certified correct by a Certified
Public Accountant);
(ii) Banking references of the proposed transferee;
(iii) A resume of the business background and experience of
the proposed transferee;
(iv) At least three (3) business references for the proposed
transferee;
(v) A copy of the instrument by which Lessee proposes to
effectuate the Transfer.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
7
<PAGE>
(b) Lessee shall reimburse Lessor as additional rent for Lessor's
reasonable costs and attorneys' fees incurred in conjunction with the processing
and documentation of any proposed Transfer of the Leased Premises, whether or
not consent is granted.
9.6 RECAPTURE.
(a) By written notice to Lessee (the "Termination Notice') within
twenty (20) business days following submission to Lessor by Lessee of the
information specified in Section 9.5, Lessor may terminate this Lease in the
event of an assignment of this Lease or sublet of the entire Leased Premises, or
terminate this Lease as to the portion of the Leased Premises to be sublet, if
the sublet is to be of less than the entire Leased Premises. In the event Lessor
elects to terminate this Lease as to that portion of the Leased Premises to be
sublet, an amendment to this Lease shall be executed whereby the description of
the Leased Premises is restated and Lessee's obligations for rent and other
charges are reduced in proportion to the reduction in Rentable Area of the
Leased Premises caused thereby. For purposes hereof, the term "Rentable Area" of
a floor shall mean all areas available or held for the exclusive use and
occupancy of the occupants or future occupants of the Complex, measured from the
inside finished surface of the dominant portion of the permanent outer Building
walls, excluding stairs, elevator shafts, flues, pipe shafts, vertical ducts,
and the like, and their enclosing walls, which serve more than one floor of the
Building, but not stairs, dumbwaiters, lifts, and the like, exclusively serving
a tenant occupying offices on more than one floor. No deductions shall be made
for columns and projections necessary to the Building. For purposes hereof, the
Rentable Area of an office or other space on a floor shall be computed by
multiplying (a) the number of square feet computed by measuring to the finished
surface of the office side of corridor and other permanent walls, to the center
of partitions that separate the office from similar adjoining areas, and to the
inside finished surface of the permanent outer Building walls ("Usable Area") by
(b) that fraction the numerator of which is Rentable Area and the denominator of
which is Usable Area.
(b) In the event that Lessor terminates this Lease or terminates this
Lease as to that portion of the Premises to be sublet, Lessor may, if it elects,
enter into a new lease covering the Premises or the affected portion thereof
with the intended assignee or sublessee on such terms as Lessor and such person
may agree or enter into a new lease covering the Premises with any other person;
in such event, Lessee shall not be entitled to any portion of the profit if any
which Lessor may realize on account of such termination and reletting. From and
after the date of such termination of this Lease, the parties shall have no
further obligations to each other under this Lease except for matters occurring
or obligations arising prior to the date of such termination.
9.7 REASONABLE RESTRICTION.
The restrictions on Transfer described in this Article 9 are acknowledged
by Lessee to be reasonable for all purposes, including, without limitation, the
provisions of California Civil Code (the "Code") Section 1951 .4(b)(2). Lessee
expressly waives any rights which it might otherwise be deemed to possess
pursuant to applicable law, including, without limitation, Section 1997.040 of
the Code, to limit any remedy of Lessor pursuant to Section 1951.2 or 1951.4 of
the Code by means of proof that enforcement of a restriction on use of the
Leased Premises would be unreasonable.
9.8 EFFECT OF TRANSFER.
If Lessor consents to a Transfer, the following conditions shall apply:
(a) Each and every covenant, condition or obligation imposed upon
Lessee by this Lease and each and every right, remedy or benefit afforded Lessor
by this Lease shall not be impaired or diminished as a result of such Transfer.
(b) Lessee shall pay to Lessor on a monthly basis, eighty percent
(80%) of the excess of any sums of money, or other economic consideration
received by Lessee from the Transferee in such month (whether or not for a
period longer than one month), including higher rent, bonuses, key money, or the
like over the aggregate, of (i) the amortized portion of the reasonable expenses
actually paid by Lessee to unrelated third parties for brokerage commissions,
tenant improvements to the Premises, or design fees incurred as a direct
consequence of the Transfer, and, (ii) the total sums which Lessee pays Lessor
under this Lease in such month, or the prorated portion thereof if the Leased
Premises transferred is less than the entire Leased Premises. The amount so
derived shall be paid with Lessee's payment of Minimum Rent. The term "amortized
portion" is that portion of the applicable expenses derived by dividing such
expenses by the number of months in the original term of the Transfer
transaction.
(c) No Transfer, whether or not consent of Lessor is required
hereunder, shall relieve Lessee of its primary obligation to pay the rent and to
perform all other obligations to be performed by Lessee hereunder. The
acceptance of rent by Lessor from any person shall not be deemed to be a waiver
by Lessor of any provision of this Lease or to be a consent to any Transfer of
the Leased Premises.
(d) If Lessor consents to a sublease, such sublease shall not extend
beyond the expiration of the Term.
(e) No Transfer shall be valid and no transferee shall take possession
of the Leased Premises or any part thereof unless, within ten (10) days after
the execution of the documentary evidence thereof, Lessee shall deliver
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
8
<PAGE>
to Lessor a duly executed duplicate original of the Transfer instrument in form
satisfactory to Lessor which provides that (i) the transferee assumes Lessee's
obligations for the payment of rent and for the full and faithful observance and
performance of the covenants, terms and conditions contained herein, (ii) such
transferee will, at Lessor's election, attorn directly to Lessor in the event
Lessee's Lease is terminated for any reason on the terms set forth in the
instrument of transfer and (iii) such instrument of transfer contains such other
assurances as Lessor reasonably deems necessary.
10. PROPERTY INSURANCE
10.1 USE OF PREMISES.
No use shall be made or permitted to be made on the Leased Premises, nor
acts done, which will increase the existing rate of insurance upon the Building
in which the Leased Premises are located or upon any other Building in the
Complex or cause the cancellation of any insurance policy covering the Building,
or any part thereof, nor shall Lessee sell, or permit to be kept, used or sold,
in or about the Leased Premises, any article which may be prohibited by the
standard form of "All-Risk" fire insurance policies. Lessee shall, at its sole
cost and expense, comply with any and all requirements pertaining to the Leased
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable property damage and commercial general liability
insurance, covering the Leased Premises, the Building, or the Complex.
10.2 INCREASE IN PREMIUMS.
Lessee agrees to pay to Lessor, as additional rent, any increase in
premiums on policies which may be carried by Lessor on the Leased Premises, the
Building or the Complex, or any blanket policies which include the Building or
Complex, covering damage thereto and loss of rent caused by fire and other
perils, resulting from the nature of Lessee's occupancy or any act or omission
of Lessee. All payments of additional rent by Lessee to Lessor pursuant to this
Section 10.2 shall be made within ten (10) days after receipt by Lessee of
Lessor's billing therefor.
10.3 PRO RATA SHARE OF PREMIUMS.
(a) Lessee shall pay to Lessor, during the Term hereof, as additional
rent, its "proportionate share" (as hereinafter defined) of the insurance
premiums for any property insurance carried by Lessor covering the Complex (the
"Complex Insurance Premium"). Such "proportionate share" is defined as that
fraction of the Complex Insurance Premium the numerator of which is the total
square footage in the Leased Premises and the denominator of which is the total
square footage in all premises to which the Complex Insurance Premium is
applicable. In the event that the property insurance carried by Lessor covering
the Complex is a blanket policy in which other properties not related to the
Complex are included, the Complex Insurance Premium shall be calculated as that
portion of such blanket policy insurance premium which, in Lessor's good faith
judgment, is properly allocable to the Complex. The sum due under this
subsection shall be in addition to that which may be due under the previous
Section of this Lease.
(b) Lessee shall pay any such premium portion to Lessor in accordance
with Section 10.4, below.
10.4 ESTIMATED PAYMENTS.
Lessor shall estimate the amount of Complex Insurance Premium to be due in
the future from Lessee and shall collect from Lessee on a monthly basis, along
with Lessee's payment of Minimum Rent hereunder, the amount of Lessee's
estimated proportionate share of the Complex Insurance Premium. Prior to March 1
of each year, Lessor shall provide Lessee with a reconciliation of Lessee's
account along with a billing for any shortage in the event of a deficiency or
statement for credit applicable to the next ensuing insurance premium payments,
if an overpayment has been made by Lessee.
10.5 PERSONAL PROPERTY INSURANCE.
Lessee shall maintain in full force and effect on all of its fixtures,
furniture, equipment and other business personal property in the Leased Premises
a policy or policies providing protection against any peril included within the
classification "All Risk" to the extent of at least ninety percent (90%) of
their replacement cost, or that percentage of the replacement cost required to
negate the effect of a coinsurance provision, whichever is greater. No such
policy shall have a deductible in a greater amount than One Thousand Dollars
($1,000.00). Lessee shall also insure in the same manner the physical value of
all its leasehold improvements and alterations in the Leased Premises. During
the Term, the proceeds from any such policy or policies of insurance shall be
used for the repair or replacement of the fixtures, equipment, and leasehold
improvements so insured. Lessor shall have no interest in said insurance, and
will sign all documents necessary or proper in connection with the settlement of
any claim or loss by Lessee. Lessee shall also maintain business interruption
insurance and insurance for all plate glass upon the Leased Premises. All
insurance specified in this Section 10.5 to be maintained by Lessee shall be
maintained by Lessee at its sole cost.
10.6 BUSINESS INTERRUPTION INSURANCE.
Lessee shall carry Business Interruption insurance covering those risks and
perils included within the classification "All Risk" in an amount equal to all
gross income generated by Lessee from its operations in the Leased Premises for
a period of twelve (12) months.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
9
<PAGE>
11. LIABILITY INSURANCE
11.1 LESSEE'S INSURANCE.
Lessee shall, at Lessee's expense, obtain and keep in force during the
Term, a commercial general liability insurance policy insuring Lessee against
the risks of bodily injury and property damage, personal injury, contractual
liability, completed operations, products liability, host liquor liability,
owned and nonowned automobile liability arising out of the ownership, use,
occupancy or maintenance of the Leased Premises and all areas appurtenant
thereto. Such insurance shall be a combined single limit policy in an amount not
less than ONE MILLION DOLLARS ($l,000,000.00) per occurrence with a TWO MILLION
DOLLAR ($2,000,000.00) annual aggregate and an umbrella policy of THREE MILLION
DOLLARS ($3,000,000.00) any one occurrence. Lessor and any lender or other party
in interest designated by Lessor shall be named as additional insured(s). The
policy shall contain cross-liability endorsements and shall insure performance
by Lessee of the indemnity. provisions of this Lease; shall be primary, not
contributing with, and not in excess of coverage which Lessor may carry; shall
state that Lessor is entitled to recovery for the negligence of Lessee even
though Lessor is named as an additional insured; shall provide for severability
of interest; shall provide that an act or omission of one of the insured or
additional insureds which would void or otherwise reduce coverage shall not void
or reduce coverages as to the other insured or additional insured; and shall
afford coverage after the Term (by separate policy or extension if necessary)
for all claims based on acts, omissions, injury or damage which occurred or
arose (or the onset of which occurred or arose) in whole or in part during the
Term. The limits of said insurance shall not limit any liability of Lessee
hereunder. Not more frequently than every three (3) years, if, in the reasonable
opinion of Lessor, the amount of liability insurance required hereunder is not
adequate, Lessee shall promptly increase said insurance coverage as required by
Lessor.
11.2 WORKERS' COMPENSATION INSURANCE.
Lessee shall carry Workers' Compensation insurance as required by law,
including an employers' liability endorsement.
12. INSURANCE POLICY REQUIREMENTS
12.1 GENERAL REQUIREMENTS.
All insurance policies required to be carried by Lessee hereunder shall
conform to the following requirements:
(a) The insurer in each case shall carry a designation in "Best's
Insurance Reports" as issued from time to time throughout the Term as follows:
Policyholders' rating of A; financial rating of not less than VII;
(b) The insurer shall be qualified to do business in the state in
which the Leased Premises are located;
(c) The policy shall be in a form and include such endorsements as are
acceptable to Lessor;
(d) Certificates of insurance shall be delivered to Lessor at
commencement of the Term and certificates of renewal, at least thirty (30) days
prior to the expiration of each policy;
(e) Each policy shall require that Lessor be notified in writing by
the insurer at least thirty (30) days prior to any cancellation or expiration of
such policy, or any reduction in the amounts of insurance carried.
13. LESSEE INSURANCE DEFAULT
13.1 RIGHTS OF LESSOR.
In the event that Lessee fails to obtain any insurance required of it under
the terms of this Lease, Lessor may, at its option, but is not obligated to,
obtain such insurance on behalf of Lessee and bill Lessee, as additional rent,
for the cost thereof Payment shall be due within ten (10) days of receipt of the
billing therefor by Lessee.
14. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION
14.1 INTENT AND PURPOSE.
This Article 14 is written and agreed to in respect of the intent of the
parties to assign the risk of loss, whether resulting from negligence of the
parties or otherwise, to the party who is obligated hereunder to cover the risk
of such loss with insurance. Thus, the indemnity and waiver of claims provisions
of this Lease have as their object, so long as such object is not in violation
of public policy, the assignment of risk for a particular casualty to the party
carrying the insurance for such risk, without respect to the causation thereof.
14.2 WAIVER OF SUBROGATION.
Lessor and Lessee release each other, and their respective authorized
representatives, from any claims for
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
10
<PAGE>
damage to the Leased Premises and the Building and other improvements in which
the Leased Premises are located, and to the furniture, fixtures, and other
business personal property, Lessee's improvements and alterations of either
Lessor or Lessee, in or on the Leased Premises and the Building and other
improvements in which the Leased Premises are located, including loss of income,
that are caused by or result from risks insured or required under the terms of
this Lease to be insured against under any property insurance policies carried
or to be carried by either of the parties.
14.3 FORM OF POLICY.
Each party shall cause each such insurance policy obtained by it to provide
that the insurance company waives all rights of recovery by way of subrogation
against either party in connection with any damage covered by such policy.
Neither party shall be liable to the other for any damage caused by any peril
included within the classification "All Risk" which is insured against under any
property insurance policy carried under the terms of this Lease.
14.4 INDEMNITY.
Lessee, as a material part of the consideration to be rendered to Lessor,
shall indemnify, defend, protect and hold harmless Lessor against all actions,
claims, demands, damages, liabilities, losses, penalties, or expenses of any
kind which may be brought or imposed upon Lessor or which Lessor may pay or
incur by reason of injury to person or property or business, from whatever
cause, all or in any way connected with the acts and omissions of Lessee, and
the condition or use of the Leased Premises, or the improvements or personal
property therein or thereon, including without limitation any liability or
injury to the person or property or business of Lessee, its agents, officers,
employees or invitees. Lessee agrees to indemnify, defend and protect Lessor and
hold it harmless from any and all liability, loss, cost or obligation on account
of; or arising out of; any such injury or loss however occurring, including
breach of the provisions of this Lease and the negligence of the parties hereto.
Nothing contained herein shall obligate Lessee to indemnify Lessor against
Lessor's sole or gross negligence or willful acts.
14.5 DEFENSE OF CLAIMS.
In the event any action, suit or proceeding is brought against Lessor by
reason of any such occurrence, Lessee, upon Lessor's request, will at Lessee's
expense resist and defend such action, suit or proceeding, or cause the same to
be resisted and defended by counsel designated either by Lessee or by the
insurer whose policy covers the occurrence and in either case approved by
Lessor. The obligations of Lessee under this Section arising by reason of any
occurrence taking place during the Term shall survive any termination of this
Lease.
14.6 WAIVER OF CLAIMS.
Lessee, as a material part of the consideration to be rendered to Lessor,
hereby waives all claims against Lessor for damages or injury, as described
below, from any cause arising at any time, including the negligence of the
parties hereto:
(a) damages to goods, wares, merchandise and loss of business in, upon
or about the Leased Premises and injury to Lessee, its agents, employees,
invitees or third persons, in, upon or about the Leased Premises; and
(b) (notwithstanding anything to the contrary contained in this Lease,
including, without limitation, the definition of "Common Area Costs" in Section
8.4, which includes "policing") damages to goods, wares, merchandise and loss of
business, in, upon or about the Leased Premises or the Complex, and injury to
Lessee, its agents, employees, invitees or third persons in, upon or about the
Leased Premises or the Complex, where such damage or injury results from
Lessor's failure to police or provide security for the Complex or Lessor's
negligence in connection therewith.
Lessee expressly acknowledges and agrees that the provisions of Section
19.6(b) below apply fully with respect to the matters waived pursuant to this
Section 14.6, and, for such purpose, the term "Released Matters," as used in
Section 19.6(b), shall be deemed to include the matters waived pursuant to this
Section 14.6.
14.7 REFERENCES.
Wherever in this Article the term Lessor or Lessee is used and such party
is to receive the benefit of a provision contained in this Article, such term
shall refer not only to that party but also to its officers, directors,
shareholders, employees, partners, contractors, agents and mortgagees or other
lienholders.
15. DESTRUCTION
15.1 RIGHTS OF TERMINATION.
In the event the Leased Premises suffers (a) an uninsured property loss (as
hereinafter defined), or (b) a property loss which cannot be repaired within one
hundred ninety-five (195) days from the date of destruction under the laws and
regulations of state, federal, county or municipal authorities, or other
authorities with jurisdiction, Lessor may terminate this Lease as at the date of
the damage upon written notice to Lessee following the property loss. In the
event of a property loss to the Leased Premises which cannot be repaired within
one hundred ninety-five (195) days of the
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
11
<PAGE>
occurrence thereof, Lessee shall have the right to terminate the Lease by
written notice to Lessor within twenty (20) days following notice from Lessor
that the time for restoration shall exceed one hundred ninety five (195) days.
For purposes of this Lease, the term "uninsured property loss" shall mean any
loss arising from a peril not covered by the standard form of "All Risk property
insurance policy.
15.2 REPAIRS.
In the event of a property loss which may be repaired within one hundred
ninety-five (195) days from the date of the damage, or, in the alternative, in
the event the parties do not elect to terminate this Lease under the terms of
Section 15.1 above, then this Lease shall continue in full force and effect and
Lessor shall forthwith undertake to make such repairs to reconstitute the Leased
Premises to as near the condition as existed prior to the property loss as
practicable. Such partial destruction shall in no way annul or void this Lease
except that Lessee shall be entitled to a proportionate reduction of Minimum
Rent following the property loss and until the time the Leased Premises are
restored. Such reduction shall be an amount which reflects the degree of
interference with Lessee's business. So long as Lessee conducts its business in
the Leased Premises, there shall be no abatement until the parties agree on the
amount thereof if the parties cannot agree within forty-five (45) days of the
property loss, the matter shall be submitted to arbitration under the rules of
the American Arbitration Association. Upon the resolution of the dispute, the
settlement shall be retroactive and Lessor shall within ten (10) days thereafter
refund to Lessee any sums due in respect of the reduced rental from the date of
the property loss. Lessor's obligations to restore shall in no way include any
construction originally performed by Lessee or subsequently undertaken by
Lessee, but shall include solely that property constructed by Lessor prior to
commencement of the Term.
15.3 REPAIR COSTS.
The cost of any repairs to be made by Lessor, pursuant to Section 15.2 of
this Lease, shall be paid by Lessor utilizing available insurance proceeds.
15.4 WAIVER.
Lessee hereby waives all statutory or common law rights of termination in
respect to any partial destruction or property loss which Lessor is obligated to
repair or may elect to repair under the terms of this Article. Further, in event
of a property loss occurring during the last two (2) years of the original Term
hereof or of any extension, Lessor need not undertake any repairs and may cancel
this Lease unless Lessee has the right under the terms of this Lease to extend
the Term for an additional period of at least five (5) years and does so within
thirty (30) days of the date of the property loss.
15.5 LESSOR'S ELECTION.
In the event that the Complex or Building in which the Leased Premises is
situated be destroyed to the extent of not less than thirty-three and one-third
percent (33-1/3%) of the replacement cost thereof; Lessor may elect to terminate
this Lease, whether the Leased Premises be injured or not, in the same manner as
in Section 15.1 above. At all events, a total destruction of the Complex of
which the Leased Premises form a part, or the Leased Premises itself; shall
terminate this Lease.
16. ACCORD AND SATISFACTION
16.1 ACCEPTANCE OF PAYMENT
No payment by Lessee or receipt by Lessor of a lesser amount of Minimum
Rent or any other sum due hereunder, shall be deemed to be other than on account
of the earliest due rent or payment, nor shall any endorsement or statement on
any check or any letter accompanying any such check or payment be deemed an
accord and satisfaction, and Lessor may accept such check or payment without
prejudice to Lessor's right to recover the balance of such rent or payment or
pursue any other remedy available in this Lease, at law or in equity. Lessor may
accept any partial payment from Lessee without invalidation of any contractual
notice required to be given herein (to the extent such contractual notice is
required) and without invalidation of any notice required to be given pursuant
to California Code of Civil Procedure Section 1161, et seq., or of any successor
statute thereto.
17. SECURITY DEPOSIT
INTENTIONALLY DELETED
18. USE
18.1 PERMITTED USE.
The Leased Premises may be used and occupied only for the purposes
specified in Section 1.7 hereof; and for no other purpose or purposes. Lessee
shall promptly comply with all laws, ordinances, orders and regulations
affecting the Leased Premises, their cleanliness, safety, occupation and use.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
12
<PAGE>
18.2 HAZARDOUS ACTIVITIES.
Lessee shall not engage in any activities or permit to be kept, used, or
sold in or about the Leased Premises, any article which may be prohibited by the
standard form of fire insurance policies. Lessee shall, at its sole cost and
expense, comply with any and all requirements, pertaining to the Leased
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering the
Building and appurtenances.
19. COMPLIANCE WITH LAWS AND REGULATIONS
19.1 LESSEE'S OBLIGATIONS.
Lessee, shall, at its sole cost and expense. comply with all of the
requirements of all municipal, state and federal authorities now in force, or
which may hereafter be in force, pertaining to the Leased Premises, and shall
faithfully observe in the use of the Leased Premises all municipal ordinances
and state and federal statutes and regulations now in force or which may
hereafter be in force, including, without limitation, "Environmental Laws" and
"Wetlands Laws" (as hereinafter defined), and the Americans with Disabilities
Act, 42 U.S.C. (S)(S) 12101-12213 (and any rules, regulations, restrictions,
guidelines, requirements or publications promulgated or published pursuant
thereto, collectively herein referred to as the "ADA"), whether or not any of
the foregoing were foreseeable or unforeseeable at the time of the execution of
this Lease. Lessee's obligation to comply with and observe such requirements,
ordinances, statutes and regulations shall apply regardless of whether such
requirements, ordinances, statutes and regulations regulate or relate to
Lessee's particular use of the Leased Premises or regulate or relate to the use
of premises in general, and regardless of the cost thereof The judgment of any
court of competent jurisdiction, or the admission of Lessee in any action or
proceeding against Lessee, whether Lessor be a party thereto or not, that any
such requirement, ordinance, statute or regulation pertaining to the Leased
Premises has been violated, shall be conclusive of that fact as between Lessor
and Lessee. Within five (5) days after receipt of notice or knowledge of any
violation or alleged violation of any Environmental Law(s), Wetlands Law(s)
and/or the ADA pertaining to the Complex, any governmental or regulatory
proceedings, investigations, sanctions and/or actions threatened or commenced
with respect to any such violation or alleged violation, and any claim made or
commenced with respect to such violation or alleged violation, Lessee shall
notify Lessor thereof and provide Lessor with copies of any written notices or
information in Lessee's possession.
19.2 CONDITION OF LEASED PREMISES.
Lessee hereby accepts the Leased Premises in the condition existing as of
the date of occupancy, subject to all applicable zoning, municipal, county and
state laws, ordinances, rules, regulations, orders, restrictions of record, and
requirements in effect during the Term or any part of the Term hereof regulating
the Leased Premises, and without representation, warranty or covenant by Lessor,
express or implied, as to the condition, habitability or safety of the Leased
Premises, the suitability or fitness thereof for their intended purposes, or any
other matter, except as specifically set forth herein.
19.3 HAZARDOUS MATERIALS.
(a) Hazardous Materials Defined. As used herein, the term "Hazardous
---------------------------
Materials" shall mean any wastes, materials or substances (whether in the form
of liquids, solids or gases, and whether or not air-borne), which are or are
deemed to be pollutants or contaminants, or which are or are deemed to be
hazardous, toxic, ignitable, reactive, corrosive, dangerous, harmful or
injurious, or which present a risk, to public health or to the environment, or
which are or may become regulated by or under the authority of any applicable
local, state or federal laws, judgments, ordinances, orders, rules, regulations,
codes or other governmental restrictions, guidelines or requirements, any
amendments or successor(s) thereto, replacements thereof or publications
promulgated pursuant thereto (collectively "Environmental Laws"), including,
without limitation, any waste, material or substance which is:
(i) defined as "hazardous waste," "extremely hazardous
waste," or "restricted hazardous waste" under Sections 25115,25117 or 25122.7,
or listed pursuant to Section 25140, of the California Health and Safety Code,
Division 20, Chapter 6.5 (Hazardous Waste Control Law);
(ii) defined as a "hazardous substance" under Section 25316
of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-
Presley-Tanner Hazardous Substance Account Act);
(iii) defined as a "hazardous material," "hazardous
substance," or "hazardous waste" under Section 25501 of the California Health
and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response
Plans and Inventory);
(iv) defined as a "hazardous substance" under Section 25281
of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground
Storage of Hazardous Substances);
(v) defined as a "waste" or "hazardous substance" under
Section 13050 of the California Water Code, Division 7, Chapter 2 (Porter-
Cologne Water Quality Control Act);
(vi) listed as a chemical known to the State of California to
cause cancer or reproductive toxicity pursuant to Section 25249.8 of the
California Health and Safety Code, Division 20, Chapter 6.6 (Safe Drinking
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
13
<PAGE>
Water and Toxic Enforcement Act of 1986);
(vii) defined as a "hazardous substance" or "pollutant or
contaminant" pursuant to Section 101 of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. (S) 9601
et seq.;
(viii) listed as an "extremely hazardous substance," "hazardous
chemical," or "toxic chemical" pursuant to the Emergency Planning and Community
Right-to-Know Act of 1986,42 U.S.C. (S) 11001 et seq.;
(ix) listed as a "hazardous substance" in the United States
Department of Transportation Table, 49 C.F.R. 172.101 and amendments thereto, or
by the Environmental Protection Agency (or any successor agency) in 40 C.F.R.
Part 302 and amendments thereto;
(x) defined, listed or designated by regulations promulgated
pursuant to any Environmental Law; or
(xi) any of the following: a pesticide; a flammable
explosive; petroleum, including crude oil or any fraction thereof; asbestos or
an asbestos-containing material; a polychlorinated biphenyl; a radioactive
material; or urea formaldehyde.
In addition to the foregoing, the term "Environmental Laws" shall be deemed
to include, without limitation, local, state and federal laws, judgments,
ordinances, orders, rules, regulations, codes and other governmental
restrictions, guidelines and requirements, any amendments and successors
thereto, replacements thereof and publications promulgated pursuant thereto,
which deal with or otherwise in any manner relate to, air or water quality, air
emissions, soil or ground conditions or other environmental matters of any kind.
(b) Use, etc., of Hazardous Materials. Lessee agrees that during the
---------------------------------
Term, there shall be no use, presence, disposal, storage, generation, leakage,
treatment, manufacture, import, handling, processing, release, or threatened
release of Hazardous Materials on, from or under the Leased Premises by Lessee,
its employees, agents, representatives, contractors, invitees, subtenants and/or
assigns. Lessee shall not be entitled to install any tanks under, on or about
the Leased Premises for the storage of Hazardous Materials without the express
written consent of Lessor, which may be given or withheld in Lessor's sole
arbitrary judgment. The use, presence, disposal, storage, generation, leakage,
treatment, manufacture, import, handling, processing, release or threatened
release of Hazardous Materials by Lessee, its employees, agents,
representatives, contractors, invitees, subtenants and/or assigns, are sometimes
hereinafter individually or collectively referred to as "Hazardous Use."
(c) Hazardous Materials Report; when Required. In the event that
-----------------------------------------
Lessor consents in writing to Lessee's Hazardous Use in the Leased Premises and
the Complex, Lessee shall submit to Lessor a written report with respect to
Hazardous Materials ("Report") in the form prescribed in subparagraph (d) below
on the following dates:
(i) Within ten (10) days prior to the commencement of any
Hazardous Use;
(ii) Within ten (10) days after each anniversary of any
Hazardous Use;
(iii) At any time within ten (10) days after written request
by Lessor, and
(iv) At any time when there has been or is planned any
condition which constitutes or would constitute a change in the information
submitted in the most recent Report, including any notice of violation as
referred to in subparagraph (d)(vii) below.
(d) Hazardous Materials Report; Contents. The Report shall contain,
------------------------------------
without limitation, the following information:
(i) Whether on the date of the Report and (if applicable)
during the period since the last Report there has been any Hazardous Use on,
from or under the Leased Premises.
(ii) If there was such Hazardous Use, the exact identity of
the Hazardous Materials, the dates upon which such materials were brought upon
the Leased Premises, the dates upon which the Hazardous Materials were removed
therefrom, and the quantity, location, use and purpose thereof.
(iii) If there was such Hazardous Use, any governmental
permits maintained by Lessee with respect to such Hazardous Materials, the
issuing agency, original date of issue, renewal dates (if any) and expiration
date. Copies of any such permits and applications therefor shall be attached.
(iv) If there was such Hazardous Use, any governmental
reporting or inspection requirements with respect to such Hazardous Materials,
the governmental agency to which reports are made and/or which conducts
inspections, and the dates of all such reports and/or inspections (if
applicable) since the last Report. Copies of any such Reports shall be attached.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
14
<PAGE>
(v) If there was such Hazardous Use, identification of any
operation or business plan prepared for any government agency with respect to
Hazardous Use.
(vi) Any liability insurance carried by Lessee with respect
to Hazardous Materials, the insurer, policy number, date of issue, coverage
amounts, and date of expiration. Copies of any such policies or certificates of
coverage shall be attached.
(vii) Any notices of violation of Environmental Laws, written
or oral, received by Lessee from any governmental agency since the last Report,
the date, name of agency, and description of violation. Copies of any such
written notices shall be attached.
(viii) Any knowledge, information or communication which Lessee
has acquired or received relating to (x) any enforcement, cleanup, removal or
other governmental or regulatory action threatened or commenced against Lessee
or with respect to the Leased Premises pursuant to any Environmental Laws; (y)
any claim made or threatened by any person or entity against Lessee or the
Leased Premises on account of any alleged loss or injury claimed to result from
any alleged Hazardous Use on or about the Leased Premises; or (z) any report,
notice or complaint made to or filed with any governmental agency concerning any
Hazardous Use on or about the Leased Premises. The Report shall be accompanied
by copies of any such claim, report, complaint, notice, warning or other
communication that is in the possession of or is available to Lessee.
(ix) Such other pertinent information or documents as are
requested by Lessor in writing.
(e) Release of Hazardous Materials: Notification and Cleanup. If at
--------------------------------------------------------
any time during the Term Lessee knows or believes that (i) any Hazardous
Materials have been or may be released onto the Leased Premises or the Complex
by Lessee, its employees, agents, representatives, contractors, invitees,
subtenants and/or assigns, or (ii) any Hazardous Materials brought onto the
Leased Premises or the Complex by or for the benefit of Lessee, its employees,
agents, representatives, contractors, invitees, subtenants and/or assigns have
been or may be released onto the Leased Premises or the Complex by any party
whatsoever, then Lessee shall immediately, either prior to the release or
following the discovery thereof by Lessee, give verbal and follow-up written
notice of that condition to Lessor. Lessee covenants to investigate, clean up
and otherwise remediate any such release of Hazardous Materials at Lessee's cost
and expense; such investigation, clean-up and remediation shall be performed
only after Lessee has obtained Lessor's written consent, which shall not be
unreasonably withheld; provided, however, that Lessee shall be entitled to
respond immediately to an emergency without first obtaining Lessor's written
consent. All clean-up and remediation shall be done in compliance with
Environmental Laws and to the reasonable satisfaction of Lessor. Notwithstanding
the foregoing, whether or not such work is prompted by the foregoing notice from
Lessee or is undertaken by Lessor for any other reason whatsoever, Lessor shall
have the right, but not the obligation, in Lessor's sole and absolute
discretion, exercisable by written notice to Lessee at any time, to undertake
within or outside the Leased Premises all or any portion of any such
investigation, clean-up or remediation with respect to Hazardous Materials (or,
once having undertaken any of such work, to cease same, in which case Lessee
shall perform the work), all at Lessee's cost and expense, which shall be paid
by Lessee as additional rent within ten (10) days after receipt of written
request there for by Lessor (and which Lessor may require to be paid prior to
commencement of any work by Lessor). No such work by Lessor shall create any
liability on the part of Lessor to Lessee or any other party in connection with
such Hazardous Materials or constitute an admission by Lessor of any
responsibility with respect to such Hazardous Materials. It is the express
intention of the parties hereto that Lessee shall be liable under this Section
19.3(e) for any and all conditions covered hereby which were caused or created
by (a) any Hazardous Materials brought onto the Leased Premises or the Complex
by or for the benefit of Lessee, its employees, agents, representatives,
contractors, invitees, subtenants and/or assigns, or (b) Lessee, its employees,
agents, representatives, contractors, invitees, subtenants and/or assigns.
Lessee shall not enter into any settlement agreement, consent decree or other
compromise with respect to any claims relating to any (1) any Hazardous
Materials brought onto the Leased Premises or the Complex by or for the benefit
of Lessee, its employees, agents, representatives, contractors, invitees,
subtenants and/or assigns, or (2) any Hazardous Materials released onto the
Leased Premises or the Complex by Lessee, its employees, agents,
representatives, contractors, invitees, subtenants and/or assigns, without first
(A) notifying Lessor of Lessee's intention to do so and affording Lessor the
opportunity to participate in any such proceedings, and (B) obtaining Lessor's
written consent.
(f) Inspection and Testing by Lessor. Lessor shall have the right at
--------------------------------
all times during the Term to (i) inspect the Leased Premises, as well as
Lessee's books and records, and to (ii) conduct tests and investigations to
determine whether Lessee is in compliance with the provisions of this Section.
Except in case of emergency, Lessor shall give reasonable notice to Lessee
before conducting any inspections, tests, or investigations. The cost of all
such inspections, tests and investigations shall be borne by Lessee, if Lessor
reasonably believes them to be necessary. Neither any action nor inaction on the
part of Lessor pursuant to this Section 19.3(f) shall be deemed in any way to
release Lessee from, or in any way modify or alter, Lessee's responsibilities,
obligations, and/or liabilities incurred pursuant to Section 19.3 hereof.
19.4 WETLANDS.
For the purposes hereof; "Wetlands" shall mean any and all real property
and/or improvements qualifying as an environmental, agricultural or wildlife
refuge, critical habitat or preserve or other protected area defined as wetlands
under, or otherwise falling within the scope of; the Wetlands Laws. For purposes
hereof, "Wetlands Laws' shall mean any applicable local, state or federal laws,
judgments, ordinances, orders, rules, regulations, codes or other governmental
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
15
<PAGE>
restrictions, guidelines or requirements governing environmental, agricultural
or wildlife refuges, critical habitats or preserves or other protected areas,
including but not limited to the Clean Water Act of 1977,33 U.S.C. Section 1251
et seq.; the Food Security Act of l985, 7 U.S.C. Section 1281 et seq.; the
Rivers and Harbors Appropriation Act of 1899, 33 U.S.C. Section 403 et seq.; the
Fish and Wildlife Conservation Act of 1980, 16 U.S.C. Section 2901 et seq.; the
Emergency Wetlands Resources Act of 1986, 16 U.S.C. Section 3901 et seq.; the
Endangered Species Act, 16 U.S.C. Section 1531 et seq.; the Migratory Bird
Treaty Act, 16 U.S.C. Section 701 et seq.; California Fish and Game Code Section
1 et seq.; the California Coastal Act, California Public Resources Code Section
30000 et seq.; the Suisun Marsh Protection Act, California Public Resources Code
Section 29000 et seq.; and any orders, rules, regulations, restrictions,
guidelines or requirements of the San Francisco Bay Conservation and Development
Commission, California Government Code Section 66600 et seq.; including all
amendments or successors to any of the foregoing, replacements thereof; and
publications promulgated by or pursuant thereto, including, without limitation,
the Federal Manual for Identifying and Delineating Jurisdictional Wetlands.
(a) Wetlands Use Prohibited. Lessee agrees that during the Term,
-----------------------
Lessee shall not allow the Leased Premises to be deemed or to be used as a
Wetland or as an environmental, agricultural or wildlife preserve, refuge or
critical habitat or other protected area of any kind whatsoever as defined by
any federal, state or local law, ordinance or regulation relating to
environmental conditions on, under or about the Leased Premises, including but
not limited to, the Wetlands Laws.
(b) Surface and Groundwater Storage. Lessee further agrees that during
-------------------------------
the Term, there shall be no presence or storage on the Leased Premises or
inundation or saturation of any or all of the Leased Premises by stagnant
surface and/or groundwater.
(c) No Violation of Laws. Lessee further agrees that during the Term,
--------------------
Lessee shall not be in violation of any of the provisions of any federal, state
or local law, ordinance or regulation relating to the use of lands as
agricultural, wildlife or other natural preserves, refuges or other protected
areas, including, but not limited to, the Wetlands Laws.
19.5 INDEMNITY.
Lessee shall indemnify, hold harmless, and, at Lessor's option (with such
attorneys as Lessor may approve in advance and in writing), defend Lessor and
Lessor's officers, directors, shareholders, trustees, partners, employees,
contractors, agents and mortgagees or other lien holders, from and against any
and all claims, demands, expenses, actions, judgments, damages (whether
consequential, direct or indirect, known or unknown, foreseen or unforeseen),
penalties, fines, liabilities, losses of every kind and nature (including,
without limitation, property damage, diminution in value of Lessor's interest in
the Leased Premises or the Complex, damages for the loss or restriction on use
of any space or amenity within the Leased Premises or the Complex, damages
arising from any adverse impact on marketing space in the Complex, sums paid in
settlement of claims and any costs and expenses associated with injury, illness
or death to or of any person), suits, administrative proceedings, costs and
fees, including, but not limited to, attorneys' and consultants' fees and
expenses, and the costs of cleanup, remediation, removal and restoration (all of
the foregoing being hereinafter sometimes collectively referred to as "Losses"),
arising from or related to (i) any violation or alleged violation of any of the
requirements, ordinances, statutes, regulations or other laws referred to in
this Article by Lessee, its employees, agents, representatives, contractors,
invitees, subtenants and/or assigns, including, without limitation,
Environmental Laws and Wetlands Laws, or (ii) any breach of the provisions of
this Article by Lessee, its employees, agents, representatives, contractors,
invitees, subtenants and/or assigns, or (iii) any Hazardous Use on, about or
from the Leased Premises by Lessee, its employees, agents, representatives,
contractors, invitees, subtenants and/or assigns, or (iv) any release of
Hazardous Materials brought onto the Leased Premises or the Complex by or for
the benefit of Lessee, its employees, agents, representatives, contractors,
invitees, subtenants and/or assigns. Lessee warrants that it is leasing the
Leased Premises "as-is, where-is," that it has thoroughly inspected the Leased
Premises prior to execution of this Lease, and that it intends to act as an
insurer with respect to any Hazardous Use on, under or about the Leased Premises
by Lessee, its employees, agents, representatives, contractors, invitees,
subtenants and/or assigns.
19.6 RELEASE AND ASSUMPTION OF RISK
(a) Lessee, for itself; and its officers, directors, shareholders,
partners, agents, contractors, attorneys, brokers, servants, employees,
sublessees, lessees, invitees, concessionaires, licensees and representatives
(hereinafter referred to as "Releasors"), hereby waives, releases, acquits and
forever discharges Lessor and its officers, directors, shareholders, trustees,
partners, agents, contractors, attorneys, brokers, servants, employees, lessees,
invitees, licensees and representatives (hereinafter referred to as "Releasees")
of and from any and all Losses, which are in any way connected with, based upon,
related to or arising out of (i) any Hazardous Use or Hazardous Materials on or
about the Leased Premises or the Complex, (ii) any violation by or relating to
the Leased Premises or the Complex (or the ownership, use, condition, occupancy
or operation thereof). or by the Releasors or any other persons or entities, of
any Environmental or Wetlands Laws affecting the Leased Premises or the Complex,
or (iii) any investigation, inquiry, order, hearing, action or other proceeding
by or before any governmental agency or any court in connection with any of the
matters referred to in clauses (i) or (ii) above (collectively, the "Released
Matters"), except to the extent caused by the gross negligence or willful
misconduct of the Releasees. Releasors hereby expressly assume any and all risk
of Losses based on or arising out of or pertaining to the Released Matters.
(b) Lessee agrees, represents and warrants that the Released Matters
are not limited to matters
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
16
<PAGE>
which are known, disclosed or foreseeable, and Lessee waives any and all rights
and benefits which are conferred upon Lessee by virtue of the provisions of
Section 1542 of the California Civil Code, which provides:
LESSEE AGREES, REPRESENTS AND WARRANTS THAT IT IS FAMILIAR WITH, HAS READ,
UNDERSTANDS, AND HAS CONSULTED LEGAL COUNSEL OF ITS CHOOSING WITH RESPECT
TO CALIFORNIA CIVIL CODE SECTION 1542 AND LESSEE REALIZES AND ACKNOWLEDGES
THAT FACTUAL MATTERS NOW UNKNOWN TO IT MAY HAVE GIVEN, OR MAY HEREINAFTER
GIVE, RISE TO LOSSES WHICH ARE PRESENTLY UNKNOWN, UNANTICIPATED AND
UNSUSPECTED. LESSEE FURTHER AGREES, REPRESENTS AND WARRANTS THAT THE
PROVISIONS OF THIS SECTION 19.6 HAVE BEEN NEGOTIATED AND AGREED UPON IN
LIGHT OF THAT REALIZATION AND THAT LESSEE NEVERTHELESS HEREBY INTENDS TO
RELEASE, DISCHARGE AND ACQUIT THE RELEASEES FROM ANY SUCH UNKNOWN LOSSES
WHICH ARE IN ANY WAY RELATED TO THIS LEASE OR THE COMPLEX.
19.7 INDOOR AIR QUALITY.
To prevent the generation, growth or deposit of any mold, mildew, bacillus,
virus, pollen or other microorganism (collectively, "Biologicals") and the
deposit, release or circulation of any indoor contaminants, including, but not
limited to, emissions from paint, carpet and drapery treatments, cleaning,
maintenance and construction materials and supplies, pesticides, pressed wood
products, insulation, tobacco and other materials and products (collectively
with Biologicals, "Contaminants"), that could adversely affect the health,
safety or welfare of any tenant, employee, or other occupant of the Complex or
their invitees (each, an "Occupant"), Lessee shall, at Lessee's sole cost and
expense, at all times during the Term (i) maintain, operate and repair the HVAC
system servicing the Leased Premises (to the extent that Lessee is otherwise
obligated to perform such maintenance, operation and repair pursuant to this
Lease) in a manner consistent with preventing or minimizing the generation,
growth, circulation, release or deposit of any Contaminants, (ii) maintain the
humidity level and the air exchange rate within the Leased Premises (to the
extent that Lessee has control thereof) at a level recommended to prevent or
minimize the growth of any Biologicals and the circulation of any other
Contaminants, (iii) maintain, operate and repair the Leased Premises in such a
manner to prevent or minimize the accumulation of stagnant water and moisture in
planters, kitchen appliances and vessels, carpeting, insulation, water coolers
and any other locations where stagnant water and moisture could accumulate, and
(iv) otherwise maintain, operate and repair the Leased Premises to prevent the
generation, growth, deposit, release or circulation of any Contaminants. If any
governmental entity or any Occupant alleges that health, safety or welfare has
been or could be adversely affected by any such Contaminants, Lessee shall
notify Lessor in writing within twenty-four (24) hours of the time the
allegation is made. Lessor may then elect to engage the services of an
industrial hygiene testing laboratory (or alternatively or concurrently require
Lessee to do the same) to determine whether the cause of any alleged adverse
health effect is or could be attributable to any Contaminants present within the
Leased Premises. Lessee shall be responsible for all such testing costs and for
any consequential damages and costs (including, without limitation, any third-
party claims, loss of rental, remediation, removal and/or abatement costs, and
increases in insurance premiums) resulting from Lessee's failure to comply in
whole or in part with the terms of this Section 19.7. The indemnity set forth in
Section 19.5 above shall apply to Lessee's failure to comply with any of the
terms of this Section.
20. UTILITIES
20.1 PAYMENT BY LESSEE.
Lessee, from the time it first enters the Leased Premises for the purpose
of constructing the Tenant Improvements and thereafter throughout the Term,
shall pay all charges including "hook-up" or connection fees for water, gas,
heat, sewer, power, telephone services and any other utility supplied to or
consumed in or on the Leased Premises. Lessee shall not allow refuse, garbage or
trash to accumulate outside of the Leased Premises except on the day of
scheduled scavenger pick-up services, and then only in areas designated for that
purpose by Lessor. Lessor shall not be responsible or liable for any
interruption in utility services, nor shall such interruption affect the
continuation or validity of this Lease. Lessor does not warrant that any of the
utilities supplied to the Leased Premises will be free of interruption or that
any of the utility systems serving the Complex will be free from the need for
maintenance, repairs and/or replacements. Lessee acknowledges that any one or
more such services may be suspended or reduced by reason of repairs, alterations
or improvements necessary to be made, by strikes or accidents, by any cause
beyond the reasonable control of Lessor, or by orders or regulations of any
federal, state, county or municipal authority. In addition, Lessor shall have no
liability for damages arising from, and Lessor does not warrant that Lessee's
use of any Lines will be free from, (a) any eavesdropping or wire-tapping by
unauthorized parties, (b) any failure of any Lines to satisfy Lessee's
requirements, or (c) any shortages, failures, variations, interruptions,
disconnections, loss or damage caused by installation, maintenance, replacement,
use or removal of Lines by or for other occupants of the Complex, by any failure
of the environmental conditions or the power supply for the Building to conform
to any requirements for the Lines or any associated equipment or an" other
problems associated with any Lines by any other cause.
20.2 SEPARATE METERS.
Lessor reserves the right to install separate meters for any utility
servicing the Leased Premises for which a meter is not presently installed, in
which event Lessee shall make payments, when due, directly to the utility
involved.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
17
<PAGE>
20.3 JOINT METERS.
If any utility services are not separately metered to Lessee, Lessee shall
pay a proportion to be determined by Lessor of all charges jointly metered with
other leased premises or occupants in the Complex. All payments to Lessor in
respect thereof shall be due within ten (10) days after receipt of the billing
by Lessee.
21. ALTERATIONS
21.1 CONSENT OF LESSOR; OWNERSHIP.
Except with respect to the Tenant Improvements to be constructed by Lessee
pursuant to Exhibit C hereto, Lessee shall not make, or suffer to be made, any
alterations to the Leased Premises, the Building, or the Complex, and/or
systems, and/or Lines and facilities therein, or any part thereof; without the
written consent of Lessor first had and obtained. Any additions to or
alterations of the Leased Premises, the Building, or the Complex, and/or
systems, and/or Lines and facilities therein (except trade fixtures) shall,
immediately upon being made, constitute a part of the realty and Lessor's
property, and shall, at the expiration or earlier termination of this Lease,
remain upon the Leased Premises without compensation to Lessee. Except as
otherwise provided in this Lease, Lessee shall have the right to remove its
trade fixtures placed upon the Leased Premises provided that Lessee restores the
Leased Premises as indicated below. Any and all costs incurred by Lessor,
whether in complying with laws, governmental requirements or otherwise, as a
result of any "alterations" (as hereinafter defined), or as a result of request
by Lessee for increased telephone or other utility capacity above that presently
existing (or, in the event the Building is to be constructed or substantially
altered by Lessor prior to the delivery date, above that which is planned by
Lessor for the Building) shall be paid by Lessee within ten (10) days after
demand there for by Lessor.
21.2 REQUIREMENTS.
Any alterations, additions or installations performed by Lessee
(hereinafter collectively "alterations") shall be subject to strict conformity
with the following requirements:
(a) All alterations shall be at the sole cost and expense of Lessee;
(b) Prior to commencement of any work of alteration, Lessee shall
submit detailed plans and specifications, including working drawings
(hereinafter referred to as "Plans"), of the proposed alterations, which shall
be subject to the consent of Lessor in accordance with the terms of Section 21.1
above;
(c) Following approval of the Plans by Lessor, Lessee shall give
Lessor at least ten (10) days' prior written notice of commencement of work in
the Leased Premises so that Lessor may post notices of non-responsibility in or
upon the Leased Premises as provided by law;
(d) No alterations shall be commenced without Lessee having previously
obtained all appropriate permits and approvals required by and of governmental
agencies;
(e) All alterations shall be performed in a skillful and workmanlike
manner, consistent with the best practices and standards of the construction
industry, and pursued with diligence in accordance with the Plans previously
approved by Lessor and in full accord with all applicable laws and ordinances.
All material, equipment, and articles incorporated in the alterations are to be
new, and of recent manufacture, and of the most suitable grade for the purpose
intended;
(f) Lessee must obtain the prior written approval from Lessor for
Lessee's contractor prior to commencement of the work. Lessor may require that
Lessee use subcontractors designated by Lessor as to specified portions of the
work. Lessee's contractor shall maintain all of the insurance reasonably
required by Lessor, including, without limitation, commercial general liability,
workers' compensation, builder's risk and course of construction insurance. The
limits of such insurance shall be the same as those specified in Article 11;
(g) As a condition of approval of the alterations, Lessor may require
performance and labor and materialmen's payment bonds issued by a surety
approved by Lessor, in a sum equal to the cost of the alterations guarantying
the completion of the alterations free and clear of all liens and other charges
in accordance with the Plans. Such bonds shall name Lessor as beneficiary;
(h) The alterations must be performed in a manner such that they will
not interfere with the quiet enjoyment of the other lessees in the Complex;
(i) Lessor shall have the right to condition any approval of the
alterations upon (i) submission by Lessee of a Report with respect to Hazardous
Materials, and/or (ii) the performance by Lessee at Lessee's cost and expense of
such investigation, clean-up and remediation with respect to Hazardous Materials
as Lessor may request, m Lessor's sole and absolute discretion; provided,
however, that Lessor shall have the right, but not the obligation, to undertake
all or any portion of such investigation, clean-up or remediation at Lessee's
cost and expense in accordance with the provisions of Section 19.3(e) above.
Lessee acknowledges and agrees that Lessor shall have the right, in its sole and
absolute discretion, to disapprove the making of any such alterations based upon
the results of any investigation with
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
18
<PAGE>
respect to Hazardous Materials.
21.3 LIENS.
Lessee shall keep the Leased Premises and the Complex in which the Leased
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Lessee. In the event a mechanic's
or other lien is filed against the Leased Premises or the Complex of which the
Leased Premises forms a part as a result of a claim arising through Lessee,
Lessor may demand that Lessee furnish to Lessor a surety bond satisfactory to
Lessor in an amount equal to at least one hundred fifty percent (150%) of the
amount of the contested lien claim or demand, indemnifying Lessor against
liability for the same and holding the Leased Premises free from the effect of
such lien or claim. Such bond must be posted within ten (10) days following
notice from Lessor. In addition, Lessor may require Lessee to pay Lessor's
attorneys' fees and costs in participating in any action to foreclose such lien
if Lessor shall decide it is to its best interest to do so. Lessor may pay the
claim prior to the enforcement thereof; in which event Lessee shall reimburse
Lessor in full, including attorneys' fees, for any such expense, as additional
rent, with the next due rental.
21.4 RESTORATION.
Lessee shall return the Leased Premises to Lessor at the expiration or
earlier termination of this Lease in good and sanitary order, condition and
repair, free of rubble and debris, broom clean, reasonable wear and tear
excepted. However, Lessee shall ascertain from Lessor at least thirty (30) days
prior to the termination of this Lease, whether Lessor desires the Leased
Premises, or any part thereof; restored to its condition prior to the making of
permitted alterations, installations and improvements, and if Lessor shall so
desire, then Lessee shall forthwith restore said Leased Premises or the
designated portions thereof as the case may be, to its original condition,
entirely at its own expense, excepting normal wear and tear. All damage to the
Leased Premises caused by the removal of such trade fixtures and other personal
property that Lessee is permitted to remove under the terms of this Lease and/or
such restoration shall be repaired by Lessee at its sole cost and expense prior
to termination.
22. MAINTENANCE AND REPAIRS
22.1 OBLIGATIONS OF LESSOR AND LESSEE.
Lessee shall, at its sole cost and expense, keep and maintain the interior
and the exterior of the Leased Premises and appurtenances, and every part
thereof in good, clean and sanitary order, condition and repair including all
necessary replacements, and shall maintain the interior and the exterior
appearance of the Leased Premises in a manner consistent with the character, use
and appearance of the Complex. Subject to the obligations of Lessee pursuant to
this Article and pursuant to Article 19, above, Lessor shall perform all
necessary repairs, maintenance and replacement of the foundation, roof and
structural parts of the Building. The cost thereof shall be paid by Lessor and
reimbursed by Lessee on a pro rata basis in the manner provided in this Lease
with respect to Common Area Costs, including amortization of Capital Costs;
provided, however, that Lessor shall be responsible, at its sole cost and
expense and not subject to reimbursement by Lessee, for the maintenance, repair
or replacement of the structural elements of the foundation, roof and exterior
walls of the Building (but specifically not including any roofing, siding,
sheathing, painting or otherwise.) Lessee's pro rata share shall be a fraction,
the numerator of which shall be the number of square feet in the Leased
Premises, and the denominator of which shall be the number of square feet in the
Building. All such amounts shall be due within ten (10) days after Lessee's
receipt of billing. Lessee shall, at its sole cost, keep and maintain all
utilities, fixtures and mechanical equipment used by Lessee in good order,
condition and repair. In the case of equipment installed by Lessor for Lessee,
or installed by Lessee and being or to become the property of Lessor, such as
heating, ventilating and air conditioning equipment (hereinafter, "HVAC"), or
other mechanical equipment, Lessee shall maintain a service contract for its
regular maintenance with a service company acceptable to Lessor, at Lessee's
expense. Evidence of such a service contract will be provided to Lessor at its
request. Prior to commencement of any repairs, Lessee shall give Lessor at least
ten (10) days' prior written notice thereof so that Lessor may post notices of
non-responsibility in or upon the Leased Premises as provided by law. Lessee
must obtain the prior written approval from Lessor for Lessee's contractor
before the commencement of the repair. Lessor may require that Lessee use a
specific contractor for certain types of repairs. Notwithstanding the foregoing,
Lessee shall not make any repairs to the equipment, Lines, facilities or systems
of the Building or Complex which are outside of the Leased Premises or which do
not exclusively serve the Leased Premises.
22.2 HVAC SYSTEM.
Notwithstanding the provisions of the preceding Section, Lessor may elect
at any time upon written notice to Lessee to perform the maintenance of the HVAC
for the account of Lessee. In such event, Lessee shall pay the full cost of the
maintenance contract for the HVAC in the Leased Premises within ten (10) days of
receipt of billing therefor from Lessor, as well as for costs of repair or
replacement of parts thereof as necessary, in the reasonable judgment of Lessor.
Lessor may, at its option, elect to have the HVAC in the Leased Premises
maintained in common with other equipment in the Complex. In such event Lessee
shall pay its pro rata share of such maintenance costs which share shall be
established in an equitable manner by Lessor based upon the relative tonnage in
the Leased Premises compared to the total tonnage under contract, or some other
reasonable means of allocation as selected by Lessor. Lessor's good faith
judgment as to the allocation of the charges described in this paragraph shall
be conclusive. Included in the charges to be allocated to Lessee shall be,
without limitation: the maintenance contract upon the HVAC, extended warranties
and any repairs and replacements not covered by the maintenance contract or
warranty. Lessor may elect to replace the HVAC system, if necessary, and in such
event the cost thereof shall be amortized in the manner provided in this Lease
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
19
<PAGE>
with respect to amortization of other Capital Costs. Lessee shall pay to Lessor,
within ten (10) days after receipt of billing, its pro rata share of such
amortization, established on an equitable basis according to the relative
tonnage in the Leased Premises as compared to the entire area served by the
system.
22.3 CONDITION OF PREMISES.
Lessee shall accept the Leased Premises in "as is" condition as of the date
of execution of this Lease by Lessee, and Lessee acknowledges that the Leased
Premises in such condition are in good and sanitary order, condition and repair.
22.4 WAIVER.
Lessee waives all rights it may have under law to make repairs at Lessor's
expense.
23. CONDEMNATION
23.1 DEFINITIONS.
(a) "Condemnation" means (i) the exercise of any governmental power,
whether by legal proceedings or otherwise, by a condemnor and/or (ii) a
voluntary sale or transfer by Lessor to any condemnor, either under threat of
condemnation or while legal proceedings for condemnation are pending.
(b) "Date of taking" means the date the condemnor has the right to
possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value awarded,
paid or received on a total or partial condemnation.
(d) "Condemnor" means any public or quasi-public authority, or private
corporation or individual, having the power of condemnation.
23.2 TOTAL TAKING.
If the Leased Premises are totally taken by condemnation, this Lease shall
terminate on the date of taking.
23.3 PARTIAL TAKING; COMMON AREAS.
(a) If any portion of the Leased Premises is taken by condemnation,
this Lease shall remain in effect, except that Lessee can elect to terminate
this Lease if 33-l/3% or more of the total number of square feet in the Leased
Premises is taken.
(b) If any part of the Common Areas of the Complex are taken by
condemnation, this Lease shall remain in full force and effect so long as there
is no material interference with the access to the Leased Premises, except that
if thirty percent (30%) or more of the Common Area is taken by condemnation,
either party shall have the election to terminate this Lease pursuant to this
Section.
(c) Fifty percent (50%) or more of the Building in which the Leased
Premises are located is taken, Lessor shall have the election to terminate this
Lease in the manner prescribed herein.
23.4 TERMINATION OR ABATEMENT.
If either party elects to terminate this Lease under the provisions of
Section 23.3 (such party is hereinafter referred to as the "Terminating Party"),
it must terminate by giving notice to the other party (the "Nonterminating
Party") within thirty (30) days after the nature and extent of the taking have
been finally determined (the "Decision Period"). The Terminating Party shall
notify the Nonterminating Party of the date of termination, which date shall not
be earlier than sixty (60) days after the Terminating Party has notified the
Nonterminating Party of its election to terminate nor later than the date of
taking. If Notice of Termination is not given within the Decision Period, the
Lease shall continue in full force and effect except that Minimum Rent shall be
reduced by subtracting therefrom an amount calculated by multiplying the Minimum
Rent in effect prior to the taking by a fraction the numerator of which is the
number of square feet taken from the Leased Premises and the denominator of
which is the number of square feet in the Leased Premises prior to the taking.
23.5 RESTORATION.
If there is a partial taking of the Leased Premises and this Lease remains
in full force and effect pursuant to this Article, Lessor, at its cost, shall
accomplish all necessary restoration so that the Leased Premises is returned as
near as practical to its condition immediately prior to the date of the taking,
but in no event shall Lessor be obligated to expend more for such restoration
than the extent of funds actually paid to Lessor by the condemnor.
23.6 AWARD.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
20
<PAGE>
Any award arising from the condemnation or the settlement thereof shall belong
to and be paid to Lessor except that Lessee shall receive from the award
compensation for the following if specified in the award by the condemning
authority, so long as it does not reduce Lessor's award in respect of the real
property: Lessee's trade fixtures, tangible personal property, loss of business
and relocation expenses. At all events, Lessor shall be solely entitled to all
award in respect of the real property, including the bonus value of the
leasehold. Lessee shall not be entitled to any award until Lessor has received
the above sum in full.
24. EMPLOYEE PARKING
24.1 DESIGNATED AREAS.
Lessor shall have the right by written notice to Lessee, to designate
specific areas of the Complex for employee parking. If Lessor so designates an
employee parking area, then automobiles of Lessee, its employees and agents
shall not park within the parking area except in areas delineated by Lessor as
"employee parking." Lessee shall he entitled to park in common with other
tenants of Lessor. Lessee agrees not to overburden the parking facilities and
agrees to cooperate with Lessor and other tenants in the use of parking
facilities. Lessor reserves the right in its absolute discretion, to determine
whether parking facilities are becoming crowded and, in such event, to allocate
and assign parking spaces among Lessee and other Lessees. Upon request, Lessee
shall provide Lessor with the license plate numbers of all employees.
25. ABANDONMENT
25.1 LESSEE TO OCCUPY.
Lessee shall not abandon the Leased Premises at any time during the Term,
nor permit the Leased Premises to remain unoccupied for a period longer than ten
(10) consecutive days during the Term, and if Lessee shall abandon, vacate or
surrender the Leased Premises, or be dispossessed by process of law, or
otherwise, any personal property belonging to Lessee and remaining on the Leased
Premises after such ten (10) day period shall, at the option of Lessor, be
deemed abandoned.
26. ENTRY BY LESSOR
26.1 RIGHTS OF LESSOR.
Lessee shall permit Lessor and Lessor's agents to enter the Leased Premises
at all reasonable times for the purpose of inspecting the same or for the
purpose of maintaining the Building, the Complex, and the Lines, systems and
facilities therein, or for the purpose of making repairs, replacements,
alterations or additions to any portion of the Building, the Complex, and the
Lines, systems and facilities therein, including the erection and maintenance of
such scaffolding, canopies, fences and props as may be required, or for the
purpose of posting notices of non-responsibility for alterations, additions or
repairs, or for the purpose of placing upon the Building any usual or ordinary
"for sale" signs, without any rebate of Rent and without any liability to Lessee
for any loss of occupation or quiet enjoyment of the Leased Premises thereby
occasioned, and shall permit Lessor, at any time within ninety (90) days prior
to the expiration of this Lease, to place upon the Leased Premises any usual or
ordinary "to let" or "to lease" signs. This Section in no way affects the
maintenance obligations of the parties hereto.
27. SIGNS
27.1 APPROVAL, INSTALLATION AND MAINTENANCE.
Lessee shall not place on the Leased Premises or on the Complex, any
exterior signs or advertisements nor any interior signs or advertisements that
are visible from the exterior of the Leased Premises, without Lessor's prior
written consent, which Lessor reserves the right to withhold for any aesthetic
reason in its sole judgment. The cost of installation and regular maintenance of
any such signs approved by Lessor shall be at the sole expense of Lessee. At the
termination of this Lease, or any extension thereof Lessee shall remove all his
signs, and all damage caused by such removal shall be repaired at Lessee's
expense.
28. DEFAULT
28.1 DEFINITION.
The occurrence of any of the following shall constitute a material default
and breach of this Lease by Lessee:
(a) Any failure by Lessee to pay the rental or to make any other
payment required to he made by Lessee hereunder when due;
(b) The abandonment of the Leased Premises by Lessee in violation of
Section 25.1 hereof;
(c) Any future by Lessee to provide executed documents as and when
required under the provisions of Section 35.2 and/or Article 36;
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
21
<PAGE>
(d) A failure by Lessee to observe and perform any other provision of
this Lease to be observed or performed by Lessee, where such failure continues
for ten (10) days after written notice thereof by Lessor to Lessee; provided,
however, that if the nature of the default is such that the same cannot
reasonably be cured within the ten (10) day period allowed, Lessee shall not be
deemed to be in default if Lessee shall, within such ten (10) day period,
commence to cure and thereafter diligently prosecute the same to completion;
(e) Either (1) the appointment of a receiver (except a receiver
appointed at the instance or request of Lessor) to take possession of all or
substantially all of the assets of Lessee, or (2) a general assignment by Lessee
for the benefit of creditors, or (3) any action taken or suffered by Lessee
under any insolvency or bankruptcy act shall constitute a breach of this Lease
by Lessee. In such event, Lessor may, at its option, declare this Lease
terminated and forfeited by Lessee, and Lessor shall be entitled to immediate
possession of the Leased Premises. Upon such notice of termination, this Lease
shall terminate immediately and automatically by its own limitation;
(f) Any two (2) failures by Lessee to observe and perform any
provision of this Lease during any twelve (12) month period of the Term, as such
may be extended, shall constitute, at the option of Lessor, a separate and
noncurable default.
29. REMEDIES UPON DEFAULT
29.1 TERMINATION AND DAMAGES.
In the event of any default by Lessee, then in addition to any other
remedies available to Lessor herein or at law or in equity, Lessor shall have
the immediate option to terminate this Lease and all rights of Lessee hereunder
by giving written notice of such intention to terminate. In the event that
Lessor shall elect to so terminate this Lease, then Lessor may recover from
Lessee.
(a) The worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus
(b) The worth at the time of award of the amount by which the unpaid
rent which would have been earned after termination until the time of award
exceeds the amount of such rental loss Lessee proves could have been reasonably
avoided; plus
(c) The worth at the time of award of the amount by which the unpaid
rent for the balance of the Term after the time of award exceeds the amount of
such rental loss that Lessee proves could be reasonably avoided; plus
(d) Any other amount necessary to compensate Lessor for all the
detriment proximately caused by Lessee's future to perform its obligations under
this Lease or which in the ordinary course of events would be likely to result
therefrom; and
(e) At Lessor's election, such other amounts in addition to or in lieu
of the foregoing as may be permitted from time to time by the applicable law in
the state in which the Leased Premises are located.
29.2 DEFINITIONS.
(a) The terms "rent' or "rental, as used in this Lease, shall be
deemed to be and to mean the Minimum Rent and all other sums required to be paid
by Lessee pursuant to the terms of this Lease.
(b) As used in subSections 29.1(a) and (b) above, the "worth at the
time of award" is computed by allowing interest at the rate of ten percent (10%)
per annum. As used in subSection 29.1(c) above, the "worth at the time of award"
is computed by discounting such amount at the discount rate of the Federal
Reserve Bank for the region in which the Complex is located at the time of award
plus one percent (1%).
29.3 PERSONAL PROPERTY.
(a) In the event of any default by Lessee, Lessor shall also have the
right, with or without terminating this Lease, to reenter the Leased Premises
and remove all persons and property from the Leased Premises; such property may
be removed and stored in a public warehouse or elsewhere at the cost of and for
the account of Lessee.
(b) In the event of default, all of Lessee's fixtures, furniture,
equipment, improvements, additions, alterations and other personal property
shall remain upon the Leased Premises and in that event, and continuing during
the length of such default, Lessor shall have the sole right to take exclusive
possession of such property and to use it, rent or charge free, until all
defaults are cured or, at Lessor's option, at any time during the Term, to
require Lessee to forthwith remove such property. The rights stated herein are
in addition to Lessor's rights described in Section 30.1.
29.4 RECOVERY OF RENT; RELETTING.
(a) In the event of the vacation or abandonment of the Leased Premises
by Lessee or in the event that Lessor shall elect to reenter as provided in
Section 29.3 above, or shall take possession of the Leased Premises
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
22
<PAGE>
pursuant to legal proceeding or pursuant to any notice provided by law, then if
Lessor does not elect to terminate this Lease as provided in Section 29.1 above,
this Lease shall continue in effect for so long as Lessor does not terminate
Lessee's right to possession, and Lessor may enforce all its rights and remedies
under this Lease, including, without limitation, Lessor's right from time to
time, without terminating this Lease, to either recover all rental as it becomes
due or relet the Leased Premises or any part thereof for such term or terms and
at such rental or rentals and upon such other terms and conditions as Lessor, in
its sole discretion, may deem advisable with the right to make alterations and
repairs to the Leased Premises. Acts of maintenance or preservation or efforts
to relet the Leased Premises or the appointment of a receiver upon initiation of
Lessor or other legal proceeding granting Lessor or its agent possession to
protect Lessor's interest under this Lease shall not constitute a termination of
Lessee's right to possession.
(b) In the event that Lessor shall elect to so relet, then rentals
received by Lessor from such reletting shall be applied: first, to the payment
of any indebtedness other than rent due hereunder from Lessee to Lessor; second,
to the payment of any cost of such reletting; third, to the payment of the cost
of any alterations and repairs to the Leased Premises ; fourth, to the payment
of rent due and unpaid hereunder; and the residue, if any, shall be held by
Lessor and applied in payment of future rent as the same may become due and
payable hereunder. Should that portion of such rentals received from such
reletting during any month, which is applied by the payment of rent hereunder,
be less than the rent payable during that month by Lessee hereunder, then Lessee
shall pay such deficiency to Lessor immediately upon demand therefor by Lessor.
Such deficiency shall be calculated and paid monthly. Lessee shall also pay to
Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
(c) No reentry or taking possession of the Leased Premises or any
other action under this Section shall be construed as an election to terminate
this Lease unless a written notice of such intention be given to Lessee or
unless the termination thereof be decreed by a court of competent jurisdiction.
Notwithstanding any reletting without termination by Lessor because of any
default by Lessee, Lessor may at any time after such reletting elect to
terminate this Lease for any such default.
(d) Lessor has the remedy described in California Civil Code Section
1951.4 (Lessor may continue Lease in effect after Lessee's breach and
abandonment and recover rent as it becomes due, if Lessee has right to sublet or
assign, subject only to reasonable limitations).
29.5 NO WAIVER.
Efforts by Lessor to mitigate the damages caused by Lessee's default in
this Lease shall not constitute a waiver of Lessor's right to recover damages
hereunder, nor shall Lessor have any obligation to mitigate damages hereunder.
29.6 CURING DEFAULTS.
Should Lessee fail to repair, maintain, keep clean, and/or service the
Leased Premises, or any part or contents thereof at any time or times, or
perform any other obligations imposed by this Lease or otherwise, then after
having given Lessee reasonable notice of the failure or failures and a
reasonable opportunity, which in no case shall exceed ten (10) days, to remedy
the failure, Lessor may enter upon the Leased Premises and perform or contract
for the performance of the repair, maintenance, or other Lessee obligation, and
Lessee shall pay Lessor for all direct and indirect costs incurred in connection
therewith within ten (10) days of receiving a bill therefor from Lessor.
29.7 NO RIGHT TO CURE.
Notwithstanding anything to the contrary set forth in Section 28.1 above,
Lessee shall be deemed to have committed a material default and breach of this
Lease, without any right on Lessee's part to cure such default and breach, upon
the failure by Lessee to observe and perform the provisions of any one or more
of the following Sections (or indicated portions thereof) of this Lease: 9.3,
19.1, 21.1 (first sentence), 26.1, 35.2, 36.1 and 36.2.
29.8 CUMULATIVE REMEDIES.
The various rights, options, election powers, and remedies of Lessor
contained in this Article and elsewhere in this Lease shall be construed as
cumulative and no one of them exclusive of any others or of any legal or
equitable remedy which Lessor might otherwise have in the event of breach or
default, and the exercise of one right or remedy by Lessor shall not in any way
impair its right to any other right or remedy.
30. FORFEITURE OF PROPERTY AND LESSOR'S LIEN
30.1 REMOVAL OF PERSONAL PROPERTY.
Lessee agrees that as at the date of termination of this Lease or
repossession of the Leased Premises by Lessor, by way of default or otherwise,
it shall remove all personal property to which it has the right to ownership
pursuant to the terms of this Lease. Any and all such property of Lessee not
removed by such date shall, at the option of Lessor, be removed by Lessor and
stored at the expense and for the account of Lessee. Lessee waives all rights to
notice and all common law and statutory claims and causes of action which it may
have against Lessor subsequent to such date as regards the storage, destruction,
damage, loss of use and ownership of the personal property affected by the terms
of this
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
23
<PAGE>
Article. Lessee acknowledges Lessor's need to relet the Leased Premises upon
termination of this Lease or repossession of the Leased Premises and understands
that the forfeitures and waivers provided herein are necessary to aid said
reletting, and to prevent Lessor incurring a loss for inability to deliver the
Leased Premises to a prospective lessee.
30.2 LESSOR'S LIEN.
Lessee hereby grants to Lessor a lien upon and security interest in all
fixtures, chattels and personal property of every kind now or hereafter to be
placed or installed in or on the Leased Premises and agrees that in the event of
any default on the part of Lessee, Lessor shall have all the rights and remedies
afforded the secured party by the chapter on "Default" of Division 9 of the
Uniform Commercial Code of the state in which the Leased Premises are located
and may, in connection therewith, also (a) enter on the Leased Premises to
assemble and take possession of the collateral, (b) require Lessee to assemble
the collateral and make its possession available to Lessor at the Leased
Premises, and (c) enter the Leased Premises, render the collateral, if
equipment, unusable and dispose of it in a manner provided by the Uniform
Commercial Code of the state in which the Leased Premises are located. Lessee
hereby designates Lessor as his attorney-in-fact for purposes of executing such
documents as may be necessary to perfect the lien and security interest granted
hereunder.
31. SURRENDER OF LEASE
31.1 NO MERGER.
The voluntary or other surrender of this Lease by Lessee, or a mutual
cancellation thereof, shall not work as a merger, and shall, at the option of
Lessor, terminate all or any existing subleases or subtenancies, or may, at the
option of Lessor, operate as an assignment to it of any or all such subleases or
subtenancies.
32. LESSOR'S EXCULPATION
32.1 LIMITED LIABILITY.
In the event of default, breach, or violation by Lessor (which term
includes Lessor's partners, co-venturers, co-tenants, officers, directors,
trustees, employees, agents, or representatives) of any of Lessor's obligations
under this Lease, Lessor's liability to Lessee shall be limited to its ownership
interest in the Leased Premises (or its interest in the Complex, if applicable)
or the proceeds of a public sale of such interest pursuant to foreclosure of a
judgment against Lessor.
32.2 NO RECOURSE.
Lessor (as defined in Section 32.1) shall not be personally liable for any
deficiency beyond its interest in the Leased Premises. All personal liability of
all trustees, their employees, agents or representatives is expressly waived by
Lessee.
33. ATTORNEYS' FEES
33.1 ACTIONS, PROCEEDINGS, ETC.
Lessee hereby agrees to pay, as additional rent, all reasonable attorneys'
fees and disbursements, and all other court costs or expenses of legal
proceedings or other legal services which Lessor may incur or pay out by reason
of or in connection with:
(a) any action or proceeding brought by Lessor wherein Lessor obtains
a final judgment or award against Lessee (including arbitration) on account of
any default by Lessee in the observance or performance of any obligation under
this Lease including, hut not limited to, matters involving payment of rent and
additional rent, alterations or other Lessee's work and subletting or
assignment;
(b) any action or proceeding brought by Lessee against Lessor (or any
officer, partner, or employee of Lessor) in which Lessee fails to secure a final
judgment against Lessor;
(c) any other appearance by Lessor (or any officer, partner, or
employee of Lessor) as a witness or otherwise in any action or proceeding
whatsoever involving or affecting Lessee or this Lease;
(d) any assignment, sublease, or leasehold mortgage proposed or
granted by Lessee (whether or not permitted under this Lease), and all
negotiations with respect thereto; and
(e) any alteration of the Leased Premises by Lessee, and all
negotiations with respect thereto.
In any action or proceeding referred to in this Section 33.1, Lessee shall
be entitled to recover its reasonable attorneys' fees and costs if Lessee is the
prevailing party against Lessor.
33.2 SURVIVAL.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
24
<PAGE>
Lessee's obligations under this Section shall survive the expiration or any
other termination of this Lease. This Section is intended to supplement (and not
to limit) other provisions of this Lease pertaining to indemnities and/or
attorneys' fees.
33.3 COUNSEL FEES.
Should it be necessary for Lessor to employ legal counsel to enforce any of
the provisions of this Lease, Lessee agrees to pay, as additional rent, all
attorneys' fees and court costs reasonably incurred thereby, whether or not
Lessor commences any legal action or proceeding.
34. NOTICES
34.1 WRITING.
All notices, demands and requests required or permitted to he given or made
under any provision of this Lease, shall be in writing and shall be: (i) given
or made by personal service, or (ii) by mailing same by registered or certified
mail, return receipt requested, postage prepaid, or (iii) by reputable overnight
courier service which provides written evidence of delivery, addressed to the
respective party at the address set forth in Section 1.2 of this Lease or at
such other address as the party may from time to time designate, by a written
notice, sent to the other in the manner aforesaid.
34.2 EFFECTIVE DATE.
Any such notice, demand or request ("notice") shall be deemed given or made
on the third day after the date so mailed. Notwithstanding the foregoing, notice
given by personal delivery to the party at its address as aforesaid shall be
deemed given on the day on which delivery is made. Notice given by a reputable
courier service which provides written evidence of delivery shall be deemed
given on the business day immediately following deposit with the courier
service.
34.3 AUTHORIZATION TO RECEIVE.
Each person and/or entity whose signature is affixed to this Lease as
Lessee or as guarantor of Lessee's obligations ("obligor") designates such other
obligor its agent for the purpose of receiving any notice pertaining to this
Lease or service of process in the event of any litigation or dispute arising
from any obligation imposed by this Lease.
35. SUBORDINATION
35.1 PRIORITY OF ENCUMBRANCES.
This Lease, at Lessor's option, shall be subordinate to any ground lease,
mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the real property of which the Leased Premises are a part
and to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof
Notwithstanding such subordination, Lessee's right to quiet possession of the
Leased Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
35.2 EXECUTION OF DOCUMENTS.
Lessee agrees to execute any documents required to effectuate such
subordination or to make this Lease prior to the lien of any mortgage, deed of
trust or ground lease, as the case may be, and failing to do so within ten (10)
days after written demand, does hereby make, constitute and irrevocably appoint
Lessor as Lessee's attorney-in-fact and in Lessee's name, place and stead, to do
so. It is understood by all parties that Lessee's failure to execute the
subordination documents referred to above may cause Lessor serious financial
damage by causing the failure of a financing or sale transaction.
35.3 ATTORNMENT.
Lessee shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any Deed given in lieu of foreclosure.
36. ESTOPPEL CERTIFICATES
36.1 EXECUTION BY LESSEE.
Within ten (10) days of request therefor by Lessor, Lessee shall execute a
written statement acknowledging the commencement and termination dates of this
Lease, that it is in full force and effect, has not been modified (or if it has,
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
25
<PAGE>
stating such modifications), and providing any other pertinent information as
Lessor or its agent might reasonably request. Failure to comply with this
Article shall be a material breach of this Lease by Lessee giving Lessor all
rights and remedies under Article 29 hereof, as well as a right to damages
caused by the loss of a loan or sale which may result from such failure by
Lessee.
36.2 FINANCING, SALE OR TRANSFER.
If Lessor desires to finance, refinance, sell, ground lease or otherwise
transfer the Leased Premises, or any part thereof, or the Building, Lessee
hereby agrees, within ten (10) days of request there for by Lessor, to deliver
to any lender or to any prospective buyer, ground lessor or other transferee
designated by Lessor such financial statements of Lessee, its Guarantor and its
parent company, if any, as may be reasonably required by such party. Such
statements shall include the past three (3) years' financial statements of
Lessee. All such financial statements shall be received by Lessor in confidence
and shall be used only for the purposes herein set forth.
37. WAIVER
37.1 EFFECT OF WAIVER.
The waiver by Lessor of any breach of any Lease provision shall not be
deemed to be a waiver of such Lease provision or any subsequent breach of the
same or any other term, covenant or condition therein contained. The subsequent
acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any
preceding breach by Lessee of any provision of this Lease, other than the
failure of Lessee to pay the particular rental so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
38. HOLDING OVER
38.1 MONTH-TO-MONTH TENANCY ON ACCEPTANCE.
If Lessee should remain in possession of the Leased Premises after the
expiration of the Term and without executing a new Lease, then, upon acceptance
of rent by Lessor, such holding over shall be construed as a tenancy from month
to month, subject to all the conditions, provisions and obligations of this
Lease as existed during the last month of the Term hereof, so far as applicable
to a month to month tenancy, except that the Minimum Rent shall be equal to one
hundred fifty percent (150%) of the Minimum Rent payable immediately prior to
the expiration or sooner termination of the Lease.
39. SUCCESSORS AND ASSIGNS
39.1 BINDING EFFECT.
The covenants and conditions herein contained shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of all of the parties hereto; and all of the parties
hereto shall be jointly and severally liable hereunder.
40. TIME
40.1 TIME OF THE ESSENCE.
Time is of the essence of this Lease with respect to each and every
article, section and subsection hereof.
41. EFFECT OF LESSOR'S CONVEYANCE
41.1 RELEASE OF LESSOR.
If during the Term, Lessor shall sell its interest in the Building or
Complex of which the Leased Premises forms a part, or the Leased Premises, then
from and after the effective date of the sale or conveyance, Lessor shall be
released and discharged from any and all obligations and responsibilities under
this Lease, except those already accrued.
42. TRANSFER OF SECURITY
42.1 TRANSFER TO PURCHASER.
If any security be given by Lessee to secure the faithful performance of
all or any of the covenants of this Lease on the part of Lessee, Lessor may
transfer and/or deliver the security, as such, to the purchaser of the
reversion, in the event that the reversion be sold, and thereupon Lessor shall
be discharged from any further liability in reference thereto.
43. CORPORATE AUTHORITY
43.1 AUTHORIZATION TO EXECUTE.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
26
<PAGE>
If Lessee is a corporation, each individual executing this Lease on behalf
of said corporation represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said corporation in accordance with
a duly adopted resolution of the Board of Directors of said corporation or in
accordance with the Bylaws of said corporation, and that this Lease is binding
upon said corporation in accordance with its terms. Further, Lessee shall,
within thirty (30) days after execution of this Lease, deliver to Lessor a
certified copy of a resolution of the Board of Directors of said corporation
authorizing or ratifying the execution of this Lease.
44. WAIVER OF CALIFORNIA CODE SECTIONS
44.1 WAIVER BY LESSEE.
In this Lease, numerous provisions have been negotiated by the parties,
some of which provisions are covered by statute. Whenever a provision of this
Lease and a provision of any statute or other law cover the same matter, the
provisions of this Lease shall control. Therefore, Lessee waives (for itself and
all persons claiming under Lessee) the provisions of Civil Code Sections 1932(2)
and 1933(4) with respect to the destruction of the Leased Premises; Civil Code
Sections 1941 and 1942 with respect to Lessor's repair duties and Lessee's right
to repair; Civil Code Section 1995.310, granting to a tenant all remedies
provided by law for breach of contract (including, without limitation, the right
to contract damages and the right to terminate the lease) in the event that the
landlord unreasonably withholds consent to a transfer in violation of the
tenant's rights under the lease; Code of Civil Procedure Section 1265.130,
allowing either party to petition the Superior Court to terminate this Lease in
the event of a partial taking of the Leased Premises by condemnation as herein
defined; and any right of redemption or reinstatement of Lessee under any
present or future case law or statutory provision (including Code of Civil
Procedure Sections 473 and 1179 and Civil Code Section 3275) in the event Lessee
is dispossessed from the Leased Premises for any reason. This waiver applies to
future statutes enacted in addition to or in substitution for the statutes
specified herein.
45. WASTE
45.1 WASTE OR NUISANCE.
Lessee shall not commit, or suffer to be committed, any waste upon the
Leased Premises, or any nuisance, or other act or thing which may disturb the
quiet enjoyment of any other tenant or occupant of the Complex in which the
Leased Premises are located.
46. BANKRUPTCY
46.1 BANKRUPTCY EVENTS.
If at any time during the Term there shall be filed by or against Lessee in
any court pursuant to any statute either of the United States or of any State a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of all or a portion of Lessee's property,
or if a receiver or trustee takes possession of any of the assets of Lessee, or
if the leasehold interest herein passes to a receiver, or if Lessee makes an
assignment for the benefit of creditors or petitions for or enters into an
arrangement (any of which are referred to herein as "a bankruptcy event"), then
the following provisions shall apply:
(a) At all events any receiver or trustee in bankruptcy or Lessee as
debtor in possession ("debtor") shall either expressly assume or reject this
Lease within sixty (60) days following the entry of an "Order for Relief."
(b) In the event of an assumption of the Lease by a debtor, receiver,
or trustee, such debtor, receiver, or trustee shall immediately after such
assumption (1) cure any default or provide adequate assurances that defaults
will be promptly cured; and (2) compensate Lessor for actual pecuniary loss or
provide adequate assurances that compensation will be made for actual pecuniary
loss; and (3) provide adequate assurance of future performance.
For the purposes of this paragraph 46.1(b), adequate assurance of future
performance of all obligations under this Lease shall include, but is not
limited to:
(i) written assurance that rent and any other consideration
due under the Lease shall first be paid before any other of Lessee's costs of
operation of its business in the Leased Premises are paid;
(ii) written agreement that assumption of this Lease will not
cause a breach of any provision hereof including, but not limited to, any
provision relating to use or exclusivity in this or any other Lease, or
agreement relating to the Leased Premises, or if such a breach is caused, the
debtor, receiver or trustee will indemnify Lessor against such loss (including
costs of suit and attorneys' fees), occasioned by such breach;
(c) Where a default exists under the Lease, the party assuming the
Lease may not require Lessor to provide services or supplies incidental to the
Lease before its assumption by such trustee or debtor, unless Lessor is
compensated under the terms of the Lease for such services and supplies provided
before the assumption of such Lease.
(d) The debtor, receiver, or trustee may only assign this Lease in
accordance with the terms of
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
27
<PAGE>
Article 30 and if adequate assurance of future performance by the assignee is
provided, whether or not there has been a default under the Lease. For the
purpose hereof; adequate assurance of future performance means written agreement
that assignment of this Lease will not cause a breach of any provision hereof
including, but not limited to, any provision relating to use or exclusivity in
this or any other Lease or agreement relating to the Leased Premises, and that
if such a breach is caused, the debtor, receiver or trustee will indemnify
Lessor against such loss (including costs of suit and attorney's fees),
occasioned by such breach. Any consideration paid by any assignee in excess of
the rental reserved in the Lease shall be the sole property of; and paid to,
Lessor. Upon assignment by the debtor or trustee, the obligations of the Lease
shall be deemed to have been assumed and the assignee shall execute an
assumption agreement on request of Lessor.
(e) Lessor shall be entitled to the fair market value for the Leased
Premises and the services provided by Lessor (but in no event less than the
rental reserved in the Lease) subsequent to the commencement of a bankruptcy
event.
(f) Lessor specifically reserves any and all remedies available to
Lessor in Article 29 hereof or at law or in equity in respect of a bankruptcy
event by Lessee to the extent such remedies are permitted by law.
47. LATE CHARGES
47.1 LATE PAYMENT BY LESSEE.
Lessee acknowledges that late payment by Lessee to Lessor of rent or any
other payment due hereunder will cause Lessor to incur costs not contemplated by
this Lease, the exact amount of such costs being extremely difficult and
impractical to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Lessor by the terms
of any encumbrance and note secured by any encumbrance covering the Leased
Premises. Therefore, if any installment of rent, or any other payment due
hereunder from Lessee is not received by Lessor when due, Lessee shall pay to
Lessor an additional sum of ten percent (10%) of such rent or other charge as a
late charge. The parties agree that this late charge represents a fair and
reasonable estimate of the cost that Lessor will incur by reason of late payment
by Lessee. Acceptance of any late charge shall not constitute a waiver of Lessee
default with respect to the overdue amount, or prevent Lessor from exercising
any other rights or remedies available to Lessor.
48. MORTGAGEE PROTECTION
48.1 NOTICE AND RIGHT TO CURE DEFAULT.
Lessee agrees to give any mortgagee(s) and/or trust deed holders, by
registered mail, a copy of any notice of default served upon Lessor, provided
that prior to such notice Lessee has been notified, in writing (by way of Notice
of Assignment of Rents and Leases, or otherwise), of the address of such
mortgagees and/or trust deed holders. Lessee further agrees that if Lessor shall
have failed to cure such default within the time provided for in this Lease,
then the mortgagees and/or trust deed holders shall have an additional thirty
(30) days within which to cure such default or, if such default cannot be cured
within that time, then such additional time as may be necessary if within such
thirty (30) days. any mortgagee and/or trust deed holder has commenced and is
diligently pursuing the remedies necessary to cure such default (including but
not limited to commencement of foreclosure proceedings, if necessary to effect
such cure), in which event this Lease shall not be terminated while such
remedies are being so diligently pursued.
49. MISCELLANEOUS PROVISIONS
49.1 CAPTIONS.
The captions of this Lease are for convenience only and are not a part of
this Lease and do not in any way limit or amplify the terms and provisions of
this Lease.
49.2 NUMBER AND GENDER.
Whenever the singular number is used in this Lease and when required by the
context, the same shall include the plural, the plural shall include the
singular, and the masculine gender shall include the feminine and neuter
genders, and the word "person" shall include corporation, firm or association.
If there be more than one Lessee, the obligations imposed under this Lease upon
Lessee shall be joint and several.
49.3 MODIFICATIONS.
This instrument contains all of the agreements, conditions and
representations made between the parties to this Lease and may not be modified
orally or in any other manner than by an agreement in writing signed by all of
the parties to this Lease.
49.4 PAYMENTS.
Except as otherwise expressly stated, each payment required to be made by
Lessee shall be in addition to and not in substitution for other payments to be
made by Lessee.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
28
<PAGE>
49.5 SEVERABILITY.
The invalidity of any provision of this Lease, as determined by a court of
competent jurisdiction, shall in no way affect the validity of any other
provision hereof.
49.6 NO OFFER.
The preparation and submission of a draft of this Lease by either party to
the other shall not constitute an offer, nor shall either party be bound to any
terms of this Lease or the entirety of the Lease itself until both parties have
fully executed a final document and an original signature document has been
received by both parties. Until such time as described in the previous sentence,
either party is free to terminate negotiations with no obligation to the other.
49.7 DISPUTED SUMS.
Under the terms of this Lease numerous charges are and may be due from
Lessee to Lessor including, without limitation, Common Area changes, real estate
taxes, insurance reimbursement and other items of a similar nature including
advances made by Lessor in respect of Lessee's default at Lessor's option. In
the event that at any time during the Term there is a bona fide dispute between
the parties as to the amount due for any of such charges claimed by Lessor to be
due, the amount demanded by Lessor shall be paid by Lessee until the resolution
of the dispute between the parties or by litigation. Failure by Lessee to pay
the disputed sums until resolution shall constitute a default under the terms of
the Lease.
49.8 LESSEE'S REMEDIES.
Notwithstanding anything to the contrary contained in this Lease, if any
provision of this Lease expressly or impliedly obligates Lessor not to
unreasonably withhold its consent or approval, an action for declaratory
judgment or specific performance will be Lessee's sole right and remedy in any
dispute as to whether Lessor has breached such obligation.
49.9 LIGHT, AIR AND VIEW.
No diminution of light, air, or view by any structure which may hereafter
be erected (whether or not by Lessor) shall entitle Lessee to any reduction of
Rent, result in any. liability of Lessor to Lessee, or in any other way affect
this Lease or Lessee's obligations hereunder.
49.10 PUBLIC TRANSPORTATION INFORMATION.
Lessee shall comply with all requirements of any local transportation
management ordinance.
49.11 RULES AND REGULATIONS.
Lessee agrees to comply with all reasonable rules and regulations adopted
and promulgated by Lessor and applicable to all tenants in the Complex for the
lawful, orderly, clean, safe, aesthetic, quiet, and beneficial use, operation,
maintenance, management, and enjoyment of the Complex. The initial rules and
regulations concerning the Complex are attached hereto as Exhibit E. Lessor
reserves the right to make additional rules affecting the Complex throughout the
Term hereof. Lessor shall have no liability for violation by any other lessee in
the Complex of any rules or regulations nor shall such violation or waiver
thereof excuse Lessee from compliance. All delivery and dispatch of supplies,
fixtures, equipment and furniture shall be by means and during hours established
by Lessor. Lessee shall not at any time park its trucks or other delivery
vehicles in the Common Areas, except in such parts thereof as from time to time
designated by Lessor.
49.12 JOINT AND SEVERAL LIABILITY.
Should Lessee consist of more than one person or entity, they shall be
jointly and severally liable on this Lease.
49.13 SURVIVAL OF OBLIGATION.
All obligations of Lessee which may accrue or arise during the Term or as a
result of any act or omission of Lessee during said Term shall, to the extent
they have not been fully performed, satisfied or discharged, survive the
expiration or termination of this Lease.
49.14 REAL ESTATE BROKERS.
Lessor and Lessee each represents and warrants to the other party that it
has not authorized or employed, or acted by implication to authorize or employ,
any real estate broker or salesman to act for it in connection with this Lease,
other than CPS ("Broker") representing both Lessor and Lessee. Lessor and Lessee
shall each indemnify, defend and hold the other party harmless from and against
any and all claims by any real estate broker or salesman whom the indemnifying
party authorized or employed, or acted by implication to authorize or employ, to
act for the indemnifying
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
29
<PAGE>
party in connection with this Lease, other than the Broker identified above.
Lessor shall pay to Broker a lease commission in connection with this Lease
transaction pursuant to a separate agreement between Lessor and Broker.
49.15 NONLIABILITY OF LESSOR FOR APPROVALS.
Except as may otherwise be expressly stated by a provision of this Lease,
and only to the extent so stated, the consent or approval, whether express or
implied, or the act, failure to act or failure to object, by Lessor in
connection with any plan, specification, drawing, proposal, request, act,
omission, notice or communication (collectively, "act") by or for, or prepared
by or for, Lessee, shall not create any responsibility or liability on the part
of Lessor, and shall not constitute a representation by Lessor, with respect
lathe completeness, sufficiency, efficacy, propriety, quality or legality of
such act.
49.16 INTEREST ON PAST DUE AMOUNTS.
If any sum due Lessor from Lessee is not received by Lessor within five (5)
calendar days after the date such sum is due and payable, such sum shall bear
interest from the due date until paid by Lessee at the rate of two percent (2%)
above the Prime Rate (as herein defined), not to exceed the maximum rate of
interest allowed by law in the state where the Leased Premises are located, and
such interest shall be deemed to be additional rent. "Prime Rate" means the
highest rate charged by Bank of America NT&SA, San Francisco Main Office, on
short-term unsecured loans to its most creditworthy corporate borrowers.
49.17 CONVERSION TO A LIMITED LIABILITY ENTITY.
(a) No Conversion Without Consent. Anything to the contrary in this
-----------------------------
Lease notwithstanding, if Lessee is currently a partnership (either general or
limited), joint venture, cotenancy, joint tenancy or an individual, Lessee may
not convert (the "Conversion") the Lessee entity or person into any type of
entity which possesses the characteristic of limited liability such as, by way
of example only, a corporation, a limited liability company, limited liability
partnership or limited liability limited partnership (singularly and
collectively, "Limited Entity"), without the consent of Lessor, which consent,
subject to fulfillment of the conditions below, shall not be unreasonably
withheld.
(b) Conditions to Lessor's Consent. The following are conditions
------------------------------
precedent to Lessor's obligation to act reasonably with respect to a Conversion
to a Limited Entity:
(i) The Limited Entity assumes all of Lessee's liabilities
and is assigned all of Lessee's assets as of the effective date of the
Conversion;
(ii) As of the effective date of the Conversion, the Limited
Entity shall have a net worth ("Net Worth"), which is not less than the greater
of (i) Lessee's Net Worth on the date of execution of the Lease or (ii) Lessee's
Net Worth as of the date Lessee requests Lessor's consent to the Conversion;
(iii) Lessee has timely fulfilled all its obligations under
any of the terms, covenants or conditions of this Lease during the term of the
Lease;
(iv) Lessee delivers to Lessor an agreement, in form and
substance satisfactory to Lessor and executed by each equity interest holder of
Lessee, wherein each equity interest holder of Lessee agrees to remain
personally liable for all of the terms, covenants and conditions of the Lease
that are to be observed and performed by the Limited Entity; and
(v) Lessee shall reimburse Lessor within ten (10) days
following Lessor's written demand therefor for any and all reasonable costs and
expenses that may be incurred by Lessor in connection with the Conversion
including, without limitation, reasonable attorney's fees.
(c) Nothing in this Section 49.17 shall modify or reduce the
obligations of Lessee under this Lease.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the
day and year first written above.
LESSOR: LESSEE:
BEDFORD PROPERTY INVESTORS, INC., CREDENCE SYSTEMS CORPORATION,
a Maryland corporation a Delaware corporation
BY: /s/ Bob Pester BY: /s/ W.R. Bottoms
------------------------------- ----------------------------------
ITS: SVP ITS: CEO
------------------------------ ---------------------------------
DATED: 12/13/97 DATED: December 12, 1997
---------------------------- -------------------------------
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
30
<PAGE>
FOR OFFICE USE ONLY:
PREPARED BY: mps
REVIEWED BY: nips
APPROVED BY: rep
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
31
<PAGE>
ADDENDUM
--------
OPTION TO EXTEND THE TERM
-------------------------
1. Notice of Exercise. Lessee shall have the right to extend the initial
------------------
Term hereof for ONE (1) additional and consecutive period of FIVE(5) years upon
the same terms and conditions as stated herein, except for Minimum Rent. Such
extension is herein referred to as an "Extended Term." Lessee must exercise its
right, if at all, by written notification (the "Notice of Exercise") to Lessor
not less than Two Hundred Ten (210) days prior to the expiration of the Term
hereof, provided that Lessee has not been in default of any of the provisions of
this Lease during the Term.
2. Options are Personal. The option to extend granted herein is personal
--------------------
to the original Lessee executing this Lease, and notwithstanding anything to the
contrary contained in the Lease, the rights contained in this Addendum are not
assignable or transferable by such original Lessee. Lessor grants the rights
contained herein to Lessee in consideration of Lessee's strict compliance with
the provisions hereof, including, without limitation, the manner of exercise of
this option.
3. Fair Market Rental. If Lessee exercises the right to extend the Term
------------------
then the Minimum Rent shall be adjusted to equal the Fair Market Rental for the
Leased Premises as of the date of the commencement of the Extended Term,
pursuant to the procedures hereinafter set forth. The term "Fair Market Rental"
means the Minimum Rent chargeable for the Leased Premises based upon the
following factors applicable to the Leased Premises or any comparable premises:
(a) rental rates being charged for comparable premises in the same
geographical location;
(b) The relative locations of comparable premises;
(c) Improvements, or allowances provided for improvements, or to be
provided;
(d) Rental adjustments, if any, or rental concessions;
(e) Services and utilities provided or to be provided;
(f) Use limitations or restrictions;
(g) Any other relevant Lease terms or conditions.
In no event, however, shall the Fair Market Rental be less than the Minimum
Rent in effect immediately prior to the commencement date of the Extended Term.
The Fair Market Rental, as determined pursuant to this Addendum, shall become
the monthly Minimum Rent payable by Lessee during the initial twelve (12) months
of the Extended Term. The Minimum Rent shall be adjusted upon the expiration of
the initial twelve (12) months of the Extended Term, and upon the expiration of
each twelve (12) month period thereafter, in accordance with the provisions of
Paragraph 9, below.
4. Determination of Fair Market Rental. Upon exercise of the right to
-----------------------------------
extend the Term, and included within the Notice of Exercise, Lessee shall notify
Lessor of its opinion of Fair Market Rental as above defined for the Extended
Term. If the parties are unable to agree upon a Minimum Rent for the Extended
Term within thirty (30) days following Lessor's receipt of the Notice of
Exercise, within ten (10) days thereafter either party may, at its sole cost and
expense and by giving notice to the other party in writing, appoint a real
estate appraiser who is a member of the Appraisal Institute, or the Society of
Real Estate Appraisers, or an equivalent professional organization, with at
least five (5) years' experience appraising properties devoted to the same
general type of use (e.g. retail, office) as the Leased Premises in the county
in which the Leased Premises are located ("Qualified Appraiser"), to set the
Fair Market Rental for the Extended Term. If a party does not appoint a
Qualified Appraiser within ten (10) days after the first party has given notice
of the name of its Qualified Appraiser, the single Qualified Appraiser appointed
shall be the sole appraiser and shall set the Fair Market Rental for the
Extended Term. If two Qualified Appraisers are appointed by the parties, they
shall meet promptly, on five (5) days notice to the parties, to take such
evidence and other information as the parties may deem reasonable to submit to
the Qualified Appraisers. Within thirty (30) days after the selection of the
last of the two Qualified Appraisers to be appointed by the parties, the
Qualified Appraisers shall render their opinions of the Fair Market Rental of
the Leased Premises as above qualified. If the two valuations are within ten
percent (10%) of each other, they shall be averaged and the average of the two
shall be the Minimum Rent for the Extended Term. If only one appraisal is timely
submitted that appraisal shall constitute the Minimum Rent for the Extended
Term. If the two valuations are separated by more than ten percent (10%), then
the two Qualified Appraisers shall, within ten (10) days following the last date
for submission of the two appraisals of Fair Market Rental, appoint a third
Qualified Appraiser, who shall decide the Fair Market Rental for the Extended
Term as specified in Section 7 of this Addendum. If the two Qualified Appraisers
are unable to agree upon a third Qualified Appraiser within such ten (10) day
period, they shall notify the parties hereto in writing of their inability to
appoint a third Qualified Appraiser, and within ten (10) days following receipt
of such notice either of the parties to this Lease, by giving five (5) days'
notice to the other party, may demand Arbitration as specified in Section 6 of
this Addendum. If neither party applies for Arbitration within the ten (10) day
period herein specified, the two appraisals of Fair Market Rental shall be
averaged as stated above, and such average shall be the Minimum Rent for the
Extended Term..
5. Arbitration. In the event the parties are unable to mutually agree upon
-----------
a Minimum Rent for the Extended
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
Term, and in such event proceed to Appraisal or Arbitration proceedings as
specified below, both parties shall be bound to submit the matter for such
determination. The procedure specified in this Addendum for appointment of
Qualified Appraisers, delivery of appraisals, appointment of an Arbitrator, and
determination of Fair Market Rental thereby, is herein collectively referred to
as "Arbitration." The Arbitration shall be conducted and determined in the
County where the Leased Premises are situated. If the Arbitration is not
concluded before the commencement of the Extended Term, Lessee shall pay Minimum
Rent to Lessor in an amount equal to the Fair Market Rental set forth in the
appraisal by Lessor's Qualified Appraiser until the Fair Market Rental is
determined in accordance with the arbitration provisions hereof If the Fair
Market Rental as determined by Arbitration differs from that stated by Lessor's
Qualified Appraiser, then any adjustment shall be made by payment by the
appropriate party within thirty (30) days after the determination of Fair Market
Rental by Arbitration has been concluded, as provided herein. Lessee shall be
obligated to make payment during the entire Extended Term of the Minimum Rent,
determined in accordance with the Arbitration procedure hereunder, as increased
pursuant to Paragraph 9, below.
6. Demand for Arbitration. A party demanding Arbitration hereunder shall
----------------------
make its demand in writing ("Demand Notice") within ten (10) days after receipt
of notice from the Qualified Appraisers that they have failed to appoint a third
Qualified Appraiser as specified in Section 4 above. A copy of the Demand Notice
shall be sent to the President of the Real Estate Board for the county in which
the Leased Premises are located. If there is no Real Estate Board, or Board
President, in said county then a copy of the Demand Notice shall be sent to the
Presiding Judge of the highest trial court in such county for the state in which
the Leased Premises are located. The Board President or Presiding Judge,
whichever is applicable, is hereinafter referred to as the "Appointer." The
Appointer, acting in his personal, private capacity, shall appoint within ten
(10) days thereafter a third Qualified Appraiser to be the "Arbitrator." The
Arbitrator shall be qualified to serve as an expert witness, over objection, to
give opinion testimony addressed to the issue in a court of competent
jurisdiction.
7. Decision of the Arbitrator. As used herein, the term "Arbitrator"
--------------------------
refers to a third Qualified Appraiser, selected by any of the methods heretofore
set forth. The Arbitrator shall, within sixty (60) days after his appointment,
state in writing his determination as to whether the Fair Market Rental stated
by Lessor's Qualified Appraiser or the Fair Market Rental stated by Lessee's
Qualified Appraiser most closely approximates his own. The Arbitrator shall have
the right to consult experts and competent authorities with factual information
or evidence pertaining to the determination of Fair Market Rental, but any such
consultation shall be made in the presence of both parties with full right to
cross examine. The Arbitrator shall not state his own opinion of Fair Market
Rental, but shall be strictly limited to the selection of one of the two
appraisals submitted by the other two Qualified Appraisers. The Arbitrator shall
have no right to propose a middle ground or any modification of either of the
proposed valuations, and shall have no power to modify this Lease. The valuation
so chosen as most closely approximating that of the Arbitrator shall constitute
his decision, shall be deemed the Minimum Rent for the Extended Term and shall
be final and binding upon the parties absent fraud or gross error. The
Arbitrator shall render a decision and award in writing, with counterpart copies
to each party. Judgement may be entered thereon in any court of competent
jurisdiction.
8. Successor Arbitrator: Fees and Expenses. In the event of failure,
---------------------------------------
refusal, or inability of the Arbitrator to act in a timely manner, a successor
shall be appointed in the same manner as such Arbitrator was first chosen
hereunder. The fees and expenses of the Arbitrator and for the administrative
hearing fee, if any, shall be divided equally between the parties. Each party
shall bear its own attorneys' fees and other expenses, including fees of
witnesses in presenting evidence, and the fees and cost of its own Qualified
Appraiser.
9. CPI Rental Adjustment. The Minimum Rent determined pursuant to this
---------------------
Addendum shall be the monthly Minimum Rent payable by Lessee during the initial
twelve(12) months of the Extended Term. Such Minimum Rent shall be adjusted upon
the expiration of the initial twelve (12) months of the Extended Term, and upon
the expiration of each twelve (12) month period thereafter(hereinafter, the
"adjustment dates"), as follows: the basis for computing the adjustment in
Minimum Rent is the Consumer Price Index, All Urban Consumers, All Items, San
Francisco/Oakland/San Jose Bay Area, published by the United States Department
of Labor, Bureau of Labor Statistics (1984=100) (the "Index.") The Index which
is published nearest to the commencement of the Extended Term (for the rental
adjustment occurring upon expiration of the initial twelve months of the
Extended Term), or the immediately prior adjustment date (for the rental
adjustment as of all other adjustment dates) shall be deemed to be the
"Beginning Index." The Index published nearest to the applicable adjustment date
shall be deemed to be the "Extension Index." If the Extension Index has
increased over the applicable Beginning Index, the Minimum Rent for the
following twelve (12) months (until the next rent adjustment date) shall be
established by multiplying the Minimum Rent in effect immediately prior to the
applicable adjustment date by a fraction, the numerator of which is the
Extension Index and the denominator is the Beginning Index. In no event,
however, shall the Minimum Rent as established at each adjustment date be less
than three percent (3%) more than, or more than eight percent (8%) more than,
the Minimum Rent due immediately prior to the applicable adjustment date. Lessor
shall notify Lessee of the amount of such adjustment, and Lessee shall
acknowledge such adjustment within five (5) days of such notice from Lessor.
Following adjustment of the Minimum Rent as specified herein, the parties shall
immediately execute an amendment to the Lease on request of either party stating
the new Minimum Rent. In the event that the Extension Index has not been
published as of the applicable adjustment date, the previous Minimum Rent shall
remain in effect until publication thereof on the first day of the first
calendar month following publication of the Extension Index (the "Retroactive
Date"), Lessee shall pay to Lessor (i) the Minimum Rent for the current month as
increased as provided herein, and (ii) the monthly increase in the Minimum Rent
resulting from the calculation upon publication of the Extension Index
multiplied by the number of months that have elapsed between the last adjustment
date and the Retroactive Date, such that the newly revised Minimum Rent shall
have been paid in full commencing with the immediately preceding adjustment
date. If the Index is changed so that the Beginning Index differs
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
from that used for the Extension Index, the Index shall be converted in
accordance with the conversion factor published by the United States Department
of Labor, Bureau of Labor Statistics. If the Index is discontinued or revised
during the term of the Lease, such other government index or computation with
which nit is replaced shall be used in order to obtain substantially the same
result as would have been obtained if the Index had not been discontinued or
revised.
LESSOR: LESSEE:
BEDFORD PROPERTY INVESTORS, INC., CREDENCE SYSTEMS CORPORATION,
BY: /s/ Bob Pester BY: /s/ W.R. Bottoms
------------------------------ ----------------------------------
ITS: SVP ITS: CEO
----------------------------- ---------------------------------
DATED: 12/12/97 DATED: December 12, 1997
--------------------------- -------------------------------
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE COMPLEX
REAL PROPERTY IN THE CITY OF FREMONT, COUNTY OF ALAMEDA, STATE OF CALIFORNIA,
DESCRIBED AS FOLLOWS:
LOT 9, TRACT 4464, FILED JULY 11, 1980, BOOK 120, PAGE 9 OF MAPS, ALAMEDA COUNTY
RECORDS.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
EXHIBIT B
PLAN OF COMPLEX SHOWING LOCATION OF THE LEASED PREMISES
[DIAGRAM OF FLOOR PLAN APPEARS HERE]
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
EXHIBIT C
CONSTRUCTION OBLIGATIONS
1. DEFINED TERMS. All capitalized terms referred to in this Exhibit C
-------------
(this "Agreement") not defined below shall have the same meaning as defined in
the Lease of which this Agreement forms a part.
2. CONSTRUCTION OF TENANT IMPROVEMENTS. Lessee shall construct the
-----------------------------------
Tenant Improvements in accordance with this Agreement and the approved
Construction Plans.
3. DEFINITIONS. Each of the following terms shall have the following
-----------
meaning:
"ARCHITECT" shall mean Zamora & Associates Architects, Planners.
Architect shall be employed by Lessee and all costs of Architect will be the
responsibility of Lessee as part of the Tenant Improvement Cost.
"BASE TENANT IMPROVEMENT ALLOWANCE" shall mean the amount to be
contributed by Lessor toward Tenant Improvement Cost. The Base Tenant
Improvements Allowance shall be an amount equal to Twenty Dollars ($20.00)
multiplied by the square footage of the Leased Premises (which Lessor and Lessee
agree is equal to 35,132 rentable square feet), or Seven Hundred Two Thousand
Six Hundred Forty Dollars ($702,640.00.) Notwithstanding anything to the
contrary contained herein or in the Lease, in no event shall Lessor have any
obligation to pay any costs or expenses incurred in connection with or arising
out of the Tenant Improvements in excess of the Base Tenant Improvement
Allowance specified above.
"BUILDING" shall mean the Building Shell and the Tenant Improvements.
"BUILDING SHELL" shall mean the basic minimum enclosure of the
Building consisting of the foundation and floors, structural framework, roof
coverings, exterior walls and exterior doors and windows, basic fire sprinkler
systems, plumbing system stubs, underground electrical power stubs with up to
1,000 amps at 277/480 volts of electrical power available to the Leased
Premises, the parking lots and landscaping appurtenant to the Complex, but
excluding all Tenant Improvements. Lessor shall construct the Building Shell at
its sole cost and expense.
"CONSTRUCTION PLANS" shall mean the complete plans and specifications
for the construction of the Tenant Improvements, which shall be in substantial
compliance with the Approved Preliminary Plans, consisting of all architectural,
engineering, mechanical and electrical drawings and specifications which are
required to obtain all building permits, licenses and certificates from the
applicable governmental authority(ies) for the construction of the Tenant
Improvements. The Construction Plans shall be prepared by Architect, and in all
respects shall be in compliance with all applicable laws, rules, regulations,
and building codes for the City of Fremont, California.
"CONTRACTOR" shall mean University Construction, a California licensed
general contractor. Contractor shall be responsible for construction of the
Tenant Improvements, and shall utilize Werthmann Electric Co. as the electrical
subcontractor, and Air Systems as the HVAC/mechanical contractor, in the
construction of the Tenant Improvements..
"LESSEE'S PERSONAL PROPERTY" shall mean all personal property
constructed or installed in the Leased Premises by Lessee at Lessee's expense,
including furniture, fixtures and equipment, but excluding Tenant Improvements.
"TENANT IMPROVEMENTS" shall mean all interior portions of the Building
to be constructed by Lessee pursuant to this Agreement and the Approved
Construction Plans, including but not limited to, electrical systems, heating,
ventilating and air conditioning systems ("HVAC"), plumbing and fire sprinkler
systems (to the extent such electrical, HVAC, plumbing and fire sprinkler
systems are not included in the Building Shell), interior partitions, millwork,
floor coverings, acoustical ceilings, interior painting, and similar items.
"TENANT IMPROVEMENT COST" shall mean the costs for construction and
installation of the Tenant Improvements, inclusive of the fees charged by
Architect. The costs for construction and installation shall include, but not be
limited to, the following:
(a) architectural / space planning fees and costs charged by
Architect in the preparation of the Preliminary Plans, Construction Plans and/or
any Change Requests;
(b) any and all other fees and costs charged by architects,
engineers and consultants in the preparation of the Construction Plans,
including mechanical, electrical, plumbing and structural drawings and of all
other aspects of the Construction Plans, and for processing governmental
applications and applications for payment, observing construction of the work,
and other customary engineering, architectural, interior design and space
planning services;
(c) surveys, reports, environmental and other tests and
inspections of the site and any improvements thereon necessary for the
construction of the Tenant Improvements;
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
(d) labor, materials, equipment and fixtures supplied by the
Contractor, its subcontractors and/or materialmen;
(e) the furnishing and installation of all HVAC duct work,
terminal boxes, distributing diffusers and accessories required for completing
the heating, ventilating and air conditioning system in the Leased Premises,
including costs of meter and key control for after-hour usage;
(f) all electrical circuits, wiring, lighting fixtures, and tube
outlets furnished and installed throughout the Leased Premises, including costs
of meter and key control for after-hour electrical power usage;
(g) all window and floor coverings in the Leased Premises:
(h) all fire and life safety control systems, such as fire
walls, sprinklers and fire alarms, including piping, wiring and accessories
installed within the Leased Premises;
(i) all plumbing, fixtures, pipes and accessories installed
within the Leased Premises;
(j) fees charged by the city and/or county where the Building is
located (including, without limitation, fees for building permits and plan
checks) required for the construction of the Tenant Improvements in the Leased
Premises;
(k) all taxes, fees, charges and levies by governmental and
quasi-governmental agencies for authorization, approvals, licenses and permits;
and all sales, use and excise taxes for the materials supplied and services
rendered in connection with the installation and construction of the Tenant
Improvements;
(l) all costs and expenses incurred to comply with all laws,
rules, regulations or ordinances of any governmental authority in connection
with the construction of the Tenant Improvements.
Tenant Improvement Costs shall not include the cost of any of
Lessee's Personal Property or the installation thereof, which shall be performed
by Lessee at its sole cost and expense. Subject to the payment by Lessor of the
Base Tenant Improvement Allowance in the time and manner specified in Section
12, below, Lessee shall be solely responsible for paying all Tenant Improvement
Costs.
4. SPACE PLAN FOR TENANT IMPROVEMENTS.
----------------------------------
4.1 PREPARATIONS BY ARCHITECT. The space plan ("Preliminary Plans")
for the Tenant Improvements shall be prepared by Architect. Within five (5)
business days following execution of the Lease, Lessee shall meet with Architect
to develop the Preliminary Plans. Within five (5) business days thereafter,
Architect shall provide the Preliminary Plans to Lessee and Lessor for review
and approval.
4.2 REVIEW AND APPROVAL. Lessor and Lessee will either approve the
Preliminary Plans in writing, or note changes to be made to the Preliminary
Plans in writing, and shall provide such written approval or proposed changes to
Architect and the other party within five (5) business days after receipt of the
Preliminary Plans from Architect. In the event changes are necessary, Architect
shall make such changes following receipt of the written changes from Lessor
and/or Lessee and shall provide the revised Preliminary Plans to Lessee and
Lessor for approval in writing as soon as possible thereafter, but in no event
to exceed five (5) business days.
4.3 APPROVED PRELIMINARY PLANS. The Preliminary Plans which are
approved by both Lessor and Lessee in writing ("Approved Preliminary Plans")
shall be used by Architect to develop the Construction Plans.
5. CONSTRUCTION PLANS FOR TENANT IMPROVEMENTS.
------------------------------------------
5.1 PREPARATION BY ARCHITECT. Within fourteen (14) business days
following approval by Lessor and Lessee of the Approved Preliminary Plans,
Architect shall provide Lessee and Lessor with completed Construction Plans
showing (i) Lessee's partition layout and the location and details; (ii) the
location of telephone and electrical outlets; (iii) the location, style and
dimension of any desired special lighting; (iv) the location, design and style
of all doors, floor coverings and wall coverings; (v) the location, design,
style and dimensions of cabinets and casework; and (vi) all details, including
"cut sheets," for the Tenant Improvements, which shall be in conformity with the
Approved Preliminary Plans. The Construction Plans shall be in a form
satisfactory to appropriate governmental authorities responsible for issuing
permits and licenses required for construction of the Tenant Improvements.
5.2 LESSOR'S REVIEW OF CONSTRUCTION PLANS FOR TENANT IMPROVEMENTS.
Within three (3) business days after receipt of the Construction Plans, Lessor
shall notify Lessee in writing of any changes necessary to bring the
Construction Plans into substantial conformity with the Approved Preliminary
Plans. If any changes requested by Lessor are reasonably necessary to bring the
Construction Plans into substantial conformity with the Approved Preliminary
Plans, Architect shall make such changes and provide the revised Construction
Plans to Lessor for its review and approval, such approval not to be
unreasonably withheld or delayed. Within three (3) business days thereafter,
Lessor shall either (i) notify Lessee in writing of any changes necessary to
bring the Construction Plans into substantial
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
conformity with the Approved Preliminary Plans, or (ii) approve such revised
Construction Plans. Architect shall continue to revise the Construction Plans as
required by Lessor and Lessee until Lessor's and Lessee's written approval is
received. The Construction Plans approved in writing by both Lessor and Lessee
shall be deemed the "Approved Construction Plans."
6. CONTRACTOR. Lessee shall, as soon as reasonably possible, enter into a
contract with the Contractor for the construction of the Tenant Improvements
(the "Construction Contract"), for a bid price acceptable to Lessee in its sole
discretion (the "Approved Bid.") The Construction Contract between Lessee and
Contractor shall provide that all Tenant Improvements shall be warranted by
Contractor for a period not less than one (1) year, and shall provide that all
such warranties are assignable to, and enforceable by, Lessor. Lessor must
approve the Construction Contract before Lessee and Contractor execute the same,
such approval not to be unreasonably withheld.
7. BUILDING PERMIT. Lessee shall be responsible for obtaining a building
---------------
permit ("Building Permit") for the Tenant Improvements. To the extent requested
by Lessee, Lessor shall, at no cost or expense to Lessor, assist Lessor in
obtaining the Building Permit. Lessee, the Architect or the Contractor shall
submit the Approved Construction Plans to the appropriate governmental body for
plan checking and a Building Permit.
8. CHANGE REQUESTS. No changes to the Approved Construction Plans
---------------
requested by Lessee (each, a "Change Request") shall be made without Lessor's
prior written approval, which approval shall not be unreasonably withheld or
delayed, subject to the following:
(i) No Change Request shall affect the structure or
operating systems of the Building;
(ii) A Change Request shall constitute an agreement by Lessee
to any delay in completion of the Tenant Improvements caused by reviewing,
processing and implementing the Change Request;
(iii) Any delays in completion of the Tenant Improvements
caused as a result of a Change Request shall not delay the commencement of the
term of the Lease from the date specified in Section 1.4 of the Lease. Lessee
agrees that the Lease and all obligations of Lessee thereunder (including
without limitation the obligation to pay rent) shall commence on the date
specified in Section 1.4 of the Lease, notwithstanding any delay in construction
of the Tenant Improvements caused by any Change Request.
Any and all costs incurred in connection with a Change Request approved by
Lessor shall be paid for solely by Lessee, including, without limitation,
increased architectural or engineering fees and costs, permit re-submittal fees
and costs, increased construction costs, costs incurred as a result of any delay
in constructing the Tenant Improvements as a result of the Change Request, or
any other costs and expenses incurred in connection with or arising out of such
Change Request.
9. PAYMENT OF ADDITIONAL COSTS. Following Substantial Completion of the
---------------------------
Tenant Improvements and determination of the total Tenant Improvement Cost, to
the extent the Tenant Improvement Cost exceeds the Base Tenant Improvement
Allowance (the "Additional Costs"), and such Additional Costs have not
previously been paid by Lessee pursuant to Section 10, below, Lessee shall be
solely responsible for payment of such Additional Costs.
10. PAYMENT OF CONTRACTOR. Once Lessee and Contractor have mutually
---------------------
executed the Construction Contract, Lessee shall be responsible for making
monthly progress payments to Contractor in accordance with the Construction
Contract, subject to reimbursement by Lessor pursuant to the following
procedure. Lessor shall reimburse Lessee each month, within twenty (20) days of
receipt of bills or invoices from Lessee representing the current months'
payment obligation to the Contractor (the "Monthly Payment"), for that portion
of the Monthly Payment determined by taking a fraction, the numerator of which
is the sum of the Base Leasehold Improvement Allowance, and the denominator of
which is the Approved Bid, and multiplying the Monthly Payment by such fraction.
Lessee shall be solely responsible for paying the balance of any Monthly Payment
as Additional Costs. If the total Approved Bid is in equal to or less than the
sum of the Base Tenant Improvement Allowance, Lessor shall reimburse Lessee each
month, within twenty (20) days of receipt of bills or invoices from Lessee
representing the current Monthly Payment, for the entire Monthly Payment. It
shall be a condition precedent to Lessor's obligation to reimburse Lessee for
any Monthly Payment that Lessee shall have provided Lessor with unconditional
lien releases and waivers from the Contractor, any subcontractors and/or any
material suppliers providing goods or services for the Tenant Improvements, in
the form required by California law, whereby such Contractor, any subcontractors
and/or any material suppliers unconditionally waive any mechanics' or other
statutory lien rights with respect to the current and/or any prior Monthly
Payment made or to be made by Lessor to Lessee.
11. REQUIREMENTS. All construction and installation of the Tenant
------------
Improvements shall be subject to strict conformity with the following
requirements:
(a) Lessee shall give Lessor at least ten (10) days' prior written
notice of commencement of the construction of the Tenant Improvements so that
Lessor may post notices of non-responsibility in or upon the Leased Premises as
provided by law;
(b) All Tenant Improvements shall be constructed in a skillful and
workmanlike manner,
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
consistent with the best practices and standards of the construction industry,
and pursued with diligence in accordance with the Approved Construction Plans
and in full accord with all applicable laws, regulations and ordinances,
including without limitation, the ADA. All material, equipment, and articles
incorporated in the Tenant Improvements are to be new, and of recent
manufacture, and of the most suitable grade for the purpose intended;
(c) The Contractor shall maintain all of the insurance reasonably
required by Lessor, including, without limitation, commercial general liability
and workers' compensation insurance in the amounts specified in Article 11 of
the Lease, and builder's risk and course of construction insurance in an amount
not less than the total Tenant Improvement Costs. Lessee shall provide Lessor
with certificates of insurance evidencing such insurance coverage by Contractor
prior to commencing the construction of the Tenant Improvements.
(d) Lessor may require performance and labor and materialmen's payment
bonds issued by a surety approved by Lessor, in a sum equal to the Tenant
Improvement Costs, guarantying the completion of the Tenant Improvements free
and clear of all liens and other charges in accordance with the Approved
Construction Plans. Such bonds shall name Lessor as beneficiary;
(e) Construction of the Tenant Improvements must be performed in a
manner such that it will not interfere with the quiet enjoyment of the other
tenants in the Complex;
12. LIENS. Lessee shall keep the Leased Premises and the Complex in which
-----
the Leased Premises are situated free from any liens arising out of any work
performed, materials furnished or obligations incurred by Lessee in connection
with the construction of the Tenant Improvements. In the event a mechanic's or
other lien is filed against the Leased Premises or the Complex as a result of a
claim arising through Lessee or the Tenant Improvements, Lessor may demand that
Lessee furnish to Lessor a surety bond satisfactory to Lessor in an amount equal
to at least one hundred fifty percent (150%) of the amount of the contested lien
claim or demand, indemnifying Lessor against liability for the same and holding
the Leased Premises and Complex free from the effect of such lien or claim. Such
bond must be posted within ten (10) days following notice from Lessor. In
addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in any action to foreclose such lien if Lessor shall decide it is
to its best interest to do so. In any event, Lessee shall indemnify', defend,
protect and hold harmless Lessor from and against any and all claims, demands,
expenses, actions, judgments, damages, penalties, fines, liabilities, losses,
suits, costs and fees, including, but not limited to, reasonable attorneys' fees
and expenses, incurred in connection with or related to a claim arising through
Lessee or the Tenant Improvements.
13. DEMISING WALL. Lessor and Lessee agree that a demising wall (the
-------------
"Wall") must be constructed between the Leased Premises and the adjoining space,
and that such Wall may need to be constructed prior to Lessee's commencement or
completion of the Tenant Improvements. Lessor shall have the right, exercisable
upon prior notice to Lessee, to enter upon the Leased Premises as is reasonably
necessary to construct the Wall, provided that Lessor has done the following:
(i) Lessor has provided Lessee with plans for the construction of the Wall (the
"Wall Plans"), (ii) Lessee has reviewed and approved or disapproved such Wall
Plans, such approval or disapproval to be given within five (5) business days
following Lessee's receipt of the Wall Plans; in the event that Lessee
disapproves the Wall Plans, Lessee shall notify Lessor in writing as to what
specific changes need to made to the Wall Plans in order for Lessee to approve
the same, and (iii) following Lessee's approval of the Wall Plans, Lessor gives
Lessee notice of the date Lessor intends to commence construction of the Wall.
Following completion of the Wall, Lessee agrees that Lessor may charge up to
one-half(l/2) of the cost of designing, permitting and constructing the Wall,
and one hundred percent (100%) of the costs of any special designs,
improvements, utilities or services serving only the Leased Premises that Lessee
specifies must be constructed along with, or placed within, the Wall (the "Wall
Construction Costs"), to Lessee. Lessee shall pay the Wall Construction Costs to
Lessor within ten (10) days after receipt of billing therefore, or Lessor may
elect, in its sole discretion, to subtract the Wall Construction Costs from the
Base Tenant Improvement Allowance.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
EXHIBIT D
ACKNOWLEDGEMENT OF COMMENCEMENT
This Acknowledgement of Commencement is made as of ____________, 199__, with
reference to that certain Lease Agreement (hereinafter referred to as the
"Lease") dated ______________, l99__, by and between BEDFORD PROPERTY INVESTORS,
INC., as "Lessor" therein, and CREDENCE SYSTEMS CORPORATION, as "Lessee", for
the Leased Premises situated at 47513 Westinghouse Drive, Suite __, Fremont, CA
94539.
The undersigned hereby confirms the following:
1. That the Lessee accepted possession of the Leased Premise on
_________________ 199__ and acknowledges that the Leased Premises are as
represented by Lessor and in good order, condition and repair, and that the
improvements, if any, required to be constructed for Lessee by Lessor under the
Lease have been so constructed and are satisfactorily completed in all respects.
2. That all conditions of said Lease to be performed by Lessor
prerequisite to the full effectiveness of said Lease have been satisfied and
that the Lessor has fulfilled all of its duties of an inducement nature.
3. That in accordance with the provisions of said Lease the commencement
date of the term is _______________________, and that, unless sooner terminated,
the original term thereof expires on ______________________.
4. That said Lease is in full force and effect and that the same
represents the entire agreement between Lessor and Lessee concerning said Lease.
5. That there are no existing defenses which Lessee has against the
enforcement of said Lease by Lessor, and no offsets or credits against rentals.
6. That the minimum rental obligation of said Lease is presently in
effect and that all rentals, charges and other obligations on the part of Lessee
under said lease commenced to accrue on ______________________.
7. That the undersigned has not made any prior assignment, hypothecation
or pledge of said Lease or of the rents hereunder.
LESSEE:
CREDENCE SYSTEMS CORPORATION
By: ___________________________________
Its: ___________________________________
Date: _________________________________
_________________ _________________
LESSOR'S INITIALS LESSEE'S INITIALS
<PAGE>
EXHIBIT E
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be
inscribed, displayed or printed or affixed on the Building or to any part
thereof, or which is visible from the outside of the Building, without the prior
written consent of Lessor, first had and obtained and Lessor shall have the
right to remove any such sign, placard, picture, advertisement, name or notice
without notice to and at the expense of Lessee.
All approved signs or lettering on doors shall be printed, affixed or
inscribed at the expense of Lessee by a person approved by Lessor.
Lessee shall not place anything or allow anything to be placed near the
glass of any window, door, partition or wall which may appear unsightly from
outside the Leased Premises.
Window covering desired by Lessee shall be approved by Lessor.
2. If a directory is located at the Building, it is provided exclusively for
the display of the name and location of Lessee only and Lessor reserves the
right to exclude any other names therefrom.
3. The sidewalks, passages, exits, entrances, and stairways in and around the
Building shall not be obstructed by Lessee or used by it for any purpose other
than ingress and egress from the Leased Premises. The passages, exits,
entrances, stairways, and roof are not for the use of the general public and
Lessor shall in all cases retain the right to control and prevent access thereto
by all persons whose presence in the judgement of Lessor shall be prejudicial to
the safety, character, reputation and interests of the Building and its Lessees,
provided that nothing herein contained shall be construed to prevent such access
to persons with whom Lessee normally deals in the ordinary course of Lessee's
business unless such persons are engaged in illegal activities. Neither Lessee
nor any employees or invitees of Lessee shall go upon the roof of the Building.
4. Lessee shall not be permitted to install any additional lock or locks on
any door in the Building unless written consent of Lessor shall have first been
obtained. Two keys will be furnished by Lessor for every room. Each Lessee must,
upon the termination of his tenancy, restore to the Lessor all keys of offices,
and toilet rooms, either furnished to, or otherwise procured by, such Lessee and
in the event of loss of any keys furnished to Lessee, such Lessee shall pay to
the Lessor the cost of replacing the same or of changing the lock or locks
opened by such lost key if Lessor shall deem it necessary to make such change.
5. The toilets, urinals and other plumbing fixtures shall not be used for any
purpose other than those for which they were constructed, and no rubbish,
newspapers, rags or other substances shall be thrown into them. Wastes and
excessive or unusual use of water shall not be allowed. Lessee shall be
responsible for any breakage, stoppage or damage resulting from the violation of
this rule by Lessee or its employees or invitees.
6. Lessee shall not overload the floor of the Leased Premises or mark, drive
nails, screw or drill into the partitions, woodwork or plaster or in any way
deface the Leased Premises or any part thereof.
7. Lessee shall not use, keep or permit to be used or kept any foul or noxious
gas or substance in the Leased Premises, or permit or suffer the Leased Premises
to be occupied or used in a manner offensive or objectionable to Lessor or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other Lessees or those having business therein.
8. The Leased Premises shall not be used for washing clothes, for lodging, or
for any improper, objectionable, immoral or illegal purposes.
9. Lessee shall not use or keep in the Leased Premises or the Building any
kerosene, gasoline, or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Lessor.
10. Lessor will direct electricians as to the manner and location in which
telephone and telegraph wires are to be introduced. No boring or cutting for
wires will be allowed without the consent of Lessor. The location of telephones,
call boxes, and other office equipment affixed to the Leased Premises shall be
subject to the approval of Lessor.
11. Lessee shall not lay linoleum, tile, carpet or other similar floor covering
so that the same shall be affixed to the floor of the Leased Premises in any
manner except as approved by Lessor. The expense of repairing any damage
resulting from a violation of this rule or removal of any floor covering shall
be borne by Lessee.
12. Lessor reserves the right to exclude or expel from the Building any person
who, in the judgement of Lessor, is intoxicated or under the influence of liquor
or drugs, or who shall in any manner do any act in violation of any of the rules
and regulations of the Building.
13. Lessee shall not disturb, solicit, or canvass any occupant of the Building.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<PAGE>
14. Without the written consent of Lessor, Lessee shall not use the name of the
Building in connection with or in promoting or advertising the business of
Lessee except as Lessee's address.
15. Lessee shall not permit any contractor or other person making any
alterations, additions or installations within the Leased Premises to use the
hallways, lobby, or corridors as storage or work areas without the prior consent
of Lessor. Lessee shall be liable for and shall pay the expense of any
additional cleaning or other maintenance required to be performed by Lessor as a
result of the transportation or storage of materials or work performed within
the Building by or for Lessee.
16. Lessee shall be entitled to use parking spaces as mutually agreed upon
between Lessee and Lessor subject to such reasonable conditions and regulations
as may be imposed from time to time by Lessor. Lessee agrees that vehicles of
Lessee or its employees, or agents shall not park in driveways nor occupy
parking spaces or other areas reserved for any use such as Visitors, Delivery,
Loading, or other tenants anywhere in the complex except in parking spaces
designated as such. Lessor or its agents, shall have the right to cause or be
removed any car of Lessee, its employees or agents, that may be parked in
unauthorized areas, and Lessee agrees to save and hold harmless Lessor, its
agents and employees from any and all claims, losses, damages and demands
asserted or arising in respect to or in connection with the removal of any such
vehicle. Lessee, its employees, or agents shall not park campers, trucks or cars
on the Leased Premises parking areas overnight or over weekends. Lessee will
from time to time, upon request of Lessor, supply Lessor with a list of license
plate numbers of vehicles owned or operated by its employees and agents.
17. Canvassing, soliciting and peddling is prohibited in the Building and each
Lessee shall cooperate to prevent the same.
18. Lessor is not responsible for the violation of any rule contained herein by
any other Lessees.
19. Lessor may waive any one or more of these rules for the benefit of any
particular Lessee, but no such waiver shall be construed as a waiver of Lessor's
right to enforce these rules against any or all Lessee's occupying the Building.
20. Lessee is responsible for purchasing and installing a security system of
required by law or ordinance. The cost of purchasing and installation of any
such system is the sole cost and expense of the Lessee.
21. The display, carrying, and use of pistols, rifles, shotguns and other
firearms is prohibited in and about the Building, the parking lots and other
common areas, except for authorized municipal, state and federal law enforcement
personnel. Lessee and its employees, agents and invitees shall not display,
carry or use any firearms within the Building, parking lots or other common
areas.
22. Lessor reserves the right to make modifications hereto and such other and
further rules and regulations as in its sole judgement may be required for the
safety, care and cleanliness of the Leased Premises and the Building and for the
preservation of good order therein. Lessee agrees to abide by all such rules and
regulations.
/s/ MM /s/ WRB
________________ ________________
LESSORS INITIALS LESSEE'S INITALS
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE 1Q 1998
QUARTERLY REPORT ON FORM 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 95,873
<SECURITIES> 62,608
<RECEIVABLES> 64,036
<ALLOWANCES> 1,933
<INVENTORY> 48,761
<CURRENT-ASSETS> 283,897
<PP&E> 82,311
<DEPRECIATION> 37,814
<TOTAL-ASSETS> 363,232
<CURRENT-LIABILITIES> 44,316
<BONDS> 115,000
0
0
<COMMON> 22
<OTHER-SE> 203,528
<TOTAL-LIABILITY-AND-EQUITY> 363,232
<SALES> 82,375
<TOTAL-REVENUES> 82,375
<CGS> 35,438
<TOTAL-COSTS> 35,438
<OTHER-EXPENSES> 33,799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 550
<INCOME-PRETAX> 14,125
<INCOME-TAX> 4,934
<INCOME-CONTINUING> 9,191
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,191
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.41
</TABLE>
