SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the Fiscal Year Ended December 31,
1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______________________
to _______________________
Commission File Number 0-21321
CYMER, INC.
(Exact name of registrant as specified in its charter)
Nevada 33-0175463
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16750 Via Del Campo Court, San Diego, CA 92127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (619) 451-7300
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of each class on which registered
Common Stock, $.001 par value Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of $38.50 for shares of the
registrant's Common Stock on March 10, 1997 as reported on the Nasdaq
National Market, was approximately $531,687,772. In calculating such
aggregate market value, shares of Common Stock owned of record or
beneficially by officers, directors, and persons known to the registrant to
own more than five percent of the registrant's voting securities (other than
such persons of whom the Company became aware only through the filing of a
Schedule 13G filed with the Securities and Exchange Commission) were excluded
because such persons may be deemed to be affiliates. The registrant
disclaims the existence of control or any admission thereof for any other
purpose.
Number of shares of Common Stock outstanding as of March 10, 1997: 13,810,072
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in Parts I, II,
III and IV of this Annual Report on Form 10-K: portions of registrant's proxy
statement for its annual meeting of stockholders to be held on April 24, 1997
(Part III).
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<CAPTION>
CYMER, INC.
1996 Annual Report on Form 10-K
TABLE OF CONTENTS
<S> <C> <S> <C>
PART I 1
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security-Holders 11
PART II 12
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 12
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplemental Data 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 26
PART III 27
Item 10. Directors and Executive Officers of the Registrant 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain Beneficial Owners
and Management 27
Item 13. Certain Relationships and Related Transactions 27
PART IV 28
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 28
</TABLE>
CYMER is a registered trademark of Cymer, Inc.
PART I
Item 1. Business
This Business section and other parts of this Form 10K contain
forward-looking statements that involve risk and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
General
Cymer is the leading provider of excimer laser illumination sources for
use in deep ultraviolet ("DUV") photolithography systems targeted at the
pilot and volume production segments of the semiconductor manufacturing
market. The Company's lasers are incorporated into step-and-repeat and
step-and-scan photolithography systems for use in the manufacture of
semiconductors with critical feature sizes below 0.35 microns. The Company
believes that its excimer lasers constitute a substantial majority of all
excimer lasers incorporated in DUV photolithography tools. The Company's
customers include all five manufacturers of DUV photolithography systems:
ASM Lithography, Canon, Integrated Solutions, Nikon and SVG Lithography.
Photolithography systems incorporating the Company's excimer lasers have
been purchased by the world's largest semiconductor manufacturers such as
Intel, NEC, Toshiba, Hitachi, Motorola, Samsung, Texas Instruments, Mitsubishi,
Fujitsu and Philips.
Products
The Company's products consist of photolithography lasers, industrial
high power lasers and replacement parts.
Photolithography Laser Products
The Company's photolithography lasers produce narrow bandwidth pulses
of short wavelength light. The lasers permit very fine feature resolution
and high throughput. The Company has designed its lasers to be highly
reliable, easy to install and compatible with existing semiconductor
manufacturing processes.
Introduced in the third quarter of 1995, the Company's ELS-4000F KrF
excimer laser is designed to meet the requirements of photolithography tool
and semiconductor manufacturers. The laser operates at a 600Hz pulse
repetition rate and provides power output of 7.2 watts of 248nm wavelength
light. The ELS-4000F incorporates advanced discharge chamber technology and
solid state pulse power technology to excite the laser gas efficiently,
reducing the cost of ownership. The ELS-4000F achieves high resolution and
stable focus through proprietary optical modules that perform line-narrowing
and wavelength stabilization, thereby optimizing the light emitted by the
laser for the photolithography application. The list price of the ELS-4000F
is approximately $425,000.
The Company's 5000 series KrF excimer lasers, introduced in the first
quarter of 1996, are offered in both narrowband, ELS-5000, and broadband,
EX-5000, configurations. The 5000 series lasers incorporate the advanced
technological features of the Company's ELS-4000F laser but operate at a
higher pulse repetition rate and provide higher power outputs that shorten
exposure time and increase throughput, and in the case of the ELS-5000, a
narrower bandwidth. The 5000 series lasers incorporate the Company's
proprietary line narrowing and wavelength stabilization modules together
with an atomic reference for long-term accuracy of the wavemeter calibration.
The 5000 series lasers utilize a modular design that allows the Company to
outsource many of the system's subassemblies, thereby reducing manufacturing
cycle times.
The Company's lasers incorporate advanced software control and
diagnostic systems. The control system provides users with on-line
monitoring of laser operating conditions, with approximately 75 diagnostic
readings (including flow rate, temperatures, pressures and light quality),
that are automatically monitored by the photolithography tool's control
system. Additionally, approximately 140 configurable parameters can be
adjusted to optimize the laser's performance for each customer's system. A
portable computer attached to the laser logs this data, automatically
providing critical information about performance and reliability. The lasers
are also designed for easy serviceability, with most major modules and
components articulated for easy swing-out or roll-out motion to facilitate
inspection and replacement.
Industrial High Power Laser Products
The Company's HPL-100K/110K series KrF excimer lasers are designed to
meet the rigors of high duty cycle industrial usage, such as microdrilling,
micromachining and annealing applications. The laser operates at a 200 to
250Hz pulse repetition rate and provides average power output of 100 watts
for the HPL-100K and 110 watts for the HPL-110K. The pulse repetition rate
and high power makes these lasers well suited for micro-fabrication
processes. The Company is currently focusing its development and marketing
efforts on its photolithography laser products, and the Company's total
revenues from industrial laser products in 1996 were $1.2 million. Sales of
industrial lasers to Tamarack Scientific Co., Inc., a supplier of equipment
used by Hewlett-Packard to manufacture InkJet print heads, accounted for
1.5% of the Company's total revenues in 1996.
Replacement Parts
Certain components and subassemblies included in the Company's lasers
require replacement or refurbishment following continued operation. For
example, the discharge chamber of the Company's lasers has a component life
of approximately two to three billion pulses, depending on the model. The
Company estimates that a laser used in a semiconductor production environment
will require one to three replacement chambers per year. Similarly, certain
optical components of the laser will deteriorate with continued exposure to
DUV light and will require periodic replacement. The Company provides these
and other spare and replacement parts for its photolithography lasers as
needed by its customers. On a limited basis, the Company also refurbishes and
resells complete laser systems.
Customers and End Users
The Company sells its photolithography laser products to each of the
five manufacturers of DUV photolithography tools:
ASM Lithography Nikon
Canon SVG Lithography
Integrated Solutions
The Company works closely with its customers to integrate the Company's
products into their photolithography tools and is collaborating with certain
of its customers on advanced technology developments under jointly funded
programs. Sales to ASM Lithography, Canon and Nikon accounted for 19%, 30%
and 31%, respectively, of total revenue in 1996. ASM Lithography, Canon and
Nikon are stockholders of the Company.
The following semiconductor manufacturers have purchased one or more
DUV photolithography tools incorporating the Company's laser:
United States Japan Korea
Advanced Micro Devices Fujitsu Hyundai
Digital Equipment Corporation Hitachi Lucky Goldstar
IBM Mitsubishi Electric Samsung
Integrated Device Technology NEC
Intel Corporation NTT Europe
Micron Technology Oki Electric
Motorola Sharp C-Net
Rockwell Sony IMEC
SEMATECH* Toshiba LETI
Texas Instruments Philips
SGS Thompson
Taiwan Siemens
ERSO/ITRI
ProMos
TSMC
UMC
Vanguard International
* A semiconductor industry consortium.
Backlog
The Company schedules production of lasers based upon order backlog and
informal customer forecasts. The Company includes in backlog only those
orders to which a purchase order number has been assigned by the customer and
for which delivery has been specified within 12 months. Because customers
may cancel or delay orders with little or no penalty, the Company's backlog
as of any particular date may not be a reliable indicator of actual sales for
any succeeding period. At December 31, 1996, the Company had a backlog of
approximately $98 million, compared with a backlog of $28.5 million at
December 31, 1995.
Manufacturing
The Company's manufacturing activities consist of assembly, integration
and test. These activities are performed in a 22,800 square foot facility
in San Diego, California that includes approximately 11,000 square feet of
class 1000 clean room manufacturing and test space. In order to focus on its
core technology, leverage the expertise of its key suppliers and respond
more efficiently to customer demand, the Company has outsourced many of its
subassemblies. The Company's outsourcing strategy is exemplified by the
modular design of the Company's 5000 series laser, for which substantially
all of the nonproprietary subassemblies have been outsourced.
To meet current and anticipated demand for its products, the Company
must substantially increase the rate by which it manufactures and tests its
photolithography laser systems. In order to accomplish this objective, the
Company intends to continue to hire and train additional manufacturing
personnel, improve its assembly and test processes in order to reduce cycle
time, invest in additional manufacturing tooling and implement a multi-shift
testing schedule. This increase would follow a nearly seven-fold increase
in the manufacturing rate from December 1995 to December 1996. The Company
has been unable to manufacture and test its photolithography laser systems
fast enough to fill orders and is behind on its delivery schedules. While
the Company is not aware of any order cancellations as a result of these
delays, such delays, if they continue or recur, increase the risk that
customers will cancel orders and seek to meet all or a portion of their needs
for illumination sources from the Company's competitors. The Company is also
increasingly relying on outside suppliers for the manufacture of various
components and subassemblies used in its products and is dependent upon these
suppliers to meet the Company's manufacturing schedules. The failure by one
or more of these suppliers to supply the Company on a timely basis with
sufficient quantities of components or subassemblies that perform to the
Company's specifications could affect the Company's ability to deliver
completed lasers to its customers on schedule. Additionally, the Company may
underestimate the costs required to increase its manufacturing capacity,
which may materially adversely affect the Company's results of operations.
In December 1996, the Company leased an additional 100,000 square feet
of manufacturing facilities in San Diego. In addition to increasing
manufacturing capacity at its San Diego facility, the Company has entered
into a contract manufacturing agreement with Seiko Instruments under which
Seiko has agreed to manufacture for the Company a certain number of the
Company's photolithography excimer lasers and subsequent enhancements. In
order to ensure uniformity of product for all customers, the Company will
maintain control of all work flow design, manufacturing process, engineering
changes and component sourcing decisions. The Company will manufacture and
seal all core technology modules in San Diego. The agreement expires in 2001,
but will automatically renew for two-year terms unless one year's notice to
terminate is given by either party. Seiko began limited production of lasers
in 1996.
Certain of the components and subassemblies included in the Company's
products are obtained from a single supplier or a limited group of suppliers.
In particular, there are no alternative sources for certain of the components
and subassemblies, including certain optical components and pre-ionizer tubes
used in the Company's lasers. To date, the Company has been able to obtain
adequate supplies of its components and subassemblies from existing sources
to meet its current manufacturing schedule; however, suppliers of such
components and subassemblies have recently been unable to fully satisfy the
Company's orders for such products. The Company has only recently commenced
volume production of its laser systems and the Company believes that its
recent manufacturing expansion is likely to further strain the production
capacity of certain key suppliers, including suppliers of optical components
and pre-ionizer tubes. For example, the supplier of one of the key optical
components for the Company's lasers has recently experienced diminished
manufacturing yields of the component. While the Company is working actively
with the supplier to increase production of the component, there can be no
assurance that the supplier will be able to increase its production capacity
in time to satisfy the Company's increasing requirements. Moreover, the
Company is increasingly outsourcing the manufacture of various other
subassemblies. If the Company is unable to obtain sufficient quantities of
components or subassemblies, or if such items do not meet the Company's quality
standards, delays or reductions in product shipments could occur which would
have a material adverse effect on the Company's business, financial condition
and results of operations.
Sales and Marketing
The Company's sales and marketing efforts have been predominately
focused on DUV photolithography tool manufacturers. The Company markets and
sells its products through four account managers, two of whom are located in
the United States and two of whom are based in Japan. The Company is in the
process of developing product and applications engineering teams to support
the account managers and the Company's customers. The Company believes that
to facilitate the sales process it must work closely with and understand the
requirements of semiconductor manufacturers, the end users of the Company's
products. The Company visits major semiconductor manufacturers, and their
representatives attend Company-sponsored seminars on advanced excimer
photolithography. In Japan, the Company sponsors an annual seminar with
Seiko in conjunction with Semicon Japan. This seminar has attracted
representatives of semiconductor manufacturers from Japan, Korea, the United
States and SEMATECH, as well as photolithography tool manufacturers and
other photolithography process suppliers.
Service and Support
The Company supports its customers with field service, technical
service engineers and training programs, and in some cases provides ongoing
on-site technical support at the customer's manufacturing facility. Prior
to shipment, the Company's support personnel typically assist the customer in
site preparation and inspection and provide customers with training at the
Company's facilities or at the customer's location. Customers and end users
are also provided with a comprehensive set of manuals, including operations,
maintenance, service, diagnostic and safety manuals.
The Company's field engineers and technical support specialists are
based at its San Diego headquarters, its field service office near Boston and
its Japanese facility. Support in Korea is provided by EO Technics, a
contractor trained and supported by the Company. As part of its customer
service, the Company maintains an inventory of spare parts at each of its
service facilities. As the Company's installed base grows so does the
demand for replacement parts to satisfy world wide support requirements for
customers' support organizations as well as the companies' own logistics
organization. As the Company rapidly expands its production of new systems,
it must even more rapidly expand its production of component modules which are
required not only for systems but also for support and warranty requirements.
The Company believes that the need to provide fast and responsive
service to the semiconductor manufacturers using its lasers is critical and
that it will not be able to depend solely on its customers to provide this
specialized service. Therefore, the Company believes it is essential to
establish, through trained third party sources or through its own personnel, a
rapid response capability to service its customers throughout the world.
Accordingly, the Company intends to expand its direct support infrastructure
in Japan and Europe, establish a joint service and support capability with
an independent firm to serve Korea, and establish a joint service and support
capability with an independent firm to serve Taiwan and Southeast Asia. The
establishment of these activities will entail recruiting and training
qualified personnel or identifying qualified independent firms and building
effective and highly trained organizations that can provide service to
customers in various countries in their assigned regions. There can be no
assurance that the Company will be able to attract qualified personnel to
establish these operations successfully or that the costs of such operations
will not be excessive. A failure to implement this plan effectively could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company generally warrants its products against defects in design,
materials and workmanship for the earlier to occur of 17 months from the date
of shipment or 12 months after acceptance by the end user.
Research and Development
The semiconductor industry is subject to rapid technological change and
new product introductions and enhancements. The Company believes that
continued and timely development and introduction of new and enhanced laser
products are essential for the Company to maintain its competitive position.
The Company intends to continue to develop its technology and innovative
products to meet customer demands. Current projects include the development
of the next generation of photolithography lasers, including ArF lasers.
Other research and development efforts are currently focused on reducing
manufacturing costs, lowering the cost of laser operation, enhancing laser
performance and developing new features for existing lasers.
The Company has historically devoted a significant portion of its
financial resources to research and development programs and expects to
continue to allocate significant resources to these efforts. As of
December 31, 1996, the Company had 93 employees engaged in research and
development. Research and development expenses for 1994, 1995 and 1996 were
approximately $3.3 million, $6.2 million and $11.7 million, respectively.
In addition to funding its own research and development projects, the
Company has pursued a strategy of securing research and development contracts
from customers, government agencies and SEMATECH in order to develop advanced
technology for current and future laser systems based on the Company's core
technology. Revenues generated from research and development contracts
amounted to approximately $1.2 million, $3.2 million and $2.5 million during
1994, 1995, and 1996, respectively.
Intellectual Property Rights
The Company believes that the success of its business depends more on
such factors as the technical expertise of its employees, as well as their
innovative skills and marketing and customer relations abilities, than on
patents, copyrights, trade secrets and other intellectual property rights.
Nevertheless, the success of the Company may depend in part on patents, and the
Company owns 17 United States patents covering certain aspects of technology
associated with excimer lasers which expire from January 2008 to December
2013 and has applied for 12 additional patents in the United States, two of
which have been allowed. As of December 31, 1996, the Company also has filed
57 patent applications in other countries. There can be no assurance that
the Company's pending patent applications or any future applications will be
approved, that any issued patents will provide it with competitive advantages
or will not be challenged by third parties, or that the patents of others will
not have an adverse effect on the Company's ability to do business. In this
regard, due to cost constraints, the Company did not begin filing for patents
in Japan or other countries with respect to inventions covered by its United
States patents and patent applications until recently and has therefore lost
the right to seek patent protection in those countries for certain of its
inventions. Additionally, because foreign patents may afford less protection
under foreign law than is available under United States patent law, there can
be no assurance that any such patents issued to the Company will adequately
protect the Company's proprietary information. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company.
Others may have filed and in the future may file patent applications
that are similar or identical to those of the Company. To determine the
priority of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that
could result in substantial cost to the Company. No assurance can be given that
any such patent application will not have priority over patent applications
filed by the Company.
The Company also relies upon trade secret protection, employee and
third-party nondisclosure agreements and other intellectual property
protection methods to protect its confidential and proprietary information.
Despite these efforts, 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 or
disclose such technology or that the Company can meaningfully protect its
trade secrets.
The Company has in the past been, and may in the future be, notified
that it may be infringing intellectual property rights possessed by third
parties. In November 1993, the Company was notified by Coherent, the parent
corporation of Lambda Physik, one of the Company's competitors, that certain
aspects of the Company's products might infringe upon a patent owned by
Coherent. In June 1996, the Company was notified by Coherent that certain
aspects of its products might infringe a second patent owned by Coherent. In
September 1996, Coherent and Lambda-Physik commenced a patent infringement
action against the Company with respect to the first patent in the United
States District Court for the Northern District of California. On November 1,
1996, the Company entered into a settlement agreement with Coherent and
Lambda Physik. Under the terms of the settlement, Coherent and Lambda-Physik
agreed to (i) dismiss the patent infringement action with prejudice and
(ii) release the Company from any claims either may have with respect to the
two disputed patents. In return, the Company agreed to make annual payments
to Coherent over a 13-year period. Such annual payments are not material to
the Company's financial position or results of operations.
In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that
certain aspects of the Company's lasers might infringe certain claims
furnished by Komatsu to Seiko that Komatsu advised Seiko were included in a
patent application filed by Komatsu in Japan (the "Patent Claims"). Seiko
in turn notified the Company of this claim. In connection with its
manufacturing agreement with Seiko, the Company has agreed to indemnify
Seiko against such claims under certain circumstances. A patent has now been
issued by the Japanese Patent Office, covering the Patent Claims, and Komatsu
has advised Seiko of its intention to enforce its rights under that patent
against Seiko if Seiko engages in manufacturing activities for the Company.
The Company has been advised by its patent counsel in this matter, Wilson
Sonsini Goodrich & Rosati, Professional Corporation, which is relying in part
on the opinion of the Company's Japanese patent counsel, that in the opinion of
such firm the Company's products do not infringe any valid Patent Claims.
However, there can be no assurance that litigation will not ensue with
respect to these claims, that the Company and Seiko would ultimately prevail
in any such litigation, that Komatsu will not assert infringement claims
under additional patents or that Seiko will continue to manufacture lasers
under the threat of potential litigation.
Any patent litigation would, at a minimum, be costly and could divert
the efforts and attention of the Company's management and technical personnel,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that other infringement claims by third parties or other claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. If any
such claims are asserted against the Company, 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 resort to
litigation to challenge such claims or to design around the patented
technology. Such actions could be costly and would divert the efforts and
attention of the Company's management and technical personnel, which would
materially adversely affect the Company's business, financial condition and
results of operations.
The Company has registered the trademark CYMER in the United States and
certain other countries and is seeking additional registrations in certain
countries. In Japan, the Company's application for registration was rejected
on the grounds that it is similar to a trademark previously registered by a
Japanese company for a broad range of products. The Company is seeking a
partial nullification of the other registration with respect to laser devices
and related components and does not believe that the holder of the other
trademark is engaged in any business similar to that of the Company. For
this reason, the Company is continuing to use the trademark CYMER in Japan
and believes that it will ultimately be permitted to register such mark for use
with its products and that it is not infringing the other company's
trademark. There can be no assurance that the Company will ultimately
succeed in its efforts to register its trademark in Japan or that it will not
be subjected to an action for trademark infringement, which could be costly
to defend and, if successful, would require the Company to cease use of the
mark and, potentially, to pay damages.
Effective August 1, 1989 and lasting until the expiration of the
licensed patents, the Company entered into an agreement for a nonexclusive
worldwide license to certain patented laser technology with Patlex Corp., a
patent holding company ("Patlex"). Under the terms of the agreement, the
Company is required to pay royalties ranging from 0.25% to 5% of gross sales
and leases of its lasers, as defined, based on total revenues earned. During
1995 and 1996, royalty fees totaled $64,000 and $226,000, respectively.
The Company has granted to Seiko the exclusive right in Japan and the
non-exclusive right outside of Japan to manufacture and sell the Company's
industrial high power laser and subsequent enhancements thereto. The Company
has also granted Seiko a right of first refusal to fund the Company's
development of, and receive a license to, new industrial laser technologies
not developed with funding from other parties. In exchange for these rights,
the Company received upfront license fees of $3.0 million. The Company is
also entitled to royalties of 5% on related product sales through
September 1999, after which the royalty rate is subject to renegotiation.
The license agreement also provides that product sales between the Company
and Seiko will be at a 15% discount from the respective companies' list
prices. The agreement terminates in August 2012.
Competition
The Company, believes that the principal elements of competition in the
Company's markets are the technical performance characteristics of the
excimer laser products; the cost of ownership of the system, which is based
on price, operating cost and productivity; customer service and support; and
product availability. The Company believes that it competes favorably with
respect to these factors.
The Company currently has two significant competitors in the market for
photolithography laser systems, Lambda-Physik, a German-based subsidiary of
Coherent, and Komatsu located in Japan. Both of these companies are larger
than the Company, have access to greater financial, technical and other
resources than the Company and are located in closer proximity to certain of
the Company's customers than is the Company. Although the Company believes
that these competitors are not yet supplying excimer lasers in volume, the
Company believes that both companies are aggressively seeking to gain larger
positions in the market for photolithography applications. The Company
believes that its customers have each purchased one or more products offered
by these competitors and that its customers may consider further purchases,
in part as a result of delays in deliveries by the Company in recent months
as the Company has been seeking to expand its manufacturing capacity. The
Company also believes that its customers are actively seeking a second source
for excimer lasers. Furthermore, photolithography tool manufacturers may
seek to develop or acquire the capability to manufacture internally their own
excimer lasers. In the future, the Company will likely experience
competition from other technologies, such as X-ray, electron beam and ion
projection processes. To remain competitive, the Company believes that it
will be required to manufacture and deliver products to customers on a timely
basis and without significant defects and that it will also be required to
maintain a high level of investment in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to continue to make the investments necessary to maintain its
competitive position. In addition, the market for excimer lasers is still
relatively small and immature and there can be no assurance that larger
competitors with substantially greater financial resources, including other
manufacturers of industrial lasers, will not attempt to enter the market.
There can be no assurance that the Company will remain competitive. A
failure to remain competitive would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors-Competition."
Employees
On December 31, 1996, there were 336 persons employed by the Company,
including 18 in Japan. No employees are currently covered by collective
bargaining agreements or are members of any labor organization as far as the
Company is aware. The Company has not experienced any work stoppages and
believes that its employee relations are good.
Executive Officers
Set forth below is certain information regarding the executive officers
of the Company and their ages as of December 31, 1996.
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Name Age Position
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Dr. Robert P. Akins 45 Chairman of the Board, Chief Executive
Officer and President
William A. Angus, III 50 Senior Vice President, Chief Financial
Officer and Secretary
G. Scott Scholler 46 Senior Vice President of Operations
Dr. Richard L. Sandstrom 46 Vice President of Advanced Research
Thomas C. Dannemiller 36 Vice President of Manufacturing
Robert B. MacKnight, III 47 Vice President and General Manager,
After Market Operations
Robert G. Ozarski 49 Vice President of Engineering
Louis A. Kaplan 54 Vice President, Human Resources
Nancy J. Baker 34 Director, Corporate Finance and
Treasurer
Dr. Robert P. Akins, a co-founder of the Company, has served as its
President, Chief Executive Officer and Chairman of the Board since its
inception in January 1986. From 1980 to 1985, Dr. Akins was a Senior Program
Manager for HLX, Inc., a manufacturer of laser and defense systems, where
he was responsible for managing the development of compact excimer lasers for
military communications applications and an excimer laser trigger for the
particle beam fusion accelerator at Sandia National Laboratories. Dr. Akins
received a B.S. in Physics and a B.A. in Literature in 1974, and a Ph.D. in
Applied Physics in 1983, from the University of California, San Diego.
William A. Angus, III has served as Senior Vice President and Chief
Financial Officer since February 1996 and Secretary of the Company since July
1990. From July 1990 to February 1996, Mr. Angus served as Vice President of
Finance and Administration. From April 1988 to June 1990, Mr. Angus was
Executive Vice President and Chief Operating Officer, and from May 1985 to
April 1988, Chief Financial Officer, of Avant-Garde Computing Inc., a
manufacturer of data communications network management systems. Mr. Angus
graduated from the Wharton School of the University of Pennsylvania with a
B.S. in Economics in 1968.
G. Scott Scholler has served as Senior Vice President of Operations of
the Company since March 1996. From June 1995 to February 1996, Mr. Scholler
served as a consultant in product development and program management for
Electro Scientific Industries, a manufacturer of semiconductor capital
equipment. From March 1994 until October 1995, Mr. Scholler was a co-founder
and President of Black Rose Ltd., a developer of computer telephony software
for automated commerce applications. From August 1992 to September 1994, he
was Senior Vice President of Operations for Whittaker Communications, Inc.,
a wholly-owned subsidiary of Whittaker Corporation, and a manufacturer of
high-performance multimedia servers. From October 1988 to August 1992, Mr.
Scholler served as Vice President of Operations for Etec Systems, Inc., a
manufacturer of semiconductor capital equipment and as General Manager of its
Laser Lithography subsidiary. From 1986 to 1988, Mr. Scholler was Director of
Engineering, and from 1983 to 1986, Director of Manufacturing, of the Etch
Products Division of Applied Materials Inc., a supplier of equipment to the
semiconductor industry. Mr. Scholler received a B.S. in Nuclear Engineering
from the United States Military Academy at West Point in 1972 and an M.S. in
Research and Development Management in 1978 from the University of Southern
California.
Dr. Richard L. Sandstrom, a co-founder of the Company, has served as its
Vice President of Advanced Research since June 1994. From February 1986 to
June 1994, Dr. Sandstrom served as Vice President of Technology for the
Company. Dr. Sandstrom received a B.A. in Physics in 1972 and a Ph.D. in
Engineering Physics in 1979 from the University of California, San Diego.
Thomas C. Dannemiller has served as Vice President of
Manufacturing of the Company since July 1995. From May 1991 to July 1995,
Mr. Dannemiller served as Director of Logistics at A.G. Associates, Inc., a
manufacturer of rapid thermal processing equipment for the semiconductor
industry. From September 1988 to February 1991, he was Director of
Operations for KLA. From 1986 to 1988, Mr. Dannemiller served as
Manufacturing Manager for Applied Materials, Inc., a supplier of equipment to
the semiconductor industry. Mr. Dannemiller graduated from the DeVry
Institute of Technology with a B.S. in Electronics Engineering Technology in
1982.
Robert B. MacKnight, III joined the Company in September 1996 as Vice
President and General Manager, After Market Operations. From June 1995 to
May 1996, Mr. MacKnight was Senior Vice President, Worldwide Business
Development, and from September 1994 to June 1995, General Manager of Flat
Panel Operations, of Watkins-Johnson Company, a maker of semiconductor
equipment and electronic products for wireless communications and defense.
From January 1990 to September 1994, Mr. MacKnight was the founder and
President of Aktis Corporation, a developer and manufacturer of advanced
thermal processing technology and equipment for the flat panel display
industry. From 1984 to 1989, Mr. MacKnight was a co-founder and Executive Vice
President of Peak Systems Inc., a manufacturer of semiconductor capital
equipment specializing in rapid thermal processing technology. Mr. MacKnight
received a B.S. in Business Administration in 1971, and an M.B.A. in 1973,
from the University of Massachusetts.
Robert G. Ozarski joined the Company in September 1996 as Vice President
of Engineering. From August 1992 to September 1996, Mr. Ozarski served in
various engineering management positions at Applied Materials, Inc., a
supplier of equipment to the semiconductor industry. From March 1995 to
September 1996, Mr. Ozarski was Director of Engineering and Production for its
Silicon Etch Division, from August 1994 to March 1995, Director of
Engineering for its MCVD Division, from September 1993 to August 1994,
Director of Manufacturing Engineering for its CVD Division, and from August
1992 to September 1993, Director of Engineering for its ACET Division. From
October 1991 to August 1992, Mr. Ozarski served as Director of Engineering
for Etec Systems, Inc., a manufacturer of semiconductor capital equipment.
From September 1989 to October 1991, Mr. Ozarski served as Director of
Engineering of Airco Coating Technology, Inc., a manufacturer of sputtering
equipment for architectural glass coatings and of electron-beam evaporation
systems principally used for semiconductor coating applications. From 1985
to 1989, Mr. Ozarski was Director of Engineering for General Signal Thinfilm
Co., a maker of semiconductor capital equipment for thin film deposition and
metrology. Mr. Ozarski received a B.S. in 1970, and an M.S. in 1972, in
Electrical Engineering from Wayne State University.
Louis A. Kaplan joined the Company in December 1996 as Vice President,
Human Resources. From July 1995 to November 1996, Mr. Kaplan served as
Director, Human Resources and Organizational Development for Advanced Micro
Devices, a manufacturer of integrated circuits for the personal and networked
computer and communication markets. From June 1986 to July 1995, he was a
principal in Consulting About Management, a consulting firm primarily
oriented toward turnaround situations in the high technology, health care and
printing industries. From 1981 to 1986, Mr. Kaplan served as Vice President,
Administration and Human Resources for North Star Computers, a manufacturer of
micro computers. Mr. Kaplan received a B.S. in Vocational Rehabilitation
Counseling from Pennsylvania State University in 1963 and an M.S. in
Industrial Relations in 1977 from Loyola University, Chicago.
Nancy J. Baker has served as Director, Corporate Finance and Treasurer
since October 1996. From August 1992 to October 1996, she served as
Controller of the Company. From March 1987 to April 1992, Ms. Baker was
Accounting Manager at International Totalizer Systems, Inc., a designer,
manufacturer and distributor of lottery and racetrack wagering systems. Ms.
Baker graduated from the University of Texas with a B.B.A. in Accounting in
1985.
Executive officers serve at the discretion of the Board of Directors.
There are no family relationships between any of the directors and executive
officers of the Company.
Item 2. Properties
Cymer's headquarters are located at 16750 Via Del Campo Court in an
approximate 37,000 square foot facility and a manufacturing facility is
housed in an approximately 66,000 square foot building located in San Diego,
California which the Company leases under leases expiring in January 1, 2010.
For use as a field service office, the Company also leases a 400 square foot
facility near Boston, Massachusetts under a lease expiring on August 31,
1998, and, for use as a field service and sales office, the Company leases
404 square meters of facilities in Ichikawa, Japan under four renewable one
and two year leases expiring at various times but cancelable by the Company
upon three months notice. The Company intends to add additional field
service offices as necessary to service its customers. In December 1996, the
Company leased the 37,000 building housing the corporate headquarters and an
additional 100,000 square feet of manufacturing facilities in San Diego.
Item 3. Legal Proceedings
For a description of certain patent infringement claims against the
Company and its Japanese manufacturing partner, see the fourth, fifth and
sixth paragraphs under "Intellectual Property Rights" in Item 1 of this
Annual Report. Neither the Company, nor any of its subsidiaries, is a party
to any other litigation, other than non-material litigation incidental to the
Company's business.
Item 4. Submission of Matters to a Vote of Security-Holders
No matters were submitted to a vote of the security holders of the
Company during the fourth quarter of the fiscal year ended December 31, 1996.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The Company's Common Stock is publicly traded over-the-counter on the
Nasdaq National Market under the symbol CYMI. The following table lists the
high and low closing sales prices of the Company's Common Stock since its
initial public offering on September 18, 1996.
</TABLE>
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Third quarter of 1996 $17 3/4 $13 5/8
Fourth quarter of 1996 $48 1/4 $13 3/8
</TABLE>
Item 6. Selected Financial Data
The following selected consolidated financial data should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and with Management's Discussion and Analysis of Financial Condition
and Results of Operations, which are included elsewhere in this Annual Report
on Form 10-K. The consolidated statement of operations data for the years ended
December 31, 1994, 1995, and 1996 and the consolidated balance sheet data at
December 31, 1995 and 1996 are derived from, and are qualified by reference
to, the consolidated financial statements included elsewhere in this Annual
Report on Form 10-K, which have been audited by Deloitte & Touche LLP. The
consolidated statement of operations data for the years ended December 31,
1992 and 1993 and the consolidated balance sheet data at December 31, 1992,
1993, and 1994 are derived from consolidated financial statements not included
in this Annual Report on Form 10-K, which have also been audited by Deloitte &
Touche LLP. These historical results are not necessarily indicative of the
results to be expected in the future.
<TABLE>
<CAPTION>
Years Ended December 31,
1992 1993 1994 1995 1996
(in thousands, except per share data)
Consolidated Statement of
Operations Data:
Revenues:
<S> <C> <C> <C> <C> <C>
Product sales $7,423 $3,393 $7,705 $15,576 $62,510
Other 1,708 2,306 1,216 3,244 2,485
Total revenues 9,131 5,699 8,921 18,820 64,995
Costs and expenses:
Cost of product sales 4,404 2,726 4,797 8,786 35,583
Research and development 2,673 2,733 3,283 6,154 11,742
Sales and marketing 2,182 2,154 1,780 2,353 5,516
General and administrative 989 782 849 1,181 4,270
Total costs and expenses 10,248 8,395 10,709 18,474 57,111
Operating income (loss) (1,117) (2,696) (1,788) 346 7,884
Other income (expense) - net (51) (7) (199) (241) (183)
Income (loss) before provision (1,168) (2,703) (1,987) 105 7,701
for income taxes
Provision for income taxes 100 221 58 36 1,191
Net income (loss) (1,268) (2,924) (2,045) 69 6,510
Primary earnings per share (1) $0.58
Weighted average common and
common equivalent shares
outstanding (1) 11,210
</TABLE>
<TABLE>
<CAPTION>
December 31,
1992 1993 1994 1995 1996
(in thousands)
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $1,537 $ 715 $2,326 $2,015 $55,405
Working capital 2,289 (122) (1,557) 3,845 84,743
Total assets 6,265 5,805 9,172 15,619 129,467
Total debt (2) 1,026 2,717 6,879 4,164 2,217
Redeemable convertible
preferred stock 12,889 12,989 19,290 28,409
Stockholders' equity (deficit) (8,947) (11,828) (19,752) (21,830) 98,820
</TABLE>
(1) See note 1 of Notes to Consolidated Financial Statements for
an explanation of the determination of shares used in computing
earnings per share for 1996.
(2) Total debt includes indebtedness for borrowed money and capital lease
obligations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's statements of
operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996
<S> <C> <C> <C>
Revenues:
Product sales 86.4% 82.8% 96.2%
Other 13.6 17.2 3.8
Total revenues 100.0 100.0 100.0
Cost and expenses:
Cost of product sales 53.8 46.7 54.7
Research and development 36.8 32.7 18.1
Sales and marketing 20.0 12.5 8.5
General and administrative 9.5 6.3 6.6
Total costs and expenses 120.1 98.2 87.9
Operating income (loss) (20.1) 1.8 12.1
Other income (expense) - net (2.2) (1.3) (0.3)
Income (loss) before provision
for income taxes (22.3) 0.5 11.8
Provision for income taxes 0.7 0.2 1.8
Net income (loss) (23.0)% 0.3% 10.0%
Gross margin on product sales 37.7% 43.6% 43.1%
</TABLE>
YEARS ENDED DECEMBER 31, 1995 AND 1996
Revenues. The Company's total revenues consist of product sales, which
include sales of laser systems and spare parts and service and training, and
other revenues, which primarily include revenue from funded development
activities performed for customers and for SEMATECH. Revenue from product
sales is generally recognized at the time of shipment unless customer
agreements contain inspection or other conditions, in which case revenue is
recognized at the time such conditions are satisfied. Funded development
contracts are accounted for on the percentage-of-completion method based on
the relationship of costs incurred to total estimated costs, after giving
effect to estimates for costs to complete the development project.
Product sales increased 301% from $15.6 million in 1995 to $62.5 million
in 1996, primarily due to increased sales of DUV photolithography laser
systems. A total of 145 laser systems were sold in 1996 compared to 34 laser
systems in 1995. Funded development revenues decreased 23% from $3.2 million
in 1995 to $2.5 million in 1996, primarily due to the completion in 1995 of a
laser research project sponsored by SEMATECH.
The Company's sales are generated primarily by shipments to customers in
Japan, the Netherlands, and the United States. Approximately 54%, 69% and 81%
of the Company's sales in 1994, 1995, and 1996, respectively, were derived from
customers outside the United States. The Company maintains a wholly-owned
Japanese subsidiary which sells to the Company's Japanese customers. Revenues
from Japanese customers, generated primarily by this subsidiary, accounted
for 33%, 50% and 61% of revenues in 1994, 1995, and 1996, respectively. The
activities of the Company's Japanese subsidiary are limited to sales and
service of products purchased by the subsidiary from the parent corporation.
All costs of development and production of the Company's products, including
costs of shipment to Japan, are recorded on the books of the parent company.
The Company anticipates that international sales will continue to account for a
significant portion of its net sales.
Cost of Product Sales. Cost of product sales includes direct material and
labor, warranty expenses, license fees, manufacturing and service overhead,
and foreign exchange gains and losses on foreign currency exchange contracts
associated with purchases of the Company's inventories by the Japanese
subsidiary for resale under firm third-party sales commitments. Net gains or
losses from foreign currency exchange contracts are recorded on the date the
inventories are received by the Japanese subsidiary and are included in cost
of product sales in the consolidated statements of operations as the related
sales are consummated. The Company recognized net gains on such contracts of
$496,000 and $1.9 million for the years ended December 31, 1995 and 1996,
respectively. Cost of product sales rose 305% from $8.8 million in 1995 to
$35.6 million in 1996 due to the increase in sales volume. The gross margin
on these sales remained relatively consistent at approximately 43% in 1995 and
1996.
Research and Development. Research and development expenses include costs
of internally-funded and customer-funded projects as well as continuing
research support expenses which primarily include employee and material
costs, depreciation of equipment and other engineering related costs.
Research and development expenses increased 91% from $6.2 million in 1995 to
$11.7 million in 1996, due primarily to increased product support efforts
associated with the release of the Company's 5000 series lasers and the
hiring of additional technical personnel. As a percentage of total revenues,
such expenses declined from 32.7% to 18.1% in the respective periods due to
the growth in the Company's revenues.
Sales and Marketing. Sales and marketing expenses include the expenses of
the sales, marketing and customer support staffs and other marketing
expenses. Sales and marketing expenses increased 134% from $2.4 million in
1995 to $5.5 million in 1996, due primarily to increased sales commissions
and increased sales support efforts and marketing activities as more lasers
were placed in the field. As a percentage of total revenues, such expense
declined from 12.5% to 8.5% in the respective periods due to the growth in
the Company's revenues.
General and Administrative. General and administrative expenses consist
primarily of management and administrative personnel costs, professional
services and administrative operating costs. These expenses increased 262%
from $1.2 million in 1995 to $4.3 million in 1996, due to an increase in
general and administrative support as the Company's sales volume,
manufacturing capacity and overall level of business activity increased, in
addition to a $705,000 receivable reserve recorded in 1996. As a percentage
of total revenue, such expenses excluding the receivable reserve decreased
from 6.3% to 5.5% in the respective periods. Overall, total expenses
increased to 6.6% of revenue in 1996.
Other Income (Expense)- net. Net other income (expense) consists
primarily of interest income and expense and foreign currency exchange gains
and losses associated with the fluctuations in the value of the Japanese yen
against the U.S. dollar. Net other expense decreased from $241,000 in 1995 to
$183,000 in 1996, primarily due to the increase in interest income associated
with the investment of excess cash during the period, larger exchange gains
against the yen, offset by higher interest expense reflective of borrowing
requirements for the first nine months of 1996. Foreign currency exchange
gains totaled $10,000, interest income totaled $32,000, and interest expense
totaled $283,000 for 1995, compared to $161,000, $347,000, and $691,000,
respectively, for 1996.
The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to the fact that sales
by the Company to its Japanese subsidiary are denominated in dollars, and
sales by the subsidiary to customers in Japan are denominated in yen. The
Company's subsidiary manages its exposure to such fluctuations by entering
into foreign currency exchange contracts to hedge its purchase commitments to
the Company. The gains or losses from these contracts are recorded as a
component of cost of product sales, while the remaining foreign currency
exposure is recorded as other income (expense) in the consolidated statements
of operations. Gains and losses resulting from foreign currency translation
are accumulated as a separate component of consolidated stockholders' equity
(deficit).
Provision for Income Taxes. The provision for income taxes was
insignificant in 1995 and primarily represented taxes in Japan for research
and development revenues generated from agreements with Seiko. The tax
provision of $1.2 million in 1996 was primarily attributable to the
substantial growth in the Company's pretax income. As of December 31, 1996,
the Company had Federal and state tax business credit carryforwards available
to offset future tax liabilities of $1,833,000 and $293,000, respectively.
Such Federal and state tax credit carryforwards expire at various dates
beginning with the year 1997 and 2003, respectively.
YEARS ENDED DECEMBER 31, 1994 AND 1995
Revenues. Product sales increased 102% from $7.7 million in 1994 to
$15.6 million in 1995, reflecting significant increases in sales of DUV
photolithography laser systems and replacement parts and, to a lesser extent,
increases in sales of industrial laser systems. The Company sold 10 and 26
DUV photolithography systems in 1994 and 1995, respectively, and sold seven
and eight industrial laser systems during the same periods. Funded
development revenues increased 167%, from $1.2 million in 1994, to $3.2
million in 1995. This increase was primarily due to increased customer
interest in the development of production-worthy illumination sources. The
Company expects that funded development revenues will decrease as a
percentage of total revenues as the Company focuses on product sales.
Cost of Product Sales. Cost of product sales increased 83% from $4.8
million in 1994 to $8.8 million in 1995, as the Company's product sales
increased. Gross margin on product sales increased from 37.7% in 1994 to
43.6% in 1995. This increase was due primarily due to economies of scale
realized as the Company's sales volume increased.
Research and Development. Research and development expenses increased
87% from $3.3 million in 1994 to $6.2 million in 1995. The substantial
increase in 1995 was primarily due to the Company's research contract with
SEMATECH for the EX-5000 series laser system and to continuing product
development and enhancements associated with the ELS-4000F series laser system.
As a percentage of revenues, research and development expenses decreased from
36.8% to 32.7% in 1994 and 1995 due to the growth in the Company's revenues
in those periods.
Sales and Marketing. Sales and marketing expenses increased 32% from
$1.8 million in 1994 to $2.4 million in 1995. This increase was primarily
the result of increased industry interest in DUV photolithography and the
associated sales and marketing expenses, including sales commissions incurred
to support the interest. As a percentage of total revenues, these expenses
declined from 20.0% to 12.5% in 1994 and 1995, respectively.
General and Administrative. General and administrative expenses
increased 39% from $849,000 in 1994 to $1.2 million in 1995, reflecting
increases in general and administrative support as the Company's sales volume
increased and its scope of operations expanded. As a percentage of total
revenues, these expenses decreased from 9.5% to 6.3% in 1994 and 1995,
respectively, reflecting economies of scale as total revenues increased.
Other Income (Expense) - net. In 1994, the Company reported other net
expense of $199,000 primarily reflecting increased interest expense on bridge
financing obtained from the Company's investors to support is expanding
operations. This debt financing was subsequently converted into equity by the
investors in February 1995. The Company reported other expense of $241,000
in 1995 due to interest expense of $283,000, partially offset by foreign
exchange gains of $10,000 and interest income of $32,000.
Provision for Income Taxes. The Company's provision for income taxes,
which primarily represented taxes paid in Japan for license fees and research
and development revenues generated from agreements with Seiko, decreased from
$58,000 to $36,000 in 1994 and 1995, respectively, as revenues from these
activities decreased over these periods.
To date, inflation has not had a significant effect on the Company or
its results of operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the cash flow generated
from the Company's September 18, 1996 initial public offering, resulting in
net proceeds to the Company of approximately $29.7 million and the public
offering on December 12, 1996, resulting in net proceeds of approximately $50.0
million, the private sale of equity securities over the Company's ten year
history totaling approximately $27.1 million and short term bank borrowings.
As of December 31, 1996, the Company had approximately $55.4 million in cash
and cash equivalents, $10.4 million in short term investments, $84.7 million in
working capital and $1.8 million in bank debt.
Net cash used in operating activities was approximately $2.1 million in
1995 and $8.0 million in 1996. The increase in cash used in operations
during 1996 was primarily attributable to an increase in accounts receivable
and inventory as the working capital requirements of the Company increased
due to the business expanding during the period.
Net cash used for investing activities was approximately $2.4 million in
1995 as compared to $22.9 million in 1996. The increase in cash used for
investing activities during 1996 primarily reflects the investment of funds
received through the Company's public offerings, and the purchase of computer
equipment, test equipment, research and development tools, manufacturing
process machinery and tenant improvements in the manufacturing area in order
to accommodate the business expansion for the period.
The Company's financing activities provided net cash of approximately $4.3
million and $83.6 million for 1995 and 1996, respectively. During 1995, the
Company sold Redeemable Convertible Preferred Stock for approximately $3.4
million, and increased its bank borrowings by $1.2 million. In 1996, the
Company received net proceeds of approximately $6.1 million from the sale of
Redeemable Convertible Preferred Stock and received net proceeds of
approximately $79.7 million from its public offerings. Upon the Company's
initial public offering in September 1996, all Redeemable Convertible
Preferred Stock (approximately 7.7 million shares) and Redeemable Convertible
Preferred Stock warrants (to purchase 283,000 shares of such stock) were
automatically converted into the Company's common stock or warrants to
purchase common stock.
The Company has available credit arrangements with a bank permitting
borrowings of up to $11.0 million. These borrowings are secured by
substantially all of the Company's assets, including its intellectual
property, and provide for the following facilities: (i) a $5.0 million
revolving line of credit expiring June 27, 1997, which is based on eligible
accounts receivable of the Company's Japanese subsidiary and eligible
inventory of the Company and its subsidiary and is partially guaranteed by
the Export-Import Bank of the United States; (ii) a $3.0 million revolving
line of credit expiring March 5, 1997 based on eligible international
accounts receivable and inventory (excluding Japan) and partially guaranteed
by the Export-Import Bank of the United States; (iii) a $1.0 million domestic
revolving loan facility expiring March 5, 1997 based on eligible domestic
accounts receivable; and (iv) a $2.0 million term loan facility which is due
September 30, 1998. The Company also has through its subsidiary in Japan a
2.1 billion yen (approximately $18.1 million) facility for the receipt of
funds from a bank in Japan, without recourse, in connection with the
discounting of certain commercial drafts received from customers as payment for
merchandise. As of December 31, 1996, 1.2 billion yen (approximately $10.4
million) was being utilized under the facility. The Company also has three
foreign currency exchange facilities. The Company had forward foreign
exchange contracts at December 31, 1996 to buy $43.2 million for 4.7 billion
yen. The total unrecorded deferred gain and premium on these contracts
as of December 31, 1996 was $1.8 million.
The Company requires substantial working capital to fund its business,
particularly to finance inventories and accounts receivable and for capital
expenditures. The Company's future capital requirements will depend on many
factors, including the rate of the Company's manufacturing expansion, the
timing and extent of spending to support product development efforts and
expansion of sales and marketing and field service and support, the timing of
introductions of new products and enhancements to existing products, and
market acceptance of the Company's products. The Company believes that it
has sufficient working capital and available bank credit to sustain
operations and provide for the future expansion of its business during the next
fiscal year.
RISK FACTORS
The last paragraph under the heading "Liquidity and Capital Resources"
contains forward-looking statements. The Company may from time to time make
additional written and oral forward-looking statements, including statements
contained in the Company's filings with the Securities and Exchange Commission
and in its reports to stockholders. Such forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below. The Company does not undertake to update any forward-
looking statement that may be made from time to time by or on behalf of the
Company. Readers should carefully review the risk factors described in other
documents the Company files from time to time with the Securities and
Exchange Commission.
Likely Fluctuations in Operating Results. The Company's operating
results have in the past fluctuated and are likely in the future to fluctuate
significantly depending upon a variety of factors. Such factors may include:
the demand for semiconductors in general and, in particular, for leading edge
devices with smaller circuit geometries; cyclicality in the market for
semiconductor manufacturing equipment; the timing and size of orders from the
Company's small base of customers; the ability of the Company to manufacture,
test and deliver laser systems in a timely and cost effective manner; the
ability of the Company's competitors to obtain orders from the Company's
customers; the timing of new product announcements and releases by the Company
and its competitors; the entry of new competitors into the market for DUV
photolithography illumination sources; the ability of the Company to manage
its costs as it begins to supply its products in volume; and the Company's
ability to manage effectively its exposure to foreign currency exchange rate
fluctuations, principally with respect to the yen (in which sales by the
Company's Japanese subsidiary are denominated).
The Company has historically derived a substantial portion of its
quarterly and annual revenues from the sale of a relatively small number of
systems, which are priced at up to $450,000. As a result, the precise timing
of the recognition of revenue from an order for one or a small number of
systems can have a significant impact on the Company's total revenues and
operating results for a particular period. The Company's operating results
for a particular period could be adversely affected if orders for a small
number of systems, or even one system, are canceled or rescheduled by
customers or cannot be filled in time to recognize revenue during that period
due to, for example, unanticipated manufacturing, testing, shipping or
product acceptance delays. The Company had a backlog of orders at December
31, 1996 of approximately $98 million for shipment during the next 12 months.
However, customers may cancel or delay orders with little or no penalty, and
because of the Company's limited experience in producing lasers in volume,
there can be no assurance that the Company will recognize revenue on any
significant portion of this backlog. The Company's expense levels are based,
in large part, on the Company's expectations as to future revenues and are,
therefore, relatively fixed in the short term. If revenue levels fall below
expectations, net income will be disproportionately and adversely affected. The
impact of these and other factors on the Company's revenues and operating
results in any future period cannot be forecast with any degree of certainty.
The Company believes that semiconductor manufacturers are currently
developing capability for pilot production of 0.25um devices. The Company
also believes that demand for its excimer lasers for DUV photolithography
tools is currently being driven by the efforts to develop such capability.
Once semiconductor manufacturers have acquired such capability, the company
believes that they will not invest in DUV photolithography tools to expand
their capacity to manufacture 0.25um devices until such time as their sales
forecasts justify such investment. As a result, the Company believes that
once current demand is satisfied, the Company's revenues could flatten or
even decline in future periods before resuming growth in response to future
demand, if any. Accordingly, the Company currently expects that demand for
its DUV excimer lasers, and thus its revenues, may decrease in the second
half of 1997, as compared to the first half of 1997.
Recently, the Company has significantly increased the scale of its
operations and its manufacturing capacity, including hiring additional
personnel and substantially increasing the number of systems in production.
This expansion has resulted in higher materials and work-in-process inventory
levels and significantly higher operating expenses, and has required the
Company to implement a variety of new systems, procedures and controls.
Based on its backlog of orders at December 31, 1996, the Company expects to
continue to increase its inventories and operating expenses. If orders
received by the Company do not result in sales, or if the Company is unable to
sustain its revenues at anticipated levels, the Company's operating results
would be materially adversely affected.
Due to the foregoing factors, as well as other unanticipated factors, it
is likely that in some future quarter the Company's operating results will be
below the expectations of public market analysts or investors. In such
event, the price of the Company's Common Stock would be materially adversely
affected.
History of Losses; Unpredictability of Future Operating Results. The
Company was founded in 1986 and shipped its first prototype laser system in
1988. Although the Company's revenues have increased over the last three
years and each of the last eight quarters, the Company has incurred annual
operating losses from inception through 1994 and incurred an operating loss in
the quarters ended March 31, 1995 and 1996. There can be no assurance that
the Company's revenues will grow or be sustained in future periods or that
the Company will be profitable in any future period. The Company's history of
annual and quarterly operating losses, its substantial expansion in
manufacturing capacity, its limited experience in supplying products in volume
and the difficulty of predicting the demand for its products, among other
factors, make the prediction of future operating results difficult if not
impossible.
Risks Associated with Rapid and Substantial Manufacturing Expansion. To
meet current and anticipated demand for its products, the Company must
continue to increase the rate by which it manufactures and tests its
photolithography laser systems. This increase would follow a nearly
seven-fold increase in the manufacturing rate from December 1995 to December
1996. The Company is currently unable to manufacture and test its
photolithography laser systems fast enough to fill orders and is behind on
its delivery schedules. While the Company is not aware of any order
cancellations as a result of these delays, such delays, if they continue or
recur, increase the risk that customers will cancel orders and seek to meet
all or a portion of their needs for illumination sources from the Company's
competitors. The Company is also increasingly relying on outside suppliers
for the manufacture of various components and subassemblies used in its
products and is dependent upon these suppliers to meet the Company's
manufacturing schedules. The failure by one or more of these suppliers to
supply the Company on a timely basis with sufficient quantities of components or
subassemblies that perform to the Company's specifications could affect the
Company's ability to deliver completed lasers to its customers on schedule.
Additionally, the Company may underestimate the costs required to increase its
manufacturing capacity, which may materially adversely affect the Company's
results of operations.
In addition to increasing manufacturing capacity at its facilities in
San Diego, California, the Company is also seeking to qualify Seiko
Instruments, Inc. ("Seiko") of Japan as a contract manufacturer of its
photolithography lasers. While Seiko began limited production of lasers for
the Company in 1996, there can be no assurance that Seiko will be successfully
qualified and commence production on schedule. The failure of Seiko to be so
qualified or to commence production on schedule could have a material adverse
effect on the Company's business, financial condition and results of operations.
Seiko has been advised by Komatsu, Ltd. ("Komatsu"), a competitor of the
Company, that certain aspects of the Company's lasers might infringe a patent
that has been issued to Komatsu in Japan and that Komatsu intends to enforce
its rights under that patent against Seiko if Seiko engages in manufacturing
activities for the Company. Cymer has been advised by its patent counsel
that in the opinion of such firm the Company's products do not infringe any
valid claims included in the Komatsu patent. In the event that,
notwithstanding its manufacturing agreement with the Company, Seiko should
determine not to commence or continue manufacturing the Company's products
until resolution of the matter with Komatsu, the Company's ability to meet the
anticipated demand for its products could be materially adversely affected.
Dependence on Key Suppliers. Certain of the components and subassemblies
included in the Company's products are obtained from a single supplier or a
limited group of suppliers. In particular, there are no alternative sources
for certain of the components and subassemblies, including certain optical
components and pre-ionizer tubes used in the Company's lasers. In addition,
the Company is increasingly outsourcing the manufacture of various
subassemblies. Although to date the Company has been able to obtain adequate
supplies of its components and subassemblies in a timely manner from existing
sources, the Company has only recently commenced volume production of its
laser systems. The Company believes that its recent manufacturing expansion
has significantly strained the production capacity of certain key suppliers,
including suppliers of optical components and pre-ionizer tubes. If the
Company is unable to obtain sufficient quantities of components or
subassemblies, or if such items do not meet the Company's quality standards,
delays or reductions in product shipments could occur which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Single Product Line. The Company's only product line is
excimer lasers, the primary market for which is for use in DUV
photolithography equipment for manufacturing deep-submicron semiconductor
devices. Demand for the Company's products will depend in part on the rate
at which semiconductor manufacturers adopt excimer lasers as the illumination
source for their photolithography tools. Impediments to such adoption
include a shortage of engineers with experience implementing, utilizing and
maintaining DUV photolithography systems that incorporate excimer laser
illumination sources, instability of photoresists used in DUV
photolithography and a shortage of specialized glass used in DUV optics.
There can be no assurance that such impediments can or will be overcome, and, in
any event, such impediments may materially reduce the demand for the
Company's products. In addition, to the extent that such manufacturers are
able to produce semiconductors with smaller critical feature sizes by
extending the performance capabilities of mercury lamp illumination sources
used in existing i-line or DUV photolithography tools, the demand for the
Company's products would also be materially reduced. Further, if the Company's
customers experience reduced demand for DUV photolithography tools, or if the
Company's competitors are successful in obtaining significant orders from
such customers, the Company's results of operations would be materially
adversely affected.
Risk of Excessive Inventory Buildups by Photolithography Tool
Manufacturers. Substantially all of the Company's customers are
photolithography tool manufacturers, which in turn sell their systems to
semiconductor manufacturers. Over the past year, the Company's customers
have substantially increased their forecasted shipments of DUV
photolithography tools. The Company believes that the increase in demand for
DUV photolithography tools coupled with the dependence of the manufacturers of
these tools on a limited number of laser suppliers may have caused a degree
of over-ordering of the Company's products. The Company is working with its
customers to better understand end user demand for DUV photolithography
tools. However, there can be no assurance that the Company will be
successful in this regard, or that is customers will not build excessive
laser inventories. Excessive customer laser inventories could result in a
material decline in the Company's revenues and operating results in future
periods as such inventories are brought into balance.
Limited Production Use of Excimer Lasers. The Company first shipped its
lasers for photolithography applications in 1988. The Company is not aware of
any semiconductor manufacturer using the Company's laser for volume
production of semiconductor devices. There can be no assurance that the
Company's products will meet production specifications when subjected to
prolonged and intense use in volume production in semiconductor manufacturing
processes. If any semiconductor manufacturer is not able to successfully
achieve volume production using the Company's lasers, the Company's
reputation with semiconductor manufacturers or the limited number of
photolithography tool manufacturers could be damaged, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Small Number of Customers. The Company's primary customer
base is composed of a small number of manufacturers of DUV photolithography
tools. Four large firms, ASM Lithography, Canon, Nikon and SVG Lithography
(a subsidiary of Silicon Valley Group, Inc.), dominate the photolithography
tool business and collectively accounted for approximately 65% and 90% of the
Company's total revenues in 1995 and 1996, respectively. Sales to ASM
Lithography, Canon, Nikon and SVG Lithography accounted for approximately
19%, 30%, 31% and 10%, respectively, of total revenues in 1996 and 18%, 19%, 27%
and 1%, respectively, of total revenues in 1995. The Company expects that
sales of its systems to these customers will continue to account for
substantially all of its revenues in the foreseeable future. None of the
Company's customers is obligated to purchase a minimum number of the
Company's products. Loss of any significant business from any one of these
customers or a significant reduction in orders from any one of these customers,
including reductions caused by changes in a customer'scompetitive position, a
decision to purchase illumination sources from other suppliers or economic
conditions in the semiconductor and photolithography tool industries, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
Need to Manage a Changing Business. The Company recently has
dramatically expanded the scope of its operations and the number of employees in
most of its functional areas. For example, the Company increased the number of
its employees from 136 to 336 between December 31, 1995 and 1996. The Company
also substantially increased its manufacturing capacity during that period and
installed a new management information system. If demand for the Company's
products continues to grow, the Company will be required to continue this
expansion. The management of such growth, if such growth occurs, will require
the Company to continue to improve and expand its management, operational and
financial systems, procedures and controls, including accounting and other
internal management systems, procedures and control, delivery and field
service and customer support capabilities. The Company will also be required
to manage effectively its expanding international operations, effect timely
deliveries of its products or maintain the product quality and reliability
required by its customers. The Company has experienced, and may continue to
experience, delays in deliveries to customers as a result of its inability to
increase its manufacturing capacity fast enough to meet demand. Any failure to
manage the Company's growth, if such growth occurs, would materially
adversely effect the Company's financial condition and results of operations.
Balanced Production between Systems and Replacement Parts. The Company
expects that the demand for replacement parts and component modules will
increase as the installed base of lasers increases. As a result, the Company
will be required to rapidly expand its production of component modules, which
are also required for new laser systems.
Because the Company prioritizes the reliable operation of its installed
units at semiconductor manufacturers above all other requirements, the
failure to rapidly expand the production of component modules could necessitate
the delay in shipment of new laser systems as component modules would be
utilized first to support existing systems in the field. Such delays in system
shipments could have a material adverse effect on the Company's business,
financial condition and results of operations.
Need to Expand Field Service and Support Organization. The Company
believes that the need to provide fast and responsive service to the
semiconductor manufacturers using its lasers is critical and that it will not be
able to depend solely on its customers to provide this specialized service.
Therefore, the Company believes it is essential to establish, through trained
third-party sources or through its own personnel, a rapid response capability
to service its lasers throughout the world. Accordingly, the Company intends to
expand its direct support infrastructure in Japan and Europe, expand its field
service and support in Korea through an independent firm, and establish a
joint service and support capability with an independent firm to serve
Taiwan and Southeast Asia. The establishment of these activities will entail
recruiting and training qualified personnel, identifying qualified
independent firms and building effective and highly trained organizations that
can provide service to customers in various countries in their assigned
regions. There can be no assurance that the Company will be able to attract
qualified personnel to establish these operations successfully or that the
costs of such operations will not be excessive. A failure to implement this
plan effectively could have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Semiconductor Industry. Substantially all of the
Company's revenues are derived from photolithography tool manufacturers that
in turn depend on the demand for their products from semiconductor
manufacturers. Semiconductor manufacturers correspondingly depend on the
demand from manufacturers of end-products or systems that use semiconductors.
The semiconductor industry is highly cyclical and has historically
experienced periodic and significant downturns, which often have had a severe
effect on the demand for semiconductor manufacturing equipment, including
photolithography tools. The Company believes that downturns in the
semiconductor manufacturing industry will occur in the future, and will result
in decreased demand for semiconductor manufacturing equipment. In addition,
the Company believes that its ability to reduce expenses in a future downturn
will be constrained by the need for continual investment in research and
development, and the need to maintain extensive ongoing customer service and
support capability. Accordingly, any downturn in the semiconductor industry
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Competition. The Company currently has two significant competitors in
the market for excimer laser systems for photolithography applications.
Lambda-Physik R&D ("Lambda-Physik"), a German-based subsidiary of Coherent, Inc.
("Coherent") and Komatsu, Ltd., located in Japan. Both of these companies
are larger than the Company, have access to greater financial, technical and
other resources than does the Company and are located in closer proximity to
the Company's customers than is the Company. Although the Company believes that
these competitors are not yet supplying excimer lasers in volume for
photolithography applications, the Company believes that both companies are
aggressively seeking to gain larger positions in this market. The Company
believes that its customers have each purchased one or more products offered
by these competitors and that its customers will consider further purchases, in
part as a result of delays in deliveries by the Company in recent months as
the Company has been seeking to expand its manufacturing capacity. The
Company also believes that its customers are actively seeking a second source
for excimer lasers. Furthermore, photolithography tool manufacturers may seek to
develop or acquire the capability to manufacture internally their own excimer
lasers. In the future, the Company will likely experience competition from
other technologies, such as X-ray, electron beam and ion projection processes.
To remain competitive, the Company believes that it will be required to
manufacture and deliver products to customers on a timely basism and without
significant defects and that it will also be required to maintain a high
level of investment in research and development and in sales and marketing.
There can be no assurance that the Company will have sufficient resources to
continue to make the investments necessary to maintain its competitive
position. In addition, the market for excimer lasers is still small and
immature and there can be no assurance that larger competitors with
substantially greater financial resources, including other manufacturers of
industrial lasers, will not attempt to enter the market. There can be no
assurance that the Company will remain competitive. A failure to remain
competitive would have a material adverse effect on the Company's business,
financial condition and results of operations.
Rapid Technological Change; New Product Introductions. Semiconductor
manufacturing equipment and processes are subject to rapid technological
change. The Company believes that its future success will depend in part
upon its ability to continue to enhance its excimer laser products and their
process capabilities and to develop and manufacture new products with
improved capabilities. In order to enhance and improve its products and
develop new products, among other things, the Company must work closely with
its customers, particularly in the product development stage, to integrate its
lasers with its customer's photolithography tools. There can be no assurance
that future technologies, such as X-ray, electron beam and ion projection
processes, will not render the Company's excimer laser products obsolete or
that the Company will be able to develop and introduce new products or
enhancements to its existing products and processes in a timely manner that
satisfy customer needs or achieve market acceptance. The failure to do so could
materially adversely affect the Company's business, financial condition and
results of operations.
Uncertainty Regarding Patents and Protection of Proprietary Technology.
The Company believes that the success of its business depends more on such
factors as the technical expertise of its employees, as well as their
innovative skills and marketing and customer relations ability, than on
patents, copyrights, trade secrets and other intellectual property rights.
Nevertheless, the success of the Company may depend in part on patents, and
as of December 31, 1996, the Company owned 17 United States patents covering
certain aspects of technology associated with excimer lasers which expire from
January 2008 to December 2013 and had applied for 12 additional patents in
the United States, two of which have been allowed. As of December 31, 1996,
the Company had filed 57 patent applications in other countries. There can be
no assurance that the Company's pending patent applications or any future
applications will be approved, that any patents will provide it with
competitive advantages or will not be challenged by third parties, or that
the patents of others will not have an adverse effect on the Company's
ability to do business. In this regard, due to cost constraints, the Company
did not begin filing for patents in Japan or other countries with respect to
inventions covered by its United States patents and patent applications until
recently and has therefore lost the right to seek patent protection in those
countries for certain of its inventions. Additionally, because foreign patents
may afford less protection under foreign law than is available under United
States patent law, there can be no assurance that any such patents issued to
the Company will adequately protect the Company's proprietary information.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate the Company's products or, if patents are
issued to the Company, design around the patents issued to the Company.
Others may have filed and in the future may file patent applications that
are similar or identical to those of the Company. To determine the priority
of inventions, the Company may have to participate in interference
proceedings declared by the United States Patent and Trademark Office that
could result in substantial cost to the Company. No assurance can be given
that any such patent application will not have priority over patent
applications filed by the Company.
The Company also relies upon trade secret protection, employee and
third-party nondisclosure agreements and other intellectual property
protection methods to protect its confidential and proprietary information.
Despite these efforts, 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 or
disclose such technology or that the Company can meaningfully protect its
trade secrets.
The Company has in the past been, and may in the future be, notified
that it may be infringing intellectual property rights possessed by third
parties.
In July 1996, the Company's prospective Japanese manufacturing partner,
Seiko, was notified by Komatsu, one of the Company's competitors, that
certain aspects of the Company's lasers might infringe certain claims
furnished by Komatsu to Seiko that Komatsu advised Seiko were included in a
patent application filed by Komatsu in Japan (the "Patent Claims"). Seiko in
turn notified the Company of this claim. In connection with its
manufacturing agreement with Seiko, the Company has agreed to indemnify Seiko
against such claims under certain circumstances. A patent has now been issued by
the Japanese Patent Office covering the Patent Claims and Komatsu has advised
Seiko of its intention to enforce its rights under that patent against Seiko
if Seiko engages in manufacturing activities for the Company. The Company
has been advised by its patent counsel in this matter, Wilson, Sonsini,
Goodrich & Rosati, Professional Corporation, which is relying in part on the
opinion of the Company's Japanese patent counsel, that in the opinion of such
firm the Company's products do not infringe any valid Patent Claims.
However, there can be no assurance that litigation will not ensue with
respect to these claims or that the Company and Seiko would ultimately
prevail in any such litigation.
Any patent litigation would at a minimum be costly and could divert the
efforts and attention of the Company's management and technical personnel,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that other infringement claims by third parties or other claims for
indemnification by customers or end users of the Company's products resulting
from infringement claims will not be asserted in the future or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. If any
such claims are asserted against the Company, 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 resort to litigation to
challenge such claims or to design around the patented technology. Such
actions could be costly and would divert the efforts and attention of the
Company's management and technical personnel, which would materially
adversely affect the Company's business, financial condition and results of
operations.
The Company has registered the trademark CYMER in the United States and
certain other countries and is seeking additional registrations in certain
countries. In Japan, the Company's application for registration was rejected
on the grounds that it is similar to a trademark previously registered by a
Japanese company for a broad range of products. The Company is seeking a
partial nullification of the other registration with respect to laser devices
and related components and does not believe that the holder of the other
trademark is engaged in any business similar to that of the company. For
this reason, the Company is continuing to use the trademark CYMER in Japan
and believes that it will ultimately be permitted to register such mark for use
with its products and that it is not infringing the other company's
trademark. There can be no assurance that the Company will ultimately
succeed in its efforts to register its trademark in Japan or that it will not be
subjected to an action for trademark infringement, which could be costly to
defend and, if successful, would require the Company to cease use of the mark
and, potentially, to pay damages.
Dependence on Key Personnel. The Company is highly dependent on the
services of a number of key employees in various areas, including
engineering, research and development, sales and marketing and manufacturing.
In particular, there are a limited number of experts in excimer laser
technology and competition for such personnel is intense. The Company has in
the past experienced difficulty in hiring personnel, including experts in
laser technology. The Company believes that, to a large extent, its future
success will depend upon the continued services of its engineering, research
and development, sales and marketing and manufacturing personnel and on its
ability to attract and retain highly skilled personnel in each of these
areas. The Company does not have employment agreements with any of its
employees, and there is no assurance that the Company will be able to retain
its key employees. The failure of the Company to hire and retain such
personnel could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks of International Sales and Operations. Approximately 54%, 69% and
81% of the Company's revenues in 1994, 1995 and 1996, respectively, were
derived from customers located outside the United States. Because a
significant majority of the Company's principal customers are located in other
countries, the Company anticipates that international sales will continue to
account for a significant portion of its revenues. In order to support its
overseas customers, the Company maintains a subsidiary in Japan, is expanding
its field service and support operations in Japan and Europe, is working with an
independent firm to expand field service and support in Korea, is seeking to
establish with an independent firm a joint field service and support
capability to serve Taiwan and Southeast Asia, and is seeking to qualify
Seiko as a manufacturer of its products in Japan. There can be no assurance
that the Company will be able to manage these operations effectively or that
the Company's investment in these activities will enable it to compete
successfully in international markets or to meet the service and support
needs of its customers. Additionally, a significant portion of the Company's
sales and operations could be subject to certain risks, including tariffs and
other barriers, difficulties in staffing and managing foreign subsidiary and
branch operations, currency exchange risks and exchange controls, potentially
adverse tax consequences and the possibility of difficulty in accounts
receivable collection. Further, while the Company has experienced no
difficulty to date in complying with U.S. export controls, these rules could
change in the future and make it more difficult or impossible for the Company to
export its products to various countries. There can be no assurance that any
of these factors will not have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's results of operations are subject to fluctuations in the
value of the Japanese yen against the U.S. dollar due to sales by the Company to
its Japanese subsidiary being dominated in dollars, and sales by the
subsidiary to customers in Japan being dominated in yen. The Company's
subsidiary manages its exposure to such fluctuations by entering into foreign
currency exchange contracts to hedge its purchase commitments. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, use financial hedging techniques to
minimize the effect of these fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's results of operations or financial condition. In the future, the
Company could be required to sell its products in other currencies, which
would make the management of currency fluctuations more difficult and expose
the Company to greater risks in this regard.
The Company's products are subject to numerous foreign government
standards and regulations that are continually being amended. Although the
Company endeavors to meet foreign technical and regulatory standards, there
can be no assurance that the Company's products will continue to comply with
foreign government standards and regulations, or changes thereto, or that it
will be cost effective for the Company to redesign its products to comply
with such standards and regulations. The inability of the Company to design
or redesign products to comply with foreign standards could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Environmental and Other Government Regulations. Federal, state and local
regulations impose various controls on the storage, handling, discharge and
disposal of substances used in the Company's manufacturing process and on the
facility leased by the Company. The Company believes that its activities
conform to present governmental regulations applicable to its operations and
its current facilities, including those related to environmental, land use,
public utility utilization and fire code matters. There can be no assurance
that such governmental regulations will not in the future impose the need for
additional capital equipment or other process requirements upon the Company or
restrict the Company's ability to expand its operations. The adoption of
such measures or any failure by the company to comply with applicable
environmental and land use regulations or to restrict the discharge or
hazardous substances could subject the Company to future liability or could
cause its manufacturing operations to be curtailed or suspended.
Risks of Product Liability Claims. The Company faces a significant risk
of exposure to product liability claims in the event that the use of its
products results in personal injury or death, and there can be no assurance
that the Company will not experience material product liability losses in the
future. The Company maintains insurance against product liability claims in
the amount of $5.0 million per occurrence and $6.0 million in the aggregate,
but there can be no assurance that such coverage will continue to be
available on terms acceptable to the Company or that such coverage will be
adequate for liabilities actually incurred. Also, in the event that any of
the Company's products prove to be defective, the Company may be required to
recall or redesign such products. A successful claim brought against the
Company in excess of available insurance coverage, or any claim or product
recall that results in significant adverse publicity against the Company,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Risks Associated with Customer-Funded Research and Development. The
Company has in the past funded a significant portion of its research and
development expenses from research and development revenues received from
photolithography tool manufacturers and from SEMATECH, a semiconductor industry
consortium, in connection with the design and development of specific
products. The Company's staffing levels and other expenditures for research
and development are, in part, determined by the level of funding that the
Company expects to receive for specific projects. No assurance can be given
that the Company will continue to generate research and development revenues
to offset a sufficient portion of its production development costs. Any
material cancellation of this funding or a failure to secure research and
development funding commensurate with the Company's expectations could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, the recognition of research and
development revenues is dependent on the company accomplishing certain
research and development milestones. If such milestones are not achieved,
the Company will not recognize the associated research and development
revenues, which could have a material adverse effect on its business,
financial condition and results of operations. Although the Company
anticipates that it will continue to receive research and development
revenues in the future, there can be no assurance that this level of support
will be maintained at past levels, and the company believes that such
revenues will constitute a decreasing percentage of its overall revenues. As
a result, the Company may have to bear a greater proportion of the cost of
design and development of its products which could have a material adverse
effect on the Company's business, financial condition and results of operations.
Although the Company's arrangements with photolithography tool
manufacturers and SEMATECH seek to clarify the ownership of the intellectual
property arising from research and development services performed by the
Company, there can be no assurance that disputes over the ownership or rights to
use or market such intellectual property will not arise between the Company and
such parties. Any such dispute could result in restrictions on the Company's
ability to market its products and could have a material adverse effect on
the Company's business, financial condition and results of operations.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is included in Part IV Item
14(a)(1) and (2).
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There have been no disagreements with accountants on any matter of
accounting principles and practices or financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding the identification and business experience of
the Company's directors under the caption "Nominees" under the main caption
"Proposal One - Election of Directors" in the Company's definitive Proxy
Statement for the annual meeting of stockholders to be held, as filed with the
Securities and Exchange Commission within 120 days after the end of the
Company's fiscal year ended December 31, 1996, is incorporated herein by this
reference. For information regarding the identification and business
experience of the Company's executive officers, see "Executive Officers" at
the end of Item 1 in Part I of this Annual Report on Form 10-K. Information
concerning filing requirements applicable to the Company's executive officers
and directors under the caption "Compliance With Section 16(a) of the
Exchange Act" in the Company's Proxy Statement is incorporated herein by this
reference.
Item 11. Executive Compensation
The information under the captions "Executive Compensation" and
"Compensation of Directors" in the Company's Proxy Statement is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information under the caption "Security Ownership of Principal
Stockholders and Management" under the main caption "Additional Information"
in the Company's Proxy Statement is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions
The information under the caption "Certain Transactions" in the
Company's Proxy Statement is incorporated herein by this reference.
With the exception of the information specifically incorporated by
reference from the Company's Proxy Statement in Part III of this Annual
Report on Form 10-K, the Company's Proxy Statement shall not be deemed to be
filed as part of this Report. Without limiting the foregoing, the
information under the captions "Report of the Compensation Committee of the
Board of Directors" and "Company's Stock Performance" under the main caption
"Additional Information" in the Company's Proxy Statement is not incorporated
by reference in this Annual Report on Form 10-K.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) The following documents are filed as part of, or incorporated by
reference into, this Annual Report on Form 10-K:
(1) Financial Statements. The following Consolidated Financial
Statements of Cymer, Inc. and Independent Auditors' Report are included in
a separate section of this Report beginning on page F-1:
<TABLE>
<CAPTION>
Description Page Number
<S> <S>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of December 31,
1995 and 1996 F-2
Consolidated Statements of Operations for the
Years Ended December 31, 1994, 1995 and 1996 F-3
Consolidated Statements of Stockholders' Equity
(Deficit) for the Years Ended December 31, 1994,
1995 and 1996 F-4
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1994, 1995 and 1996 F-5
Notes to Consolidated Financial Statements F-7
</TABLE>
(2) Financial Statement Schedules. All financial statement
schedules have been omitted because the required information is not
applicable or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
(3) Exhibits. The exhibits listed under Item 14(c) hereof are
filed with, or incorporated by reference into, this Annual Report on Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by
Registrant during the fourth quarter of the fiscal year ended December 31, 1996.
(c) Exhibits. The following exhibits are filed as part of, or
incorporated by reference into, this Annual Report on Form 10-K:
3.1 Amended and Restated Articles of Incorporation of
Registrant (incorporated herein by reference to
Exhibit 3.1 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
3.2 Bylaws of Registrant (incorporated herein by
reference to Exhibit 3.4 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.1 Form of Indemnification Agreement with Directors
and Officers (incorporated herein by reference to
Exhibit 10.1 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.6 Series A Preferred Stock Purchase Agreement, dated
May 3, 1988 (incorporated herein by reference to
Exhibit 10.6 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.7 Series B Preferred Stock Purchase Agreement, dated
June 28, 1989 (incorporated herein by reference to
Exhibit 10.7 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.8 Series C Preferred Stock Purchase Agreement, dated
April 16, 1990 (incorporated herein by reference
to Exhibit 10.8 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.9 Series D Preferred Stock Purchase Agreement, dated
March 15, 1991 (incorporated herein by reference
to Exhibit 10.9 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.10 Series E Preferred Stock Purchase Agreement,
dated February 25, 1994 (incorporated herein by
reference to Exhibit 10.10 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.11 Series F Preferred Stock Purchase Agreement,
dated February 28, 1995 (incorporated herein by
reference to Exhibit 10.11 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.12 Series G Preferred Stock Purchase Agreement,
dated January 30, 1996 (incorporated herein by
reference to Exhibit 10.12 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.13 Patent License Agreement, dated October 13,
1989, by and between the Company and Patlex
Corporation (incorporated herein by reference to
Exhibit 10.13 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.14 Loan Agreement, dated August 15, 1991, by and
between Mitsubishi International Corporation and
the Company (incorporated herein by reference to
Exhibit 10.14 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.15 Standard Industrial Lease - Multi-Tenant,
dated August 19, 1991, by and between Frankris
Corporation and the Company (incorporated herein
by reference to Exhibit 10.15 to the Registrant's
Registration Statement on Form S-1 (as amended)
no. 333-08383)
10.16 Contract Manufacturing Agreement -
Lithography Laser, dated August 28, 1992, by and
between the Company and Seiko Instruments Inc.
(incorporated herein by reference to Exhibit 10.16
to the Registrant's Registration Statement on
Form S-1 (as amended) no. 333-08383)
10.17 Product License and Manufacturing Agreement -
High Power Laser, dated August 28, 1992, by and
between the Company and Seiko Instruments Inc.
(incorporated herein by reference to Exhibit 10.17
to the Registrant's Registration Statement on
Form S-1 (as amended) no. 333-08383)
10.18 Agreement, dated December 14, 1994, between
the Company and EO Technics Co., Ltd.
(incorporated herein by reference to Exhibit 10.18
to the Registrant's Registration Statement on
Form S-1 (as amended) no. 333-08383)
10.19 Master Lease Agreement, dated April 23, 1996, between
Tokai Financial Services and the Company (incorporated herein by
reference to Exhibit 10.19 to the Registrant's Registration
Statement on Form S-1 (as amended) no. 333-08383)
10.20 Single-Tenant Industrial Lease, dated December 19,
1996, by and between AEW/LBA Acquisition Co. II, LLC and the
Company.
11.1 Calculation of earnings per share
21.1 Subsidiaries of Registrant
23.1 Independent Auditors' Consent
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CYMER, INC.
Dated: March 19, 1997 By: /s/ ROBERT P. AKINS
_________________________________
Dr. Robert P. Akins,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
/s/ ROBERT P. AKINS President, Chief Executive March 19, 1997
___________________________ Officer, and Chairman of the
Robert P. Akins Board
/s/ WILLIAM A. ANGUS, III Senior Vice President, Chief March 19, 1997
___________________________ Financial Officer and
William A. Angus, III Secretary
/s/ NANCY J. BAKER Director, Corporate Finance, March 19, 1997
___________________________ Treasurer and Chief Accounting
Nancy J. Baker Officer
/s/ RICHARD P. ABRAHAM Director March 19, 1997
___________________________
Richard P. Abraham
/s/ KENNETH M. DEEMER Director March 19, 1997
___________________________
Kenneth M. Deemer
/s/ PETER J. SIMONE Director March 19, 1997
___________________________
Peter J. Simone
/s/ F. DUWAINE TOWNSEN Director March 19, 1997
___________________________
F. Duwaine Townsen
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Cymer, Inc.:
We have audited the accompanying consolidated balance sheets of Cymer, Inc.
(successor to Cymer Laser Technologies) and its subsidiary (collectively the
"Company") as of December 31, 1995 and 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1995 and 1996, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, during 1994
the Company changed its method of accounting for the accretion of the 8% per
annum redemption provision on the Company's Redeemable Convertible Preferred
Stock.
DELOITTE & TOUCHE LLP
San Diego, California
January 29, 1997
CYMER, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31,
1995 1996
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $2,015 $55,405
Short-term investments 10,449
Accounts receivable - net 4,832 18,833
Foreign exchange contracts receivable 9,317
Inventories 5,315 15,678
Deferred income taxes 1,432
Prepaid expenses and other 306 1,880
Total current assets 12,468 112,994
PROPERTY - net 3,053 11,707
OTHER ASSETS 98 4,766
TOTAL ASSETS $15,619 $129,467
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Revolving loan and security agreements $2,786 $1,750
Advances against commercial drafts 1,305
Accounts payable 2,369 7,095
Accrued and other liabilities 2,163 8,401
Foreign exchange contracts payable 8,396
Income taxes payable 2,609
Total current liabilities 8,623 28,251
OTHER LIABILITIES 417 2,396
COMMITMENTS AND CONTINGENCIES (Note 9)
REDEEMABLE CONVERTIBLE PREFERRED STOCK -
authorized 9,834,880 shares; $.01 stated
par value; issued and outstanding 6,496,000
shares (liquidation preference - $28,409,000)
at December 31, 1995 28,409
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock - authorized 5,000,000
shares; $.001 par value, no shares issued
or outstanding
Common stock - authorized 25,000,000 shares;
$.001 par value, issued and outstanding
13,780,000 shares at December 31, 1996 14
Common stock - authorized 15,000,000 shares;
$.01 stated par value, issued and outstanding
1,160,000 shares at December 31, 1995 12
Paid-in capital 195 106,672
Accumulated deficit (21,832) (7,421)
Cumulative translation adjustment (205) (445)
Total stockholders' equity (deficit) (21,830) 98,820
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $15,619 $129,467
</TABLE>
See Notes to Consolidated Financial Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
<S> <C> <C> <C>
REVENUES:
Product sales $7,705 $15,576 $62,510
Other 1,216 3,244 2,485
Total revenues 8,921 18,820 64,995
COSTS AND EXPENSES:
Cost of product sales 4,797 8,786 35,583
Research and development 3,283 6,154 11,742
Sales and marketing 1,780 2,353 5,516
General and administrative 849 1,181 4,270
Total costs and expenses 10,709 18,474 57,111
OPERATING INCOME (LOSS) (1,788) 346 7,884
OTHER INCOME (EXPENSE):
Foreign currency exchange gain - net 65 10 161
Interest and other income 17 32 347
Interest and other expense (281) (283) (691)
Total other income (expense)-net (199) (241) (183)
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,987) 105 7,701
PROVISION FOR INCOME TAXES 58 36 1,191
NET INCOME (LOSS) (2,045) 69 6,510
EARNINGS PER SHARE:
Primary:
Earnings per share $0.58
Weighted average common and common
equivalent shares 11,210
Fully Diluted:
Earnings per share $0.56
Weighted average common and common
equivalent shares 11,566
</TABLE>
See Notes to Consolidated Financial Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Paid-in Accumulated Translation Stockholders'
Shares Amount Capital Deficit Adjustment Equity
(Deficit)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 1,063 $11 $149 $(11,956) $ (32) $(11,828)
Exercise of common stock options 28 15 15
Net loss (2,045) (2,045)
Accretion of redeption - preferred
stock (5,897) (5,897)
Cumulative translation adjustment 3 3
BALANCE, DECEMBER 31, 1994 1,091 11 164 (19,898) (29) (19,752)
Exercise of common stock options 69 1 31 32
Net income 69 69
Accretion of redemption - preferred
stock (2,003) (2,003)
Cumulative translation adjustment (176) (176)
BALANCE, DECEMBER 31, 1995 1,160 12 195 (21,832) (205) (21,830)
Change in par value due to
reincorporation (10) 10
Exercise of common stock options 127 93 93
Issuance of common stock under
consulting agreement 10 100 100
Initial public offering of common
stock, net of issuance costs 3,509 3 29,737 29,740
Conversion of preferred stock and
warrants to common stock 7,704 8 26,550 26,558
Secondary public offering of common
stock, net of issuance costs 1,270 1 49,987 49,988
Net income 6,510 6,510
Reversal of accretion of redemption
upon conversion of preferred stock 7,901 7,901
Cumulative translation adjustment (240) (240)
BALANCE, DECEMBER 31, 1996 13,780 14 106,672 (7,421) (445) 98,820
</TABLE>
See Notes to Consolidated Financial Statements.
CYMER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(2,045) $69 $6,510
Adjustments to reconcile net
(loss) to net cash used for
operating activities:
Depreciation and amortization 677 820 2,284
Loss on disposal of property 223
Change in assets and liabilities:
Accounts receivable (207) (2,574) (15,436)
Foreign exchange contracts
receivable (9,317)
Inventories (1,205) (2,813) (10,512)
Deferred income taxes (1,432)
Prepaid expenses and other assets (233) 99 (4,919)
Accounts payable 424 1,404 5,501
Foreign exchange contracts payable 8,396
Accrued and other liabilities 407 379 8,769
Income taxes payable 2,609
Other (17) 502 (674)
Net cash used for operating
activities (2,199) (2,114) (7,998)
INVESTING ACTIVITIES:
Acquisition of property (640) (2,653) (11,090)
Disposal of property 91 226 16
Purchases of investments (13,715)
Sales of investments 1,900
Net cash used for investing
activities (549) (2,427) (22,889)
FINANCING ACTIVITIES:
Net (payments) borrowings under
revolving loan and security
agreements (42) 1,240 (1,036)
Proceeds from issuance of redeemable
convertible preferred stock 404 3,407 6,050
Proceeds from issuance of common
stock 15 32 79,935
Net advances against (discounting of)
commercial drafts 945 (390) (1,240)
Payments on capital lease obligations (27) (159)
Net proceeds from issuance of
subordinated promissory notes 3,150
Net cash provided by financing
activities 4,472 4,262 83,550
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (113) (32) 727
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,611 (311) 53,390
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 715 2,326 2,015
CASH AND CASH EQUIVALENTS AT END
OF YEAR 2,326 2,015 55,405
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid 162 219 467
Income taxes paid 58 36 14
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of Redeemable Convertible
Preferred Stock to common stock
upon initial public offering 26,558
Capital lease obligations incurred
for furniture and equipment 100 573
Net book value of property
transferred to inventory for resale 39 177
Conversion of subordinated promissory
notes and related interest payable
to Redeemable Convertible Preferred
Stock 3,755
</TABLE>
See Notes to Consolidated Financial Statements.
CYMER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Cymer, Inc. (successor to Cymer Laser Technologies)
and its subsidiary (collectively the "Company") is engaged primarily in the
development, manufacturing and marketing of excimer lasers for sale to
manufacturers of photolithography tools in the semiconductor equipment industry.
The Company sells its product to customers primarily in Japan, the Netherlands
and the United States.
Reincorporation and Recapitalization - The Company's Board of Directors and
stockholders approved a reincorporation into the State of Nevada that became
effective on August 21, 1996. In connection with the reincorporation, the
Company increased its authorized common stock to 25,000,000 shares. The Board
of Directors and stockholders also approved the creation of a new class of
5,000,000 shares of undesignated preferred stock which was authorized on the
closing of the Company's initial public offering.
The Company completed its initial public offering of 3,509,000 shares of
common stock on September 18, 1996, resulting in net proceeds to the Company of
approximately $29.7 million. In connection with the offering, all outstanding
Redeemable Convertible Preferred Stock and related outstanding warrants, were
converted into 7,704,000 shares of common stock (see Note 6). On December 12,
1996, the Company completed a secondary public offering of 1,270,000 shares of
common stock, resulting in net proceeds to the Company of approximately $50
million.
Principles of Consolidation - The consolidated financial statements include
the accounts of Cymer, Inc. and its wholly-owned subsidiary, Cymer Japan, Inc.
The Company sells its excimer lasers in Japan primarily through Cymer Japan,
Inc. All significant intercompany balances have been eliminated in
consolidation.
Accounting Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those estimates.
Cash Equivalents - Cash equivalents consist of money market instruments,
commercial paper and other highly liquid investments purchased with an original
maturity of three months or less.
Investments - The Company's investments are composed primarily of government
and corporate fixed income securities. While it is the Company's general intent
to hold such securities until maturity, management will occasionally sell
particular securities for cash flow purposes. Therefore, the Company's
investments are classified as available-for-sale and are carried at fair value.
Gains and losses on these investments were not material in 1996. See Note 3.
Inventories - Inventories are carried at the lower of cost (first-in,
first-out) or market.
Property - Property is stated at cost. Depreciation is provided using the
straight-line or declining balance methods over the estimated useful lives of
the assets (generally three to five years). Leasehold improvements are
amortized, using the straight-line method, over the shorter of the life of the
improvement or the remaining lease term. Lasers built for internal use are
capitalized and depreciated using the straight line method over three years.
Impairment of Long-Lived Assets - Effective january 1, 1996, the Company
adopted Financial Accounting Standards Board Statement No. 121 (FAS 121),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". FAS 121 requires that long-lived assets be reviewed for
impairment and written down to fair value whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Under
the provisions of FAS 121, impairment losses are recognized when expected
future cash flows are less than the assets' carrying value. In 1996, the
Company recorded expense related to impairment losses totaling $223,000.
Revenue Recognition - Revenue from product sales is generally recognized at
the time of shipment unless customer agreements contain inspection or other
conditions, in which case revenue is recognized at the time such conditions are
satisfied. Product sales include sales of lasers, replacement parts, and
product service contracts. Other revenue primarily represents revenue earned
from funded development activities and license fees. Such revenue is recognized
on a basis consistent with the performance requirements of the agreements.
Payments received in advance of performance are recorded as deferred revenue.
Long-term contracts are accounted for on the percentage-of-completion method
based upon the relationship of costs incurred to total estimated costs, after
giving effect to estimates of costs to complete.
Research and development revenues totaled $1,216,000, $3,244,000 and
$2,485,000 for the years ended December 31, 1994, 1995, and 1996, respectively.
Warranty Expense - The Company generally warrants its products against
defects for the earlier to occur of 17 months from the date of shipment or 12
months after acceptance by the end-user. The Company accrues a provision for
warranty expense for all products sold. The amount of the provision is based
on actual historical expenses incurred and estimated probable future expenses
related to current sales. Warranty costs incurred are charged against the
provision.
Stock-Based Compensation - Effective January 1, 1996, the Company adopted
Financial Accounting Standards Board Statement No. 123 (FAS 123), "Accounting
for Stock-Based Compensation". FAS 123 encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees", and related Interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of the grant over the amount an employee must
pay to acquire the stock. See Note 7.
Foreign Currency Translation - Gains and losses resulting from foreign
currency translation are accumulated as a separate component of consolidated
stockholders' equity (deficit). Gains and losses resulting from foreign
currency transactions are included in the consolidated statements of operations.
Foreign Exchange Contracts - The Company enters into foreign currency
exchange contracts in order to reduce the impact of currency fluctuations
related to purchases of the Company's inventories by Cymer Japan, Inc. for
resale under firm third-party sales commitments. Net gains or losses are
recorded on the date the inventories are received by Cymer Japan, Inc. (the
transaction date) and are included in cost of product sales in the consolidated
statements of operations as the related sale is consummated. Amounts due
from/to the bank on contracts not settled as of the transaction date are
recorded as foreign exchange contracts receivable/payable in the consolidated
balance sheets.
The Company recognized net gains from the above foreign currency exchange
contracts of $496,000 and $1,920,000 for the years ended December 31, 1995 and
1996, respectively. The net gain of $496,000 for the year ended December 31,
1995 was reclassified to cost of product sales for consistency with the 1996
presentation. The face amount of the underlying contracts was $4,048,000 and
$16,123,000 at December 31, 1995 and 1996, respectively. The Company also had
forward foreign exchange contracts at December 31, 1996 to buy $43.2 million for
4.7 billion yen under foreign currency exchange facilities with banks in Japan
(see Note 4). The total unrecorded deferred gain and premium on these contracts
as of December 31, 1996 was $1,814,000. Such contracts expire on various dates
through September 1997.
Concentration of Credit Risk - The Company invests its excess cash in an
effort to preserve capital, provide liquidity, maintain diversification and
generate returns relative to the Company's corporate investment policy and
prevailing market conditions. The Company has not experienced any losses on
its cash accounts. The Company has a small number of significant customers
and maintains a reserve for potential credit losses and such losses, to date,
have been minimal (see "Major Customers and Related Parties").
Major Customers and Related Parties - Revenues from major customers are
detailed as follows:
<TABLE>
<CAPTION>
Year ended December 31,
1994 1995 1996
Customer (in thousands)
<S> <C> <C> <C>
A $2,134 $5,035 $20,123
B 3,557 19,134
C 1,472 3,395 12,586
D 6,555
E 1,320 1,954
F 1,231
</TABLE>
Receivables from these customers totaled $2,576,000 and $16,183,000 at
December 31, 1995 and 1996, respectively.
Revenues from Japanese customers, generated primarily by the Company's
subsidiary, accounted for 33%, 50% and 61% of revenues for the years ended
December 13, 1994, 1995 and 1996, respectively. Revenues from a customer in the
Netherlands accounted for 17%, 18% and 19% of revenues for the years ended
December 31, 1994, 1995 and 1996, respectively.
Revenues from stockholders totaled $2,917,000, $9,085,000 and $52,114,000
for the years ended December 31, 1994, 1995 and 1996, respectively.
Earnings Per Share - Primary earnings per share is computed based on the
weighted average number of common and common equivalent shares (common stock
options and warrants) outstanding during each period using the treasury stock
method. Fully diluted earnings per share reflect the maximum dilution of per
share earnings utilizing the end of the year market price per share under
the treasury stock method. All shares of common stock and common stock
equivalents issued within twelve months of an initial public offering at a
price per share less than the estimated offering price are considered to be
outstanding for all periods presented in the same manner as a stock split.
Accordingly, all shares of common stock and common stock equivalent issued in
1996 prior to the Company's initial public offering at a price per share below
the initial public offering price are considered to be outstanding for all of
1996. Earnings (loss) per share information is not presented for 1994 and
1995 as such presentation prior to the Company's initial public offering would
not be meaningful.
Reclassifications - Certain amounts in the prior years' financial statements
have been reclassified to conform to current period presentation.
2. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
December 31,
1995 1996
(in thousands)
<S> <C> <C>
ACCOUNTS RECEIVABLE:
Trade $ 3,412 $19,072
Other 1,420 466
Subtotal 4,832 19,538
Less allowance for doubtful accounts (705)
Total 4,832 18,833
INVENTORIES:
Raw materials 2,114 6,243
Work-in-progress 2,232 6,680
Finished goods 969 2,755
Total 5,315 15,678
PROPERTY - at cost:
Furniture and equipment 4,113 10,888
Capitalized lasers 1,788 3,474
Leasehold improvements 245 1,713
Construction in process 587 1,229
Subtotal 6,733 17,304
Less accumulated depreciation and
amortization (3,680) (5,597)
Total 3,053 11,707
</TABLE>
3. INVESTMENTS
Investments consist of the following as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Short-term:
Weekly Municipal Floater $4,602
Municipal Bonds 3,706
Floating Rate Bonds 950
Commercial Paper 591
Medium-Term Notes 300
U.S. Government Agencies 300
Total 10,449
Long-term:
Municipal Bonds 1,061
Medium-Term Notes 300
Total 1,361
</TABLE>
Investments are recorded at fair value, which approximated cost as of
December 31, 1996. Short-term investments mature within one year and long-term
investments mature in one year to 17 months. Long-term investments are included
with other long-term assets on the consolidated balance sheet. See also
"Investments" in Note 1.
4. CREDIT FACILITIES
Revolving Loan Facility - The Company had a revolving loan facility ("Loan
Facility") providing for borrowings of up to $1,000,000 and guaranteed by a
preferred stockholder of the Comany (see Note 10). Interest was payable
quarterly, and the balance was due on the earlier of March 31, 1997 or the
completion of the Company's initial public offering. The $1,000,000 balance
owed plus accrued interest due against the Loan Facility was paid upon
completion of the Company's initial public offering in September 1996.
Loan and Security Agreement - The Loan and Security Agreement (the
"Agreement") provides for three revolving loan facilities and a loan with a bank
to provide for combined borrowings of up to a maximum of $11,000,000 with
interest on outstanding borrowings ranging from prime to prime plus 0.25% (8.25%
and 8.50%, respectively, at December 31, 1996). Borrowings under the Agreement
are secured by substantially all of the Company's assets. The Agreement
provides for the following (i) a $2,000,000 bank loan which is secured by the
Company's assets, bears interest at a rate of prime plus .25% per annum, is
payable in equal quarterly installments which begin December 31, 1996 through
September 30, 1998, (ii) a $1,000,000 revolving bank line of credit which is
also secured by the Company's assets, bears interest at a rate of prime per
annum, is due March 5, 1997 and (iii) $8,000,000 under lines of credit secured
by the Company's foreign receivables and inventory and guaranteed by the U.S.
Export-Import Bank, which bears interest at prime rate per annum, and are due
March 5, 1997 (as to $3,000,000) and June 27, 1997 (as to $5,000,000). There
was $1,750,000 outstanding under the Agreement at December 31, 1996.
The Agreement requires the Company to maintain compliance with certain financial
statement and other covenants including, among other items, limitation on
additional debt, total liabilities to tangible net worth and minimum tangible
net worth. As of December 31, 1996, the Company was in compliance with all
such covenants.
In connection with the original Agreement, the Company issued the bank a
five-year warrant to purchase 15,000 shares of the Company's Series D
Redeemable Convertible Preferred Stock at $8.50 per share. In February 1995,
warrants to purchase 16,000 shares of the Company's Series E Redeemable
Convertible Preferred Stock at $4.00 per share were exchanged for the 15,000
Series D warrants (see Note 6).
Advances Against Commercial Draft - Advances against commercial drafts
represent funds advanced by a bank in Japan, without recourse, in connection
with the discounting of certain commercial drafts received from customers as
payment for the purchase of merchandise. The advances against commercial
drafts are for a maximum of 2.1 billion yen (approximately $18,125,000 at
December 31, 1996), are discounted at the bill discount rate plus 0.5% (1.875%
at December 31, 1996) and generally mature within 120 days. The Company has
deposited $459,000 with the bank under lien to the bank as security under the
agreement.
Foreign Exchange Facilities - The Company has foreign exchange facilities
with banks in Japan and a bank in the United States. The first facility with
a bank in Japan provides up to $43.2 million to be utilized for forward
contracts for periods of up to one year. As of December 31, 1996, $18.7
million was being utilized under the foreign exchange facility (see "Foreign
Exchange Contracts" in Note 1). The Company has guaranteed approximately $1.7
million as security under this agreement.
The second foreign exchange facility with another bank in Japan provides
up to $32.4 million to be utilized for forward contracts for periods of up to
eight months. As of December 31, 1996, $24.5 million was being utilized under
the foreign exchange facility (see "Foreign Exchange Contracts" in Note 1).
The facility is part of the agreement providing advances against commercial
drafts and is subject to the same security.
The foreign exchange facility with the United States Bank provides up to
$3.5 million to be utilized for spot and future foreign exchange contracts.
The total gross amount to be settled within 2 business days is not to exceed
$1 million (settlement limit) at any one time. The settlement limit may be
increased against the revolving credit line availability or advance payment
arranged prior to delivery of the foreign currency overseas. There were no
foreign exchange contracts outstanding under this agreement at December 31,
1996. This facility is part of the Loan and Security Agreement discussed
above and is subject to the same security and covenants.
5. CONVERSION OF SUBORDINATED PROMISSORY NOTES - STOCKHOLDERS
During 1995, principal totaling $3,622,000 plus accrued interest of
$133,000 relating to loans obtained from certain stockholders in 1994 were
converted into 1,073,000 fully-paid and non-assessable shares of Series F
Redeemable Convertible Preferred Stock of the Company at $3.50 per share.
In connection with the original loan, the Company also issued warrants to
purchase shares of Series F Redeemable Convertible Preferred Stock (see
Note 6).
6. REDEEMABLE CONVERTIBLE PREFERRED STOCK
Upon the Company's initial public offering in September 1996, all
Redeemable Convertible Preferred Stock (approximately 7.7 million shares) and
Redeemable Convertible Preferred Stock warrants (to purchase 283,000 shares of
such stock) were automatically converted into the Company's common stock or
warrants to purchase common stock. The conversion of the preferred stock and
warrants to common was on a 1 for 1 basis, except for the Series E preferred
stock and warrants, which were converted on an approximate 1.5 to 1 basis.
Upon conversion of the preferred stock and warrants, all preferred stock
dividends and other rights previously assigned ceased.
In 1994, the Company changed its method of accounting for the 8% per annum
accretion of the redemption price for the Company's Redeemable Convertible
Preferred Stock. Prior to 1994, the Company did not record the accretion, as
it was not probable that funds would be available for redemption. However, in
1994, the Company's prospects improved, justifying the change in method in
accounting for the accretion. The impact of the change was to increase the
balance of Redeemable Convertible Preferred Stock by $5,897,000 with a
respective increase in the accumulated deficit in stockholders' deficit as of
December 31, 1994. Upon the September 1996 conversion discussed above, the
cumulative accretion of $7,901,000 was recorded as a reduction of the
accumulated deficit.
7. STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock - Pursuant to the Company's Articles of Incorporation, the
Board of Directors has the authority, without further action by the
stockholders, to issue up to 5,000,000 shares of Preferred Stock in one or more
series and to fix the designations, powers, preferences, privileges, and
relative participation, optional or special rights and the qualifications,
limitations or restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption and liquidation preferences, any or
all of which may be greater than the rights of the common stock.
Common Stock Warrants - At December 31, 1996, the Company had warrants
outstanding to purchase 323,000 shares of its common stock at a weighted average
purchase price of $3.42 per share. The warrants expire in 2000 and 2001.
Stock Option and Purchase Plans - The Companyy has four plans that are
described in the following as:
<TABLE>
<CAPTION>
Common Shares Designated
for Issuance
<s) <S> <C>
(i) 1987 Stock Plan 1,500,000
(ii) 1996 Stock Option Plan 1,500,000
(iii) 1996 Employee Stock Purchase Plan 250,000
(iv) 1996 Director Option Plan 100,000
Total 3,350,000
</TABLE>
(i) 1987 Stock Plan (the "1987 Plan") - The 1987 Plan provides that
incentive and nonstatutory options to purchase shares of common stock may be
granted to employees and consultants at prices that are not less than 100% (85%
for nonstatutory options) of the fair market value of the Company's common
stock on the date the options are granted. The 1987 Plan also provides for
various restrictions regarding option terms, prices, transferability and other
matters. Options issued under the 1987 Plan expire five to ten years after the
options are granted and generally become exercisable ratably over a four-year
period following the date of grant.
(ii) 1996 Stock Option Plan (the "1996 Stock Plan") - The 1996 Stock Plan
provides for the grant of incentive stock options within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
nonqualified stock options to employees, directors and consultants of the
Company. Incentive stock options may be granted only to employees. The 1996
Stock Plan is administered by the Board of Directors or by a committee
appointed by the Board of Directors, which determines the terms of options
granted, including the exercise price and the number of shares subject to the
option. The exercise price of incentive stock options granted under the 1996
Stock Plan must be at least equal to the fair market value of the Company's
common stock on the date of grant and the exercise price of nonqualified stock
options must be at least equal to 85% of the fair market value of the Company's
common stock on the date of grant. The maximum term of options granted under
the 1996 Stock Plan is ten years.
(iii) 1996 Employee Stock Purchase Plan (the "Purchase Plan") - The
Purchase Plan is intended to qualify under Section 423 of the Code. Under
the Purchase Plan, an eligible employee may purchase shares of common stock
from the Company through payroll deductions of up to 10% of his or her base
compensation (excluding bonuses, overtime and sales commissions), at price
per share equal to 85% of the lower of (i) the fair market value of the
Company's common stock as of the first day of each offering period under
the Purchase Plan or (ii) the fair market value of the common stock at the
end of the offering period. Each six month offering period will commence
the first day on which the national stock exchanges and the Nasdaq National
Market are open for trading on or after May 1 and November 1 of each year,
except that the first offering period began on the date of the Company's
initial public offering and will end on April 30, 1997. In the event of a
merger or asset sale, the offering period then in progress will be
shortened so that each participant's options will be exercised before the
date of the merger or sale. Any employee who is customarily employed
for at least 20 hours per week and more than five months per calendar year
and who has been so employed for at least three consecutive months on or
before the commencement date of an offering period is eligible to
participate in the Purchase Plan.
(iv) 1996 Director Option Plan (the "Director Option Plan") - The
Director Option Plan went into effect upon the completion of the Company's
initial public offering. Each director who is elected or appointed to the
Board of Directors subsequent to the adoption of the Director Option Plan and
who is not an employee of the Company automatically receives a nonstatutory
option to purchase 10,000 shares of common stock of the Company on the date
such person becomes a director. In addition, each non-employee director shall
receive an option to acquire 2,500 shares of the Company's common stock upon
such director's reelection at each Annual Meeting of Stockholders, provided
that on such date such director shall have served on the Board of Directors
for at least six months. Each option granted under the Director Option Plan
is exercisable at 100% of the fair market value of the Company's common stock
on the date such option is granted. Of the options granted under the Director
Option Plan, 6.25% vest three months after their dates of grant, with an
additional 6.25% vesting at the end of each subsequent three month period. The
Plan is in effect for a term of ten years unless sooner terminated by the
Board. There were no options issued under the Plan in 1996.
Stock option transactions are summarized as follows (in thousands, except
per share data):
<TABLE>
<CAPTION>
Weighted Average
Number of Exercise Price
Shares Per Share
<S> <C> <C>
Outstanding, January 1, 1994 492 $0.78
Granted 67 $0.50
Exercised (28) $0.59
Terminated (107) $0.72
Outstanding, December 31, 1994 424 $0.76
Granted 979 $0.61
Exercised (59) $0.70
Terminated (383) $0.67
Outstanding, December 31, 1995 961 $0.65
Granted 694 $14.31
Exercised (127) $0.73
Terminated (39) $2.32
Outstanding, December 31, 1996 1,489 $6.96
Exercisable, December 31, 1996 293 $0.62
</TABLE>
The Company applies APB 25 and related interpretations in accounting for
its employee stock option plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plan, as the options are granted
at the fair market value of the Company's common stock. Had compensation cost
been determined based upon the fair value at the grant date for awards under
the plan consistent with the methodology prescribed under FAS 123, the
Company's net income for the year ended December 31, 1995 would have been
reduced by approximately $19,000 and the Company's net income and earnings per
share for the year ended December 31, 1996 would have been reduced by
approximately $218,000 or $.02 per share. The fair value of the options
granted during 1995 is estimated as $599,000 on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: no dividend
yield or volatility rate, risk free interest rates of 5.57% to 7.54%, assumed
forfeiture rate of 3% and an expected life of five years. The fair value of
the options granted during 1996 is estimated as $9,700,000 on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
no dividend yield, volatility rate of 107%, risk free interest rates of 5.33%
to 6.68%, assumed forfeiture rate of 3% and an expected life of five years.
The following table summarized information as of December 31, 1996
concerning currently outstanding and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
_______________________________________________ ____________________________
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
(in thousands) (years) (in thousands)
<S> <C> <C> <C> <C> <C>
$0.25 - $3.00 801 3.30 $0.63 293 $0.62
$4.00 - $8.00 333 4.19 5.32
$9.50 187 4.68 9.50
$22.75 30 4.79 22.75
$41.00 138 4.91 41.00
__________ _________
1,489 293
</TABLE>
Common Shares Reserved - As of December 31, 1996, the Company had reserved
the following number of shares of common stock for issuance (in thousands):
<TABLE>
<S> <C>
Issuance under stock option and purchase plans 1,502
Exercise of common stock purchase warrants 323
_______
Total 1,825
</TABLE>
8. INCOME TAXES
Income taxes in the statement of operations for years ended December 31,
1994 and 1995 primarily represent taxes paid in Japan for research and
development revenues generated from agreements with Japanese companies (see
Note 10).
The components of the provision for income taxes are summarized as follows
for the year ended December 31, 1996 (in thousands):
<TABLE>
<S> <C>
Current income taxes:
Federal $1,605
Foreign 1,004
Total 2,609
Deferred income taxes:
Federal (131)
State (12)
Foreign (352)
Total (495)
Reduction in valuation allowance (923)
Provision for income taxes $1,191
</TABLE>
The provision for income taxes is different from that which would be
obtained by applying the statutory Federal income tax rate (34%) to income
before provision for income taxes. The items causing this difference for the
period ended December 31, 1996 are as follows:
<TABLE>
<S> <C>
Provision at statutory rate 34.0%
Foreign provision in excess of Federal statutory rate 7.3
State income taxes, net of Federal benefit (1.6)
Foreign sales corporation taxes, net of Federal benefit (4.4)
Federal tax credits (2.5)
Miscellaneous/other items 3.2
Reduction in valuation allowance (20.5)
Provision at effective rate 15.5%
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
1994 1995 1996
(in thousands)
<S> <C> <C> <C>
Tax credit carryforwards $1,241 $1,829 $2,126
Net operating loss carryforwards 3,608 3,195
Capitalized research and development costs 298 359 243
Reserves and accruals not currently deductible 254 339 3,290
Differences between book and tax basis of
inventory and fixed assets 242 450 594
Unearned revenues 199 307 108
Deferred rent 141 159 175
State taxes (351) (427) (65)
Deferred taxes - foreign 352
Settlement costs (103)
Net deferred tax assets before valuation allowance 5,632 6,211 6,720
Valuation allowance (5,632) (6,211) (5,288)
Total $ - $ - $1,432
</TABLE>
The Company has Federal and state tax business credit carryforwards
available to offset future tax liabilities of $1,833,000 and $293,000,
respectively. Such Federal and state tax credit carryforwards expire at
various dates beginning with the year 1997 and 2003, respectively.
The Company recorded a valuation allowance equal to the total net
deferred tax asset balance at December 31, 1994 and 1995. The Company reduced
its valuation allowance in 1996 by $923,000 to the extent management believes
current year activity made realization of such benefit more likely than not.
9. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases its primary facilities under non-cancelable
operating leases. The lease terms are through January 1, 2010 and provide
for certain rent abatements and minimum annual increases and options to extend
the term. The Company also leases certain other facilities and equipment under
capital and short-term operating lease agreements. The capital leases expire
on various dates through 2000.
Under the terms of an operating lease for an office building entered into
in December 1996, the Company has deposited approximately $2,224,000 in an
escrow account in lieu of a security deposit for the premises. The majority
of this amount is included with other long-term assets on the consolidated
balance sheet.
Rent expense under operating leases is recognized on a straight-line basis
over the life of the related leases and totaled approximately $555,000,
$736,000, and $1,052,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
The net book value of assets under capital leases at December 31, 1995 and
1996 was approximately $85,000 and $528,000, net of accumulated amortization of
approximately $16,000 and $145,000, respectively.
Total future minimum lease commitments under operating and capital leases
are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31, Operating Capital
<S> <C> <C>
1997 $ 1,864 $ 181
1998 2,388 154
1999 2,443 148
2000 2,502 100
2001 2,560
Thereafter 23,418
________ _______
Total 35,175 583
Less amount representing interest 116
Present value of minimum lease payments 467
Less current portion 148
Long term obligations under capital leases $ 319
</TABLE>
Patent License Agreement - The Company has a patent license agreement
for a non-exclusive worldwide license to certain patented laser technology.
Under the terms of the agreement, the Company is required to pay royalties
ranging from 0.25% to 5% of gross sales and leases as defined depending on the
total amounts attained. Royalty fees totaled $30,000, $64,000 and $226,000 for
the years ended December 31, 1994, 1995 and 1996, respectively.
Employee Savings Plan - The Company has a 401(k) plan that allows
participating employees to contribute a percentage of their salary, subject to
annual limits. The Plan is available to substantially all full-time United
States employees. The Company is not required to make contributions and
through December 31, 1996, no contributions had been made.
Retirement Plan - During the period ended December 31, 1996, Cymer Japan,
Inc. adopted a retirement benefit plan for all Cymer Japan, Inc. employees and
Japanese directors. The plan consists of a multi-employer retirement plan
covering all employees and life insurance policies covering all employees and
Japanese directors. The multi-employer retirement plan was established under
the Small and Medium-Size Enterprise Retirement Benefits Cooperative Law.
Total expense under the plan for the year ended December 31, 1996 amounted to
$37,000.
Contingency - On November 1, 1996, the Company entered into a settlement
agreement for the dismissal of a patent infringement complaint filed against
the Company in September, 1996. Under the terms of the settlement, the
plaintiffs agreed to (i) release the Company from any claims they may have with
respect to the disputed patent and (ii) dismiss the patent infringement action
with prejudice. In return, the Company agreed to make annual payments to the
plaintiffs over a 13 year period. Such annual payments and the related expense
are not material to the Company's financial position, results of operations or
cash flows.
In addition, the Company's Japanese manufacturing partner has been notified
that its manufacture of the Company's laser systems in Japan may infringe a
Japanese patent held by another Japanese company. The Company has indemnified
its Japanese manufacturing partner against patent infringement claims under
certain circumstances. The Company believes, based upon the advice of counsel,
that the Company's products do not infringe any valid claim of the asserted
patent.
10. RELATED PARTY TRANSACTIONS
Collaborative Arrangement - The Company has a collaborative arrangement
with a Japanese company that is also a stockholder of the Company. The
arrangement, entered into in August 1992, includes a (i) stock purchase
agreement, (ii) research and development agreement (iii) product license
agreement, and (iv) contract manufacturing agreement. The general provisions
of these agreements are as follows:
Stock Purchase Agreement - The stockholder purchased 235,295 shares of the
Company's Series D Redeemable Convertible Preferred Stock at $8.50 per share
with net proceeds to the Company of $1,909,000. Such stock was converted to
common stock in 1996 (see Note 6).
Research and Development Agreement - The stockholder will reimburse the
Company 50% of the Company's total research and development expenses under
annual sub-agreements, as defined, to a maximum of $500,000 per year.
Reimbursements of $375,000 and $250,000 were received under the agreement for
the years ended December 31, 1994 and 1995, respectively. The agreement
expired in June 1995.
Product License Agreement - The Company granted to the stockholder the
exclusive right in Japan and the non-exclusive right outside Japan to
manufacture and sell one of the Company's products and subsequent enhancements
thereto. The Company also granted the stockholder the right of first refusal
to license and fund the development of new technologies not developed with
funding from other parties. In exchange for these rights, the Company received
up-front license fees and is also entitled to royalties of 5% on related
product sales through September 1999, after which the royalty rate is subject
to renegotiation. The license agreement also provides that product sales
between the Company and the stockholder will be at a 15% discount from the
respective companies' list price. The agreement terminates in August 2012.
There was no activity under this agreement in 1994, 1995 and 1996.
Contract Manufacturing Agreement - The stockholder has agreed to
manufacture for the Company another of its products. The Company will be
required to purchase a specified percentage of its total annual product, as
defined. The agreement expires on August 2001, and will automatically renew
for two-year terms unless one year's notice is given by either party. The
Company made $477,000 in purchases under this agreement in 1996. No purchases
were made in 1994 and 1995.
Design and Development Agreements - During 1995, the Company entered into
design and development agreements with certain of its major customers who are
also stockholders. Such agreements generally provide, among other things,
discounts to these customers on future sales of the related lasers. Revenues
from such agreements are not a material component of 1995 or 1996 revenues.
Service Agreement - The Company has a service agreement with another
Japanese company who is also a stockholder of the Company. The general
provisions of the service agreement are as follows:
Sales and Marketing - The Japanese company is to assist the Company in
establishing sales, marketing, manufacturing, and maintenance capabilities in
exchange for consideration equal to a percentage of net sales of certain
products in Japan. The agreement initially expired in March 1996 and
automatically extends until the total consideration paid under the agreement
aggregates $2,000,000. Under certain conditions, if the agreement is
terminated, the Company may be required to pay liquidated damages equal to
$2,000,000 less the aggregate of previous consideration plus other eligible
consideration paid to the Japanese company as defined in the agreement.
Consideration expensed under the agreement for the years ended December 31,
1994, 1995 and 1996, totaled $67,000, $211,000 and $1,284,000, respectively.
Business Strategy - In addition, the Japanese company has agreed to assist
the Company in establishing a business strategy for the Japanese market,
evaluating third party contractors, preparing and negotiating the terms and
conditions of a license proposal with third party contractors, and finding new
investors. In exchange for such assistance, the Company agreed to pay the
Japanese company a percentage of any (i) up-front license fees, (ii) royalties
received on certain sales, and (iii) funding received from new investors. No
payments were made under the agreement in 1994, 1995 and 1996.
Royalties - The Company has also agreed to pay the Japanese company
additional royalties on net sales of certain products manufactured by the third
party contractor as well as a fee for each laser chamber reburbished by the
third party contractor. Such royalties are applicable only for the period
subsequent to the expiration of the original agreement.
11. GEOGRAPHIC INFORMATION
Presented below is information regarding sales, income (loss) from
operations, and identifiable assets, classified by operations located in the
United States and Japan. The Company sells its excimer lasers in Japan through
Cymer Japan, Inc. Intercompany sales to Cymer Japan, Inc. are primarily at
85% of the price of products sold to outside customers. All significant
intercompany balances are eliminated in consolidation. The majority of
consolidated costs and expenses are incurred in the United States and are
reflected in the operating income (loss) from the United States operations.
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1995 1996
(in thousands)
<S> <C> <C> <C>
Sales:
United States $ 6,661 $11,303 $ 26,918
Japan 2,260 7,517 38,077
Total 8,921 18,820 64,995
Operating income (loss):
United States (2,312) (3,425) (13,974)
Japan 524 3,275 21,858
Total (1,788) (150) 7,884
</TABLE>
<TABLE>
<CAPTION>
December 31,
1994 1995 1996
<S> <C> <C> <C>
Identifiable assets:
United States 6,414 10,876 105,902
Japan 2,758 4,743 23,565
Total 9,172 15,619 129,467
</TABLE>
SINGLE-TENANT INDUSTRIAL LEASE
(TRIPLE NET)
LANDLORD:
AEW/LBA ACQUISITION CO. 11, LLC,
a California limited liability company
TENANT:
CYMER, INC.,
a Nevada corporation
STANDARD FORM SINGLE-TENANT INDUSTRIAL LEASE
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Title Page
<C> <S> <C>
SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS iii
1. Premises 1
2. Term 1
3. Rent 3
4. Triple Net Lease 4
5. Security Deposit 4
6. Use 4
7. Payments and Notices 6
8. Brokers 6
9. Surrender; Holding Over 7
10. Taxes 7
11. Repairs 8
12. Alterations 8
13. Liens 9
14. Assignment and Subletting 9
15. Entry by Landlord 10
16. Utilities and Services 10
17. Indemnification and Exculpation 10
18. Damage or Destruction 11
19. Eminent Domain 12
20. Tenant's Insurance 13
21. Waiver of Subrogation 14
22. Tenant's Default and Landlord's Remedies 14
23. Landlord's Default 16
24. Subordination 16
25. Estoppel Certificate 16
26. Easements 17
27. Modification and Cure Rights of Landlord's Mortgagees
and Lessors 17
28. Quiet Enjoyment 17
29. Transfer of Landlord's Interest 17
30. Limitation on Landlord's Liability 17
31. Miscellaneous 17
32. Lease Execution 19
</TABLE>
EXHIBITS
<TABLE>
<S> <C> <S>
EXHIBIT "A" Site Plan
EXHIBIT "B" Legal Description of Premises
EXHIBIT "C" Work Letter Agreement
Schedule 1 Description of Conceptual Plans
EXHIBIT "D" Sample Form of Notice of Lease Term Dates
EXHIBIT "E" Environmental Questionnaire
EXHIBIT "F" Sample Form of Tenant Estoppel Certificate
EXHIBIT "G" Description of Parking Lot Improvements
EXHIBIT "H" Prior Occupant's FF&E
</TABLE>
STANDARD FORM SINGLE-TENANT INDUSTRIAL LEASE
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
Abandonment 14
Acquisition Costs 1
Acquisition Date 3
Actual Commencement Date for Manufacturing Building iii
Actual Commencement Date for Office Building iii
Actual Commencement Date for Parking Lot iii
Basic Elements 8
Buildings iii
Business Day 6
Cap 13
Conceptual Plans Exhibit C
Depository 12
Early Occupancy Date 2
Effective Date 1
Event of Default 14
Extension Option 2
Extension Options 2
Fair Market Rental 2
Force Majeure Delays 18
Hazardous Materials 5
Indemnified Claims 11
Insurance Failure Notice 11
Landlord 1
Landlord Indemnified Parties 5
Landlord's Parties 5
Laws 1
Lease 1
Losses 1
Manufacturing Building iii
Manufacturing Building Allowance Exhibit C
Office Building iii
Office Building Allowance Exhibit C
Option Period 2
Parcel 1 iii
Parcel 2 iii
Parking Lot iii
Parking Lot Improvement Costs 1
Parking Lot Improvements 1
PCBs 5
Permitted Assignees 10
Permitted Business 9
Pre-Approved Change 8
Premises iii
Proceeds 12
Property iii
Real Property Taxes 7
Respective Commencement Dates 2
Restoration 11
Restore 11
Substantial Completion 1
Substantially Complete 1
Summary 1
Tenant 1
Tenant Change 8
Tenant Changes 8
Tenant Improvement Allowance Items Exhibit C
Tenant Improvements Exhibit C
Tenant Indemnified Parties 5
Tenant's Parties 5
Term 1
Transfer 10
Transfer Date 10
Transfer Notice 10
Transfer Fee 10
Vacation 14
Work Letter 2
</TABLE>
SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS
This SUMMARY OF BASIC LEASE INFORMATION AND DEFINITIONS ("Summary") is hereby
incorporated into and made a part of the attached Single-Tenant Industrial
Lease which pertains to the Premises described in Section 1.3 below. All
references in the Lease to the "Lease" shall include this Summary. All
references in the Lease to any term defined in this Summary shall have the
meaning set forth in this Summary for such term. Any initially capitalized
terms used in this Summary and any initially capitalized terms in the Lease
which are not otherwise defined in this Summary shall have the meaning given
to such terms in the Lease.
1.1 Landlord's Address: AEW/LBA Acquisition Co. 11, LLC
c/o Layton Belling Associates 10251 Vista
Sorrento Parkway, Suite 100 San Diego,
California 92121
Attn: Mr. David C. Thomas
Telephone: (619) 597-8795
Facsimile: (619) 597-0242
1.2 Tenant's Address: Cymer, Inc.
16275 Technology Drive
San Diego, California 92127-1815
Attn: Chief Financial Officer
Telephone: (619) 487-2442
Facsimile: (619) 487-2441
1.3 Premises: The industrial development located at 16750 Via Del
Campo Court and an adjacent undeveloped parcel, in the City
of San Diego, County of San Diego State of California, as
shown on the site plan attached hereto as Exhibit "A". The
real property ("Property") which is a part of the Premises is
more particularly described in Exhibit "B" attached hereto.
The Premises includes all buildings, improvements and
facilities, now or subsequently located on the Property from
time to time, including, without limitation, the one (1)
building of approximately 36,959 square feet of space (the
"Office Building"), the one (1) building of approximately
100,205 square feet of space (the "Manufacturing Building")
(the Office Building and the Manufacturing Building are
hereinafter sometimes collectively referred to as the
"Buildings" and the portion of the Property underlying the
Buildings is described, and defined herein, as "Parcel 1" on
Exhibit "B" attached hereto), both of which Buildings are
currently located on the Property, as depicted on the site
plan attached hereto as Exhibit "A". The aggregate rentable
square feet of the Buildings is 137,164 square feet. The
Premises also includes that certain lot (described, and
defined herein, as "Parcel 2" on Exhibit "B" attached hereto)
which shall be improved by Landlord in accordance with the
terms of Section 1.2 of the Lease (the "Parking Lot").
1.4 Estimated Commencement Date for Office Building: December 16,
1996; Actual Commencement Date for Office
Building: Fifteen (15) calendar days after Landlord's
delivery of the Office Building in the condition required by
Section 2.3 of the Lease.
1.5 Actual Commencement Date for Manufacturing Building: June 1,
1997
1.6 Estimated Commencement Date for Parking Lot: March 1, 1997;
Actual Commencement Date for Parking Lot to be determined as
provided in Section 1.2 of the Lease.
1.7 Lease Expiration Date: January 1, 201 0, subject to two (2)
extension options of five (5) years each pursuant to Section
2.4 of the Lease.
1.8 Rent for Office Building and Manufacturing Building:
<TABLE>
<CAPTION>
Monthly Rent Annual Rent
Year Office Building/Manufacturing Building Office Building/Manufacturing Building
<C> <C> <C>
1 $35,111.05/$95,194.75 $421,332.60/$1,142,337.00
2 $36,164.38/$98,050.59 $433,972.58/$1,176,607.11
3 $37,249.31/$100,992.11 $446,991.76/$1,211,905.32
4 $38,336.79/$104,021.87 $460,401.51/$1,248,262.48
5 $39,517.80/$107,142.53 $474,213.55/$I,285,710.36
6 $40,703.33/$110,356.81 $488,439.96/$1,324,281.67
7 $41,924.43/$113,667.51 $503,093.16/$1,364,010.12
8 $43,182.16/$117,077.54 $518,185.95/$1,404,930.42
9 $44,477.63/$120,589.86 $533,731.53/$1,447,078.33
10 $45,811.96/$124,207.56 $549,743.48/$1,490,490.68
11 $47,186.32/$127,933.78 $566,235.78/$1,535,205.41
12 $48,601.90/$131,771.80 $583,222.86/$1,581,261.57
13 $50,059.96/$135,724.95 $600,719.54/$1,628,699.41
</TABLE>
For purposes of calculating Rent for the Manufacturing Building, Year 1 shall
be deemed to end on the day prior to the first anniversary of the Actual
Commencement Date for Office Building, and Year 2 and all subsequent years of
the Term as it relates to the Manufacturing Building will commence on the
respective anniversary dates of the Actual Commencement Date for Office
Building. Annual Rent is specified on an annualized basis, and if any Year
specified above does not contain twelve (12) months, the Rent payable during
such Year shall be appropriately prorated.
1.9 Rent for Parking Lot: Tenant shall pay Landlord Annual Rent
for the Parking Lot in an initial amount equal to twelve
percent (12%) of the sum of the (i) Acquisition Costs (as
defined in Section 1.2 of the Lease) and the (ii) Parking Lot
Improvement Costs (as defined in Section 1.2 of the Lease).
Commencing on the first anniversary of the Actual
Commencement Date for Parking Lot, and on each anniversary
date thereafter, the Annual Rent for Parking Lot will be
increased by three percent (3%) of the amount payable
immediately prior to such adjustment date.
1.10 Security Deposit: $2,224,41 6.00, subject to return as set
forth in Section 5 of the Lease.
1.11 Permitted Use: The Office Building may be used only for
general office purposes and, to the extent allowed by
applicable law, research and development and laboratory use.
The Manufacturing Building may be used only for research,
development, design, fabrication, storage, light
manufacturing and assembly and any other use allowed by
applicable law. The Parking Lot may be used only for the
parking of vehicles by Tenant's employees, agents,
contractors, invitees and visitors.
1.12 Brokers: John Burnham & Company representing Landlord and
The Irving Hughes Group representing Tenant.
1.13 Interest Rate: The lesser of: (a) the rate announced from
time to time by Wells Fargo Bank or, if Wells Fargo Bank
ceases to exist or ceases to publish such rate, then the rate
announced from time to time by the largest (as measured by
deposits) chartered operating bank operating in California,
as its "prime rate" or "reference rate", plus three percent
(3%); or (b) the maximum rate permitted by law.
1.14 Tenant Improvements: The tenant improvements installed or to
be installed in the Premises by Tenant, as described in the
Work Letter Agreement attached hereto as Exhibit "C".
SINGLE-TENANT INDUSTRIAL LEASE
This LEASE ("Lease"), which includes the preceding Summary of Basic Lease
Information and Definitions ("Summary") attached hereto and incorporated
herein by this reference, is made as of the 19th day of December, 1996, by
and between AEW/LBA ACQUISITION CO. 11, LLC, a California limited liability
company ("Landlord"), and CYMER, INC., a Nevada corporation ("Tenant").
1. Premises.
1.1 Lease of Premises. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord the Premises upon and subject to the terms,
covenants and conditions contained in this Lease to be performed by each party.
1.2 Parking Lot. Promptly following the Acquisition Date (as defined in
Section 2.5 below), Landlord shall begin construction of facilities for
parking on a portion of the Parking Lot (the "Parking Lot Improvements") as
described on Exhibit "G" attached hereto. Landlord shall cause the Parking
Lot Improvements to be constructed in accordance with all then-applicable
laws. The "Actual Commencement Date for the Parking Lot" shall occur upon
Substantial Completion of the Parking Lot Improvements. "Substantial
Completion" or "Substantially Complete" is herein defined as the date upon
which all of the following have been satisfied: (i) construction of the
Parking Lot Improvements is complete, as determined by Landlord's
construction contractor; (ii) Landlord has obtained all permits or approvals
from the City of San Diego as may be necessary for the use of the Parking Lot
Improvements as a parking lot and delivered evidence of same to Tenant; and
(iii) Tenant has accepted the Parking Lot Improvements (Tenant may not
accept the Parking Lot Improvements only if they are not constructed
substantially in accordance with the requirements of Exhibit "G", or if they
do not comply with then-applicable laws, and Tenant's failure to give Landlord
written notice of Tenant's non-acceptance of the Parking Lot Improvements
within five (5) business days following the date of Tenant's receipt of
written notice of the satisfaction of clause (i) above and clause (ii) above
(accompanied by materials to be delivered pursuant to clause (ii) above) will be
deemed Tenant's acceptance of the Parking Lot Improvements). Upon Substantial
Completion of the Parking Lot Improvements, Landlord shall assign to Tenant
all warranties for the Parking Lot Improvements from Landlord's construction
contractor and all warranties available at law or in equity and Landlord
shall have no further obligations or liabilities to Tenant concerning the
Parking Lot Improvements; however, Landlord shall cooperate with Tenant as
necessary to enforce such warranties. For purposes of calculating the Rent
for the Parking Lot, (a) "Acquisition Costs" is defined as all reasonable
costs and expenses incurred by Landlord in connection with or arising from the
purchase of the Parking Lot including, without limitation, the purchase price,
escrow and title charges and fees, documentary and transfer taxes, recording
costs, loan fees and costs, if any, attorneys fees and any and all other
costs or expenses of such purchase, and (b) "Parking Lot Improvement Costs"
is defined as all reasonable hard and soft costs incurred by Landlord in
connection with or arising from the design and construction of the Parking
Lot Improvements, including, without limitation, design, drafting,
architecture and engineering fees, permitting and other governmental fees
and charges, and costs, contractor and subcontractor charges and fees and
any and all other costs or expenses of construction. The Rent for the Parking
Lot shall be paid in monthly installments equal to one-twelfth (1/12th) of the
Rent described in Section 1.9 of the Summary of Basic Lease Information and
Definitions.
1.3 AS-IS. Tenant acknowledges and agrees that, except to the extent
specifically set forth in Section 1.2 above with respect to the construction
of the Parking Lot Improvements by Landlord, Landlord has not made, does not
make and specifically negates and disclaims any representations, warranties,
promises, covenants, agreements or guarantees of any kind or character
whatsoever concerning or with respect to (a) the value, nature, quality or
condition of the Premises; (b) the suitability of the Premises for any and
all activities and uses which Tenant may conduct thereon; (c) the compliance
of the Premises with any laws, rules, ordinances or regulations of any
applicable governmental authority or body, including, without limitation,
environmental laws (collectively, "Laws"); (d) the habitability,
merchantability, marketability, profitability or fitness for a particular
purpose of the Premises; (e) the manner or quality of the construction or
materials incorporated into the Premises; (f) the manner, quality, state of
repair or lack of repair of the Premises; or (g) any other matter with
respect to the Premises. Tenant further acknowledges and agrees that having
been given the opportunity to inspect the Premises, Tenant is relying solely on
its own investigation of the Premises and not on any information provided or to
be provided by Landlord. Tenant further acknowledges and agrees that any
information provided or to be provided by or on behalf of Landlord with
respect to the Premises, was obtained from a variety of sources and that
Landlord has not made any independent investigation or verification of such
information and makes no representations as to the accuracy or completeness of
such information. Tenant further acknowledges and agrees that, except to the
extent specifically set forth in Section 1.2 above with respect to the
Parking Lot Improvements, the leasing of the Premises as provided for herein
is made on an "AS-IS" condition and basis with all faults. Tenant and anyone
claiming by, through or under Tenant hereby fully and irrevocably releases
Landlord from any and all claims that it may now have or hereafter acquire
against Landlord for any cost, loss, liability, damage, expense, demand, action
or cause of action arising from or related to any construction defects, errors,
omissions or other conditions (excluding, however, environmental matters, now
or hereafter affecting the Premises), except as otherwise specifically set
forth herein (collectively, "Losses"), except to the extent (i) such Losses
arise from the negligence or misconduct or breach of this Lease of or by
Landlord or Landlord's Parties or (ii) Landlord has indemnified Tenant
against such Losses. This release includes claims of which Tenant is presently
unaware or which Tenant does not presently suspect to exist in its favor
which, if known by Tenant, would materially affect Tenant's release of
Landlord. Tenant specifically waives the provision of California Civil Code
1542, which provides as follows: "A general release does not extend to claims
which the creditor does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially affected
his settlement with the debtor."
2. Term.
2.1 Term; Notice of Lease Dates. This Lease shall be effective upon the
date first above written (the "Effective Date"). Subject to Section 2.4(a)
below, the term of this Lease (the "Term") shall commence upon the Actual
Commencement Date for Office Building, the Actual Commencement Date for
Manufacturing Building, and the Actual Commencement Date for Parking Lot with
respect to the Office Building, Manufacturing Building and Parking Lot,
respectively (hereinafter the Actual Commencement Dates for the Office
Building, the Manufacturing Building and the Parking Lot may be collectively
referred to as the "Respective Commencement Dates"). Within ten (10) days
after Landlord's written request, Tenant and Landlord shall execute a written
confirmation of the Respective Commencement Dates in the form of the Notice
of Lease Term Dates attached hereto as Exhibit "D". The Notice of Lease Term
Dates executed by Landlord shall be binding upon Tenant unless Tenant objects
thereto in writing within such ten (10) day period.
2.2 Estimated Commencement Date for Parking Lot. It is estimated by the
parties that Landlord will deliver possession of the Parking Lot, and that
the Term of this Lease respecting the Parking Lot will commence on, the
Estimated Commencement Date for Parking Lot set forth in Section 1.6 of the
Summary. The Estimated Commencement Date for Parking Lot is merely an estimate
of the Actual Commencement Date for Parking Lot and, consequently, Tenant
agrees that Landlord shall have no liability to Tenant for any loss or
damage, nor shall Tenant be entitled to terminate or cancel this Lease
(except as set forth in Section 2.5 below) if the Term of this Lease
respecting the Parking Lot does not commence by the Estimated Commencement Date
for Parking Lot for any reason whatsoever, including any delays in
Substantial Completion of the Parking Lot Improvements.
If Landlord has not delivered possession of the Parking Lot by June 1, 1997,
due to Landlord's failure to Substantially Complete the Parking Lot
Improvements (as such date is subject to extension by one day for each day
Landlord is delayed in constructing the Parking Lot Improvements due to
Force Majeure Delays), then Tenant may, following delivery of written notice to
Landlord, construct the Parking Lot Improvements substantially in accordance
with Exhibit "G". In such event, the Actual Commencement Date for Parking
Lot shall be the earlier to occur of (i) the date of Substantial Completion
of the Parking Lot Improvements or (ii) ninety (90) days following the date
Tenant gives Landlord written notice of its election to construct the Parking
Lot Improvements. Within thirty (30) days following Substantial Completion
of the Parking Lot Improvements and delivery to Landlord of evidence of the
lien-free completion thereof and the costs incurred by Tenant in connection
therewith, Landlord will reimburse Tenant the actual cost of construction of
the Parking Lot Improvements. If Landlord fails to so reimburse Tenant
within said thirty (30) day period, then the Rent for the Parking Lot will
be calculated without the inclusion of the Parking Lot Improvement Costs,
notwithstanding Section 1.9 of the Summary to the contrary.
2.3 Delivery; Early Occupancy. Landlord shall deliver possession of all
of Parcel 1 on the first (lst) business day following the Acquisition Date
(as that term is defined in Section 2.5 below) (the "Early Occupancy Date") for
purposes of construction of improvements to the Premises in accordance with
the Work Letter attached hereto as Exhibit "C" ("Work Letter"); provided,
however, Tenant acknowledges that approximately 30,000 square feet of the
Manufacturing Building (in the approximate location depicted on Exhibit "A")
and certain areas outside of the Manufacturing Building (as described on
Exhibit "A") will be occupied by ALCOA (the current owner of the Premises)
pursuant to a license for the purpose of removing certain trade fixtures,
equipment and personal property, which removal is expected to be completed
by February 28, 1997. Landlord represents and warrants to Tenant that such
license will require ALCOA to vacate such space by February 28, 1997 (with an
extension right to March 31, 1997). Landlord will exercise good faith efforts
to cause ALCOA to remove its trade fixtures, equipment and personal property
and vacate such portion of the Manufacturing Building by February 28, 1997
(or March 31, 1997, as applicable) and will exercise all remedies available
under such license to cause such vacation. Notwithstanding anything to the
contrary contained in this Lease (including, but not limited to, the Work Letter
attached hereto), Tenant shall not perform or cause to be performed any tests
or studies affecting or relating to the soils or subsurface areas below the
Premises without prior written notice to and approval of Landlord, which
approval shall not be unreasonably withheld or delayed. Such early occupancy
shall be subject to all of the terms and conditions of this Lease (including,
without limitation, Sections 10, 17, 20 and 22) except that Tenant will not
be obligated to pay Monthly Rent for the Office Building or operating
expenses for the Premises until the Actual Commencement Date for Office
Building, and Tenant will not be obligated to pay Monthly Rent for the
Manufacturing Building until the Actual Commencement Date for Manufacturing
Building (however, Tenant will pay operating expenses associated with the
entire Premises commencing on the Actual Commencement Date for Office Building).
Landlord shall deliver the Office Building and Manufacturing Building in
broom-clean condition and without any of ALCOA's trade fixtures, equipment or
personal property other than those items identified on Exhibit "H" attached
hereto.
2.4 Options to Extend. Tenant shall have two (2) options (individually,
an "Extension Option" and collectively, the "Extension Options") to extend
the Term for a period (individually, an "Option Period") of five (5) years,
each commencing upon the Lease Expiration Date and the expiration of the
first (1st) Option Period, as the case may be, upon the same terms and
conditions previously applicable, except for the grant of any exercised
Extension Option and Annual Rent (which shall be determined as set forth
below). Each Extension Option may be validly exercised only by notice in
writing received by Landlord not later than twelve (12) months prior to
commencement of the Option Period; provided, however, that the Extension
Option may be validly exercised only if no material Event of Default exists
as of the date of exercise and, at Landlord's option, as of the commencement
of the Option Period. If Tenant does not exercise an Extension Option during
the exercise period set forth above in strict accordance with the provisions
hereof, the Extension Options shall forever terminate and be of no further
force or effect. The Extension Options are personal to the original Tenant
and any Permitted Assignee, may not be exercised by any person or entity
other than the original Tenant or any Permitted Assignee, and shall become
null and void if the original Tenant assigns its interest in this Lease or
sublets any portion of the Premises to anyone other than a Permitted Assignee.
Annual Rent during each Option Period shall be equal to Fair Market Rental as
of the commencement of such Option Period. For purposes hereof, "Fair Market
Rental" shall mean the base rent payable to a willing landlord by a willing
tenant having a similar financial responsibility, credit rating and
capitalization as Tenant then has, taking into account all other relevant
factors for like and comparable space including, without limitation, the
uses permitted under this Lease, the lack of obligation to construct Tenant
Improvements, and the limited real estate commission payable, improved with
tenant improvements of like and comparable quality to those then existing in
the Premises in the Rancho Bernardo business district of San Diego (or, if no
comparable conditions exist in such area, then in the 1-15 corridor area of
San Diego). At least six (6) months prior to the Option Period, Landlord
shall notify Tenant of the Fair Market Rental as determined by Landlord. Any
dispute between the parties hereto with respect to the amount so determined
shall be resolved by appraisal, as set forth below; provided, however, that
there shall be deemed not to be such a dispute unless Tenant notifies
Landlord thereof in writing within one (1) month after Landlord so notifies
Tenant of the Fair Market Rental and Tenant sets forth in such notice
Tenant's determination of Fair Market Rental. If, in the event of a dispute,
the appraisers have not determined the Fair Market Rental by commencement of
the Option Period, Tenant shall pay as Annual Rent the amount determined by
Landlord until such time as the Fair Market Rental has been determined by
arbitration, whereupon Tenant shall pay any additional amount due to
Landlord based upon such subsequent determination of Fair Market Rental.
If the Annual Rent so paid by Tenant is higher than that ultimately
determined by the arbitration process, then Landlord shall reimburse
such difference to Tenant.
If Tenant timely notifies Landlord in writing of Tenant's dispute regarding
Landlord's determination of the Fair Market Rental, then Fair Market
Rental shall be determined as follows. Landlord and Tenant shall each
appoint one appraiser who shall by profession be a real estate appraiser
active over the five (5) year period ending on the date of such
appointment in the appraisal of commercial properties in San Diego County
and who shall not have been employed or engaged by either party during
said five (5) year period. Each such appraiser shall be appointed
within fifteen (15) days after Tenant notifies Landlord of Tenant's dispute of
Landlord's determination of Fair Market Rental. The two appraisers so
appointed shall within fifteen (15) days of the date of the appointment of
the last appointed appraiser agree upon and appoint a third appraiser who
shall be qualified under the same criteria set forth above. The three
appraisers shall, within thirty (30) days of the appointment of the
third appraiser, reach a decision as to whether the parties shall use
Landlord's or Tenant's submitted Fair Market Rental for the Premises, and
shall notify Landlord and Tenant thereof. Such decision shall be based
upon the criteria and variables set forth above. The new Annual Rent shall
thereafter be equal to the Fair Market Rental of the Premises so
selected by the appraisers. The decision of the majority of the three
appraisers shall be binding upon Landlord and Tenant. If either Landlord
or Tenant fails to appoint an appraiser within the time period specified
hereinabove, the appraiser appointed by one of them shall reach a decision,
notify Landlord and Tenant thereof, and such appraisers decision shall be
binding upon Landlord and Tenant. If the two appraisers fail to agree upon
and appoint a third appraiser, the two appraisers shall request the presiding
judge of the Superior Court of San Diego, acting in his private capacity, or
the head of the local chapter of the leading appraisal group, to appoint the
third appraiser. Each party shall pay for its own appraiser and one-half
(1/2) of the cost of the third appraiser.
Anything to the contrary herein notwithstanding, Landlord and Tenant agree
that in no event shall Fair Market Rental for any full calendar month
during an Option Period, whether determined by Landlord, by Tenant or by
appraisal, ever be less than the Monthly Rent payable by Tenant for the
full calendar month immediately preceding the Option Term for which Fair
Market Rental is to be determined.
2.5 Conditions Precedent.
(a) Tenant acknowledges that Landlord is currently in escrow to
acquire the Premises and Landlord intends to deliver
possession of Parcel 1 to Tenant within one (1) business day
following the date Landlord acquires the Premises (the
"Acquisition Date"). Landlord's and Tenant's obligations
under this Lease are conditioned upon Landlord's acquisition
of the Premises on or before March 1, 1997. If Landlord has
not acquired the Premises by March 1, 1997, then Landlord
shall return the first month's Monthly Rent and the Security
Deposit to Tenant and this Lease shall terminate and neither
party shall have any further obligations to the other
hereunder.
(b) Landlord will not be obligated to deliver possession of the
Premises to Tenant (but Tenant will be liable for Rent if
Landlord can otherwise deliver the Premises, or the
applicable portion thereof, to Tenant as required hereunder)
until Landlord has received from Tenant all of the following:
(i) a copy of this Lease fully executed by Tenant; (ii)
evidence satisfactory to Landlord of the deposit of the
Security Deposit in accordance with Section 5 below, and the
first installment of Monthly Rent in accordance with Section
3.1 below; and (iii) copies of policies of insurance or
certificates thereof as required under Section 21 of this
Lease.
(c) If, as of the delivery of possession of the Parcel 1,
Landlord's interest in the Premises is subject to a mortgage
or deed of trust, then Tenant's obligations hereunder shall
be subject to Landlord's delivery to Tenant of a commercially
reasonable non-disturbance agreement (which agreement shall
recognize Tenant's offset rights under the Work Letter). If
such non-disturbance agreement has not been delivered to
Tenant by the Actual Commencement Date for Office Building,
Tenant may terminate this Lease by giving Landlord written
notice thereof within ten (10) days thereafter, but prior to
Landlord's delivery of such non-disturbance agreement.
3. Rent.
3.1 Annual Rent. Tenant agrees to pay Landlord, as rent for the Premises,
the Annual Rent designated in Sections 1.8 and 1.9 of the Summary. The
Annual Rent shall be paid by Tenant in twelve (12) equal monthly installments
of Monthly Rent in the amounts designated in Sections 1.8 and 1.9 of the
Summary in advance on the first day of each and every calendar month
commencing upon the Respective Commencement Dates, except that the first full
month's Monthly Rent for the Office Building and the Manufacturing Building
shall, upon execution of this Lease by Tenant, be delivered into the escrow
referred to in Section 2.5(a) above with instructions for disbursement to
Landlord upon (i) Landlord's acquisition of the Premises and (ii) the
determination of the escrow holder that it is in a position, without the
requirement for Landlord to satisfy any additional conditions, to deliver to
Landlord (and deliver a copy to Tenant) an owner's policy of title insurance
insuring Landlord as the fee owner of the Property subject to Tenant's
leasehold estate (as evidenced by a recorded memorandum of lease) in (a) first
priority position or (b) second position, provided that the policy also
evidences the recording of a nondisturbance, recognition and attornment
agreement satisfying the requirements of Section 2.5(c) above executed by
Tenant, Landlord and the holder of the lien shown on the title report as
having priority over Tenant's leasehold estate. Monthly Rent for any
partial month shall be prorated in the proportion that the number of days
this Lease is in effect during such month bears to the actual number of
days in such month.
3.2 Additional Rent; Management Fee. All amounts and charges payable by
Tenant under this Lease in addition to the Annual Rent described in Section
3.1 above shall be considered additional rent for the purposes of this Lease,
and the word "Rent" in this Lease shall include such additional rent unless
the context specifically or clearly implies that only the Annual Rent is
referenced. The Annual Rent and additional rent shall be paid to Landlord as
provided in Section 7, without any prior demand therefor and without any
deduction or offset, in lawful money of the United States of America. Tenant
shall pay to Landlord as additional rent an annual management fee equal to
two percent (2%) of Annual Rent for the Premises. Such fee shall be payable
in twelve (1 2) equal monthly installments together with Monthly Rent.
3.3 Late Payments. Late payments of Monthly Rent and/or any item of
additional rent will be subject to interest and a late charge as provided in
Sections 22.6 and 22.7 below.
4. Triple-Net Lease. All Rent shall be absolutely net to Landlord so
that this Lease shall yield net to Landlord, the Rent to be paid each
month during the Term of this Lease. Accordingly, except as specifically set
forth herein, all costs, expenses and obligations of every kind or nature
whatsoever relating to the Premises (excepting the Acquisition Costs) which
may arise or become due during the Term of this Lease with respect to
the Premises shall be paid by Tenant. Nothing herein contained shall be
deemed to require Tenant to pay or discharge any liens or mortgages of any
character whatsoever which may exist or hereafter be placed upon the
Premises by an affirmative act or omission of Landlord.
5. Security Deposit. Concurrently with the execution of this Lease,
Tenant shall deposit the Security Deposit designated in Section 1.10 of the
Summary into an investment escrow account with Morgan Stanley or
Montgomery Securities or such other investment company as is reasonably
acceptable to both Landlord and Tenant. The escrow instructions for such
account shall be subject to Landlord's prior approval and must provide
the following: (i) Landlord will not acquire any rights to the monies in such
account until Landlord's acquisition of the Premises and delivery of
possession of Parcel 1 as contemplated in Section 2.3 (unless such delivery
does not occur by reason of the failure of Tenant's obligations described in
Section 2.5(b) above) and Landlord has satisfied the conditions to
disbursement of the first full month's Monthly Rent set forth in Section 3.1
of this Lease; (ii) that Landlord shall have a first priority security
interest in the monies in such account, (iii) Landlord will have access to
the monies in such account upon Landlord's delivery of a certificate to the
escrow holder certifying that (A) there exists an Event of Default, and (B)
Landlord is entitled to receive such payment(s) in the specified amount
pursuant to the terms and conditions of the Lease; (iv) that Tenant shall have
the right to direct the investment decisions for the account provided that
all such investments shall be limited to those customarily utilized in a
conservative pension fund investment portfolio; (v) that escrow shall
distribute all earnings from the account in excess of the then-required
Security Deposit directly to Tenant; and (vi) any funds remaining in the
account after thirty (30) days following the expiration or earlier termination
of this Lease for which Landlord has not requested disbursement pursuant to
clause (iii) above within said thirty (30) day period shall be returned to
Tenant. If Landlord withdraws more funds from the escrow account than
necessary to cure an Event of Default, Landlord shall promptly re-deposit
such excess funds into the escrow account. If Landlord fails to re-deposit
such funds into the escrow account within five (5) Business Days after
Landlord realizes or reasonably should have realized that Landlord had
withdrawn excess funds, Landlord shall also be obligated to pay to Tenant
interest on such amount at the Interest Rate from the expiration of such five
(5) Business Day period until the date of re-deposit. Landlord may not
request a withdrawal from the escrow account after thirty (30) days following
the expiration or sooner termination of this Lease. Tenant hereby
acknowledges and agrees that Landlord shall have no liability or
responsibility for any loss of principal or interest not caused by Landlord
from such account and that Tenant shall, within ten (10) days from the date
of any such loss, deposit cash into the account sufficient to restore the
Security Deposit to its then-required amount. The Security Deposit shall be
held as security for the full and faithful performance by Tenant of all
of the terms, covenants and conditions of this Lease to be performed
by Tenant during the Term. The Security Deposit is not, and may not be
construed by Tenant to constitute, rent for the last month or any portion
thereof. If Tenant defaults with respect to any of its obligations under
this Lease, Landlord may (but shall not be required to) use, apply or
retain all or any part of the Security Deposit for the payment of any rent or
any other sum in default, or for the payment of any other amount, loss or
damage which Landlord may spend, incur or suffer by reason of Tenant's
default. If any portion of the Security Deposit is so used or applied,
Tenant shall, within ten (10) days after demand therefor, deposit cash with
Landlord in an amount sufficient to restore the Security Deposit to its
original amount. The Security Deposit (or any balance thereof remaining
following Landlord's use of the Security Deposit [or portion thereof as
permitted by this Lease] which has not been restored by Tenant) shall be
returned to Tenant within thirty (30) days following the expiration of the
Lease Term. If Landlord sells its interest in the Premises during the Lease
Term and if Landlord transfers to the purchaser the Security Deposit (or
balance thereof, and such purchaser acknowledges receipt thereof, then, upon
such sale, Landlord shall be discharged from any further liability with
respect to the Security Deposit. So long as no Event of Default under this
Lease has occurred prior to the reduction dates set forth below, the
required Security Deposit shall be reduced in accordance with the following
schedule if, on or before the date for any scheduled reduction in the required
Security Deposit, Landlord has not delivered a request for a withdrawal from
such account, accompanied by the required certificate described above :
<TABLE>
<CAPTION>
Month of
Lease Term respecting the
Office Building Required Security Deposit
<C> <C>
1-12 $2,224,416.00
13-24 $1,516,277.00
25-36 $808,138.00
37-end $100,000.00
Landlord will waive the requirement to maintain the Security Deposit
upon the satisfaction of the following conditions: (i) at the time of
Tenant's request for such waiver, Tenant has a tangible net worth of
at least Seventy-Five Million Dollars ($75,000,000.00) and no Event of
Default exists and (ii) during the immediately preceding six (6) month
period, there has been no Event of Default and Tenant has maintained a
tangible net worth of at least Seventy-Five Million Dollars ($75,000,000.00).
6. Use.
6.1 General. Tenant shall use the Premises solely for the Permitted
Use specified in Section 1.1 I of the Summary, and shall not use or
permit the Premises to be used for any other use or purpose whatsoever.
Tenant shall, at its sole cost and expense, observe and comply with all
requirements of any board of fire underwriters or similar body relating to
the Premises, and all laws, statutes, codes, rules and regulations now or
hereafter in force relating to or affecting the use, occupancy, alteration
or improvement (whether structural or non-structural) of the Premises,
including, without limitation, the provisions of Title III of the Americans
with Disabilities Act of 1990 as it pertains to Tenant's use, occupancy,
improvement and alteration (whether structural or non-structural) of the
Premises. Tenant shall not use or allow the Premises to be used (a) in
violation of any recorded covenants, conditions and restrictions
affecting the Premises or of any law or governmental rule or regulation, or of
any certificate of occupancy issued for the Premises, or (b) for any
unlawful purpose. Tenant shall not cause, maintain or permit any nuisance
in, on or about the Premises, nor commit or suffer to be committed any
waste in, on or about the Premises. Notwithstanding any provision to the
contrary herein, Tenant's obligations to comply with laws, ordinances,
regulations and the like shall not include the obligation to
comply with environmental laws, ordinances, regulations and the like except
to the extent applicable to Hazardous Materials introduced to the Premises
by Tenant or Tenant's Parties, and Landlord releases Tenant from, and
waives any and all claims against, Tenant for any liability resulting from
any Hazardous Materials not introduced to the Premises by Tenant or Tenant's
Parties.
6.2 Signs, Awnings and Canopies. Tenant shall have the exclusive
right to install upon the Premises such signage as Tenant deems
appropriate provided Tenant obtains approval from all governmental
authorities having jurisdiction over the Premises and from Landlord,
which approval shall not be unreasonably withheld or delayed. Tenant
agrees to maintain any such sign, awning, canopy, decoration, lettering or
advertising matter as may be approved by Landlord in good condition and
repair at all times. At the expiration or earlier termination of this Lease,
at Landlord's election, Tenant shall remove all signs, awnings, canopies,
decorations, lettering and advertising and shall repair any damage to the
Premises resulting therefrom all at Tenant's sole cost and expense. If
Tenant fails to maintain any such approved sign, awning, decoration,
lettering, or advertising, Landlord may do so following thirty (30) days'
prior written notice to Tenant and Tenant shall reimburse Landlord
for such cost. If, without Landlord's prior written consent, Tenant
installs any sign, awning, decoration, lettering or advertising, or fails to
remove any such item(s) at the expiration or earlier termination of
this Lease, Landlord may have such item(s) removed and stored and may
repair any damage to the Premises at Tenant's expense. The removal,
repair and/or storage costs shall bear interest until paid at the Interest
Rate.
6.3 Hazardous Materials. Except for ordinary and general office supplies,
such as copier toner, liquid paper, glue, ink and commo household
cleaning materials (some or all of which may constitute "Hazardous
Materials" as defined in this Lease), neither Tenant nor its agents,
employees, subtenants, assignees, licensees, contractors or invitees
(collectively, "Tenant's Parties") shall cause any Hazardous Materials to be
brought upon, stored, used, handled, generated, released or disposed of on, in,
under or about the Premises without the prior written consent of Landlord,
which consent Landlord may withhold in its sole but reasonable discretion.
Concurrently with the execution of this Lease, Tenant agrees to complete
and deliver to Landlord an Environmental Questionnaire in the form of
Exhibit "E" attached hereto. Upon the expiration or earlier termination of
this Lease, Tenant agrees to promptly remove from the Premises, at its sole
cost and expense, any and all Hazardous Materials, including any equipment or
systems containing Hazardous Materials which are installed, brought upon,
stored, used, generated or released upon, in, under or about the Premises
by Tenant or any of Tenant's Parties.
To the fullest extent permitted by law, Tenant agrees to promptly indemnify,
protect, defend and hold harmless Landlord and Landlord's partners,
officers, directors, employees, agents, successors and assigns
(collectively, "Landlord Indemnified Parties") from and against any and all
claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including, without limitation,
clean-up, removal, remediation and restoration costs, sums paid in settlement
of claims, attorneys' fees, consultant fees and expert fees and court costs)
which arise or result from the presence of Hazardous Materials on, in, under or
about the Premises and which are caused by Tenant or any of Tenant's
Parties. Tenant agrees to promptly notify Landlord of any release of
Hazardous Materials which Tenant becomes aware of during the Term of this
Lease, whether caused by Tenant or any other persons or entities. In
the event of any release of Hazardous Materials caused by Tenant or any of
Tenant's Parties, Landlord shall have the right, but not the obligation, to
cause Tenant to immediately take all steps Landlord deems necessary or
appropriate to remediate such release and prevent any similar future
release to the satisfaction of Landlord and Landlord's mortgagee(s). At
all times during the Term of this Lease, Landlord will have the right,
but not the obligation, to enter upon the Premises to inspect, investigate,
sample and/or monitor the Premises to determine if Tenant is in compliance
with the terms of this Lease regarding Hazardous Materials. As used in
this Lease, the term "Hazardous Materials" shall mean and include any
hazardous or toxic materials, substances or wastes as now or hereafter
designated under any law, statute, ordinance, rule, regulation, order or
ruling of any agency of the State, the United States Government or any
local governmental authority, including, without limitation, asbestos,
petroleum, petroleum hydrocarbons and petroleum based products, urea
formaldehyde foam insulation, polychlorinated biphenyis ("PCBs"), and freon
and other chlorofluorocarbons. The provisions of this Section 6.3 will
survive the expiration or earlier termination of this Lease.
To the fullest extent permitted by law, Landlord agrees to promptly
indemnify, protect, defend and hold harmless Tenant and Tenant's partners,
officers, directors, employees, agents, successors and assigns
(collectively, "Tenant Indemnified Parties") from and against any and all
claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including, without limitation,
clean-up, removal, remediation and restoration costs, sums paid in
settlement of claims, attorneys' fees, consultant fees and expert fees and
court costs) which arise or result from the presence of Hazardous Materials
on, in, under or about the Premises and which are caused by Landlord or
any of Landlord's employees, agents or contractor (collectively, "Landlord's
Parties"). Notwithstanding any provision to the contrary in this Lease, if
any environmental condition arises with respect to the Premises for which
Tenant has been released from liability hereunder, and for which Tenant
is therefore not responsible under this Lease, and Landlord does not
remediate such environmental condition (which Landlord shall have the right but
not the obligation hereunder to do, unless caused by Landlord or Landlord's
Parties) as and to the extent required by applicable law and adequately
protect the health and safety of Tenant and Tenant's Parties during such
remediation activity, and such environmental condition would pose a
material threat to the health and safety of Tenant's Parties if
unremediated, then (i) Tenant shall have the right to terminate this Lease,
effective upon the date stated in Tenant's written notice to Landlord (and
Landlord's Lender) exercising such right to terminate; provided, however,
Landlord (or Landlord's lender) may rescind such termination by commencing
such remediation and providing for such adequate protection within ninety
(90) days following receipt of such termination notice, and thereafter
diligently pursuing such remediation to completion, and (ii) if such
environmental condition was not caused by Landlord or Landlord's Parties, then
neither Landlord nor Landlord's Parties shall have, and Tenant, on behalf
of itself only, releases Landlord and Landlord's Parties from, any
liability arising from such environmental condition. Notwithstanding the
foregoing, Tenant's termination right under clause (i) of the preceding
sentence shall not apply with respect to the environmental condition of
the Premises disclosed by that certain AEPI Permit By Rule/Conditionally
Authorized Facility Closure Plan amended as of December 11, 1996 and those
certain Specifications for Decontamination and Demolition, provided such
environmental condition is remediated in accordance with said plans and
specifications.
Notwithstanding the foregoing, Landlord consents to the storage and use at
the Premises, and disposal from the Premises, of certain Hazardous Materials
upon the following conditions:
(a) The Hazardous Materials are only those materials that are
necessary for Tenant's manufacture of semiconductor capital
equipment at the Premises;
(b) The storage, use and disposal of the Hazardous Materials
complies with all applicable laws, and no disposal of the
Hazardous Materials shall be through the drains of the
Premises or the trash receptacles at the Premises without
Landlord's prior written consent;
(c) The storage, use and disposal of the Hazardous Materials does
not result in objectionable odors or health hazards to
adjacent owners;
(d) Tenant obtains and maintains all permits and approvals
necessary for the storage, use and disposal of the Hazardous
Materials;
(e) On the first day of each calendar year during the Term (and,
in addition, promptly following the date Tenant uses, stores
or disposes new Hazardous Materials that have not been
previously disclosed to Landlord), Tenant shall deliver to
Landlord a disclosure statement containing the following:
(i) A list containing, to the best knowledge of Tenant, all
Hazardous Materials and the quantities thereof stored,
used or disposed from the Premises during the preceding
calendar year;
(ii) A statement that (A) the use, storage and disposal of
such Hazardous Materials complies with all applicable
laws, (B) Tenant has all necessary permits and approvals
for the use, storage and disposal thereof, and (C)
identifies the method of disposal of such Hazardous
Materials; and
(iii) Copies of all necessary permits and approvals
relating to the use, storage and disposal of such
Hazardous Materials to the extent not previously
delivered to Landlord;
(f) Tenant shall immediately advise Landlord in writing of, and
provide Landlord a copy of:
(i) Any notice of violation or potential or alleged
violation of any law concerning Hazardous Materials
received by Tenant from any governmental agency;
(ii) Any and all inquiry, investigation, enforcement, clean-
up, removal or governmental or regulatory actions
instituted or threatened relating to Tenant or the
Premises; and
(iii) All claims made or threatened by any third party
against Tenant or the Premises relating to any Hazardous
Materials.
In the event any of the preceding conditions are not satisfied, Tenant shall
immediately cease the use, storage and disposal of Hazardous Materials
until all such conditions are satisfied. Landlord's consent to the use,
storage and disposal of such Hazardous Materials shall not constitute
an assumption of the risk respecting the same and Tenant shall indemnify,
protect, defend and hold the Landlord Indemnified Parties harmless from
and against the same as required by this Section 6.3.
6.4 Refuse and Sewage. Tenant agrees not to keep any trash, garbage,
waste or other refuse on the Premises except in sanitary containers and
agrees to regularly and frequently remove same from the Premises. Tenant
shall keep all containers or other equipment used for storage of such
materials in a clean and sanitary condition. Tenant shall, at Tenant's
sole cost and expense, properly dispose of all sanitary sewage and shall
not use the sewage disposal system for the disposal of anything except
sanitary sewage. Tenant shall keep the sewage disposal system free of all
obstructions and in good operating condition. Tenant shall contract directly
for all trash disposal services at Tenant's sole cost and expense.
7. Payments and Notices. All Rent and other sums payable by Tenant to
Landlord hereunder shall be paid to Landlord at the address designated in
Section 1.1 of the Summary, or to such other persons and/or at such other
places as Landlord may hereafter designate in writing. Any notice required or
permitted to be given hereunder must be in writing and may be given by
personal delivery (including delivery by nationally recognized overnight
courier or express mailing service), facsimile transmission, or by
registered or certified mail, postage prepaid, return receipt requested,
addressed to Tenant at the address(es) designated in Section 1.2 of the
Summary, or to Landlord at the address(es) designated in Section 1.1 of
the Summary. Any notice or report addressed to Tenant or to Landlord shall
be deemed to have been given (i) when delivered if given by personal
delivery, (ii) instantaneously upon confirmation of receipt of facsimile
if such confirmation is on or before 5:00 p.m. (recipient's time) on a
Business Day, otherwise on the next Business Day, (iii) on the date the U.S.
Post office certifies delivery, nondeliverability or refusal of delivery if
such notice or report was deposited in the United States mail, certified,
postage prepaid, and (iv) in all other cases when actually received.
Either party may change its address by giving notice of the same in
accordance with this Paragraph. The term "Business Day") as used in
this Lease shall mean Monday through Friday, excepting those holidays
observed by the U.S. PostalService.
8. Brokers. The parties recognize that the broker(s) who
negotiated this Lease are stated in Section 1.12 of the Summary.
Each party represents and warrants to the other, that, to its
knowledge, no other broker, agent or finder (a) negotiated or was
instrumental in negotiating or consummating this Lease on its
behalf, and (b) is or might be entitled to a commission or
compensation in connection with this Lease. Any broker, agent or
finder of Tenant whom Tenant has failed to disclose herein shall
be paid by Tenant. Tenant shall indemnify, protect, defend (by
counsel reasonably approved in writing by Landlord) and hold
Landlord harmless from and against any and all claims, judgments,
suits, causes of action, damages, losses, liabilities and
expenses (including attorneys' fees and court costs) resulting
from any breach by Tenant of the foregoing representation,
including, without limitation, any claims that may be asserted
against Landlord by any broker, agent or finder undisclosed by
Tenant herein. Landlord shall indemnify, protect, defend (by
counsel reasonably approved in writing by Tenant) and hold Tenant
harmless from and against any and all claims, judgments, suits,
causes of action, damages, losses, liabilities and expenses
(including attorneys' fees and court costs) resulting from any
breach by Landlord of the foregoing representation, including,
without limitation, any claims that may be asserted against
Tenant by any broker, agent or finder undisclosed by Landlord
herein. The foregoing indemnities shall survive the expiration
or earlier termination of this Lease.
9. Surrender; Holding Over.
9.1 Surrender of Premises. Upon the expiration or sooner
termination of this Lease, Tenant shall surrender all keys for
the Premises to Landlord, and Tenant shall deliver exclusive
possession of the Premises to Landlord broom clean and in the
same condition and repair as existed on the date the initial
Tenant Improvements were completed, reasonable wear and tear
excepted (and casualty damage excepted if this Lease is
terminated as a result thereof pursuant to Section 18),
condemnation excepted and Hazardous Materials not caused to be
present in, on , under or about the Premises by Tenant or
Tenant's Parties excepted, with all of Tenant's personal property
(and those items, if any, of Tenant Improvements and Tenant
Changes identified by Landlord pursuant to Section 12.2 below)
removed therefrom and all damage caused by such removal repaired,
as required pursuant to Sections 12.2 and 12.3 below. If, for
any reason, Tenant fails to surrender the Premises on the
expiration or earlier termination of this Lease, with such
removal and repair obligations completed in the time required by
Sections 12.2 and 12.3 below, then, in addition to the provisions
of Section 9.3 below and Landlord's rights and remedies under
Section 12.4 and the other provisions of this Lease, Tenant shall
indemnify, protect, defend (by counsel reasonably approved in
writing by Landlord) and hold Landlord harmless from and against
any and all claims, judgments, suits, causes of action, damages,
losses, liabilities and expenses (including attorneys' fees and
court costs) resulting from such failure to surrender, including,
without limitation, any claim made by any succeeding tenant based
thereon. The foregoing indemnity shall survive the expiration or
earlier termination of this Lease.
9.2 Holding Over. If Tenant holds over after the expiration or
earlier termination of the Lease Term, then, without waiver of
any right on the part of Landlord as a result of Tenant's failure
to timely surrender possession of the Premises to Landlord,
Tenant shall become a tenant at sufferance only, upon the terms
and conditions set forth in this Lease so far as applicable
(including Tenant's obligation to pay all costs, expenses and any
other additional rent under this Lease), but at a Monthly Rent
equal to: one hundred twenty-five percent (125%) of the Monthly
Rent applicable to the Premises immediately prior to the date of
such expiration or earlier termination. Acceptance by Landlord
of rent after such expiration or earlier termination shall not
constitute a consent to a hold over hereunder or result in an
extension of this Lease.
10. Taxes.
10.1 Real Property Taxes. Tenant shall pay all general and
special real property taxes, assessments (including, without
limitation, change in ownership taxes or assessments), liens,
bond obligations, license fees or taxes and any similar
impositions in-lieu of other impositions now or previously within
the definition of real property taxes or assessments and any and
all assessments under any covenants, conditions and restrictions
affecting the Premises (collectively "Real Property Taxes") which
may be levied or assessed against the Premises applicable to the
period from the Early Occupancy Date with respect to Parcel 1,
and the Actual Commencement Date for Parking Lot with respect to
Parcel 2, until the expiration or sooner termination of this
Lease. Notwithstanding the foregoing provisions, if the Real
Property Taxes are not levied and assessed against the Premises
as separate tax parcels, then Tenant shall pay Tenant's pro rata
share of all Real Property Taxes which may be levied or assessed
by any lawful authority against the land and improvements of the
separate tax parcel on which the Premises are located. Tenant's
pro rata share under such circumstances shall be apportioned
according to the floor area of the Premises as it relates to the
total leasable floor area of all of the buildings (including the
Premises) situated in the separate tax parcel in which the
Premises is located.
Tenant reserves the right to approve any assessment of public
improvements that may affect the Premises to the extent Landlord
has such night. Any future assessments for public improvements
may be paid by Landlord in full or in installments, but Tenant's
contribution will be determined and payable based on the
assumption that such assessments were allowed to go to bond and
became payable in installments.
All Real Property Taxes for the tax year in which the Early
Occupancy Date and the Actual Commencement Date for Parking Lot
occur and for the tax year in which this Lease terminates shall
be apportioned and adjusted so that Tenant shall not be
responsible for any Real Property Taxes for a period of time
occurring prior to the Early Occupancy Date and the Actual
Commencement Date for Parking Lot or subsequent to the expiration
of the Lease term.
Tenant agrees to pay to the taxing authority entitled thereto the
total Real Property Taxes due. Any of said payments to be made
directly to the taxing authority shall be made prior to the
delinquency date established by the taxing authority, and Tenant
shall, concurrently with such payment, deliver evidence of such
payment to Landlord. Failure of Tenant to pay said Real Property
Taxes as and when herein specified shall, in addition to all
other rights and remedies of Landlord hereunder, subject Tenant
to any fine, penalty, interest, or cost which Landlord may incur
as a result thereof. Tenant shall, within thirty (30) days after
demand, reimburse Landlord for any such fine, penalty, interest,
or cost, together with interest thereon at the Interest Rate.
If at any time during the Term under the laws of the United
States, or the state, county, municipality, or any political
subdivision thereof in which the Premises is located, a tax or
excise on rent or any other tax however described is levied or
assessed by any such political body against Landlord on account
of rent payable to Landlord hereunder or any tax based on or
measured by expenditures made by Tenant on behalf of Landlord,
such tax or excise shall be considered "Real Property Taxes" for
purposes of this Section 10.1, and shall be payable in full by
Tenant. Such taxes or excises shall be payable within ten (IO)
days after Tenant's receipt of the tax bill therefor from
Landlord.
10.2 Personal Property Taxes. Tenant shall be liable for, and
shall pay before delinquency, all taxes and assessments (real and
personal) levied against (a) any personal property or trade
fixtures placed by Tenant in or about the Premises (including any
increase in the assessed value of the Premises based upon the
value of any such personal property or trade fixtures); and (b)
any Tenant Improvements or alterations in the Premises (whether
installed and/or paid for by Landlord or Tenant). If any such
taxes or assessments are levied against Landlord or Landlord's
property, Landlord may, after written notice to Tenant (and under
proper protest if requested by Tenant) pay such taxes and
assessments, and Tenant shall reimburse Landlord therefor within
ten (10) business days after demand by Landlord; provided,
however, Tenant, at its sole cost and expense, shall have the
right, with Landlord's cooperation, to bring suit in any court of
competent jurisdiction to recover the amount of any such taxes
and assessments so paid under protest.
11. Repairs.
11.1 Tenant's Repair Obligations. Tenant shall at all times and
at Tenant's sole cost and expense, keep, maintain, clean, repair,
replace and preserve the Premises and all parts thereof, both
structural and non-structural, including, without limitation,
utility meters, plumbing, pipes and conduits, all heating,
ventilating and air conditioning systems located within the
Premises, all fixtures, furniture and equipment, Tenant's signs,
if any, locks, closing devices, security devices, windows, window
sashes, casements and frames, floors and floor coverings,
shelving, restrooms, ceilings, interior and exterior walls, roof,
foundations, skylights, interior and demising walls, doors,
electrical and lighting equipment, sprinkler systems, parking
areas, driveways, walkways, parking lots, loading dock areas and
doors, rail spur areas, fences, signs, lawns and landscaping, if
any, and any Tenant Improvements, Tenant Changes or other
alterations, additions and other property and/or fixtures located
within the Premises in good condition and repair, except for
reasonable wear and tear, casualty damage (if Tenant is not
obligated to repair hereunder), condemnation and Hazardous
Materials not introduced to, in, on, under or about the Premises
by Tenant or Tenant's Parties. Tenant's repair and maintenance
obligations shall include, but not be limited to, slurry coating
the parking areas of Parcel 1 and the Parking Lot every thirty
(30) months; parking area and driveway sweeping and repairing;
and responsibility for painting. Tenant agrees to procure and
maintain maintenance contracts for all heating, ventilating and
air conditioning systems with reputable contractors reasonably
approved by Landlord. Such maintenance and repairs shall be
performed with due diligence, lien-free and in a good and
workmanlike manner, by licensed contractor(s) which are selected
by Tenant and approved by Landlord, which approval Landlord shall
not unreasonably withhold or delay. Except to the extent
provided in Section 1.2 above with respect to the construction of
the Parking Lot Improvements, Landlord shall have no obligation
to alter, remodel, improve, repair, renovate, redecorate or paint
all or any part of the Premises.
11.2 Landlord's Repair Rights. Tenant waives the right to make
repairs at Landlord's expense under any law, statute or ordinance
now or hereafter in effect (including the provisions of
California Civil Code Section 1942 and any successive sections or
statutes of a similar nature). If Tenant fails to perform
Tenant's obligations under Section 11.1 hereof, or under any
other provision of this Lease, then Landlord shall have the
option (but not the obligation) to enter upon the Premises after
ten (10) days' prior written notice to Tenant, or in the case of
an emergency immediately without prior notice, to perform such
obligations on Tenant's behalf necessary to return the Premises
to good order, condition and repair. The costs incurred by
Landlord pursuant to this Section 11.2 shall become due and
payable to Landlord, upon demand.
11.3 Landlord's Contribution to Certain Expenditures. If any
replacement obligation of Tenant under Section 11.1 with respect
to a Basic Element would normally be capitalized under normal
accounting practice and is in excess of Twenty-Five Thousand
Dollars ($25,000.00), and if as a result of such expenditure the
useful life of the Basic Element (as such useful life is based on
the estimated actual life pursuant to generally accepted
accounting practices) will extend beyond the Term, then, subject
to the requirements set forth in this Section 11.3, Landlord will
reimburse Tenant for Landlord's prorata share thereof within
thirty (30) days following the expiration or sooner termination
of this Lease; provided, however, Landlord will have no such
reimbursement obligation if this Lease terminates as a result of
an Event of Default. Landlord's prorata share of such
expenditure shall be a fraction, the numerator of which is the
number of months remaining on the useful life of the Basic
Element after the expiration or sooner termination of this Lease,
and the denominator of which is the total number of months of the
useful life of the Basic Element. As a condition precedent to
Landlord's obligation to reimburse Tenant for a prorata share of
any such expenditure, Tenant shall first obtain Landlord's prior
written approval of the contractor, the plans and specifications,
the amount of any such expenditure and the useful life resulting
from such expenditure, which approval shall not be unreasonably
withheld or delayed. Upon such approval, either party shall, at
the other party's request, enter into an amendment of this Lease
identifying the amount subject to reimbursement by Landlord. The
"Basic Elements" are the foundations and structural walls of the
Premises, HVAC equipment and the roof.
12. Alterations.
12.1 Tenant Changes; Conditions.
(a) Tenant shall not make any alterations, additions,
improvements or decorations to the Premises (collectively,
"Tenant Changes," and individually, a "Tenant Change") unless
Tenant first obtains Landlord's prior written approval
thereof, which approval Landlord shall not unreasonably
withhold or delayed. Notwithstanding the foregoing,
Landlord's prior approval shall not be required for any
Tenant Change which satisfies all of the following conditions
(hereinafter a "Pre-Approved Change"): (i) the costs of such
Tenant Change does not exceed Fifty Thousand Dollars
($50,000.00); (iii) Tenant delivers to Landlord final plans,
specifications and working drawings for such Tenant Change at
least ten (1 0) days prior to commencement of the work
thereof; (iv) Tenant and such Tenant Change otherwise satisfy
all other conditions set forth in this Section 12.1; and (v)
the Tenant Change does not affect the structural, mechanical,
life-safety or exterior elements of the Premises.
(b) All Tenant Changes shall be performed: (i) in accordance with
the approved plans, specifications and working drawings; (ii)
lien-free and in a good and workmanlike manner; (iii) in
compliance with all applicable laws, rules and regulations of
all governmental agencies and authorities including, without
limitation, the provisions of Title III of the Americans with
Disabilities Act of 1990; and (iv) at such times, in such
manner and subject to such rules and regulations as Landlord
may from time to time reasonably designate.
(c) Throughout the performance of the Tenant Changes, Tenant
shall obtain, or cause its contractors to obtain, workers
compensation insurance and commercial general liability
insurance in reasonable amounts.
12.2 Removal of Tenant Changes and Tenant Improvements. All
Tenant Changes and the initial Tenant Improvements in the
Premises (whether installed or paid for by Landlord or Tenant),
shall become the property of Landlord and shall remain upon and
be surrendered with the Premises at the end of the Term of this
Lease; provided, however, (i) Tenant shall remove those items of
the initial Tenant Improvements, if any, designated for removal
pursuant to the Work Letter and (ii) Landlord may, by written
notice delivered to Tenant on or before the expiration of the
Lease Term (or upon any sooner termination of this Lease)
identify those items of Tenant Changes which Landlord shall
require Tenant to remove at the end of the Term of this Lease
(however, if Tenant, prior to the installation of any Tenant
Changes, requested in writing that Landlord identify whether the
proposed Tenant Changes must be removed at the expiration or
termination of this Lease [which notice further informed Landlord
that Landlord's failure to respond within ten (1 0) days would
result in Landlord's waiver of the right to require removal of
the Tenant Changes], and Landlord did not give Tenant written
notice within ten (1 0) days thereafter that Landlord would
require the removal of any such items, then Tenant will not be
required to remove the same at the expiration or termination of
this Lease). If Landlord requires Tenant to remove any such
items as described above, Tenant shall, at its sole cost, remove
the identified items on or before the later to occur of (i) the
expiration or sooner termination of this Lease or (ii) thirty
(30) days following Tenant's receipt of written notice of such
requirement, and repair any damage to the Premises caused by such
removal (or, at Landlord's option, shall pay to Landlord all of
Landlord's reasonable costs of such removal and repair provided
that Landlord provides Tenant with reasonable evidence that
Landlord incurred such costs). Notwithstanding the thirty (30)
day time period for Tenant's removal specified above, if such
removal cannot be completed without incurring overtime charge,
such time period shall be extended by the period reasonably
required to permit Tenant to complete such removal and repair (if
any repair is required).
12.3 Removal of Personal Property. All articles of personal
property owned by Tenant or installed by Tenant at its expense in
the Premises (including business and trade fixtures, furniture
and movable partitions) shall be, and remain, the property of
Tenant, and shall be removed by Tenant from the Premises, at
Tenant's sole cost and expense, on or before the expiration or
sooner termination of this Lease. Tenant shall repair any damage
caused by such removal.
12.4 Tenant's Failure to Remove. If Tenant fails to remove by
the expiration or sooner termination of this Lease all of its
personal property, or if Tenant fails to remove any items of
Tenant Improvements or Tenant Changes identified by Landlord for
removal pursuant to, and within the time required by, Section
12.2 above, Landlord may, (without liability to Tenant for loss
thereof), at Tenant's sole cost and in addition to Landlord's
other rights and remedies under this Lease, at law or in equity:
(a) remove and store such items in accordance with applicable
law; and/or (b) upon ten (1 0) days' prior notice to Tenant, sell
all or any such items at private or public sale for such price as
Landlord may obtain as permitted under applicable law. Landlord
shall apply the proceeds of any such sale to any amounts due to
Landlord under this Lease from Tenant (including Landlord's
attorneys' fees and other costs incurred in the removal, storage
and/or sale of such items), with any remainder to be paid to
Tenant.
13. Liens. Tenant shall not permit any mechanic's,
materialmen's or other liens to be filed against all or any part
of the Premises, nor against Tenant's leasehold interest in the
Premises, by reason of or in connection with any repairs,
alterations, improvements or other work contracted for or
undertaken by Tenant or any other act or omission of Tenant or
Tenant's agents, employees, contractors, licensees or invitees.
Tenant shall, at Landlord's request, provide Landlord with
enforceable, conditional and final lien releases (and other
reasonable evidence reasonably requested by Landlord to
demonstrate protection from liens) from all persons furnishing
labor and/or materials with respect to the Premises. Landlord
shall have the right at all reasonable times to post on the
Premises and record any notices of non-responsibility which it
deems necessary for protection from such liens. If any such
liens are filed, Tenant shall, at its sole cost, immediately
cause such lien to be released of record or bonded so that it no
longer affects title to the Premises. If Tenant fails to cause
such lien to be so released or bonded within the earlier to occur
of (i) five (5) days prior to the date the lien may be foreclosed
upon or (ii) twenty (20) days after Tenant has actual notice of
the filing thereof, Landlord may, without waiving its rights and
remedies based on such breach, and without releasing Tenant from
any of its obligations, cause such lien to be released by any
means it shall deem proper, including payment in satisfaction of
the claim giving rise to such lien. If Landlord acquires
knowledge that any such lien has been filed against the Premises,
Landlord will promptly give Tenant written notice thereof.
Tenant shall pay to Landlord within five (5) days after receipt
of invoice from Landlord, any sum paid by Landlord to remove such
liens, together with interest at the Interest Rate from the date
of such payment by Landlord.
14. Assignment and Subletting.
14.1 Restriction on Transfer. Tenant will not assign or encumber
this Lease in whole or in part, nor sublet all or any part of the
Premises, without the prior written consent of Landlord, which
consent Landlord will not unreasonably withhold or delay, except
as provided in this Section 14. The consent by Landlord to any
assignment, encumbrance or subletting shall not constitute a
waiver of the necessity for such consent to any subsequent
assignment or subletting. This prohibition against assigning or
subletting shall be construed to include a prohibition against
any assignment or subletting by operation of law. If this Lease
is assigned by Tenant, or if the Premises or any part thereof are
sublet or occupied by any person or entity other than Tenant,
Landlord may collect rent from the assignee, and apply the net
amount collected to the rent herein reserved, but no such
assignment, subletting, occupancy or collection shall be deemed a
waiver on the part of Landlord, or the acceptance of the
assignee, subtenant or occupant as Tenant, or a release of Tenant
from the further performance by Tenant of covenants on the part
of Tenant herein contained unless expressly made in writing by
Landlord. Irrespective of any assignment or sublease, Tenant
shall remain fully liable under this Lease and shall not be
released from performing any of the terms, covenants and
conditions of this Lease. Without limiting in any way Landlord's
right to withhold its consent on any reasonable grounds, it is
agreed that Landlord will not be acting unreasonably in refusing
to consent to an assignment or sublease if, in Landlord's
opinion, (i) the net worth or financial capabilities of such
assignee or subtenant is less than that of Tenant at the date
hereof, (ii) the proposed assignee does not have the financial
capability to fulfill the obligations imposed by the assignment,
(iii) the proposed assignment or sublease involves a change of
use of the Premises from that specified herein, or (iv) the
proposed assignee is not, in Landlord's reasonable opinion, of
reputable or good character. Any proposed assignee or subtenant
which Landlord does not disapprove shall be deemed a "Permitted
Business." If Tenant assigns this Lease or sublets the Premises
to a third party who is not in any way affiliated or connected
with Tenant by way of a merger, reorganization, consolidation or
otherwise, fifty percent (50%) of any rent, additional rent or
other compensation paid to Tenant in addition to the Rent payable
to Landlord as set forth in this Lease shall be paid by Tenant to
Landlord as additional rent. In calculating excess rent or other
consideration which may be payable to Landlord under this
Section, Tenant will be entitled to deduct commercially
reasonable third party brokerage commissions and attorneys' fees
and other amounts reasonably and actually expended by Tenant in
connection with such assignment or subletting if acceptable
written evidence of such expenditures is provided to Landlord.
If Tenant is a corporation, or is an unincorporated association
or partnership, the transfer, assignment or hypothecation of any
stock or interest in such corporation, association or partnership
in the aggregate in excess of forty-nine percent (49%) shall be
deemed an assignment within the meaning and provisions of this
Section 14.1. Notwithstanding any provision to the contrary in
this Lease, Tenant may, without Landlord's prior written consent
and without any participation by Landlord in assignment and
subletting proceeds, sublet the Premises or assign this Lease to:
(i) a subsidiary, affiliate, division or corporation controlled
or under common control with Tenant-, (ii) a successor
corporation related to Tenant by merger, consolidation,
nonbankruptcy reorganization, or government action; or (iii) a
purchaser of substantially all of Tenant's assets (collectively,
"Permitted Assignees"), provided that, within ten (10) days
following the effective date of such transaction, Tenant gives
Landlord written notice of the transaction and sufficient
information to evidence that the transaction satisfies the
foregoing requirements, together with the Permitted Assignee's
assumption of Tenant's obligations hereunder in the case of an
assignment. For the purpose of this Lease, sale or transfer of
Tenant's capital stock through any public exchange shall not be
deemed an assignment, subletting, or any other transfer of the
Lease or the Premises. Landlord's consent to any proposed
assignment or subletting shall not be unreasonably withheld and,
if not given or withheld within fifteen (1 5) days following
Landlord's receipt of the Transfer Notice, shall be deemed given,
provided that the Transfer Notice informs Landlord that the
failure to respond within fifteen (15) days will be deemed
Landlord's consent.
14.2 Transfer Notice. If Tenant desires to effect an assignment,
encumbrance or subletting (a "Transfer"), then at least thirty
(30) days prior to the date when Tenant desires the Transfer to
be effective (the "Transfer Date"), Tenant agrees to give
Landlord a notice (the "Transfer Notice"), stating the name,
address and business of the proposed assignee, sublessee or other
transferee (sometimes referred to hereinafter as "Transferee"),
reasonable information (including references) concerning the
character, ownership, and financial condition of the proposed
Transferee, the Transfer Date, any ownership or commercial
relationship between Tenant and the proposed Transferee, and the
consideration and all other material terms and conditions of the
proposed Transfer, all in such detail as Landlord may reasonably
require.
14.3 Landlord's Options. Within fifteen (15) days of Landlord's
receipt of any Transfer Notice, and any additional information
requested by Landlord concerning the proposed Transferee's
financial responsibility, Landlord will notify Tenant of its
election to do one of the following: (i) consent to the proposed
Transfer; or (ii) refuse such consent, which refusal shall be on
reasonable grounds.
14.4 Additional Conditions. Within ten (10) days following any
Transfer, Tenant shall deliver to Landlord of a true copy of the
fully executed instrument of assignment, sublease, transfer or
hypothecation, in form and substance reasonably satisfactory to
Landlord. No Transfer will release Tenant of Tenant's
obligations under this Lease or alter the primary liability of
Tenant to pay the Rent and to perform all other obligations to be
performed by Tenant hereunder. Consent by Landlord to one
Transfer will not be deemed consent to any subsequent Transfer.
In the event of default by any Transferee of Tenant or any
successor of Tenant in the performance of any of the terms
hereof, Landlord may proceed directly against Tenant without the
necessity of exhausting remedies against such Transferee or
successor. If Tenant effects a Transfer or requests the consent
of Landlord to any Transfer (whether or not such Transfer is
consummated), then, upon demand, and as a condition precedent to
Landlord's consideration of the proposed assignment or sublease,
Tenant agrees to pay Landlord a non-refundable administrative fee
of Five Hundred Dollars ($500.00), plus Landlord's reasonable
attorneys' fees and costs incurred by Landlord in reviewing such
proposed assignment or sublease.
15. Entry by Landlord. Landlord and its employees and agents
shall at all reasonable times have the right to enter the
Premises to inspect the same, to exhibit the Premises to
prospective lenders or purchasers (or during the last year of the
Term, to prospective tenants), to post notices of non-
responsibility, and/or to alter, improve or repair the Premises
as contemplated by Section 11.2 in the event Tenant fails to
perform its obligations under Section 11.1, all without being
deemed guilty of or liable for any breach of Landlord's covenant
of quiet enjoyment or any eviction of Tenant, and without
abatement of rent. In exercising such entry rights, Landlord
shall endeavor to minimize, as reasonably practicable, the
interference with Tenant's business, and shall provide Tenant
with reasonable advance written notice of such entry (except in
emergency situations). Any entry to the Premises obtained by
Landlord by any of said means or otherwise shall not under any
circumstances be construed or deemed to be a forcible or unlawful
entry into, or a detainer of, the Premises, or an eviction of
Tenant from the Premises or any portion thereof, or grounds for
any abatement or reduction of Rent and Landlord shall not have
any liability to Tenant for any damages or losses on account of
any such entry by Landlord except, subject to the provisions of
Sections 21.1 and 23, to the extent of Landlord's negligence or
willful misconduct.
16. Utilities and Services. Tenant shall be solely responsible
for and shall promptly pay all charges for heat, air
conditioning, water, gas, electricity or any other utility used,
consumed or provided in, furnished to or attributable to the
Premises directly to the supplying utility companies. Tenant
shall reimburse Landlord within ten (10) days of billing for
fixture charges and/or water tariffs, if applicable, which are
charged to Landlord by local utility companies. Landlord will
notify Tenant of this charge as soon as it becomes known. This
charge will increase or decrease with current charges being
levied against Landlord or the Premises by the local utility
company, and will be due as additional rent. In no event shall
Rent abate or shall Landlord be liable for any interruption or
failure in the supply of any such utility services to Tenant.
17. Indemnification and Exculpation.
17.1 Tenant's Assumption of Risk and Waiver. Except to the
extent such matter is attributable to the breach of this Lease or
the negligence or willful misconduct of Landlord or Landlord's
Parties (but subject to the waivers and releases in Section 21),
Landlord shall not be liable to Tenant, Tenant's employees,
agents or invitees for: (i) any damage to property of Tenant, or
of others, located in, on or about the Premises, (ii) the loss of
or damage to any property of Tenant or of others by theft or
otherwise, (iii) any injury or damage to persons or property
resulting from fire, explosion, falling plaster, steam, gas,
electricity, water, rain or leaks from any part of the Premises
or from the pipes, appliance of plumbing works or from the roof,
street or subsurface or from any other places or by dampness or
by any other cause of whatsoever nature, or (iv) any such damage
caused by other persons in the Premises, occupants of adjacent
property, or the public, or caused by operations in construction
of any private, public or quasi-public work. Landlord shall in
no event be liable for any consequential damages or loss of
business or profits and Tenant hereby waives any and all claims
for any such damages. All property of Tenant kept or stored on
the Premises shall be so kept or stored at the sole risk of
Tenant and Tenant shall hold Landlord harmless from any claims
arising out of damage to the same, including subrogation claims
by Tenant's insurance carriers, unless such damage shall be
caused by the breach of this Lease or the negligence or willful
misconduct of Landlord or Landlord's Parties and such damage is
not covered by the insurance required to be maintained by Tenant
under this Lease. Landlord or its agents shall not be liable for
interference with the light or other intangible rights.
17.2 Tenant's Indemnification of Landlord. Except to the extent
such matter is caused by the breach of this Lease or the
negligence or misconduct of Landlord or Landlord's Parties (but
subject to the waivers and releases in Section 21), Tenant shall
be liable for, and shall indemnify, defend, protect and hold
Landlord and Landlord's partners, officers, directors, employees,
agents, successors and assigns (collectively, "Landlord
Indemnified Parties") harmless from and against, any and all
claims, damages, judgments, suits, causes of action, losses,
liabilities and expenses, including attorneys' fees and court
costs (collectively, "Indemnified Claims"), arising or resulting
from (a) any act or omission of Tenant or any of Tenant's
Parties; (b) the use of the Premises and conduct of Tenant's
business by Tenant or any Tenant Parties, or any other activity,
work or thing done, permitted or suffered by Tenant or any Tenant
Parties, in or about the Premises; and/or (c) any default by
Tenant of any obligations on Tenant's part to be performed under
the terms of this Lease. In case any action or proceeding is
brought against Landlord or any Landlord Indemnified Parties by
reason of any such Indemnified Claims, Tenant, upon notice from
Landlord, shall defend the same at Tenant's expense by counsel
reasonably approved in writing by Landlord, which approval shall
not be unreasonably withheld.
17.3 Survival; No Release of Insurers. Tenant's indemnification
obligation under Section 17.2, shall survive the expiration or
earlier termination of this Lease. Tenant's covenants,
agreements and indemnification in Sections 17.1 and 17.2 above,
are not intended to and shall not relieve any insurance carrier
of its obligations under policies required to be carried by
Tenant, pursuant to the provisions of this Lease.
18. Damage or Destruction.
18.1 Obligation to Restore. Except as set forth below, in case
of damage to or destruction of the Premises, whether or not by a
risk required to be covered by insurance as set forth in Section
20 of this Lease, this Lease shall not terminate and Tenant shall
promptly restore, rebuild, replace or repair (hereinafter
referred to as "Restore" or "Restoration") the Premises to
substantially the same condition as existed immediately prior to
such damage or destruction. Such Restoration shall be commenced
promptly but in no event later than ninety (90) days after the
casualty and shall thereafter be prosecuted with due diligence.
Notwithstanding the foregoing or any provision to the contrary in
this Lease, the following shall apply to and modify Tenant's
obligations to Restore the Premises and/or any trade fixtures or
equipment thereon or therein owned by Tenant, provided that
Tenant, at Tenant's option may exercise any right to terminate
pursuant to the last grammatical paragraph of Section 18.1:
(a) If Tenant has carried insurance in the amounts, types
and with insurance companies required by this Lease, and the
insurance company(ies) issuing such policy(ies) fail(s)
(through no fault of Tenant) to make the appropriate
insurance proceeds available within ninety (90) days
following a casualty to which such insurance applies (or if
Landlord has elected to maintain the All Risks insurance for
the Premises pursuant to Section 20.4 and either fails to so
maintain such insurance or if the insurance company fails,
through no fault of Tenant, to make the appropriate insurance
proceeds available within ninety (90) days following a
casualty to which such insurance applies), and there is no
reasonable expectation that such proceeds will be made
available in a timely manner, then Tenant shall have no
obligation to Restore and Tenant shall have the right to
terminate this Lease (i) if Landlord (or Landlord's lender)
does not notify Tenant, within sixty (60) days following the
date Tenant gives Landlord (and Landlord's lender) written
notice of such failure on the part of the insurance
company(ies) (the "Insurance Failure Notice"), that Landlord
(or Landlord's lender) will Restore the Premises within three
hundred (300) days following the Insurance Failure Notice or
(ii) if Landlord (or Landlord's lender) undertakes
Restoration but fails to complete such Restoration within
three hundred (300) days following the Insurance Failure
Notice. If Landlord (or Landlord's lender) does so Restore
the Premises and Tenant does not terminate this Lease, then
Tenant will Restore its trade fixtures and equipment.
Notwithstanding any provision to the contrary in this Lease,
if Landlord has elected to carry the All-Risk insurance under
Section 20.4 and the deductible exceeds the deductible Tenant
is permitted to maintain hereunder, Tenant shall not be
required to pay all or any portion of such excess deductible.
(b) If casualty damage Restored by Tenant is uninsured (any
"deductible" amount applicable to any insurance policy
covering the casualty in question shall be deemed to mean
that the casualty damage is uninsured to the extent of the
deductible) to the extent of ten percent (1 0%) or more of
the full replacement cost of the building or buildings in
question, and Tenant Restores (or intends to Restore) such
casualty damage, then Tenant shall have the onetime option,
upon written notice to Landlord given within one hundred
twenty (120) days following such casualty event, to elect to
extend the then-current Term for an additional ten (10) year
period upon all of the terms and conditions of this Lease
(including the right to exercise any options to extend then
remaining and to occupy the Premises pursuant to any
previously exercised options), provided that the Monthly Rent
for any such extended Term shall be equal to the Monthly Rent
in effect during the year immediately preceding such extended
Term, increased by an amount equal to three percent (3%) of
such previous year's Monthly Rent, and Monthly Rent for each
subsequent year of said extended Term shall be increased by
an amount equal to three percent (3%) of the preceding year's
Monthly Rent. There shall be no adjustment to fair market
rent in connection with any such extended Term.
Notwithstanding the foregoing, however, in the case of damage to
or destruction of the Premises during the last eighteen (18)
months of the Term that will render the Premises, in Tenant's
reasonable opinion, inaccessible or unusable for purposes of
conducting Tenant's business for more than ninety (90) days,
Tenant may elect to terminate this Lease by giving Landlord
written notice of such election within thirty (30) days following
the casualty, in which event Tenant shall have no obligation to
Restore the Premises; provided, however, Tenant shall deliver any
insurance proceeds to Landlord in accordance with Section 18.5
below.
18 2 Reconstruction and Repair Requirements. Tenant shall
obtain Landlord's prior approval of all plans for
Restoration work performed by Tenant, which approval shall not be
unreasonably withheld or delayed.
18.3 No Rent Abatement During Reconstruction. There shall be
no Rent abatement during Restoration of the
Premises or during that period after any casualty and prior to
commencement of Restoration.
Notwithstanding the foregoing, in the event Landlord elects to
maintain rental loss insurance pursuant to Section 20.4, then the
following shall apply: In the event that as a result of any
casualty damage to the Premises, Tenant is prevented from using,
and does not use, the Premises or does not use some portion
thereof, then the Rent shall be abated or reduced, as the case
may be, during the period that Tenant continues to be so
prevented from using and does not use the Premises or does not
use some portion thereof, in the proportion that the rentable
square feet of the portion of the Premises that Tenant is
prevented from using, and does not use, bears to the total
rentable square feet of the Premises; 'provided, however, Tenant
shall only be entitled to such abatement so long as Tenant is
complying with its Restoration obligations under Section 1 B. 1
and in no event may such abatement continue beyond the later to
occur of (i) twelve (12) months following the casualty or (ii)
the expiration date of coverage under Landlord's rental loss
insurance policy. Notwithstanding the foregoing to the contrary,
if the damage is due to the willful or intentional misconduct of
Tenant or any Tenant Parties, there shall be no abatement of Rent
unless such abatement (i) is covered by the rental loss insurance
maintained by Landlord or (ii) would have been covered by the
rental insurance loss insurance required to be maintained under
Section 20.4 in the event Landlord has failed to maintain such
insurance.
18.4 Adjustment of Loss and Disbursement of Insurance Proceeds
upon Restoration. Except for Restoration that is reasonably
expected to cost less than Fifty Thousand Dollars ($50,000), any
adjustment of the loss with the insurance company(ies) by Tenant
must be made with Landlord's consent, which will not be
unreasonably withheld or delayed. If Landlord elects to maintain
All Risk insurance pursuant to Section 20.4, then Landlord shall
adjust any loss covered thereby subject to Tenant's consent,
which will not be unreasonably withheld or delayed. All proceeds
of the insurance policies maintained pursuant to Section 20.1 (a)
and/or Section 20.4 ("Proceeds") shall be deposited with a
depository acceptable to Landlord and Tenant (the "Depository").
If the Proceeds are insufficient to cover the anticipated cost of
Restoration, Tenant shall deposit with the Depository prior to
the commencement of Restoration funds in the amount of such
deficiency. The Depository shall disburse the Proceeds and
Tenant's funds, if applicable, during the course of Restoration
in accordance with customary construction disbursements,
including a ten percent (10%) retention. If, after the
Restoration has been completed in accordance with the terms of
this Lease, there are remaining funds held by the Depository,
then such funds (after first deducting from such funds the fees
and expenses of the Depository) shall be delivered to Tenant. If
there are not sufficient funds remaining to pay for the
Depository's fees and expenses, Tenant shall be responsible for
the payment of same.
18.5 Disbursement of Insurance Proceeds upon Termination. Upon
any termination of this Lease under the provisions of this
Article 18, all proceeds from insurance policies maintained under
Section 20 shall be disbursed and paid to Landlord, except to the
extent such proceeds are paid by one or more insurers with
respect to Tenant's furniture, equipment trade fixtures and other
personal property and those items of Tenant Changes and Tenant
Improvements that must be removed from the Premises at the
expiration or earlier termination of this Lease pursuant to
Section 12.2.
18.6 Waiver of Termination. The agreements contained in this
Article 10 provide a material part of the consideration for this
Lease and in bargaining for and obtaining its rights under this
Article 18, Tenant waives any right to terminate this Lease under
Section 1932 and/or 1933 of the Civil Code of California, or any
similar statute or law now or hereafter in force.
19. Eminent Domain.
19.1 Total or Partial Taking. In case all of the Premises, or
such part thereof as shall materially and substantially interfere
with Tenant's ability to conduct its business upon the Premises,
shall be taken for any public or quasi-public purpose by any
lawful power or authority by exercise of the right of
appropriation, condemnation or eminent domain, or sold to prevent
such taking, Tenant shall have the right to terminate this Lease
effective as of the date possession is required to be surrendered
to said authority. Tenant shall not assert any claim against
Landlord or the taking authority for any compensation because of
such taking, and Landlord shall be entitled to receive the entire
amount of any award without deduction for any estate or interest
of Tenant; provided, however, in the event of such a taking,
Tenant shall be entitled to such portion of the award as shall be
attributable to the loss of the unamortized cost of the
improvements to the Premises made and paid for by Tenant pursuant
to Exhibit "C" (such amortization being the same as that used by
Tenant for federal income tax purposes), relocation costs,
goodwill and for damage to, or the cost of removal of, Tenant's
personal property. In the event the amount of property or the
type of estate taken shall not materially and substantially
interfere with the ability of Tenant to conduct its business upon
the Premises, Landlord shall be entitled to the entire amount of
the award without deduction for any estate or interest of Tenant,
Landlord shall restore the Premises to substantially their same
condition prior to such partial taking to the extent of any award
proceeds received by Landlord, and a fair and equitable abatement
shall be made to Tenant for the Annual Rent corresponding to the
time during which, an(i to the part of the Premises of which,
Tenant shall be so deprived on account of such taking and
restoration.
19.2 Temporary Taking. In the event of taking of the Premises or
any part thereof for temporary use, (i) this Lease shall be and
remain unaffected thereby and Rent shall not abate, and (ii)
Tenant shall be entitled to receive for itself such portion or
portions of any award made for such use with respect to the
period of the taking which is within the Lease Term. For
purposes of this Section 19.2, a temporary taking shall be
defined as a taking for a period of one (1) year or less.
19.3 Waiver of Termination. Tenant and Landlord waive any right
to terminate this Lease under Section 1265.130 of the California
Code of Civil Procedure, or any similar statute or law now or
hereafter in force.
20. Tenant's Insurance.
20.1 Types of Insurance. On or before the earlier of the Early
Occupancy Date (for Parcel 1), the Actual Commencement Date for
Parking Lot (for Parcel 2) or the date Tenant commences or causes
to be commenced any work of any type in or on any portion of the
Premises, and continuing during the entire Term, Tenant shall
obtain and keep in full force and effect respecting Parcel 1 or
Parcel 2 or both, as applicable, the following insurance:
(a) All Risk insurance, including fire and extended coverage,
sprinkler leakage, vandalism, malicious mischief, flood (if
the Premises are in a flood zone) and earthquake coverage
upon property of every description and kind located on the
Premises, without limitation, furniture, equipment and any
other personal property, any Tenant Changes, the Buildings,
the Tenant Improvements, and the Parking Lot Improvements in
an amount not less than the full replacement cost thereof.
In the event that there shall be a dispute as to the amount
which comprises full replacement cost, the decision of
Landlord or the mortgagees of Landlord shall be presumptive.
No co-insurance provision shall apply under such insurance
policy or, in the alternative, the insurance policy shall
contain an agreed amount endorsement. All references to
earthquake coverage herein shall be deemed to include
earthquake sprinkler leakage coverage.
Notwithstanding the foregoing, if earthquake coverage is not
available from an insurer satisfying the requirements of
Section 20.2 below with a deductible satisfying the
requirements of Section 20.2 below, or if such earthquake
coverage is available from an insurer satisfying the
requirements of Section 20.2 but the premium for such
insurance is in excess of Thirty Thousand Dollars
($30,000.00) per year (the "Cap"), then Tenant, following at
least thirty (30) days' prior written notice thereof to
Landlord, shall have no obligation to maintain earthquake
insurance so long as such insurance is not available for
less than or equal to the Cap; provided, however, if
Landlord gives Tenant written notice that Landlord will
reimburse Tenant one-half (1/2) of the amount of the
earthquake insurance premium in excess of the Cap and if the
insurance policy will satisfy the requirements of Section
20.2, Tenant shall be obligated to obtain such earthquake
insurance until Landlord gives Tenant written notice of its
rescission of such election. If Landlord has agreed to
reimburse Tenant one-half (1/2) of the amount of such
excess, Landlord shall do so within thirty (30) days
following receipt of an invoice therefor, and if Landlord
fails to so reimburse Tenant, Tenant may deduct one-half (%)
of such excess against Rent. The Cap shall be subject to
annual increases in the same proportion as increases, if
any, in the Consumer Price Index-Urban Wage Earners and
Clerical Workers (Los Angeles-Anaheim-Riverside) All-items
Base 1982-84=1 00, or successor index, using the month in
which this Lease is executed as the base month.
(b) Commercial general liability insurance coverage, including
personal injury, bodily injury (including wrongful death),
property damage, operations hazard, owners protective
coverage, contractual liability (including Tenant's
indemnification obligations under this Lease, including
Section 17 hereof, but only to the extent such
indemnification obligations are covered under a commercial
general liability policy), liquor liability (if Tenant serves
or stores alcohol on the Premises), products and completed
operations liability, and owned/non-owned auto liability,
with a general aggregate of not less than Five Million
Dollars ($5,000,000). The general aggregate amount of such
commercial general liability insurance shall be increased
every five (5) years during the Term of this Lease to an
amount reasonably required by Landlord but in no event
greater than that commonly required of similar tenants of
similar buildings in the Rancho Bernardo area of San Diego
County.
(c) Workers compensation and employees liability insurance, in
statutory amounts and limits.
(d) Loss of income, extra expense and business interruption
insurance covering a minimum of twelve (12) months of
Tenant's Rent and such additional amounts as will reimburse
Tenant for direct or indirect loss of earnings attributable
to all perils commonly insured against by prudent tenants or
attributable to prevention of access to the Premises or
Tenant's parking areas as a result of such perils.
(e) Any other form or forms of insurance as Tenant or Landlord or
the mortgagees of Landlord may reasonably require from time
to time, in form, amounts and for insurance risks against
which a prudent tenant would protect itself, but only to the
extent such risks and amounts are available in the insurance
market at commercially reasonable costs.
20.2 Requirements. Each policy required to be obtained by Tenant
hereunder shall: (a) be issued by insurers authorized to do
business in the state in which the Premises is located and rated
not less than financial class VII, and not less than policyholder
rating A- in the most recent version of Best's Key Rating Guide
(provided that, in any event, the same insurance company shall
provide the coverages described in Sections 20.1 (a) and 20.1(d)
above); (b) be in then-standard form; (c) name Tenant as named
insured thereunder and shall name Landlord and, at Landlord's
request, Landlord's mortgagees and ground lessors of which Tenant
has been informed in writing, as additional insureds (and with
respect to the insurance described in Sections 20.1 (a) and (d)
above, as loss-payees thereunder), all as their respective
interests may appear (however, as to the insurance described in
Section 20.1 (d) above, the loss-payees' interest in the
insurance proceeds will be limited only to those amounts
allocable to Tenant's rental obligations hereunder following a
casualty at the Premises and shall be further limited to as and
when such rental obligations become due and payable); (d) shall
not have a deductible amount exceeding Ten Thousand Dollars
($10,000.00) (or such higher amount as Landlord may permit in its
reasonable discretion, but in no event may the All-Risk insurance
deductible be greater than five percent (5%) of the replacement
cost), except that with respect to earthquake coverage, the
deductible amount shall not exceed ten percent (10%) of the total
insured value (however, the deductible shall be, at Landlord's
option, five percent (5%) during all times Tenant has a net worth
of less than Twenty-Five Million Dollars ($25,000,000), as such
net worth amount is subject to increase in the same manner as the
Cap pursuant to Section 20.1 (a) above); (e) specifically provide
that the insurance afforded by such policy for the benefit of
Landlord and Landlord's mortgagees and ground lessors shall be
primary, and any insurance carried by Landlord or Landlord's
mortgagees and ground lessors shall be excess and non-
contributing; (o except for worker's compensation insurance,
contain an endorsement that the insurer (only with respect to the
policy required by Section 20.1 (a) above) waives its right to
subrogation as described in Section 22 below; and (g) contain an
undertaking by the insurer to notify Landlord (and the mortgagees
and ground lessors of Landlord who are named as additional
insureds) in writing not less than thirty (30) days prior to any
change, reduction in coverage, cancellation or other termination
thereof. Tenant agrees to deliver to Landlord, as soon as
practicable after the placing of the required insurance, but in
no event later than ten (1 0) days after the date Tenant takes
possession of all or any part of the Premises, certificates from
the insurance company evidencing the existence of such insurance
and Tenant's compliance with the foregoing provisions of this
Section 20). Tenant shall cause replacement certificates to be
delivered to Landlord not less than five (5) days prior to the
expiration of any such policy or policies. If any such initial
or replacement certificates are not furnished within the time(s)
specified herein, Tenant shall be deemed to be in material
default under this Lease without the benefit of any additional
notice or cure period provided in Section 22.1 below, and
Landlord shall have the right, but not the obligation, to procure
such policies and certificates at Tenant's expense.
20.3 Effect on Insurance. Tenant shall not do or permit to be
done anything which will violate or invalidate any insurance
policy maintained by Tenant hereunder. If Tenant's occupancy or
conduct of its business in or on the Premises results in any
increase in premiums for any insurance carried by Landlord,
Tenant shall pay such increase as additional rent within ten (1
0) days after being billed therefor by Landlord. If any
insurance coverage carried by Landlord shall be canceled or
reduced (or cancellation or reduction thereof shall be
threatened) by reason of the use or occupancy of the Premises by
Tenant or by anyone permitted by Tenant to be upon the Premises,
and if Tenant fails to remedy such condition within five (5) days
after notice thereof, Tenant shall be deemed to be in default
under this Lease, without the benefit of any additional notice or
cure period specified in Section 22.1 below, and Landlord shall
have all remedies provided in this Lease, at law or in equity,
including, without limitation, the right (but not the obligation)
to enter upon the Premises and attempt to remedy such condition
at Tenant's cost.
20.4 Landlord's Option to Insure. Landlord shall have the option
from time to time to maintain the All Risk insurance referred to
in Section 20.1(a) above covering the property described therein
(other than Tenant's personal property, furniture and equipment,
which Tenant shall continue to insure) and/or rental loss
insurance covering Tenant's rental obligations hereunder for a
period of at least twelve (12) months (or such longer period of
time as Tenant may request) by giving Tenant written notice
thereof. If Landlord elects to maintain such insurance, Tenant
shall have no obligation to maintain such insurance on the
property or obligations covered thereby until Landlord elects not
to maintain such insurance by giving Tenant at least sixty (60)
days' prior written notice thereof. Tenant shall reimburse
Landlord, as additional rent, the cost of such insurance within
thirty (30) days following receipt of an invoice therefor;
however, Tenant's obligation to reimburse the cost of earthquake
coverage in excess of the Cap shall be limited to one-half of
such excess.
21. Waiver of Subrogation.
21.1 Waiver. Notwithstanding any provision to the contrary
herein, the parties release each other and their respective
agents, employees, successors, assignees and subtenants from any
claims or damages or losses which are caused by or result from
(a) property damage insured against under any property insurance
policy carried by Tenant pursuant to the provisions of this Lease
and enforceable at the time of such damage or loss or which is
actually carried by either party, or (b) property damage which
would have been covered under any insurance required to be
obtained and maintained by Tenant under Section 20 of this Lease
(or which Landlord has elected to carry under Section 20.4 above)
had such insurance been obtained and maintained as required
therein. The foregoing waiver shall be in addition to, and not a
limitation of, any other waivers or releases contained in this
Lease.
21.2 Waiver of Insurers. Each party shall cause any property
insurance policy obtained by it with respect to the Premises to
provide that the insurer waives all rights of recovery by way of
subrogation in connection with any claims, losses and damages
covered by such policy. If Tenant fails to maintain property
insurance required hereunder (or if Landlord elects to carry the
All-Risk insurance pursuant to Section 20.4 and fails to so
maintain such insurance), such insurance shall be deemed to be
self-insured with a deemed full waiver of subrogation as set
forth in the immediately preceding sentence.
22. Tenant's Default and Landlord's Remedies.
22.1 Tenant's Default, The occurrence of any one or more of
the following events shall constitute an "Event of
Default" under this Lease by Tenant:
(a) the vacation or abandonment of the Premises by Tenant.
"Abandonment" is herein defined to mean any absence by Tenant
from the Premises for five (5) Business Days or longer while
in default of any other provision of this Lease. "Vacation"
shall mean vacating the Premises without providing a
reasonable level of security to minimize the potential for
vandalism, or where the coverage of the property insurance
under Section 20.1 (a) is jeopardized as a result thereof;
(b) the failure by Tenant to make any payment of Rent or any
other payment required to be made by Tenant hereunder, within
three (3) Business Days after Tenant's receipt of notice from
Landlord that such payment is past due;
(c) the failure by Tenant to observe or perform any of the
express or implied covenants or provisions of this Lease to
be observed or performed by Tenant, other than as specified
in Sections 22.1 (a) or . (b) above, where such failure shall
continue for a period of thirty (30) days after written
notice thereof from Landlord to Tenant; provided, however,
that, if the nature of Tenant's default is such that more
than thirty (30) days are reasonably required for its cure,
then Tenant shall not be deemed to be in default if Tenant
shall commence such cure within said thirty (30) day period
and thereafter diligently prosecute such cure to completion;
or
(d) (i) the making by Tenant of any general assignment for
the benefit of creditors, (ii) the filing by or against
Tenant of a petition to have Tenant adjudged a bankrupt or a
petition for reorganization or arrangement under any law
relating to bankruptcy (unless, in the case of a petition
filed against the Tenant, the same is dismissed within sixty
(60) days), (iii) the appointment of a trustee or receiver to
take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this
Lease, where possession is not restored to Tenant within
sixty (60) days, or (iv) the attachment, execution or other
judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease
where such seizure is not discharged within sixty (60) days.
Any notice under this Section 22.1 shall be in lieu of, and not
in addition to, any notice required under California Code of
Civil Procedure, Section 1161.
22.2 Landlord's Remedies; Termination. In the event of any such
default by Tenant, in addition to any other remedies available to
Landlord under this Lease, at law or in equity, Landlord shall
have the immediate option to terminate this Lease and all rights
of Tenant hereunder. In the event that Landlord shall elect to
so terminate this Lease, then Landlord may recover from Tenant:
(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 the award of the amount by which the
unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental
loss that Tenant 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 Tenant
proves could be reasonably avoided; plus
(d) any other amount necessary to compensate Landlord for all the
detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which, in the ordinary
course of things, would be likely to result therefrom
including, but not limited to: unamortized Tenant Improvement
costs; attorneys' fees; unamortized brokers' commissions; the
costs of refurbishment, alterations, renovation and repair of
the Premises; and removal (including the repair of any damage
caused by such removal) and storage (or disposal) of Tenant's
personal property, equipment, fixtures, Tenant Changes,
Tenant Improvements and any other items which Tenant is
required under this Lease to remove but does not remove,
As used in Sections 22.2(a) and 22.2(b) above, the "worth at the
time of award" is computed by allowing interest at the Interest
Rate set forth in Section 1.13 of the Summary. As used in
Section 22.2(c) above, the "worth at the time of award" is
computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus
one percent (1%).
22.3 Landlord's Remedies; Re-Entry Rights. In the event of any
such default by Tenant, in addition to any other remedies
available to Landlord under this Lease, at law or in equity,
Landlord shall also have the right, with or without terminating
this Lease, to re-enter the Premises and remove all persons and
property from the Premises; such property may be removed, stored
and/or disposed of pursuant to Section 12.4 of this Lease or any
other procedures permitted by applicable law. No re-entry or
taking possession of the Premises by Landlord pursuant to this
Section 22.3, and no acceptance of surrender of the Premises or
other action on Landlord's part, shall be construed as an
election to terminate this Lease unless a written notice of such
intention be given to Tenant or unless the termination thereof be
decreed by a court of competent jurisdiction or unless Tenant's
right to possession of the Premises is terminated.
22.4 Landlord's Remedies; Continuation of Lease. In the event of
any such default by Tenant, in addition to any other remedies
available to Landlord under this Lease, at law or in equity,
Landlord shall have the right to continue this Lease in full
force and effect, whether or not Tenant shall have abandoned the
Premises so long as Landlord does not terminate Tenant's right to
possession of the Premises. The foregoing remedy shall also be
available to Landlord pursuant to California Civil Code Section
1951.4 and any successor statute thereof in the event Tenant has
abandoned the Premises. In the event Landlord elects to continue
this Lease in full force and effect pursuant to this Section
22.4, then Landlord shall be entitled to enforce all of its
rights and remedies under this Lease, including the right to
recover rent as it becomes due. Landlord's election not to
terminate this Lease pursuant to this Section 22.4 or pursuant to
any other provision of this Lease, at law or in equity, shall not
preclude Landlord from subsequently electing to terminate this
Lease or pursuing any of its other remedies.
22.5 Landlord's Right to Perform. Except as specifically
provided otherwise in this Lease, all covenants and agreements by
Tenant under this Lease shall be performed by Tenant at Tenant's
sole cost and expense and without any abatement or offset of
rent. If Tenant shall fail to pay any sum of money (other than
Annual Rent) or perform any other act on its part to be paid or
performed hereunder and such failure shall continue for three (3)
Business Days with respect to monetary obligations (or ten (1 0)
days with respect to non-monetary obligations) after Tenant's
receipt of written notice thereof from Landlord, Landlord may,
without waiving or releasing Tenant from any of Tenant's
obligations, make such payment or perform such other act on
behalf of Tenant. All sums so paid by Landlord and all necessary
incidental costs incurred by Landlord in performing such other
acts shall be payable by Tenant to Landlord within five (5) days
after demand therefor as additional rent.
22.6 Interest. If any monthly installment of Annual Rent, or any
other amount payable by Tenant hereunder is not received by
Landlord by the tenth (10th) day following the due date, it shall
bear interest at the Interest Rate set forth in Section 1.14 of
the Summary from the date due until paid. All interest, and any
late charges imposed pursuant to Section 22.7 below, shall be
considered additional rent due from Tenant to Landlord under the
terms of this Lease.
22.7 Late Charges. Tenant acknowledges that, in addition to
interest costs, the late payments by Tenant to Landlord of any
Annual Rent or other sums due under this Lease will cause
Landlord to incur costs not contemplated by this Lease, the exact
amount of such costs being extremely difficult and impractical to
fix. Such other costs include, without limitation, processing,
administrative and accounting charges and late charges that may
be imposed on Landlord by the terms of any mortgage, deed of
trust or related loan documents encumbering the Premises.
Accordingly, if any monthly installment of Annual Rent or any
other amount payable by Tenant hereunder is not received by
Landlord within five (5) days after the due date thereof, Tenant
shall pay to Landlord an additional sum of four percent (4%) of
the overdue amount as a late charge, but in no event more than
the maximum late charge allowed by law. The parties agree that
such late charge represents a fair and reasonable estimate of the
costs that Landlord will incur by reason of any late payment as
hereinabove referred to by Tenant, and the payment of late
charges and interest are distinct and separate in that the
payment of interest is to compensate Landlord for the use of
Landlord's money by Tenant, while the payment of late charges is
to compensate Landlord for Landlord's processing, administrative
and other costs incurred by Landlord as a result of Tenant's
delinquent payments. Acceptance of a late charge or interest
shall not constitute a waiver of Tenant's default with respect to
the overdue amount or prevent Landlord from exercising any of the
other rights and remedies available to Landlord under this Lease
or at law or in equity now or hereafter in effect.
22.8 Rights and Remedies Cumulative. All rights, options and
remedies of Landlord contained in this Section 22 and elsewhere
in this Lease shall be construed and held to be cumulative, and
no one of them shall be exclusive of the other, and Landlord
shall have the right to pursue any one or all of such remedies or
any other remedy or relief which may be provided by law or in
equity, whether or not stated in this Lease. Nothing in this
Section 22 shall be deemed to limit or otherwise affect Tenant's
indemnification of Landlord pursuant to any provision of this
Lease.
23. Landlord's Default. Landlord shall not be in default in the
performance of any obligation required to be performed by
Landlord under this Lease unless Landlord has failed to perform
such obligation within thirty (30) days after the receipt of
written notice from Tenant specifying in detail Landlord's
failure to perform; provided however, that if the nature of
Landlord's obligation is such that more than thirty (30) days are
required for its performance, then Landlord shall not be deemed
in default if it commences such performance within such thirty
(30) day period and thereafter diligently pursues the same to
completion. Upon any such uncured default by Landlord, Tenant
may exercise any of its rights provided in law or at equity;
provided, however: (a) Tenant shall have no right to offset or
abate Rent in the event of any default by Landlord under this
Lease, except to the extent offset rights are specifically
provided to Tenant in this Lease; (b) Tenant's rights and
remedies hereunder shall be limited to the extent (i) Tenant has
expressly waived in this Lease any of such rights or remedies,
and/or (ii) this Lease otherwise expressly limits Tenant's rights
or remedies, including the limitation on Landlord's liability
contained in Section 30 hereof; and (c) Tenant shall not have the
right to terminate this Lease as a result of any such default.
24. Subordination. At the request of Landlord or any mortgagee
of a mortgage or a beneficiary of a deed of trust now or
hereafter encumbering all or any portion of the Premises, or any
lessor of any ground or master lease now or hereafter affecting
all or any portion of the Premises, this Lease shall be subject
and subordinate at all times to such ground or master leases (and
such extensions and modifications thereof, and to the lien of
such mortgages and deeds of trust (as well as to any advances
made thereunder and to all renewals, replacements, modifications
and extensions thereof; provided, however, no subordination of
this Lease shall result in Tenant being disturbed in its
possession of the Premises or in the enjoyment of its rights
under this Lease so long as Tenant is not in default with respect
to its obligations hereunder, and any subordination agreement
which Landlord, any mortgagee or ground lessor requests Tenant to
execute to effect or confirm such subordination shall so provide
and shall further provide that if the holder of any such lease or
lien succeeds to the position of Landlord under the Lease,
whether by foreclosure or termination of the ground or master
lease, such successor-in-interest shall recognize Tenant as its
tenant and shall perform the obligations of Landlord under the
Lease accruing subsequent to the date such successor-in-interest
succeeds to the position of Landlord and shall recognize Tenant's
offset rights under the Work Letter. Notwithstanding the
foregoing, Landlord shall have the right to subordinate or cause
to be subordinated any or all ground or master leases or the lien
of any or all mortgages or deeds of trust to this Lease. In the
event that any ground or master lease terminates for any reason
or any mortgage or deed of trust is foreclosed or a conveyance in
lieu of foreclosure is made for any reason, Tenant shall attorn
to and become the tenant of such successor and such successor-in-
interest shall recognize Tenant as its tenant and shall perform
the obligations of Landlord under the Lease accruing subsequent
to the date such successor-in-interest succeeds to the position
of Landlord. Tenant hereby waives its rights under any current
or future law which gives or purports to give Tenant any right to
terminate or otherwise adversely affect this Lease and the
obligations of Tenant hereunder in the event of any such
foreclosure proceeding or sale. Subject to the foregoing, Tenant
covenants and agrees to execute and deliver to Landlord within
ten (1 0) days after receipt of written demand by Landlord and in
the form reasonably required by Landlord and reasonably
acceptable to Tenant, any additional documents evidencing the
priority or subordination of this Lease with respect to any such
ground or master lease or the lien of any such mortgage or deed
of trust or Tenant's agreement to attorn. Should Tenant fail to
sign and return any such documents within said ten (10) day
period, and should such failure continue for an additional ten
(10) days following written notice thereof to Tenant, Tenant
shall be in default hereunder without the benefit of any
additional notice or cure periods specified in Section 22.1
above. Notwithstanding any provision to the contrary in this
Lease, insurance proceeds shall be used as set forth herein, and
any subordination agreement to be executed by Tenant shall so
provide and shall provide that Tenant's offset rights under the
Work Letter shall be recognized.
25. Estoppel Certificate.
25.1 Tenant's Obligations. Within ten (1 0) Business Days
following Landlord's written request, Tenant shall execute and
deliver to Landlord an estoppel certificate, in a form
substantially similar to the form of Exhibit "F" attached hereto,
certifying: (a) the Respective Commencement Dates of this Lease;
(b) that this Lease is unmodified and in full force and effect
(or, if modified, that this Lease is in full force and effect as
modified, and stating the date and nature of such modifications);
(c) the date to which the Rent and other sums payable under this
Lease have been paid; (d) that there are not, to the best of
Tenant's knowledge, any defaults under this Lease by either
Landlord or Tenant, except as specified in such certificate; and
(e) such other matters as are reasonably requested by Landlord.
Any such estoppel certificate delivered pursuant to this Section
25.1 may be relied upon by any mortgagee, beneficiary, purchaser
or prospective purchaser of any portion of the Premises, as well
as their assignees.
25.2 Tenant's Failure to Deliver. Tenant's failure to deliver
such estoppel certificate within such time, which failure
continues for an additional ten (10) day period following written
notice thereof to Tenant, shall constitute a default hereunder
without the applicability of any additional notice and cure
periods specified in Section 22.1 above and shall be conclusive
upon Tenant that: (a) this Lease is in full force and effect
without modification, except as may be represented by Landlord;
(b) there are no uncured defaults in Landlord's or Tenant's
performance (other than Tenant's failure to deliver the estoppel
certificate); and (c) not more than one (1) month's rental has
been paid in advance. Tenant shall indemnify, protect, defend
(with counsel reasonably approved by Landlord in writing) and
hold Landlord harmless from and against any and all claims,
judgments, suits, causes of action, damages, losses, liabilities
and expenses (including attorneys' fees and court costs)
attributable to any failure by Tenant to timely deliver any such
estoppel certificate to Landlord pursuant to Section 25.1 above.
26. Easements. Landlord reserves to itself the right, from time
to time, to grant such easements, rights and dedications that
Landlord deems necessary or desirable, and to cause the
recordation of parcel maps and restrictions, so long as such
easements, rights, dedications, maps and restrictions do not
interfere with the use and enjoyment of the Premises by Tenant.
Tenant shall sign any of the aforementioned documents promptly
following the request of Landlord.
27. Modification and Cure Rights of Landlord's Mortgagees and
Lessors.
27.1 Modifications. If, in connection with Landlord's obtaining
or entering into any financing or ground lease for any portion of
the Premises, the lender or ground lessor shall request
modifications to this Lease, Tenant shall, within ten (10) days
after request therefor, execute an amendment to this Lease
including such modifications, provided such modifications are
reasonable, do not increase the obligations of Tenant hereunder,
do not decrease Tenant's rights and benefits hereunder, and do
not otherwise adversely affect the leasehold estate created
hereby or Tenant's rights hereunder.
27.2 Cure Rights. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail
to any beneficiary of a deed of trust or mortgagee covering the
Premises or ground lessor of Landlord whose address shall have
been furnished to Tenant in writing, and shall offer such
beneficiary, mortgagee or ground lessor a reasonable opportunity
to cure the default (including with respect to any such
beneficiary or mortgagee, time to obtain possession of the
Premises, subject to this Lease and Tenant's rights hereunder, by
power of sale or judicial foreclosure, if such should prove
necessary to effect a-cure).
28. Quiet Enjoyment. Landlord covenants and agrees with Tenant
that, upon Tenant performing all of the covenants and provisions
on Tenant's part to be observed and performed under this Lease
(including payment of rent hereunder), Tenant shall and may
peaceably and quietly have, hold and enjoy the Premises in
accordance with and subject to the terms and conditions of this
Lease.
29. Transfer of Landlord's Interest. The term "Landlord" as used
in this Lease, so far as covenants or obligations on the part of
the Landlord are concerned, shall be limited to mean and include
only the owner or owners, at the time in question, of the fee
title to, or a lessee's interest in a ground lease of, the
Premises. In the event of any transfer or conveyance of any such
title or interest (other than a transfer for security purposes
only), the transferor shall be automatically relieved of all
covenants and obligations on the part of Landlord contained in
this Lease accruing after the date of such transfer or conveyance
except that such transferor shall remain liable for any portion
of the Security Deposit held by such transferor and not returned
to Tenant or delivered to the transferee at the time of such
transfer. Landlord and Landlord's transferees and assignees
shall have the absolute right to transfer all or any portion of
their respective title and interest in the Premises and/or this
Lease without the consent of Tenant, and such transfer or
subsequent transfer shall not be deemed a violation on Landlord's
part of any of the terms and conditions of this Lease.
30. Limitation on Landlord's Liability. Notwithstanding
anything contained in this Lease to the contrary, the obligations
of Landlord under this Lease (including any actual or alleged
breach or default by Landlord) do not constitute personal
obligations of the individual partners, directors, officers or
shareholders of Landlord or Landlord's partners, and Tenant shall
not seek recourse against the individual partners, directors,
officers or shareholders of Landlord or Landlord's partners, or
any of their personal assets for satisfaction of any liability
with respect to this Lease. In addition, in consideration of the
benefits accruing hereunder to Tenant and notwithstanding
anything contained in this Lease to the contrary, Tenant hereby
covenants and agrees for itself and all of its successors and
assigns that the liability of Landlord for its obligations under
this Lease (including any liability as a result of any actual or
alleged failure, breach or default hereunder by Landlord), shall
be limited solely to, and Tenant's and its successors' and
assigns' sole and exclusive remedy shall be against, Landlord's
interest in the Premises and proceeds therefrom, and no other
assets of Landlord.
31. Miscellaneous.
31.1 Governing Law. This Lease shall be governed by, and
construed pursuant to, the laws of the state in which the
Premises is located.
31.2 Successors and Assigns. Subject to the provisions of
Section 29 above, and except as otherwise provided in this Lease,
all of the covenants, conditions and provisions of this Lease
shall be binding upon, and shall inure to the benefit of, the
parties hereto and their respective heirs, personal
representatives and permitted successors and assigns; provided,
however, no rights shall inure to the benefit of any Transferee
of Tenant unless the Transfer to such Transferee is made in
compliance with the provisions of Section 14, and no options or
other rights which are expressly made personal to the original
Tenant hereunder or in any rider attached hereto shall be
assignable to or exercisable by anyone other than the original
Tenant under this Lease except as expressly set forth herein.
31.3 No Merger. The voluntary or other surrender of this Lease
by Tenant or a mutual termination thereof shall not work as a
merger and shall, at the option of Landlord, either (a) terminate
all or any existing subleases, or (b) operate as an assignment to
Landlord of Tenant's interest under any or all such subleases.
31.4 Professional Fees. If either Landlord or Tenant should
bring suit against the other with respect to this Lease,
including for unlawful detainer or any other relief against the
other hereunder (including arbitration proceedings pursuant to
the Work Letter), then all costs and expenses incurred by the
prevailing party therein (including, without limitation, its
actual appraisers', accountants', attorneys' and other
professional fees, expenses and court costs), shall be paid by
the other party.
31.5 Waiver. The waiver by either party of any breach by the
other party of any term, covenant or condition herein contained
shall not be deemed to be a waiver of any subsequent breach of
the same or any other term, covenant and condition herein
contained, nor shall any custom or practice which may become
established between the parties in the administration of the
terms hereof be deemed a waiver of, or in any way affect, the
right of any party to insist upon the performance by the other in
strict accordance with said terms. No waiver of any default of
either party hereunder shall be implied from any acceptance by
Landlord or delivery by Tenant (as the case may be) of any rent
or other payments due hereunder or any omission by the non-
defaulting party to take any action on account of such default if
such default persists or is repeated, and no express waiver shall
affect defaults other than as specified in said waiver. The
subsequent acceptance of rent hereunder by Landlord shall not be
deemed to be a waiver of any preceding breach by Tenant of any
term, covenant or condition of this Lease other than the failure
of Tenant to pay the particular rent so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of
acceptance of such rent.
31.6 Terms and Headings. The words "Landlord" and "Tenant" as
used herein shall include the plural as well as the singular.
Words used in any gender include other genders. The Section
headings of this Lease are not a part of this Lease and shall
have no effect upon the construction or interpretation of any
part hereof.
31.7 Time. Time is of the essence with respect to performance of
every provision of this Lease in which time or performance is a
factor. All references in this Lease to "days" shall mean
calendar days unless specifically modified herein to be
"business" days.
31.8 Prior Agreements; Amendments. This Lease, including the
Summary and all Exhibits and Riders attached hereto contains
all of the covenants, provisions, agreements, conditions and
understandings between Landlord and Tenant concerning the
Premises and any other matter covered or mentioned in this Lease,
and no prior agreement or understanding, oral or written, express
or implied, pertaining to the Premises or any such other matter
shall be effective for any purpose. No provision of this Lease
may be amended or added to except by an agreement in writing
signed by the parties hereto or their respective successors in
interest. The parties acknowledge that all prior agreements,
representations and negotiations are deemed superseded by the
execution of this Lease to the extent they are not expressly
incorporated herein.
31.9 Separability. The invalidity or unenforceability of any
provision of this Lease (except for Tenant's obligation to pay
Rent) shall in no way affect, impair or invalidate any other
provision hereof, and such other provisions shall remain valid
and in full force and effect to the fullest extent permitted by
law.
31.10 Recording. Neither Landlord nor Tenant shall record
this Lease. In addition, neither party shall record a short form
memorandum of this Lease without the prior written consent (and
signature on the memorandum) of the other, and provided that
prior to recordation Tenant executes and delivers to Landlord, in
recordable form, a properly acknowledged quitclaim deed or other
instrument extinguishing all of the Tenant's rights and interest
in and to the Premises, and designating Landlord as the
transferee, which deed or other instrument shall be held by
Landlord and may be recorded by Landlord once this Lease
terminates or expires (but not prior thereto). If such short
form memorandum is recorded in accordance with the foregoing, the
party requesting the recording shall pay for all costs of or
related to such recording, including, but not limited to,
recording charges and documentary transfer taxes.
31.11 Exhibits and Riders. All Exhibits and Riders attached
to this Lease are hereby incorporated in this Lease for all
purposes as though set forth at length herein.
31.12 Auctions. Tenant shall have no right to conduct any
auction in, on or about the Premises.
31.13 Accord and Satisfaction. No payment by Tenant or
receipt by Landlord of a lesser amount than the rent
payment herein stipulated shall be deemed to be other than on
account of the rent, nor shall any endorsement or statement on
any check or any letter accompanying any check or payment as rent
be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to
recover the balance of such rent or pursue any other remedy
provided in this Lease. Tenant agrees that each of the foregoing
covenants and agreements shall be applicable to any covenant or
agreement either expressly contained in this Lease or imposed by
any statute or at common law.
31.14 Financial Statements. Upon ten (10) days prior written
request from Landlord (which Landlord may make at any time during
the Term but no more often than once in any calendar year),
Tenant shall deliver to Landlord then current public financial
statement of Tenant. At Landlord's request, Tenant will add
Landlord to its mailing list to receive Tenant's public financial
reports when published (three (3) quarterly reports and one (1)
annual report). If Tenant is not a publicly traded corporation,
then the financial statements to be delivered by Tenant shall be
prepared in accordance with generally acceptable accounting
principles and certified as true in all material respects by
Tenant.
31.15 No Partnership. Landlord does not, in any way or for any
purpose, become a partner of Tenant in the conduct of its
business, or otherwise, or joint venturer or a member of a joint
enterprise with Tenant by reason of this Lease.
31.16 Force Majeure. In the event that either party hereto
shall be delayed or hindered in or prevented from the performance
of any act required hereunder by reason of strikes, lock-outs,
labor troubles, inability to procure materials, failure of power,
governmental moratorium or other governmental action or inaction
(including failure, refusal or delay in issuing permits,
approvals and/or authorizations), injunction or court order,
riots, insurrection, war, fire, earthquake, flood or other
natural disaster or other reason of a like nature not the fault
of the party delaying in performing work or doing acts required
under the terms of this Lease (but excluding delays due to
financial inability) (herein collectively, "Force Majeure
Delays"), then performance of such act shall be excused for the
period of the delay and the period for the performance of any
such act shall be extended for a period equivalent to the period
of such delay. The provisions of this Section 31.16 shall not
apply to nor operate to excuse Tenant from the payment of Monthly
Rent, additional rent or any other payments strictly in
accordance with the terms of this Lease.
31.17 Counterparts. This Lease may be executed in one or more
counterparts, each of which shall constitute an original and all
of which shall be one and the same agreement.
.1
31.18 Nondisclosure of Lease Terms. Tenant acknowledges and
agrees that the terms of this Lease are confidential and
constitute proprietary information of Landlord. Disclosure of
the terms could adversely affect the ability of Landlord to
negotiate other leases and impair Landlord's relationship with
other tenants. Accordingly, Tenant agrees that it, and its
partners, officers, directors, employees, agents and attorneys,
shall not intentionally and voluntarily disclose the terms and
conditions of this Lease to any newspaper or other publication or
any other tenant or apparent prospective tenant of the Building
or other portion of the Premises, or real estate agent, either
directly or indirectly, without the prior written consent of
Landlord, provided, however, that Tenant may disclose the terms
to prospective subtenants or assignees under this Lease. Tenant
shall have the right to make any disclosures concerning this
Lease and its terms which are required by law.
31.19 Non-Discrimination. Tenant acknowledges and agrees
that there shall be no discrimination against, or segregation of,
any person, group of persons, or entity on the basis of race,
color, creed, religion, age, sex, marital status, national
origin, or ancestry in the leasing, subleasing, transferring,
assignment, occupancy, tenure, use, or enjoyment of the Premises,
or any portion thereof.
32. Lease Execution.
32.1 Tenant's Authority. If Tenant executes this Lease as a
partnership or corporation, then Tenant and the persons and/or
entities executing this Lease on behalf of Tenant represent and
warrant that: (a) Tenant is a duly authorized and existing
partnership or corporation, as the case may be, and is qualified
to do business in the state in which the Premises are located;
(b) such persons and/or entities executing this Lease are duly
authorized to execute and deliver this Lease on Tenant's behalf
in accordance with the Tenant's partnership agreement (if Tenant
is a partnership), or a duly adopted resolution of Tenant's board
of directors and the Tenant's by-laws (if Tenant is a
corporation); and (c) this Lease is binding upon Tenant in
accordance with its terms.
32.2 Joint and Several Liability. If more than one person or
entity executes this Lease as Tenant: (a) each of them is and
shall be jointly and severally liable for the covenants,
conditions, provisions and agreements of this Lease to be kept,
observed and performed by Tenant; and (b) the act or signature
of, or notice from or to, any one or more of them with respect to
this Lease shall be binding upon each and all of the persons and
entities executing this Lease as Tenant with the same force and
effect as if each and all of them had so acted or signed, or
given or received such notice.
32.3 No Option. The submission of this Lease for examination or
execution by Tenant does not constitute a reservation of or
option for the Premises and this Lease shall not become effective
as a Lease until it has been executed by Landlord and delivered
to Tenant.
32.4 Landlord's Authority. Landlord represents and warrants to
Tenant that: (a) Landlord is a duly authorized and existing
limited partnership and is qualified to do business in
California; (b) the persons and entities executing this Lease are
duly authorized to execute and deliver this Lease on Landlord's
behalf in accordance with Landlord's partnership agreement; and
(c) this Lease is binding upon Landlord in accordance with its
terms.
IN WITNESS WHEREOF, the parties have executed this Lease as of
the day and year first above written.
"TENANT" CYMER, INC.,
a Nevada corporation
By: /s/
Name: William A. Angus, III
Title: Sr. Vice President and
Chief Financial Officer
"LANDLORD" AEW/LBA ACQUISITION CO. 11, LLC, a
California limited liability company
By: Eastrich No. 175, LLC, a
California limited liability
company, its member-manager
By: /s/
Name:
Its: Authorized Signatory
Exhibits:
Exhibit "A" Site Plan
Exhibit "B" Legal Description of Premises
Exhibit "C" Work Letter Agreement
Schedule 1 Description of Conceptual Plans
Exhibit "D" Sample Form of Notice of Lease Term Dates
Exhibit "E" Environmental Questionnaire
Exhibit "F" Sample Form of Tenant Estoppel Certificate
Exhibit "G" Description of Parking Lot Improvements
Exhibit "H" Prior Occupant's FF&E
The Company will undertake to supply any of the above documents
upon request of the Securities and Exchange Commission.
</TABLE>
EXHIBIT 11.1
CYMER, INC.
CALCULATION OF
EARNINGS PER SHARE
(in thousands, except per
share data)
<TABLE>
<CAPTION>
Year Ended
December 31, 1996
<S> <C>
EARNINGS PER SHARE
PRIMARY
Weighted average number of
common shares outstanding 9,935
Assumed exercise of
outstanding stock options and
warrants (1) 1,275
Weighted average common and
common equivalent shares 11,210
Net Income $6,510
Primary earnings per share $0.58
FULLY DILUTED EARNINGS PER SHARE
Weighted average number of
common shares outstanding 9,935
Assumed exercise of outstanding
stock options and warrants (1) 1,631
Weighted average common and
common equivalent shares 11,566
Net Income $6,510
Fully diluted earnings per
share $0.56
</TABLE>
(1) Computed using the treasury stock method. See
Note 1 of Notes to Consolidated Financial Statements.
EXHIBIT 21
Subsidiaries of Registrant Jurisdiction of
Incorporation
Cymer Japan, Inc. Japan
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration
Statement No. 333-16559 on Form S-8 of our report dated January
29, 1997, appearing in this Annual Report on Form 10-K of Cymer,
Inc. for the year ended December 31, 1996 and to the reference to
us under the heading "Selected Financial Data" in such Form 10-K.
DELOITTE & TOUCHE LLP
San Diego, California
March 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 55,405
<SECURITIES> 10,449
<RECEIVABLES> 19,080
<ALLOWANCES> 706
<INVENTORY> 15,678
<CURRENT-ASSETS> 112,994
<PP&E> 17,415
<DEPRECIATION> 5,708
<TOTAL-ASSETS> 129,467
<CURRENT-LIABILITIES> 28,251
<BONDS> 0
0
0
<COMMON> 14
<OTHER-SE> 98,806
<TOTAL-LIABILITY-AND-EQUITY> 129,467
<SALES> 62,510
<TOTAL-REVENUES> 64,995
<CGS> 35,583
<TOTAL-COSTS> 35,853
<OTHER-EXPENSES> 21,528
<LOSS-PROVISION> 741
<INTEREST-EXPENSE> 467
<INCOME-PRETAX> 7,701
<INCOME-TAX> 1,191
<INCOME-CONTINUING> 6,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,510
<EPS-PRIMARY> .58
<EPS-DILUTED> .56
</TABLE>
