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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-22248
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ULTRATECH STEPPER, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 94-3169580
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3050 ZANKER ROAD 95134
SAN JOSE, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
</TABLE>
(408) 321-8835
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE;
SERIES A PREFERRED STOCK
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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 or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates based on
the closing sale price of the Common Stock on March 17, 2000, as reported on the
Nasdaq National Market was approximately $290,000,000. Shares of Common Stock
held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of March 17, 2000, the Registrant had 21,461,942 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on June 1, 2000 are incorporated by reference into Part
III of this Annual Report on Form 10-K.
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PART I
ITEM 1. BUSINESS
This Annual Report on Form 10-K may contain, in addition to historical
information, certain forward-looking statements that involve significant risks
and uncertainties. The Company's actual results could differ materially from the
information set forth in any such forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below under
"Additional Risk Factors", as well as those discussed elsewhere in this Annual
Report on Form 10-K.
THE COMPANY
Ultratech Stepper, Inc. ("Ultratech" or the "Company") develops,
manufactures and markets photolithography equipment designed to reduce the cost
of ownership for manufacturers of integrated circuits, including advanced
packaging processes, photomasks, thin film magnetic recording devices and
micromachined components. The Company supplies step-and-repeat systems based on
one-to-one ("1X") and reduction optical technology to customers located
throughout North America, Europe, Japan and the rest of Asia. Ultratech believes
that its 1X steppers offer cost and certain performance advantages, as compared
with competitors' reduction steppers, to semiconductor device manufacturers for
applications involving line geometries of 0.65 microns or greater ("noncritical
feature sizes") and to thin film head manufacturers. The Company's 1X steppers
do not currently address applications involving line geometries of less than
0.65 microns ("critical feature sizes"). Advanced packaging for integrated
circuits, specifically "bump or flipchip" techniques, requires lithography steps
in the fabrication process. Ultratech has provided equipment to this emerging
market, both for development and production. Ultratech has developed and has
commenced shipment of its Saturn Spectrum 3 stepper, with specific design
modifications to address the requirements of this market segment. The Company's
1X steppers also are used as replacements for scanners in existing fabrication
facilities to enable semiconductor manufacturers to extend the useful life and
increase the capabilities of their facilities. In addition, the Company's
steppers are used to manufacture high volume, low cost semiconductors used in a
variety of applications such as telecommunications, automotive control systems
and consumer electronics. Ultratech also supplies 1X photolithography systems to
thin film head manufacturers and believes that its steppers offer advantages
over certain competitive reduction lithography tools with respect to field size,
throughput, specialized substrate handling and cost. Additionally, the Company
supplies 1X photolithography equipment to the micromachining market, where
certain technical features such as high resolution at g-line wavelengths and
superior depth of focus may offer advantages over competitive tools.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep
ultra-violet (DUV) reduction lithography systems (the "Acquisition") for
approximately $19.2 million in cash, $2.6 million in transaction costs and the
assumption of certain liabilities. With this Acquisition, the Company expanded
its photolithography stepper product line to include reduction steppers. The
reduction steppers complement the 1X steppers for use in the integrated circuit,
thin film head and micromachining markets, as their resolution requirements go
below 0.65 microns.
The Company markets and manufactures the UltraBeam "V" Model electron beam
pattern generation system based on vector-scan technology for use in the
development and production of photomasks for the integrated circuit industry.
The Company acquired this technology in February 1997 when it acquired the
assets of Lepton, Inc.
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The Company's products and markets are more fully described, below.
BACKGROUND
The fabrication of devices such as integrated circuits ("semiconductors" or
"ICs") and thin film magnetic recording heads ("thin film heads" or "TFHs")
requires a large number of complex processing steps, including deposition,
photolithography and etching. Deposition is a process in which a layer of either
electrically insulating or electrically conductive material is deposited on the
surface of a wafer. The photolithographic imaging process imprints device
features on a light sensitive polymer photoresist. After development of the
photoresist, etching selectively removes material from areas not covered by the
imprinted pattern.
Photolithography is one of the most critical and expensive steps in IC and
TFH device manufacturing. According to the Semiconductor Industry Association, a
significant portion of the cost of processing silicon wafers in the fabrication
of ICs is related to photolithography. Photolithography exposure equipment is
used to image device features on the surface of thin deposition films by
selectively exposing a light sensitive polymer photoresist coated on the wafer
surface, through a photomask containing the master image of a particular device
layer. Exposure of each process layer imprints a different set of features on
the device. These device layers must be properly aligned to previously defined
layers before imaging takes place, so that structures formed on the wafers are
correctly placed, one on top of the other, in order to ensure a functioning
device.
Since the introduction of the earliest commercial photolithography tools for
IC manufacturing in the early 1960s, a number of tools have been introduced to
enable manufacturers to produce increasingly complex devices that incorporate
progressively finer line widths. In the late 1970s, photolithography tools known
as step-and-repeat projection aligners, or steppers, were introduced. Unlike
prior tools, such as contact printers which required the photomask to physically
contact the wafer in order to transfer the entire pattern during a single
exposure, and scanners, which transferred the device image by scanning a narrow
slit of light across the entire photomask and wafer in a single, continuous
motion, steppers expose only a small square or rectangular portion of the wafer
in a single exposure, then move or "step" to an adjacent site to repeat the
exposure. This stepping process is repeated as often as necessary until the
entire wafer has been exposed. By imaging a small area, steppers are able to
achieve finer resolution and better alignment between the multiple device layers
and higher yield and productivity in certain devices than possible with earlier
tools. Since the late 1980s, 1X steppers have become a critical tool for the
fabrication of thin film heads because of their performance characteristics.
Thin film heads are devices that form the small read/write component in the most
advanced disk drives and have enabled disk drives to increase in speed and
memory capacity and perform more efficiently. Steppers are currently the
predominant lithography tools used in the manufacture of devices such as ICs and
TFHs. The Company believes that manufacturers of leading-edge TFH devices are
relying increasingly on reduction steppers to address the more critical feature
sizes for these devices in their front-end applications.
According to VLSI Research, Inc. ("VLSI"), a semiconductor industry market
research firm, the two principal types of steppers currently in use by the
semiconductor industry are reduction steppers, which are the most widely used
steppers, and one-to-one steppers. Reduction steppers, which typically have
reduction ratios of four or five-to-one, are tools in which the photomask
pattern containing the design is typically four or five times larger than the
device pattern that is to be exposed on the wafer surface. Additionally,
step-and-scan systems have been introduced recently in order to address device
sizes of .18 micron and below. In contrast to steppers, which expose the entire
field in a single exposure, step-and-scan systems scan across the field until
the entire field is exposed.
The Company believes that one of the fastest growing segments of the
photolithography equipment market is reduction steppers and step-and-scan
systems that use a deep ultra-violet light source ("DUV"). The lower DUV
wavelength allows IC manufacturers to produce critical geometries of
0.25 microns and
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below. The Company's reduction stepper product line includes DUV systems at
248nm, 193nm and 157nm wavelengths.
The principal advantage of reduction steppers and step-and-scan systems is
that they may be used in manufacturing steps requiring critical feature sizes
and are therefore necessary for manufacturing advanced ICs. One-to-one steppers,
on the other hand, are tools in which the photomask containing the design is the
same size as the device pattern that is exposed on the wafer surface. Current
one-to-one steppers, unlike most current reduction steppers, are based on
different technology which incorporates both reflective and refractive elements
in its optical lens imaging system that, although highly sophisticated in
design, is much simpler than a current reduction stepper's lens imaging system
which incorporates only refractive elements. As a result, current 1X steppers
are generally less expensive than current reduction steppers required for
critical feature sizes. Because of their optical design, 1X steppers typically
are also able to deliver greater energy to the wafer surface, which generally
results in higher throughput than is achievable with most reduction steppers.
One-to-one steppers, however, are currently limited to use in manufacturing
steps involving noncritical feature sizes. Accordingly, the Company believes
that sales of these systems are highly dependent upon capacity expansions by its
customers.
In the past, manufacturers of ICs and similar devices purchased capital
equipment based principally on technological capabilities. In view of the
significant capital expenditures required to construct, equip and maintain
fabrication facilities, relatively short product cycles and manufacturers'
increasing concern for overall fabrication costs, the Company believes that
manufacturers of ICs and thin film heads increasingly are focusing on reducing
their total cost to manufacture a device. A major component of this cost is the
cost of ownership of the equipment used for a particular application in a
fabrication facility. Cost of ownership is measured in terms of the costs
associated with the acquisition of equipment as well as factors such as
throughput, yield, up-time, service, labor overhead, maintenance, and various
other costs of owning and using the equipment. With increasing importance being
placed upon a system's overall cost of ownership, in many cases the system with
the most technologically advanced capabilities will not necessarily be the
manufacturing system of choice. As part of the focus on cost reduction, the
Company believes that device manufacturers are attempting to extend the useful
life and enhance the production capabilities of fabrication facilities by
selecting equipment that can replace existing tools while offering better
performance in a cost-effective manner.
PRODUCTS
The Company currently offers three different series of 1X systems for use in
the semiconductor fabrication process: the model 1500 Series, which addresses
the markets for scanner replacement and high volume/low cost semiconductor
fabrication; the Saturn Wafer Stepper-Registered Trademark- Family, which
addresses the market for mix-and-match in advanced semiconductor fabrication and
bump processing for flip chips; and the Titan Wafer
Stepper-Registered Trademark-, which addresses the markets for scanner
replacement and high volume/low cost semiconductor fabrication. These steppers
currently offer feature size capabilities ranging from 2.0 microns to 0.65
microns and typically range in price from $800,000 to $2.1 million. The model
1500 Series and the Titan Wafer Stepper offer g- and h-line illumination
specifications. The Saturn Wafer Stepper Family features an i-line illumination
specification that is designed to make them compatible with advanced i-line
reduction steppers. In bump processing, the Saturn Spectrum 3 stepper is used in
conjunction with electroplating to produce a pattern of bumps, or metal
connections, on the bond pads of the die for flip chip devices. This pattern can
be placed in a tight array across the entire die, as opposed to the conventional
method of wire bonding which is limited to the periphery of the die. This allows
manufacturers to shrink the die size. The flip chip device can then be placed in
a small outline package or directly on a printed circuit board. The Saturn and
Titan widefield systems have a unique D-shaped field that allows for a
one-to-one field match with step-and-scan systems, or a two-to-one match with
reduction steppers. The D-shaped field is designed to allow the semiconductor
manufacturer to optimize overlay and throughput for its non-critical
mix-and-match layers. The Company also offers a reduction stepper product
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line for selected semiconductor markets. These products include the Mercury XLS
200, Mercury XLS 248, XLS 193nm and XLS 157nm systems.
The Mercury XLS 200 is an i-line reduction system with a minimum resolution
of 0.35 microns, providing a high resolution i-line reduction stepper option for
selected semiconductor markets. The Mercury XLS 248 is a DUV (248nm) reduction
stepper providing a minimum resolution of 0.25 microns for selected
semiconductor applications requiring sub-0.35 micron resolution. The XLS 193nm
(small field) and XLS 157nm (small and mid field) systems are DUV tools used for
advanced research and development semiconductor materials and processes.
The XLS 9800 and XLS 9900 provide i-line and DUV wavelengths capabilities
and are designed to meet TFH customers' requirements for shrinking geometries on
their critical layers. In addition, the Company provides a 1700 Series stepper
capable of patterning features on rowbars utilizing an alternate alignment
system (Machine Vision System, or "MVS"). The model 1700 Series steppers are
used to expose the Air Bearing Surface (ABS) pattern on these rowbars. The
Company's TFH steppers offer feature size capabilities ranging from 2.0 to
0.25 microns and typically range in price from $800,000 to $3.6 million.
The Company also offers photolithography equipment for use in the
micromachining market. Micromachining combines electronics with mechanics in
small devices for detection and control of a wide variety of parameters.
Examples include accelerometers used to activate air bags in automobiles, and
membrane pressure sensors used in industrial control systems. These
micromachined devices are manufactured on silicon substrates using
photolithographic techniques similar to those used for manufacturing
semiconductors and thin film head devices. The Company believes that its 1500
Series steppers and the Saturn Wafer Stepper Family offer resolution and depth
of focus advantages over alternative technologies, to the manufacturers of
micromachined devices.
The UltraBeam "V" Model electron beam pattern generation system is based on
vector-scan technology and is designed for use in the development and production
of photomasks for the IC industry. The UltraBeam system addresses the production
requirements of photomasks for .18 micron design rule and below. Using the
vector/raster-scan technology employed by the Company, the electron beam moves
directly to those areas of the photomask that are to be exposed, bypassing
unexposed areas, and then rasters in the area to be exposed. In contrast,
alternative technologies use an electron beam that is scanned continuously back
and forth over the entire photomask.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
The Company also sells upgrades and refurbishments to certain older product
lines in its installed base. These refurbished older systems typically have a
purchase price significantly less than the purchase price for the Company's
newer systems.
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Features of the Company's current stepper systems are set forth below:
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MINIMUM FEATURE
PRODUCT LINE WAVELENGTH SIZE(MICRON)
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SEMICONDUCTOR/MICRO-MACHINING:
Model 1500 Series............................ gh-line 0.8 - 1.0
Saturn Wafer Stepper......................... i-line 0.65
Saturn Spectrum 3............................ ghi-line 2.0
Titan Wafer Stepper.......................... gh-line 0.75
XLS (Reduction) Stepper Family:
Mercury XLS 200............................ i-line 0.35
Mercury XLS 248............................ DUV (248 nm) 0.25
XLS 193nm.................................. DUV (193 nm) 0.16
XLS 157nm.................................. DUV (157 nm) 0.10
PHOTOMASK:
UltraBeam "V" Model.......................... n/a 0.18
THIN-FILM HEAD:
Model 1700 Series............................ gh-line 1.0
Reduction Steppers
XLS 9800................................... i-line 0.35
XLS 9900................................... DUV (248nm) 0.25
</TABLE>
RESEARCH, DEVELOPMENT AND ENGINEERING
The semiconductor and magnetic recording head manufacturing industries are
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 systems are essential for the Company to
maintain its competitive position. The Company has made a substantial investment
in the research and development of its core optical technology, which the
Company believes is critical to its financial results. The Company intends to
continue to develop its technology and to develop innovative products and
product features to meet customer demands. Current engineering projects include:
the continued research and development and process insertion for the Verdant
rapid thermal annealing/laser doping systems and technologies; continued
development of the Company's 1X and 4X reduction optical products, including the
Company's 1X 300mm tool for bump processing and Company's XLS 157nm DUV
reduction stepper; and development of larger and more flexible optical systems.
Other research and development efforts are currently focused on reliability
improvement; manufacturing cost reduction; and performance enhancement and
development of new features for existing systems, both for inclusion in the
Company's systems and to meet specific customer order requirements. These
research and development efforts are undertaken, principally, by the Company's
research, development and engineering organizations and costs are generally
expensed as incurred. Other operating groups within the Company support the
above referenced research, development and engineering efforts, and the
associated costs are charged to these organizations as incurred. The Company
also has programs devoted to the development of new photolithography systems,
including new generations of photolithography systems for existing and new
markets, enhancements and extensions of existing photolithography systems for
existing and new markets and custom engineering for specific customers.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or
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otherwise cease operations of its electron beam technology unit. In such a
scenario, significant uncertainties exist and circumstances currently unknown
may result in the need to recognize an impairment of the Company's electron beam
technology assets in future financial periods, although management believes it
will be able to realize its net investment in the technology and related net
assets. Should an impairment occur, the Company's financial condition and
results of operations would be materially adversely impacted. The Company did
not recognize any revenue related to its electron beam technology during 1998
and 1999.
The Company works with many customers to develop technology required to
manufacture advanced devices or to lower the customer's cost of ownership. The
Company maintains an engineering department that supports customer design of 1X
stepper photomasks for both test and production purposes and an applications
engineering group, consisting of highly qualified engineers located throughout
the world that assist customers in optimizing the use of the Company's systems.
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 in the future. As of
December 31, 1999, the Company had approximately 106 full-time employees engaged
in research, development, and engineering. For 1999, 1998 and 1997, total
research, development, and engineering expenses were approximately
$27.7 million, $26.7 million and $26.4 million, respectively, and represented
24.5%, 32.7% and 17.9% of the Company's net sales, respectively.
SALES AND SERVICE
The Company markets and sells its products in North America and Europe
principally through its direct sales organization. The Company sells its
products in the Asia/Pacific region primarily through outside sales
organizations. In December 1997, the Company terminated its relationship with
its Japanese distributor, Innotech Corporation and has established a direct
sales force in Japan. (See "Additional Risk Factors: International Sales;
Japanese Market").
Ultratech's service personnel are based throughout the United States,
Europe, Japan and the rest of Asia. The Company currently leases five sales and
service offices in the United States outside of California, maintains
subsidiaries in the United Kingdom, Japan, Korea and Thailand and leases offices
for its branch in Taiwan, to service equipment and support customers in such
locations. As part of its customer service, the Company maintains an on-line
computerized network of its parts inventory in the United States, Europe and
Japan.
The Company believes that as semiconductor and thin film head manufacturers
produce increasingly complex devices, they will require a higher degree of
support. Reliability, performance, yield, cost, uptime and mean time between
failure are increasingly important factors by which customers evaluate potential
suppliers of photolithography equipment. The Company believes that the strength
of its worldwide service and support organization is an important factor in its
ability to sell its systems, maintain customer loyalty and reduce the
maintenance costs of its systems. In addition, the Company believes that working
with its suppliers and customers is necessary to ensure that the Company's
systems are cost effective, technically advanced and designed to satisfy
customer requirements.
The Company supports its customers with field service, technical service
engineers and training programs. The Company provides its customers with
comprehensive support and service before, during and after delivery of its
systems. To support the sales process and to enhance customer relationships, the
Company works closely with prospective customers to develop hardware and
software test specifications and benchmarks, and often designs customized
applications to enable prospective customers to evaluate the Company's equipment
for their specific needs. Prior to shipment, Ultratech's support personnel
typically assist the customer in site preparation and inspection, and typically
provide customers with training at the Company's facilities or at the customer's
location. The Company currently offers to its customers various courses of
instruction on the Company's systems, including instructions in system hardware
and software tools for optimizing the Company's systems. The Company's customer
training
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program also includes instructions in the maintenance of the Company's systems.
The Company's field support personnel work with the customer's employees to
install the system and demonstrate system readiness. Technical support is also
available through on-site Company personnel.
In general, the Company warrants its new systems against defects in design,
materials and workmanship for one year. The Company offers its customers
additional support after the warranty period in the form of maintenance
contracts for specified time periods. Such contracts include various options
such as priority response, planned preventive maintenance, scheduled one-on-one
training, daily on-site support, and monthly system and performance analysis.
MANUFACTURING
The Company performs all of its manufacturing activities (final assembly,
system testing and certain subassembly) in clean room environments totaling
approximately 46,000 square feet. These facilities are located in California,
Massachusetts, and New Jersey. Performing manufacturing operations in California
exposes the Company to a higher risk of natural disasters, particularly floods
and earthquakes.
The Company's manufacturing activities consist of assembling and testing
components and subassemblies, which are then integrated into finished systems.
The Company is relying increasingly on outside vendors and subcontractors to
manufacture certain components and subassemblies. This strategy has enabled the
Company to increase its manufacturing capacity. The Company orders one of the
most critical components of its technology, the glass for its 1X lenses, from
suppliers on purchase orders. The Company designs the 1X lenses and provides the
lens specifications to other suppliers that grind the lens elements. The Company
then assembles and tests the optical 1X lenses in its metrology laboratory. The
Company has recorded the critical parameters of each of its optical lenses sold
since 1982, and believes that such information enables it to supply lenses to
its customers that match the characteristics of its customers' existing lenses.
Additionally, the Company orders reduction lenses from suppliers on purchase
orders. These lenses are designed to the Company's specifications and tested by
the supplier. Prior to shipment, the customer's engineers may perform acceptance
tests at Ultratech's facility. After passing the acceptance test, the system is
packaged in the clean room environment and prepared for shipment.
The Company procures certain of its critical systems' components,
subassemblies and services from a single supplier or a limited group of
suppliers in order to ensure overall quality and timeliness of delivery. To
date, the Company has been able to obtain adequate services and supplies of
components and subassemblies for its systems in a timely manner. However,
disruption or termination of certain of these sources could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company is relying on outside vendors to manufacture certain
components of its products. The Company's reliance on sole or a limited group of
suppliers and the Company's increasing reliance on subcontractors involve
several risks, including a potential inability to obtain an adequate supply of
required components due to the suppliers' failure or inability to provide such
components in a timely manner, or at all, and reduced control over pricing and
timely delivery of components. Although the timeliness, yield and quality of
deliveries to date from the Company's subcontractors have been acceptable,
manufacture of certain of these components and subassemblies is an extremely
complex process, and long lead-times are required. Any inability to obtain
adequate deliveries or any other circumstance that would require the Company to
seek alternative sources of supply or to manufacture such components internally
could delay the Company's ability to ship its products, which could damage
relationships with current and prospective customers and therefore would have a
material adverse effect on the Company's business, financial condition and
results of operations.
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The Company maintains a company-wide quality program. The intent of the
program is to provide continuous improvement in the Company's steppers and
services to meet customer requirements. The Company trains all of its employees
in basic quality skills and regularly participates in quality sharing meetings
with other equipment manufacturers and customer quality audits of procedures and
personnel. The Company's 1X operation achieved ISO 9001 certification in 1996,
and has maintained this certification uninterrupted through this report date.
COMPETITION
The capital equipment industry in which the Company operates is intensely
competitive. A substantial investment is required to install and integrate
capital equipment into a semiconductor or thin film head production line. The
Company believes that once a device manufacturer has selected a particular
vendor's capital equipment, the manufacturer generally relies upon that
equipment for the specific production line application and, to the extent
possible, subsequent generations of similar products. Accordingly, it is
difficult to achieve significant sales to a particular customer once another
vendor's capital equipment has been selected. The Company experiences intense
competition worldwide from a number of leading foreign and domestic stepper
manufacturers, such as Nikon Inc. ("Nikon"), Canon Inc. ("Canon"), ASM
Lithography, Ltd. ("ASML") and Silicon Valley Group ("SVG"), Inc.'s Micralign
products, all of which have substantially greater financial, marketing and other
resources than the Company. Nikon supplies a 1X stepper for use in the
manufacture of liquid crystal displays and Canon, Nikon and ASML offer reduction
steppers for thin film head fabrication. Additionally, the XLS reduction stepper
product line acquired by the Company from ISI competes directly with advanced
reduction steppers offered by Canon, Nikon and ASML. Current thin film head
front-end production involves manufacturing steps that require critical feature
sizes. Although the reduction stepper product lines acquired address critical
feature sizes, additional development of these product lines may be necessary to
fully address the unique requirements of thin film head manufacturing.
Additionally, ASML has entered the low-cost lithography market. ASML and Nikon
have each introduced an i-line step-and-scan system as a lower cost alternative
to the DUV step-and-scan system for use on the less critical layers. These
systems compete with widefield steppers, such as the Saturn and Titan steppers,
for advanced mix-and-match applications. The Company's UltraBeam "V" model
electron beam pattern generation system competes against systems produced by
ETEC Systems, Inc.; Hitachi, Ltd.; Leica Camera AG; Toshiba and JEOL, Ltd.
("Japan Electron Optical Laboratory"). In addition, the Company believes that
the high cost of developing new lithography tools has increasingly caused its
competitors to collaborate with customers and other parties in various areas
such as research and development, manufacturing and marketing, or to acquire
other competitors, thereby resulting in a combined competitive threat with
significantly enhanced financial, technical and other resources. The Company
expects its competitors to continue to improve the performance of their current
products. These competitors have stated that they will introduce new products
with improved price and performance characteristics that will compete directly
with the Company's products. This could cause a decline in sales or loss of
market acceptance of the Company's steppers, and thereby materially adversely
affect the Company's business, financial condition and results of operations.
There can be no assurance that enhancements to, or future generations of,
competing products will not be developed that offer superior cost of ownership
and technical performance features. The Company believes that to be competitive,
it will require significant financial resources in order to continue to invest
in new product development, features and enhancements, to introduce next
generation stepper systems on a timely basis, and to maintain customer service
and support centers worldwide. In marketing its products, the Company may also
face competition from vendors employing other technologies. In addition,
increased competitive pressure has led to intensified price-based competition,
resulting in lower prices and margins. Should these competitive trends continue,
the Company's business, financial condition and operating results would continue
to be materially adversely affected. There can be no assurance that the Company
will be able to compete successfully in the future.
Foreign IC manufacturers have a significant share of the worldwide market
for certain types of ICs for which the Company's systems are used. However, the
Japanese stepper manufacturers are well established
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in the Japanese stepper market, and it is extremely difficult for non-Japanese
lithography equipment companies to penetrate the Japanese stepper market. To
date, the Company has not established itself as a major competitor in the
Japanese equipment market and there can be no assurance that the Company will be
able to achieve significant sales to Japanese manufacturers in the future. (See
"International Sales; Japanese Market").
INTELLECTUAL PROPERTY RIGHTS
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, it believes that
any success will depend more upon the innovation, technological expertise and
marketing abilities of its employees. Nevertheless, the Company has a policy of
seeking patents when appropriate on inventions resulting from its ongoing
research and development and manufacturing activities. The Company owns various
United States and foreign patents, which expire on dates ranging from July 2000
to December 2017, and has various United States and foreign patent applications
pending. The Company also has various registered trademarks and copyright
registrations covering mainly software programs used in the operation of its
stepper systems. The Company also relies upon trade secret protection for its
confidential and proprietary information. There can be no assurance that the
Company will be able to protect its technology adequately or that competitors
will not be able to develop similar technology independently. There can be no
assurance that any of the Company's pending patent applications will be issued
or that foreign intellectual property laws will protect the Company's
intellectual property rights. In addition, litigation may be necessary to
enforce the Company's patents, copyrights or other intellectual property rights,
to protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement.
Such litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's business, financial
condition and results of operations, regardless of the outcome of the
litigation. There can be no assurance that any patent issued to the Company will
not be challenged, invalidated or circumvented or that the rights granted
thereunder will provide competitive advantages to the Company. 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.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patent or any other
intellectual property right, the Company has from time to time been notified of
claims that it may be infringing intellectual property rights possessed by third
parties. Certain of the Company's customers have received notices of
infringement from Technivision Corporation and the Lemelson Medical, Education
and Research Foundation, Limited Partnership alleging that the manufacture of
certain semiconductor products and/or the equipment used to manufacture those
semiconductor products infringes certain issued patents. The Company has been
notified by certain of such customers that the Company may be obligated to
defend or settle claims that the Company's products infringe any of such patents
and, in the event it is subsequently determined that the customer infringes any
of such patents, they intend to seek reimbursement from the Company for damages
and other expenses resulting from this matter.
Although there are no pending lawsuits against the Company regarding
infringement claims with respect to any existing patents or any other
intellectual property rights, there can be no assurance that infringement claims
by third parties or claims for indemnification resulting from infringement
claims in the future will not be asserted, or that such assertions, if proven to
be true, will not materially adversely affect the Company's business, financial
condition and results of operations, regardless of the outcome of any
litigation. With respect to any such future claims, the Company may seek to
obtain a license under the third party's intellectual property rights. There can
be no assurance, however, that a license will be available on reasonable terms
or at all. The Company could decide, in the alternative, to resort to litigation
to challenge such claims. Such challenges could be extremely expensive and time
consuming and could materially adversely affect the Company's business,
financial condition and results of operations, regardless of the outcome of any
litigation.
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ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances used to manufacture the
Company's systems. The Company believes that it is currently in compliance in
all material respects with such regulations and that it has obtained all
necessary environmental permits to conduct its business. Nevertheless, the
failure to comply with current or future regulations could result in substantial
fines being imposed on the Company, suspension of production, alteration of the
manufacturing process or cessation of operations. Such regulations could require
the Company to acquire expensive remediation equipment or to incur substantial
expenses to comply with environmental regulations. Any failure by the Company to
control the use, disposal or storage of, or adequately restrict the discharge
of, hazardous or toxic substances could subject the Company to significant
liabilities.
CUSTOMERS, APPLICATIONS AND MARKETS
The Company sells its systems to semiconductor, photomask, thin film head
and micromachining manufacturers located throughout North America, Europe, Japan
and the rest of Asia. Semiconductor manufacturers have purchased the model 1500
Series steppers, the Saturn Wafer Stepper, the Titan Wafer Stepper and the XLS
product family for the fabrication of microprocessors, microcontrollers, DRAMs,
ASICs and other devices. Such systems are used in mix-and-match environments
with other lithography tools, as replacements for scanners and contact printers,
in start-up fabrication facilities, in packaging for ultrathin and flip chip
applications and for high volume, low cost noncritical feature size
semiconductor production. The Company's reduction stepper product line, acquired
in the Acquisition, will continue to address selected semiconductor markets.
Thin film head manufacturers have purchased the model 1700 Series steppers due
to their throughput and overall cost of ownership. The XLS 9800, first
introduced in 1998, is an i-line reduction stepper designed specifically for the
thin film head market. The XLS 9900, a DUV reduction stepper, is also offered to
manufacturers of leading-edge TFH devices. Manufacturers of micromachined
components have purchased the model 1500 Series steppers and Saturn/Titan wafer
stepper families because of high throughput and flexible field size advantages
along with cost-effective, submicron imaging capabilities.
Historically, the Company has sold a substantial portion of its systems to a
limited number of customers. In 1999, no single customer accounted for 10% or
more of the Company's net sales. Sales to one customer accounted for
approximately 25% and 14% of the Company's net sales in 1998 and 1997,
respectively. Additionally, in 1997, a second customer accounted for
approximately 10% of the Company's net sales. The Company expects that sales to
relatively few customers will continue to account for a high percentage of its
net sales in the foreseeable future and believes that the Company's financial
results depend in significant part upon the success of these major customers,
and the Company's ability to meet their future capital equipment needs. Although
the composition of the group comprising the Company's largest customers may vary
from period to period, the loss of a significant customer or any reduction in
orders by any significant customer, including reductions due to market, economic
or competitive conditions in the semiconductor or magnetic recording head
industries or in the industries that manufacture products utilizing integrated
circuits or thin film heads, may have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's ability
to maintain or increase its sales in the future will depend, in part, upon its
ability to obtain orders from new customers as well as the financial condition
and success of its customers, the semiconductor and thin film head industries
and the economy in general, of which there can be no assurance. (See "Additional
Risk Factors: Cyclicality of Semiconductor and Thin Film Head Industries").
In addition to the business risks associated with the dependence on these
major customers, these significant customer concentrations have in the past
resulted in significant concentrations of accounts receivable and leases
receivable. The formation of significant and concentrated receivables exposes
the Company to additional risks, including the risk of default by one or more
customers representing a
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<PAGE>
significant portion of the Company's total receivables. During the three month
periods ended September 30 and December 31, 1998, the Company recorded
significant reserves against its trade accounts receivable and leases
receivable. If additional lease and accounts receivable reserves were to be
required, the Company's business, financial condition and results of operations
would be materially adversely affected.
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically involves
a significant commitment of capital. In view of the significant investment
involved in a system purchase, the Company has experienced and may continue to
experience delays following initial qualification of the Company's systems as a
result of delays in a customer's approval process. For this and other reasons,
the Company's systems typically have a lengthy sales cycle during which the
Company may expend substantial funds and management effort in securing a sale.
Lengthy sales cycles subject the Company to a number of significant risks,
including inventory obsolescence and fluctuations in operating results, over
which the Company has little or no control.
BACKLOG
The Company schedules production of its systems based upon order backlog,
informal customer commitments and general economic forecasts for its targeted
markets. The Company includes in its backlog all customer orders for its
one-to-one and reduction optical technology systems for which it has accepted
purchase order numbers and assigned shipment dates within six months, all
customer orders for its electron beam lithography systems for which it has
accepted purchase order numbers and assigned shipment dates within one year, as
well as all orders for service, spare parts and upgrades. All orders are subject
to cancellation or rescheduling by the customer with limited or no penalties.
Because of orders received for systems to be shipped in the same quarter in
which the order is received, possible changes in system delivery schedules,
cancellations of orders and potential delays in system shipments, the Company's
backlog at any particular date may not necessarily be representative of actual
sales for any succeeding period. As of December 31, 1999, the Company's backlog
was approximately $27.8 million, compared with approximately $29.4 million as of
December 31, 1998.
EMPLOYEES
At December 31, 1999, the Company had approximately 476 full-time employees,
including 106 engaged in research, development, and engineering, 26 in sales and
marketing, 164 in customer service and support, 115 in manufacturing and 65 in
general administration and finance. The Company believes any future success,
should it occur, would depend, in large part, on its ability to attract and
retain highly skilled employees. None of the employees of the Company is covered
by a collective bargaining agreement. The Company considers its relationships
with its employees to be good.
ADDITIONAL RISK FACTORS
CYCLICALITY OF SEMICONDUCTOR AND THIN FILM HEAD INDUSTRIES
The Company's business depends in significant part upon capital expenditures
by manufacturers of semiconductors, photomasks and thin film head magnetic
recording devices, which in turn depend upon the current and anticipated market
demand for such devices and products utilizing such devices. The semiconductor
industry is highly cyclical and historically has experienced recurring periods
of oversupply. This has, from time to time, resulted in significantly reduced
demand for capital equipment including the systems manufactured and marketed by
the Company. The Company believes that markets for new generations of
semiconductors will also be subject to similar fluctuations. Accordingly, the
Company can give no assurance that it will be able to achieve or maintain its
current level of sales.
The Company attempts to mitigate the risk of cyclicality by participating in
both the semiconductor and thin film head markets, as well as diversifying into
new markets such as photolithography for micromachining and the development of
photomasks. Despite such efforts, when one or more of such
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<PAGE>
markets experiences a downturn or slowdown, such as is currently occurring in
the thin film head market, the Company's net sales and operating results are
materially adversely affected.
During 1999, 1998 and 1997, approximately 30%, 50% and 50%,respectively, of
the Company's net sales were derived from sales to thin film head manufacturers
and micromachining customers. The Company believes the TFH market is currently
in a state of over-capacity and expects this situation to last for at least the
next several quarters. This has and will continue to result in lower sales and
delays or deferrals of customer orders from these industries, which will
continue to materially adversely affect the Company's business, financial
condition and results of operations in the near term. Additionally, the Company
is experiencing increased competition in this market from Nikon, Canon and ASML.
The Company's business and operating results would be materially adversely
affected by continued downturns or slowdowns in the thin film head market or by
loss of market share.
DEVELOPMENT OF NEW PRODUCT LINES; EXPANSION OF OPERATIONS; ASSIMILATION OF
ACQUIRED PRODUCT LINES Currently, the Company is devoting significant resources
to the development, introduction and commercialization of new products and
technologies that are outside the Company's core businesses (see "Research,
Development and Engineering"). During 2000, the Company will continue to develop
these products and will continue to incur significant operating expenses in the
areas of research, development and engineering and general and administrative
costs in order to further develop and support these new products. Additionally,
gross profit margins and inventory levels may be further adversely impacted in
the future by costs associated with the initial production of these new product
lines. These costs include, but are not limited to, additional manufacturing
overhead, additional inventory write-offs, costs associated with managing
multiple sites and the establishment of additional after-sales support
organizations. Additionally, there can be no assurance that operating expenses
will not increase, relative to sales, as a result of adding additional marketing
and administrative personnel, among other costs, to support the Company's new
products. If the Company is unable to achieve significantly increased net sales
or its sales fall below expectations, the Company's operating results will be
materially adversely affected until, among other factors, costs and expenses can
be reduced.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of ISI, a privately held
manufacturer of i-line and DUV reduction lithography systems (the
"Acquisition"). Acquisitions involve numerous risks, including difficulties in
the assimilation of the operations, technologies and products of the acquired
companies; diversion of management's attention from other business concerns;
risks of entering markets in which the Company has no or limited direct
experience; and the potential loss of key employees of the acquired company. In
the event the Company acquires product lines, technologies or businesses which
do not complement the Company's business, or which otherwise do not enhance the
Company's sales or operating results, the Company may incur substantial
write-offs and higher recurring operating costs, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Accordingly, there can be no assurance as to the effect of the
Acquisition on the Company's business, financial condition or operating results.
In conjunction with the Acquisition, significant intangible assets were
acquired. The creation of additional intangible assets has the impact of
increasing amortization expense, which may continue to have a material adverse
affect on the Company's results of operations should significant sales for these
newly acquired product lines not materialize. Additionally, prior to the
Acquisition, ISI had recently completed several significant restructurings of
its businesses and organization and had incurred substantial operating losses.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for
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sharing future development funding in electron beam technology, sell its
electron beam technology unit, or otherwise cease operations of its electron
beam technology unit. In such a scenario, significant uncertainties exist and
circumstances currently unknown may result in the need to recognize an
impairment of the Company's electron beam technology assets in future financial
periods, although management believes it will be able to realize its net
investment in the technology and related net assets. Should an impairment occur,
the Company's financial condition and results of operations would be materially
adversely impacted. The Company did not recognize any revenue related to its
electron beam technology during 1998 and 1999.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION The
semiconductor and magnetic recording head manufacturing industries are subject
to rapid technological change and new product introductions and enhancements.
The Company's ability to be competitive in these and other markets will depend,
in part, upon its ability to develop new and enhanced systems and related
software tools, and to introduce these systems and related software tools at
competitive prices and on a timely and cost-effective basis to enable customers
to integrate them into their operations either prior to or as they begin volume
product manufacturing. The Company will also be required to enhance the
performance of its existing systems and related software tools. Any success of
the Company in developing new and enhanced systems and related software tools
depends upon a variety of factors, including product selection, timely and
efficient completion of product design, timely and efficient implementation of
manufacturing and assembly processes, product performance in the field and
effective sales and marketing. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate both
future demand and the technology that will be available to supply that demand.
There can be no assurance that the Company will be successful in selecting,
developing, manufacturing and marketing new products and related software tools
or enhancing its existing products and related software tools. Any such failure
would materially adversely affect the Company's business, financial condition
and results of operations.
Because of the large number of components in the Company's systems,
significant delays can occur between a system's introduction and the
commencement by the Company of volume production of such systems. The Company
has experienced delays from time to time in the introduction of, and technical
and manufacturing difficulties with, certain of its systems and enhancements and
related software tools and may experience delays and technical and manufacturing
difficulties in future introductions or volume production of new systems or
enhancements and related software tools.
There can be no assurance that the Company will not encounter additional
technical, manufacturing or other difficulties that could further delay future
introductions or volume production of systems or enhancements. The Company's
inability to complete the development or meet the technical specifications of
any of its systems or enhancements and related software tools, or its inability
to manufacture and ship these systems or enhancements and related software tools
in volume and in time to meet the requirements for manufacturing the future
generation of semiconductor or thin film head devices would materially adversely
affect the Company's business, financial condition and results of operations. In
addition, the Company may incur substantial unanticipated costs to ensure the
functionality and reliability of its products early in the products' life
cycles. If new products have reliability or quality problems, reduced orders or
higher manufacturing costs, delays in collecting accounts receivable and
additional service and warranty expenses may result. Any of such events may
materially adversely affect the Company's business, financial condition and
results of operations.
INTERNATIONAL SALES; JAPANESE MARKET International sales accounted for
approximately 53%, 47% and 33% of total net sales for the years 1999, 1998 and
1997, respectively. The Company anticipates that international sales, which
typically have lower gross margins than domestic sales, principally due to
higher field service and support costs, will continue to account for a
significant portion of total net sales. As a result, a significant portion of
the Company's sales will continue to be subject to certain risks, including
unexpected changes in regulatory requirements, difficulty in satisfying existing
regulatory requirements, exchange rate fluctuations, tariffs and other barriers,
political and economic instability, difficulties in accounts receivable
collections, natural disasters, difficulties in staffing and managing foreign
subsidiary
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and branch operations and potentially adverse tax consequences. Although the
Company generally transacts its international sales in U.S. dollars,
international sales expose the Company to a number of additional risk factors,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products and may further impact the purchasing ability of its international
customers. In Japan, however, the Company has commenced direct sales operations
and orders are typically denominated in Japanese yen. This may subject the
Company to a higher degree of risk from currency fluctuations. The Company
attempts to mitigate this exposure through the use of foreign exchange
contracts. The Company is also subject to the risks associated with the
imposition of legislation and regulations relating to the import or export of
semiconductors and magnetic recording head products. The Company cannot predict
whether quotas, duties, taxes or other charges or restrictions will be
implemented by the United States, Japan or any other country upon the
importation or exportation of the Company's products in the future. There can be
no assurance that any of these factors or the adoption of restrictive policies
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
Although the Company has sold a number of its systems to Japanese thin film
head manufacturers, to date, the Company has made limited sales of its systems
to Japanese semiconductor manufacturers. The Japanese semiconductor market
segment is large, represents a substantial percentage of the worldwide
semiconductor manufacturing capacity, and is difficult for foreign companies to
penetrate. The Company is at a competitive disadvantage with respect to Japanese
semiconductor capital equipment suppliers that have been engaged for some time
in collaborative efforts with Japanese semiconductor manufacturers, and
currently dominate the Japanese stepper market. The Company believes that
increased penetration of the Japanese market is critical to its financial
results and intends to continue to invest significant resources in Japan in
order to meet this objective.
DEPENDENCE ON KEY PERSONNEL The Company's future operating results depend,
in significant part, upon the continued contributions of key personnel, many of
whom would be difficult to replace. None of such persons has an employment or
noncompetition agreement with the Company. The Company does not maintain any
life insurance on any of its key persons. The loss of key personnel could have a
material adverse effect on the business, financial condition and results of
operations of the Company. In addition, the Company's future operating results
depend in significant part upon its ability to attract and retain other
qualified management, manufacturing, and technical, sales and support personnel
for its operations. There are only a limited number of persons with the
requisite skills to serve in these positions and it may become increasingly
difficult for the Company to hire such personnel over time. Competition for such
personnel is intense, and there can be no assurance that the Company will be
successful in attracting or retaining such personnel. The failure to attract or
retain such persons would materially adversely affect the Company's business,
financial condition and results of operations.
CHANGES TO FINANCIAL ACCOUNTING STANDARDS MAY AFFECT THE COMPANY'S REPORTED
RESULTS OF OPERATIONS The Company prepares its financial statements to conform
with generally accepted accounting principles, or GAAP. GAAP are subject to
interpretation by the American Institute of Certified Public Accountants, the
SEC and various bodies formed to interpret and create appropriate accounting
policies. A change in those policies can have a significant effect on the
Company's reported results and may even affect its reporting of transactions
completed before a change is announced.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at
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the beginning of the quarter ending March 31, 2000. This charge will appear as a
non-operating item in the Company's statement of operations.
In effect, systems shipped but not yet installed and accepted by customers
as of December 31, 1999 would be included in the Company's backlog. These
systems would be recognized as sales in the quarter in which installation and
acceptance by the customer occurs. The Company presently anticipates that a
majority of the net sales for the quarter ending March 31, 2000 will result from
installation and customer acceptance of systems shipped in preceding periods.
Accounting policies affecting many other aspects of our business, including
rules relating to purchase and pooling-of-interests accounting for business
combinations, revenue recognition, in-process research and development charges,
employee stock purchase plans and stock option grants, have recently been
revised or are under review. Changes to those rules or the questioning of
current practices may have a material adverse effect on the Company's reported
financial results or on the way it conducts business. In addition, the Company's
preparation of financial statements in accordance with GAAP requires that it
make estimates and assumptions that affect the recorded amounts of assets and
liabilities, disclosure of those assets and liabilities at the date of the
financial statements and the recorded amounts of expenses during the reporting
period. A change in the facts and circumstances surrounding those estimates
could result in a change to the Company's estimates and could impact its future
operating results.
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the
Company's Certificate of Incorporation, equity incentive plans, Shareholder
Rights Plan, Bylaws and Delaware law may discourage certain transactions
involving a change in control of the Company. In addition to the foregoing, the
Company's classified board of directors, the shareholdings of the Company's
officers, directors and persons or entities that may be deemed affiliates and
the ability of the Board of Directors to issue "blank check" preferred stock
without further stockholder approval could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock.
VOLATILITY OF STOCK PRICE The Company believes that factors such as
announcements of developments related to the Company's business, fluctuations in
the Company's operating results, sales of securities of the Company into the
marketplace, general conditions in the semiconductor and magnetic recording head
industries or the worldwide or regional economies, an outbreak of hostilities, a
shortfall in revenue or earnings from, or changes, in analysts' expectations,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in patents or other intellectual
property rights and developments in the Company's relationships with its
customers and suppliers could cause the price of the Company's Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock market
in general, and the market for shares of small capitalization stocks in
particular, including the Company's, have experienced extreme price
fluctuations, which have often been unrelated to the operating performance of
affected companies. There can be no assurance that the market price of the
Company's Common Stock will not continue to experience significant fluctuations
in the future, including fluctuations that may be unrelated to the Company's
performance.
ITEM 2. PROPERTIES
The Company maintains its headquarters and manufacturing operations in San
Jose, California in four leased facilities, totaling approximately 228,000
square feet, which contain general administration and finance, marketing and
sales, customer service and support, manufacturing and research, development,
and engineering. Additionally, the Company leases approximately 21,000 square
feet in New Providence, New Jersey for its UltraBeam product line, and
approximately 65,000 square feet in Wilmington, Massachusetts for its reduction
lithography product lines, which contain manufacturing, research, and
development, engineering and general administration. The leases for these
facilities expire at various dates from December 2000 to March 2010. The Company
also leases 6.4 acres of undeveloped land near its headquarters in San Jose.
This lease expires in November 2000. As part of this transaction, the Company
presently has segregated $5.5 million of its securities as collateral for
certain obligations of the lessor
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pertaining to this land. The Company also leases four sales and support offices
in the United States in Phoenix, Arizona; Allentown, Pennsylvania; Austin,
Texas; and Richardson, Texas under leases with terms expiring between one and
four years. The Company also maintains a branch office in Taiwan and sales,
service and support subsidiaries in Japan, Korea, the United Kingdom and
Thailand, with terms expiring between one month and fifteen years. The Company
believes that its existing facilities will be adequate to meet its currently
anticipated requirements and that suitable additional or substitute space will
be available as needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation. From time to time,
however, the Company may be subject to claims and lawsuits arising in the normal
course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of December 31, 1999, the executive officers of the Company, who are
appointed by and serve at the discretion of the Board of Directors, were as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ---- -------- -------------------------
<S> <C> <C>
Arthur W. Zafiropoulo................ 60 Chairman of the Board of Directors and Chief
Executive Officer
Daniel H. Berry...................... 54 President and Chief Operating Officer
Bruce R. Wright...................... 51 Senior Vice President, Finance, Chief Financial
Officer and Secretary
</TABLE>
Mr. Zafiropoulo founded the Company in September 1992 to acquire certain
assets and liabilities of the Ultratech Stepper Division (the "Predecessor") of
General Signal Corporation and, since March 1993, has served as Chief Executive
Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as
President of the Company from March 1993 to March 1996, resumed the position of
President of the Company in May 1997 and serves in this capacity until
April 1999. Between September 1990 and March 1993, he was President of the
Predecessor. From February 1989 to September 1990, Mr. Zafiropoulo was President
of General Signal's Semiconductor Equipment Group International, a semiconductor
equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was
President and Chief Executive Officer of Drytek, Inc., a plasma dry-etch company
that he founded in August 1980, and which was later sold to General Signal in
1986. From July 1987 to September 1989, Mr. Zafiropoulo was also President of
Kayex, a semiconductor equipment manufacturer, which is a unit of General
Signal. Mr. Zafiropoulo is a director of SEMI (Semiconductor Equipment and
Materials International), an international trade association representing the
semiconductor, flat panel display equipment and materials industry;
Semi/Sematech, which represents majority United States-owned and controlled
suppliers of equipment, materials and services to the semiconductor
manufacturing industry; Advanced Energy Industries, Inc., a leading manufacturer
of power conversion and control systems; and Intelligent Reasoning
Systems, Inc., a provider of optical inspection tools which utilize artificial
intelligence software for Printed Wiring Assemblies (PWA) and High-Density
Interconnect (HDI) markets.
Mr. Berry has served as Chief Operating Officer and President of the Company
since April 1999. Between June 1998 and April 1999, Mr. Berry was the Chief
Operating Officer and Executive Vice President of the Company. Between
March 1993 and June 1998, he served as Senior Vice President, Sales and Service
of the Company. Between December 1990 and March 1993, he served as Vice
President, Sales and Service of the Predecessor. From November 1989 to
December 1990, Mr. Berry was director of
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international operations for General Signal's Semiconductor Equipment Group
International, a semiconductor equipment company. From July 1976 to
November 1989, he held various management positions including director of
marketing for optical lithography, at Perkin-Elmer Corporation, a semiconductor
equipment manufacturer. Prior to Perkin-Elmer, Mr. Berry spent nine years at
Bell Laboratories, Murray Hill, New Jersey, working on various optical and
lithography development projects. Since December 1998, Mr. Berry has served as a
director of Rudolph Technologies, Inc. Flanders, New Jersey, a manufacturer of
precision film metrology instruments for semiconductor markets
Mr. Wright has served as Senior Vice President, Finance, Chief Financial
Officer and Secretary of the Company since June 1, 1999. Mr. Wright is
responsible for all aspects of finance, legal and information services. Before
he joined the Company, Mr. Wright served as Executive Vice President, Finance
and CFO of Spectrian Corporation. From 1991 through 1997, Mr. Wright was CFO of
Tencor Instruments until its acquisition by KLA Instruments Corporation in 1997,
which formed KLA-Tencor Corporation. Mr. Wright holds an MBA degree in Finance
and Operations Management from the Massachusetts Institute of Technology, a BS
degree in Mechanical Engineering from the California Institute of Technology,
and a BA degree in Physics from Pomona College.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, for periods indicated, the range of high and
low sale prices of the Company's Common Stock, as reported by the National
Association of Securities Dealers, Inc.:
<TABLE>
<CAPTION>
FISCAL 1999--FISCAL QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- --------------------------------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Market Price:(1) High................. $20.6250 $15.4688 $15.0625 $19.4375
Low.................. $13.6875 $12.9375 $12.5000 $12.7500
FISCAL 1998--FISCAL QUARTER ENDED
- -----------------------------------------
Market Price:(1) High................. $24.0000 $26.6250 $23.0000 $20.5000
Low.................. $18.1250 $18.5000 $14.0000 $12.7500
</TABLE>
- ------------------------
(1) The Company's Common Stock is traded on the Nasdaq Stock
Market-Registered Trademark- under the symbol UTEK. The market prices per
share represent the highest and lowest closing prices for the Company's
Common Stock on the Nasdaq National Market during each fiscal quarter. As of
December 31, 1999, the Company had approximately 740 stockholders of record.
The Company's fiscal quarters in 1999 ended on April 3, 1999, July 3, 1999,
October 2, 1999 and December 31, 1999, and the Company's fiscal quarters in 1998
ended on April 4, 1998, July 4, 1998, October 3, 1998, and December 31, 1998,
respectively. For convenience of presentation, the Company's 1999 fiscal
quarters have been shown as ending on March 31, 1999, June 30, 1999,
September 30, 1999 and December 31, 1999, and the Company's 1998 fiscal quarters
have been shown as ending on March 31, 1998, June 30, 1998, September 30, 1998
and December 31, 1998.
The Company has not paid cash dividends on its Common Stock since inception,
and its Board of Directors presently plans to reinvest the Company's earnings in
its business. Accordingly, it is anticipated that no cash dividends will be paid
to holders of Common Stock in the foreseeable future.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1999 1998*** 1997** 1996 1995 1994 1993* 1992*
- ----------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Net sales......................... $113,123 $ 81,457 $147,349 $193,508 $157,831 $91,344 $54,136 $35,309
Gross profit (loss)............... 44,420 (1,319) 77,678 104,893 82,288 46,037 26,683 17,548
Gross profit (loss) as a percentage
of net sales.................... 39% (2)% 53% 54% 52% 50% 49% 50%
Operating income (loss)........... $(11,213) $(70,426) $ 18,001 $ 46,678 $ 31,782 $15,291 $ 6,833 $ 2,220
Income (loss) before income taxes
(benefit)....................... (4,168) (64,126) 25,094 52,707 36,170 16,445 6,689 2,089
Pre-tax income (loss) as a
percentage of net sales......... (4)% (79)% 17% 27% 23% 18% 12% 6%
Net income (loss)................. $ (4,168) $(57,944) $ 17,566 $ 35,311 $ 24,234 $11,019 $ 4,123 $ 1,304
Net income (loss) per
share--basic.................... $ (0.20) $ (2.76) $ 0.85 $ 1.76 $ 1.32 $ 0.68 N/A N/A
Number of shares used in per share
computation--basic.............. 21,279 20,958 20,553 20,079 18,425 16,293 N/A N/A
Net income (loss) per
share--diluted.................. $ (0.20) $ (2.76) $ 0.81 $ 1.66 $ 1.20 $ 0.65 N/A N/A
Number of shares used in per share
computation--diluted............ 21,279 20,958 21,681 21,271 20,154 16,917 N/A N/A
BALANCE SHEET:
Cash, cash equivalents and short-
term investments................ $143,544 $146,107 $164,349 $167,409 $161,356 $50,246 $26,242 $ 176
Working capital................... 163,601 166,417 223,226 212,684 176,174 69,368 32,977 6,307
Total assets...................... 236,808 245,935 300,001 280,772 245,428 104,789 56,381 16,765
Long-term obligations, less current
portion......................... -- -- -- -- -- 400 800 --
Stockholders' equity.............. 204,214 210,151 263,632 239,947 199,658 80,027 38,091 8,323
OTHER DATA:
Return on average equity.......... (2)% (24)% 7% 16% 17% 19% 18% 15%
Book value per common share
outstanding..................... $ 9.55 $ 9.96 $ 12.68 $ 11.81 $ 10.08 $ 4.84 $ 3.00 N/A
Current ratio..................... 6.06 5.81 7.60 6.40 4.94 3.93 2.89 1.76
Long term debt to equity ratio.... 0.00 0.00 0.00 0.00 0.00 0.00 0.02 0.00
Capital expenditures.............. $ 6,948 $ 9,510 $ 9,337 $ 7,849 $ 9,760 $ 7,759 $ 2,752 $ 972
Income tax/benefit as percentage of
pre-tax income/loss............. 0% 10% 30% 33% 33% 33% 38% 38%
</TABLE>
QUARTERLY DATA
<TABLE>
<CAPTION>
UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA 1ST 2ND 3RD 4TH
- ---------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1999
Net sales................................................... $25,779 $ 29,284 $ 30,413 $ 27,647
Gross profit................................................ 8,721 11,295 13,088 11,316
Operating loss.............................................. (4,377) (2,725) (1,195) (2,916)
Net income (loss)........................................... (2,529) (1,074) 434 (999)
Net income (loss) per share--basic.......................... $ (0.12) $ (0.05) $ 0.02 $ (0.05)
Number of shares used in per share computation--basic....... 21,124 21,264 21,344 21,386
Net income (loss) per share--diluted........................ $ (0.12) $ (0.05) $ 0.02 $ (0.05)
Number of shares used in per share computation--diluted..... 21,124 21,264 21,740 21,386
1998***
Net sales................................................... $27,782 $ 22,395 $ 12,359 $ 18,921
Gross profit (loss)......................................... 11,864 6,247 (13,803) (5,627)
Operating loss.............................................. (1,785) (19,452) (32,935) (16,254)
Net income (loss)........................................... 361 (15,364) (28,166) (14,775)
Net income (loss) per share--basic.......................... $ 0.02 $ (0.74) $ (1.34) $ (0.70)
Number of shares used in per share computation--basic....... 20,833 20,895 21,014 21,090
Net income (loss) per share--diluted........................ $ 0.02 $ (0.74) $ (1.34) $ (0.70)
Number of shares used in per share computation--diluted..... 21,697 20,895 21,014 21,090
</TABLE>
- ------------------------------
* Ultratech Stepper, Inc. (the "Company") acquired certain assets and
liabilities of the Ultratech Stepper Division (the "Predecessor") of General
Signal Corporation on March 8, 1993. The amounts, as presented above,
reflect historical results and do not include pro forma adjustments, which
may have been incurred as an independent company. Net income per share for
each of the two years in the period ended December 31, 1993 is not presented
because of a lack of comparability between the capital structure of the
Company and the Predecessor.
** Results of operations in 1997 include a charge of $3,619,000, or $0.12 per
share--basic and diluted, to reflect research and development cost incurred
in the first quarter of 1997 in conjunction with the acquisition of the
assets of Lepton Inc., and a special charge of $3,450,000, or $0.12 per
share--basic, $0.11 per share--diluted, to account for termination of the
Company's Japan distributor in the fourth quarter of 1997.
19
<PAGE>
*** Gross profit (loss) in 1998 includes special charges of $15,231,000 and
$11,177,000 in the third and fourth quarters, respectively, relating
primarily to the write-down of inventories and provisions for estimated
losses on purchase commitments. Results of operations in 1998 include a
charge of $12,566,000 in the second quarter, or $0.60 per share--basic and
diluted, to reflect acquired in-process research and development incurred in
conjunction with the acquisition of ISI, and a related adjustment to
operations of $7,458,000 in the fourth quarter, or $0.35 per share, to
reduce the in-process research and development charge as a result of the
final purchase price allocation. Additionally, results of operations in 1998
include special charges of $5,775,000 and $5,400,000 in the third and fourth
quarters, respectively, reflecting provisions for doubtful accounts and
leases receivable, provisions for sales returns and allowances and costs
associated with a reduction in the Company's workforce.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Ultratech develops, manufactures and markets photolithography equipment
(steppers) designed to reduce the cost of manufacturing integrated circuits,
thin film heads for disk drives and micromachined components. The Company
supplies step-and-repeat systems based on one-to-one and reduction optical
technologies to customers located throughout North America, Europe, Japan and
the rest of Asia. These products range from low-cost systems for high-volume
manufacturing to advanced systems for cost-effective production of leading-edge
devices and for research and development applications. Additionally, the Company
manufactures and markets the UltraBeam "V" Model electron beam pattern
generation system based on vector-scan technology for use in the development and
production of photomasks for the integrated circuits ("IC") industry.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. ("ISI"), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems (the "Acquisition") for approximately
$19.2 million in cash, $2.6 million in transaction costs and the assumption of
certain liabilities.
RESULTS OF OPERATIONS
The Company's operating results have fluctuated significantly in the past
and will continue to fluctuate significantly in the future. Such variability
depends upon a variety of factors, including substantial cyclicality in the
Company's target markets; various competitive factors including price-based
competition and competition from vendors employing other technologies; the
timing and terms of significant orders; lengthy sales cycles for the Company's
products; the mix of products sold; inventory and open purchase commitment
reserve positions; concentration of credit risk; lengthy development cycles for
new products; market acceptance of new products and enhanced versions of the
Company's products; delayed shipments to customers due to customer configuration
changes and other factors; acquisition activities requiring the devotion of
substantial management resources; lengthy manufacturing cycles for the Company's
products; the timing of new product announcements and releases by the Company or
its competitors; manufacturing
20
<PAGE>
inefficiencies associated with the startup of new product introductions;
customer concentration; ability to volume produce systems and meet customer
requirements; patterns of capital spending by customers; product discounts;
changes in pricing by the Company, its competitors or suppliers; political and
economic instability throughout the world, in particular the Asia/Pacific
region; natural disasters; regulatory changes; and business interruptions
related to the Company's occupation of its facilities. The Company's gross
profit as a percentage of sales has been and will continue to be significantly
affected by a variety of factors, including product discounts and increased
competition in the Company's targeted markets; the mix of products sold;
inventory and open purchase commitment reserve provisions; the rate of capacity
utilization; nonlinearity of shipments during the quarter; the introduction of
new products, which typically have higher manufacturing costs until
manufacturing efficiencies are realized and are typically discounted more than
existing products until the products gain market acceptance; the percentage of
international sales, which typically have lower gross margins than domestic
sales principally due to higher field service and support costs; and the
implementation of subcontracting arrangements.
The Company derives a substantial portion of its total net sales from sales
of a relatively small number of newly manufactured systems, which typically
range in price from $800,000 to $2.4 million for the Company's 1X steppers, and
$1.5 million to more than $6 million for the Company's reduction steppers.
Additionally, the Company's UltraBeam electron beam lithography system is
anticipated to sell in a range of $6.0 million to $9.0 million. As a result of
these high sale prices, the timing of recognition of revenue from a single
transaction has had and will continue to have a significant impact on the
Company's net sales and operating results. The Company's backlog at the
beginning of a period typically does not include all of the sales needed to
achieve the Company's objectives for that period. In addition, orders in backlog
are subject to cancellation, delay, deferral or rescheduling by a customer with
limited or no penalties. Consequently, the Company's net sales and operating
results for a period have been and will continue to be dependent upon the
Company obtaining orders for systems to be shipped in the same period in which
the order is received. The Company's business and financial results for a
particular period could be materially adversely affected if an anticipated order
for even one system is not received in time to permit shipment during the
particular period. Furthermore, a substantial portion of the Company's net sales
has historically been realized near the end of each quarter. Accordingly, the
failure to receive anticipated orders or delays in shipments near the end of a
particular quarter, due, for example, to reschedulings, delays, deferrals or
cancellations by customers, additional customer configuration requirements, or
to unexpected manufacturing difficulties or delays in deliveries by suppliers
due to their long production lead times or otherwise, has caused and may
continue to cause net sales in a particular period to fall significantly below
the Company's expectations, which has and could continue to materially adversely
affect the Company's operating results for such period. In particular, the long
manufacturing cycles of the Company's Titan Wafer Stepper-Registered Trademark-
and Saturn Wafer Stepper-Registered Trademark-, and the Company's reduction
stepper product offerings (acquired through the acquisition of certain assets
and liabilities of ISI in 1998), and the long lead time for lenses and other
materials, could cause shipments of such products to be delayed from one quarter
to the next, which could materially adversely affect the Company's financial
condition and results of operations for a particular quarter. Additionally, the
Company has very limited experience in the manufacture of its UltraBeam electron
beam pattern generation systems. The UltraBeam systems are extremely complex and
the product has significantly long manufacturing and sales cycles, which greatly
increase the likelihood of delays in shipments from one quarter to the next. Due
to the high list price for these systems, shipment delays would materially
adversely affect the Company's financial condition and results of operations for
a particular quarter if the shipment was delayed to the following quarter. The
impact of these and other factors on the Company's sales and operating results
in any future period cannot be forecast with certainty.
The Company's business has in prior years been subject to seasonality,
although the Company believes such seasonality has been masked in recent years
by cyclical trends within the semiconductor and thin film head industries. In
addition, the need for continued expenditures for research and development,
capital equipment, ongoing training and worldwide customer service and support,
among other factors, will make
21
<PAGE>
it difficult for the Company to reduce its operating expenses in a particular
period if the Company fails to achieve its net sales goals for the period.
Additionally, the Company continues to operate at less than optimal capacity
utilization, resulting in manufacturing inefficiencies that adversely affect the
Company's gross margins and results of operations. The Company presently
anticipates that this trend will continue for at least the next few quarters.
The Company presently expects that net sales for the three-month period
ending March 31, 2000 will be higher than net sales in the comparable period in
1999. However, due to lack of order visibility, the Company can give no
assurance that it will be able to achieve or maintain its current sales levels.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at the beginning of the
quarter ending March 31, 2000. This charge will appear as a non-operating item
in the Company's statement of operations.
In effect, systems shipped but not yet installed and accepted by customers
as of December 31, 1999 would be included in the Company's backlog. These
systems would be recognized as sales in the quarter in which installation and
acceptance by the customer occurs. The Company presently anticipates that a
majority of the net sales for the quarter ending March 31, 2000 will result from
installation and customer acceptance of systems shipped in preceding periods.
Irrespective of the impact of SAB 101, the Company presently expects to
recognize an operating and net loss for the quarter ending March 31, 2000. These
losses may extend to future quarters due, in part, to the significant level of
planned research, development and engineering spending, relative to anticipated
sales; the current low rate of capacity utilization; and the current backlog and
order levels for the Company's products.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
Certain of the statements contained in this report may be considered
forward-looking statements that may involve a number of risks and uncertainties.
In addition to the factors discussed herein, among other factors that could
cause actual results to differ materially include the following: highly
competitive industry; difficulties in assimilating acquired operations;
international sales; development of new product lines; rapid technological
change; importance of timely product introductions; year 2000 compliance; future
acquisitions; expansion of the Company's product lines; dependence on key
personnel; sole or
22
<PAGE>
limited sources of supply; intellectual property matters; environmental
regulations; effects of certain anti-takeover provisions; volatility of stock
price; and the other risk factors listed from time to time in the Company's SEC
reports.
Due to these and additional factors, certain statements, historical results
and percentage relationships discussed below will not necessarily be indicative
of the results of operations for any future period.
NET SALES
1999 VS. 1998
Net sales consist of revenue from system sales, spare parts sales, and
service. For the year ended December 31, 1999, net sales were $113.1 million, an
increase of 39% as compared with net sales of $81.5 million for 1998. The
increase, relative to 1998, was primarily attributed to improved conditions
within the semiconductor industry, which has resulted in higher capital spending
levels, partially offset by lower front-end equipment sales to the thin film
head industry. For the year ended December 31, 1999, the Company's unit system
shipments increased 70%, relative to 1998, while the weighted-average selling
price of all systems sold declined slightly. Service revenue increased 11% for
the year ended December 31, 1999, as compared to 1998, primarily as a result of
the acquisition of the product lines and related service business of ISI in June
of 1998. Net sales of spare parts and product upgrades declined 9% for the year
ended December 31, 1999, as compared to 1998.
For the year ended December 31, 1999, international net sales were
$60.0 million, as compared with $38.5 million for 1998, an increase of 56%.
International net sales represented 53% of total net sales for the year ended
December 31, 1999, as compared with 47% for 1998. This year-over-year increase,
in absolute dollars, was primarily attributed to sales to back-end thin film
head manufacturers in Asia, excluding Japan. However, the Company continues to
be cautious in its outlook for the Asian markets. The Company believes that the
severe currency and equity market fluctuations that have been experienced in
recent years by many of the Asian markets has resulted in the past, and may
continue to result, in delays, deferrals and cancellations of orders of the
Company's products, particularly in the short-term, which would have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's operations in foreign countries are not generally
subject to significant exchange rate fluctuations, principally because sales
contracts for the Company's systems are generally denominated in U.S. dollars.
In Japan, however, orders are typically denominated in Japanese yen. This may
subject the Company to a higher degree of risk from currency fluctuations. The
Company attempts to mitigate this exposure through the use of foreign exchange
contracts; however, there can be no assurance of the success of any such
efforts. International sales expose the Company to a number of additional risks,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products and may place the Company at a competitive disadvantage. (See
"Additional Risk Factors: International Sales; Japanese Market").
During 1997 and 1998, the Company experienced a significant level of
shipment delays and purchase order restructuring by several of its customers,
and also experienced purchase order cancellations. There can be no assurance
that this trend will not continue in the future. Accordingly, the Company can
give no assurance that it will be able to achieve or maintain its current or
prior level of sales. Additionally, the TFH market is currently in an
over-capacity situation. This factor had a material adverse impact on net sales
for the quarter ended December 31, 1999 and may further adversely impact net
sales for at least the next several quarters.
The Company presently expects that net sales for the three-month period
ending March 31, 2000 will be higher than net sales in the comparable period in
1999. However, due to lack of order visibility, the Company can give no
assurance that it will be able to achieve or maintain its current sales levels.
23
<PAGE>
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at the beginning of the
quarter ending March 31, 2000. This charge will appear as a non-operating item
in the Company's statement of operations.
In effect, systems shipped but not yet installed and accepted by customers
as of December 31, 1999 would be included in the Company's backlog. These
systems would be recognized as sales in the quarter in which installation and
acceptance by the customer occurs. The Company presently anticipates that a
majority of the net sales for the quarter ending March 31, 2000 will result from
installation and customer acceptance of systems shipped in preceding periods.
Because the Company's net sales are subject to a number of risks, including
intense competition in the capital equipment industry and the timing and market
acceptance of the Company's products, there can be no assurance that the Company
will exceed or maintain its current level of net sales for any period in the
future. Additionally, the Company believes that the market acceptance and volume
production of its XLS advanced reduction stepper (acquired from ISI), and its
Titan, Saturn and 1000 series families of wafer steppers, are of critical
importance to its future financial results. To the extent that these products do
not achieve significant sales due to difficulties involving manufacturing or
engineering, the inability to reduce the current long manufacturing cycles for
such products, competition, excess capacity in the semiconductor industry, or
any other reason, the Company's business, financial condition and results of
operations would be materially adversely affected.
1998 VS. 1997
For the year ended December 31, 1998, net sales were $81.5 million, a
decrease of 45% as compared with net sales of $147.3 million for 1997. The
decline, relative to 1997, was primarily attributed to the extremely weak market
conditions in the semiconductor industry and the related markets for
semiconductor capital equipment. Within this market segment, the Company
experienced significantly lower unit system shipments across all product lines.
Additionally, the Company experienced lower system shipments for front-end thin
film head processing, micromachining applications and the production of
photomasks. For the year ended December 31, 1998, the Company's unit system
shipments decreased 53%, relative to 1997, while the weighted-average selling
price of all systems sold declined slightly. Net sales from spare parts and
product upgrades increased 2% for the year ended December 31, 1998, as compared
to 1997, primarily as a result of the acquisition of the product lines and
related service business of ISI.
For the year ended December 31, 1998, international net sales were
$38.5 million, as compared with $48.4 million for 1997, a decline of 20%.
International net sales represented 47% of total net sales for the year ended
December 31, 1998, as compared with 33% for 1997. This year-over-year decline,
in absolute dollars, was primarily attributed to decreased system sales to the
Asian market.
GROSS PROFIT (LOSS)
1999 VS. 1998
The Company's gross profit as a percentage of net sales ("gross margin") was
39.3% for the year ended December 31, 1999, as compared with a gross loss as a
percentage of net sales of (1.6%) for 1998. In 1998, the Company recognized
$26.4 million in special charges related primarily to the write-down of
inventories and provisions for estimated losses associated with open purchase
commitments. These charges
24
<PAGE>
were primarily a result of the Company's lower sales and bookings levels in
1998, revised sales demand forecasts for 1999 and delays in the
production-readiness of the Company's electron beam lithography system. In
addition to the special charges recognized in 1998, the increase in gross profit
as a percentage of net sales in 1999 can be further attributed to significantly
higher capacity utilization; favorable changes in product mix; and a lower
percentage of service revenue relative to total net sales, which typically has
lower standard margins than system sales; partially offset by lower
weighted-average selling prices.
The Company believes that gross profit as a percentage of net sales for the
first quarter of 2000 may be comparable to levels achieved during the
three-month period ended March 31, 1999. Intense competition in the markets the
Company serves may make it difficult for the Company to increase or maintain its
current gross margin percentages in the near term.
1998 VS. 1997
The Company's gross loss as a percentage of net sales was (1.6%) for the
year ended December 31, 1998, as compared with positive gross margin of 52.7%
for 1997. In 1998, the Company recognized $26.4 million in special charges
related primarily to the write-down of inventories and provisions for estimated
losses associated with open purchase commitments. These charges were primarily a
result of the Company's lower sales and bookings levels in 1998, revised sales
demand forecasts for 1999 and delays in the production-readiness of the
Company's electron beam lithography system.
In addition to the special charges recognized in 1998, the decline in gross
profit as a percentage of net sales can be further attributed to significantly
lower capacity utilization; lower product margins as a result of higher
production costs; unfavorable changes in product mix; a higher percentage of
service and spare parts sales relative to total net sales, which typically have
lower standard margins than system sales; and continued manufacturing
inefficiencies as a result of non-linearity of system shipments and customer
cancellations, deferrals and reschedulings.
RESEARCH, DEVELOPMENT AND ENGINEERING EXPENSES
1999 VS. 1998
The Company's research, development and engineering expenses were
$27.7 million for 1999, as compared with $26.7 million for 1998. The Company
continued to invest significant resources in the development and enhancement of
its UltraBeam electron beam lithography system and its Verdant rapid thermal
annealing/laser doping systems and technologies, together with continued
expenditures for its 1X and reduction optical products and technologies. The
Company presently expects that the absolute dollar amount of research,
development and engineering expenses for the quarter ending March 31, 2000 will
be significantly higher, relative to the comparable period in 1999, due
primarily to increased spending on its 1X and reduction optical products and
technologies.
1998 VS. 1997
The Company's research, development and engineering expenses, net of third
party funding for certain projects, were $26.7 million for 1998, as compared
with $26.4 million for 1997. Despite lower net sales, the Company invested
significant resources in the development and enhancement of its UltraBeam
electron beam lithography system and in the development of its Verdant rapid
thermal annealing/laser doping systems and technologies, together with continued
expenditures for its 1X optical products and technologies. Additionally, in 1998
the Company commenced research, development and engineering spending in the area
of reduction lithography, as a direct result of the Acquisition.
25
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
1999 VS. 1998
Selling, general and administrative expenses were $26.3 million for 1999, as
compared with $25.1 million recorded for 1998. As a percentage of net sales,
selling, general and administrative expenses decreased to 23.3% of net sales in
1999, as compared to 30.8% of net sales in 1998, primarily as a result of higher
net sales and cost containment measures implemented in the second half of 1998.
The Company presently anticipates that the absolute dollar amount of selling,
general and administrative expenses will increase significantly during the
quarter ending March 31, 2000, relative to the comparable period in 1999,
primarily as a result of higher anticipated net sales.
1998 VS. 1997
Selling, general and administrative expenses were $25.1 million for 1998, as
compared with $26.0 million in 1997. As a percentage of net sales, selling,
general and administrative expenses increased to 30.8% of net sales in 1998, as
compared to 17.7% of net sales in 1997. In 1998, higher general and
administrative expenses related to the operations acquired in the Acquisition
and higher general and administrative expenses for the Company's Verdant and
UltraBeam operations were offset by cost containment measures implemented during
the second half of the year. Additionally, lower expenses as are typically
associated with a reduction in sales.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc., a privately held manufacturer of i-line and deep ultra-violet
reduction lithography systems. As a result, the Company recognized a charge for
acquired in-process research and development ("IPR&D") expense of $5.1 million,
or $0.24 per share net of tax benefits, representing products in development
stage that were not considered to have reached technological feasibility and had
no alternative future use.
The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine its
state of development and related fair value. The Company's review indicated that
the IPR&D had not reached a state of technological feasibility and the
underlying technology had no alternative future use to the Company in other
research and development projects or otherwise. In the case of IPR&D, fair
values of the corresponding technologies were determined using an income
approach, which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology was comprised of the total
present value of the anticipated net cash flows attributable to the in-process
project, discounted to net present value, taking into account the uncertainty
surrounding the successful development of the purchased IPR&D.
The IPR&D associated with the ISI acquisition related to the development of
optical and post-optical lithography systems. Included were five projects:
(i) the XLS/ISIS 3160 and 3155 project, which was 73% complete as of the
acquisition date; (ii) the Unity project, which was 56% complete as of the
acquisition date; (iii) the XLS 193nm Mid-field and 157nm Small-field platforms,
which were 70% complete as of the acquisition date; (iv) the Scalpel engineering
feasibility project, which was 35% complete as of the acquisition date; and
(v) the EUV stage project, which was 38% complete as of the acquisition date.
The aforementioned completion percentages were based on an estimated
weighted-average of the time, cost, and complexity required to bring the
projects to fruition. The significant technological hurdles remaining to be
addressed included: the development of high resolution optical systems with
- -ffUaxis illumination; the integration of complex sub]systems into production
worthy tools with user friendly operator interfaces, while achieving more
precise overlay; the ability to design vacuum and inert gas containment systems
26
<PAGE>
without unacceptable reductions in throughput; the development of CaF2 optical
elements in sizes that have never been built; and the development of an
autofocus system that is four times more accurate than any system ever
developed. The Company estimated that as of the acquisition date, the remaining
research and development work on these projects would cost approximately
$35.0 million and would be completed over the next one to five years. These
projects had progressed more slowly than originally projected due to lower than
anticipated staffing. The lower staffing levels were a result of the Company's
actions to reduce expenses during a period of reduced revenues and earnings.
There can be no assurance that the Company will be able to complete the
development and successful marketing of any products resulting from the
completion of these projects. A failure to successfully develop and market such
products could have a material adverse effect on the Company's business,
financial condition and results of operations.
During the first quarter of 1997, the Company completed the acquisition of
the assets of Lepton Inc., a developer of electron beam lithography systems. As
a result of this acquisition, the Company recognized a charge for technology
acquired for a research and development project of $3.6 million, or $0.12 per
share, net of related income tax benefits.
SPECIAL CHARGES
Due primarily to the continued downturn in the thin film head and
semiconductor industries, the Company realized significantly lower sales and
bookings levels during 1998. As a result, the Company significantly reduced its
production demand forecast for 1999 and implemented various cost containment
measures beginning in the third quarter of 1998. During the third and fourth
quarters of 1998, the Company recognized special charges in the amount of
$15.2 million and $11.2 million, respectively, for the write-down of excess
inventories and provisions for estimated losses on open purchase commitments.
These charges were included in cost of sales.
During the third and fourth quarters of 1998, the Company recognized charges
in the amount of $3.2 million and $5.4 million, respectively, related to
collection uncertainty of certain accounts and leases receivable and provisions
for sales returns and allowances. Additionally, during the third quarter of
1998, the Company recognized charges of $2.6 million as a result of the
reduction in the Company's workforce and the consolidation of certain of its
facilities. These charges have been included in operating expenses for 1998.
In December 1997, the Company terminated its relationship with its Japan
distributor, Innotech Corporation. This resulted in a special charge of
$3.5 million, or $0.11 per share, in the quarter ended December 31, 1997, net of
related income tax benefits, primarily related to termination fees negotiated
between the Company and Innotech.
INTEREST AND OTHER INCOME, NET
Interest and other income, net, which consists primarily of interest income,
was $7.4 million for 1999 as compared with $6.7 million for 1998 and
$7.3 million for 1997.
INCOME TAXES (BENEFIT)
The Company did not recognize an income tax benefit on its pre-tax loss for
1999, due to uncertainty related to the utilization of its net operating loss
carry-forward. Income taxes (benefit) represented 10% and 30% of income (loss)
before income taxes for 1998 and 1997, respectively. The decline in the tax rate
for 1998, relative to 1997, is primarily a result of not recognizing a benefit
for the 1998 net operating loss carry-forward and certain deferred tax asset
reserves recognized during the year.
27
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $9.4 million for the year
ended December 31, 1999, as compared with $6.9 million provided by operating
activities during 1998. Positive cash flows from operating activities during
1999 were primarily attributed to non-cash charges to income of $12.9 million, a
reduction in inventories of $7.8 million, an increase in income taxes payable of
$3.5 million, an increase in advance billings of $3.2 million and a reduction of
prepaid expenses and other current assets of $3.0 million, partially offset by
the net loss of $4.2 million for the year ended December 31, 1999, an increase
in accounts receivable of $9.0 million, a decline in accrued expenses of
$6.9 million and an increase in other assets of $2.1 million.
The increase in accounts receivable, as compared with December 31, 1998, was
primarily attributed to a combination of higher sales levels and lower levels of
accounts receivable sales to third parties, partially offset by improved
collections. The Company sells certain of its accounts receivable in order to
mitigate its credit risk and to enhance cash flow. Sales of accounts receivable
typically precede final customer acceptance of the system. Among other terms and
conditions, the agreements include provisions that require the Company to
repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product.
From time-to-time the Company has repurchased certain accounts and leases
receivable in accordance with these terms. At December 31, 1999, $5.6 million of
sold accounts receivable were outstanding to third-party financial institutions.
The Company may continue to attempt to mitigate the impact of extended payment
terms and non-linear shipments by selling a substantial portion of its accounts
receivable in the future. There can be no assurance that this financing will be
available on reasonable terms, or at all.
The Company believes that because of the relatively long manufacturing cycle
of certain of its systems, particularly newer products, the Company's
inventories will continue to represent a significant portion of working capital.
Additionally, as of December 31, 1999, the Company had approximately
$4.7 million of net inventories and $6.2 million of net long-lived assets
related to several new product lines, including its electron beam lithography
technologies. As such, these assets may be subject to a greater risk of
impairment, which could materially adversely affect the Company's operating
results and financial condition.
The Company has determined that two recent events have transpired which may
result in a change in its electron beam technology efforts. The first event is
the announced intention of a major semiconductor equipment manufacturer to
acquire the market share leader in electron beam technology. The second event is
the Company's decision to ensure that its research and development spending is
in line with the current stage of the industry's economic cycle and the
Company's stated desire to increase stockholder value. As a result of these two
events, the Company is evaluating its level of spending in electron beam
technology and may decide to either continue its efforts in electron beam
technology, seek a partner for sharing future development funding in electron
beam technology, sell its electron beam technology unit, or otherwise cease
operations of its electron beam technology unit. In such a scenario, significant
uncertainties exist and circumstances currently unknown may result in the need
to recognize an impairment of the Company's electron beam technology assets in
future financial periods, although management believes it will be able to
realize its net investment in the technology and related net assets. Should an
impairment occur, the Company's financial condition and results of operations
would be materially adversely impacted. The Company did not recognize any
revenue related to its electron beam technology during 1998 and 1999.
During the year ended December 31, 1999, the Company used $16.5 million of
net cash in its investing activities, primarily as a result of the net
investment of $7.5 million in "available-for-sale" securities, capital
expenditures of $6.9 million, and $2 million for the purchase of licensed
technology.
For the year ended December 31, 1999, there was $27,000 net cash provided by
financing activities, as $1.4 million generated from the issuance of Common
Stock pursuant to the exercise of employee stock
28
<PAGE>
options and the Company's employee stock purchase plan was partially offset by
$1.4 million used in repayment of a note payable.
At December 31, 1999, the Company had working capital of $163.6 million. The
Company's principal sources of liquidity at December 31, 1999 consisted of
$143.5 million in cash, cash equivalents and short-term investments.
The development and manufacture of new lithography systems and enhancements
are highly capital-intensive. In order to be competitive, the Company must
continue to make significant expenditures for capital equipment, sales, service,
training and support capabilities; investments in systems, procedures and
controls and expansion of operations and research and development, among many
other items. The Company expects that anticipated cash flows from operations and
its cash, cash equivalents and short-term investments will be sufficient to meet
the Company's cash requirements for the next twelve months. Beyond the next
twelve months, the Company may require additional equity or debt financing to
address its working capital or capital equipment needs. Additionally, the
Company may in the future pursue additional acquisitions of complementary
product lines, technologies or businesses. Future acquisitions by the Company
may result in potentially dilutive issuances of equity securities, the
incurrence of debt and contingent liabilities and amortization expenses related
to goodwill and other intangible assets, which could materially adversely affect
any Company profitability. In addition, acquisitions involve numerous risks,
including difficulties in the assimilation of the operations, technologies and
products of the acquired companies; the diversion of management's attention from
other business concerns; risks of entering markets in which the Company has no
or limited direct experience; and the potential loss of key employees of the
acquired company. In the event the Company acquires product lines, technologies
or businesses which do not complement the Company's business, or which otherwise
do not enhance the Company's sales or operating results, the Company may incur
substantial write-offs and higher recurring operating costs, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In the event that any such acquisition does occur, there
can be no assurance as to the effect thereof on the Company's business or
operating results. Additionally, the Company may experience renewed interest in
its equipment leasing program and this may result in the further formation of
significant long-term receivables, which, in turn, would require the use of
substantial amounts of working capital. The formation of significant long-term
receivables and the granting of extended customer payment terms exposes the
Company to additional risks, including potentially higher customer concentration
and higher potential operating expenses relating to customer defaults. During
the three-month periods ended September 30, 1998 and December 31, 1998, the
Company took significant reserves against certain leases receivable, which are
currently non-performing. If additional reserves on lease receivables were
required in the future, the Company's business, financial condition and results
of operations could be materially adversely affected. To the extent that the
Company's financial resources are insufficient to fund the Company's activities,
additional funds will be required. There can be no assurance that additional
financing will be available on reasonable terms, or at all.
YEAR 2000 DISCLOSURE
The information provided below constitutes a "Year 2000 Readiness
Disclosure" for purposes of the Year 2000 Information and Readiness Disclosure
Act.
March 2000 update:
Through the first two months of the year 2000, the Company's operations
around the world are fully functioning and have not experienced any significant
issues associated with the Year 2000 problem. Our customer-support operations
continue to communicate to us that the Company's customers have not reported any
consequential Year 2000 incidents. At the Company's sites worldwide, we have not
experienced any significant Year 2000-related issue that would affect our
ability to manufacture, ship, sell or service our products. While we are
encouraged by the success of our Year 2000 efforts and that of our
29
<PAGE>
customers and suppliers, the Company will continue to offer Year 2000 support to
customers and monitor our own operations.
The Company presently estimates that the total cost for the entire Y2K
project approximated one million dollars and that there are no significant
project costs remaining. However, additional requirements may be identified in
the future and unscheduled costs may be incurred. Accordingly, despite favorable
results so far, there can be no assurance that the Company, or its vendors, will
be able to timely and cost-effectively update its products to avoid Y2K date
errors, and this may result in material costs to the Company, including costs
associated with detecting and fixing such errors and costs incurred in
litigation due to any such errors.
Year 2000 readiness overview:
Many currently installed computer systems and software products were coded
to accept only two digit entries in the attached date code field. Beginning in
the year 2000, these date code fields needed to accept four digit entries to
distinguish 21(st) century dates from 20(th) century dates. As a result,
computer systems and/or software used by many companies needed to be upgraded to
comply with such "Year 2000" (Y2K) requirements. The Company has provided an
assessment, below, of the state of readiness of its information and
non-information technology systems, together with a summary of the status of
related testing, remediation and implementation. The Company estimates that the
total cost for the entire Y2K project approximated $1.0 million and that the
remaining project cost is insignificant. However additional requirements may be
identified and unscheduled costs may be incurred as the project proceeds.
Accordingly, there can be no assurance that the Company, or its vendors, will be
able to timely and cost-effectively update its products to avoid Y2K date
errors, and this may result in material costs to the Company, including costs
associated with detecting and fixing such errors and costs incurred in
litigation due to any such errors.
Many commentators had predicted that a significant amount of litigation will
arise out of year 2000 compliance issues and the Company is aware of several
such suits that are currently pending. Because of the unprecedented nature of
such litigation and the highly technical nature of the Company's products, there
can be no assurance that the Company will not be materially adversely affected
by claims related to Y2K compliance. Although the Company presently believes
that it has made required changes to the software in its products, it believes
that the most likely worst case scenario is from unknown impacts to its
customers' manufacturing processes, which could potentially adversely impact
product yields and throughput. In addition to possible litigation, the Company
could incur substantially higher product returns and warranty related expenses,
either of which could materially adversely affect the Company's business,
financial condition and results of operations. Additionally, the Company's
customers may be required to devote substantial financial resources to their own
internal Y2K audit and compliance. This may result in fewer financial resources
available to purchase the Company's products, fewer system sales by the Company,
and could have a material adverse affect on the Company's business, financial
condition and results of operations. The Company believes that its own Y2K
efforts have resulted, and may continue to result in, a diversion of management
and financial resources, which has further resulted in the delay or deferral of
various information technology and engineering projects.
Information technology systems:
The Company established, for all of its information systems, a Y2K
conversion project to address necessary code changes, testing, and
implementation and contingency plans. The Company has completed testing and
verification of its primary business/information system and has identified the
significant potential risks associated with Y2K. The Company believes it has
remedied these potential errors and has completed the related compliance
testing. The Company has also provided for contingency plans to further minimize
risks to its business system associated with Y2K.
30
<PAGE>
Although the Company is not aware of any remaining material operational
issues or costs associated with preparing its internal systems for Y2K, there
can be no assurance that the Company will not experience serious unanticipated
negative consequences and/or material costs caused by undetected errors or
defects in technology used in its internal operating systems, which are composed
primarily of third party software and hardware technology. Additionally,
although the Company has made inquiries of its key information technology
vendors, and has collected and reviewed survey responses, the Company believes
it has not been able to obtain adequate assurances from all its key vendors.
Even where assurances were received from third parties, there remained a risk
that failure of systems and products of other companies on which the Company
relies could have a material adverse affect on the Company. Accordingly the
Company continues to assess the degree of risk to the Company and to prepare
contingency plans. The Company has worked to minimize risk from vendors through
understanding and implementing necessary remediation and/or contingency plans.
There can be no assurance that such contingency plans will be adequate and that
the Company will not incur significant additional costs or business
interruptions in connection with such transition, either of which could have a
material adverse affect on the Company's business, financial condition and
results of operations.
Non-information technology systems:
The Company has commenced, for all of its key vendors, physical plant and
software contained in the products it sells, a Y2K conversion project to address
necessary remediation, testing, implementation and contingency plans. The
Company believes it has identified and implemented the required changes for its
products' hardware and software components to attain Y2K readiness and is
currently working with customers to assist in understanding these requirements.
The Company has obligations to provide these modifications to customers with
systems under warranty or currently under service contract. The Company has
commenced the process of installing and testing these upgrades at customer sites
and believes this process has been completed on a timely basis. In addressing
customer inquiries regarding the Company's Y2K readiness and in making inquiries
of the Company's vendors, the Company has adopted the Sematech process for
investigating and responding to the Y2K subject. This process includes a survey
form, a readiness matrix and a testing scenario.
Although the Company has made inquiries of its key physical plant and
materials vendors in order to assess their state of readiness, and has collected
and reviewed survey responses, the Company believes it has not been able to
obtain adequate assurances from all its key vendors. Even where assurances are
received from third parties, there remains a risk that failure of systems and
products of other companies on which the Company relies could have a material
adverse affect on the Company. Accordingly the Company continues to assess the
degree of risk to the Company and to prepare contingency plans. These
contingency plans may result, among other things, in the development of
alternative suppliers and the purchase of additional inventories. The Company
has worked to minimize risk from vendors through understanding and implementing
necessary remediation and/or contingency plans. There can be no assurance that
such contingency plans will be adequate and that the Company will not incur
significant additional costs or business interruptions in connection with such
transition, either of which could have a material adverse affect on the
Company's business, financial condition and results of operations.
The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third party
modification plans and other factors. There can be no guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, the
nature and amount of programming required to upgrade or replace each of the
affected programs, the rate and magnitude of related labor and consulting costs
and the success of the Company's external customers and
31
<PAGE>
vendors in addressing the Y2K issue. The Company's evaluation is ongoing and it
expects that new and different information will become available to it as that
evaluation continues.
ADOPTION OF THE EURO
The introduction of a European single currency, the Euro, was initially
implemented as of January 1, 1999, and the transition period will continue
through Jan 1, 2002. As of December 31, 1999, the adoption of the Euro has not
had a material effect on the Company's foreign exchange and hedging activities
or the Company's use of derivative instruments. While the Company will continue
to evaluate the impact of the Euro introduction over time, based on currently
available information, management does not believe that the introduction of the
Euro currency will have a material adverse impact on the Company's financial
condition or overall trends in results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk due to potential changes in interest
rates, relates primarily to the Company's investment portfolio, which consisted
primarily of fixed interest rate instruments as of December 31, 1999. The
Company maintains a strict investment policy, which is designed to ensure the
safety and preservation of its invested funds by limiting market risk and the
risk of default.
The following table presents the hypothetical changes in fair values in the
financial instruments held by the Company at December 31, 1999, that are
sensitive to changes in interest rates. These instruments are comprised of cash,
cash equivalents, short-term investments and restricted long-term investments.
These instruments are not leveraged and are held for purposes other than
trading. The modeling techniques used measures the change in fair values arising
from selected hypothetical changes in interest rates. Assumed market value
changes to the Company's portfolio reflects immediate hypothetical parallel
shifts in the yield curve of plus or minus 50 basis points (BPS), 100 BPS, and
150 BPS over a twelve-month time horizon. Beginning fair values represent the
market principal plus accrued interest for financial reporting purposes at
December 31, 1999. Ending fair values comprise the estimated market principal
plus accrued interest at a twelve-month time horizon, and assumes no change in
the investment principal or portfolio mix. This table estimates the fair value
of the portfolio at a twelve-month time horizon:
<TABLE>
<CAPTION>
VALUATION OF SECURITIES GIVEN VALUATION OF SECURITIES GIVEN
AN INTEREST RATE DECREASE OF NO CHANGE IN AN INTEREST RATE INCREASE OF
X BASIS POINTS INTEREST RATE X BASIS POINTS
-------------------------------- ------------- ------------------------------
SHORT-TERM INVESTMENTS, IN THOUSANDS (150 BPS) (100 BPS) (50 BPS) 0 BPS 50 BPS 100 BPS 150 BPS
- ------------------------------------ --------- --------- -------- ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies.................. $ 27,086 $ 26,799 $26,510 $ 26,223 $ 25,936 $ 25,646 $ 25,359
Obligations of states and political
subdivisions.............................. 10,477 10,477 10,477 10,477 10,477 10,477 10,477
U.S. corporate debt securities.............. 95,568 95,070 94,571 94,207 93,842 93,344 92,845
-------- -------- -------- -------- -------- -------- --------
Total short-term investments.............. $133,131 $132,346 $131,558 $130,907 $130,255 $129,467 $128,681
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
RESTRICTED LONG-TERM INVESTMENTS, IN THOUSANDS
- ----------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government agencies.................. $ 5,422 $ 5,416 $ 5,411 $ 5,405 $ 5,400 $ 5,394 $ 5,389
U.S. corporate debt securities.............. 74 74 74 74 74 74 74
-------- -------- -------- -------- -------- -------- --------
Total long-term restricted investments.... $ 5,496 $ 5,490 $ 5,485 $ 5,479 $ 5,474 $ 5,468 $ 5,463
======== ======== ======== ======== ======== ======== ========
$138,627 $137,836 $137,043 $136,386 $135,729 $134,935 $134,144
======== ======== ======== ======== ======== ======== ========
</TABLE>
The table was developed based on the fact that a 50-BPS move in the Federal
Funds Rate has occurred in nine of the last ten years; a 100-BPS move in the
Federal Funds Rate has occurred in six of the last ten years; and a 150-BPS move
in the Federal Funds Rate has occurred in four for the last ten years.
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<PAGE>
The Company mitigates default risk by attempting to invest in high credit
quality securities and by constantly positioning its portfolio to respond
appropriately to a significant reduction in a credit rating of any investment
issuer or guarantor. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity and maintains a
prudent amount of diversification. To date, the Company has not experienced
liquidity problems with its portfolio.
The Company has not materially altered its investment objectives or criteria
and believes that, although the composition of the Company's portfolio has
changed from the preceding year, the portfolio's sensitivity to changes in
interest rates is materially the same.
The Company's operations in foreign countries are not generally subject to
significant exchange rate fluctuations, principally due to the limited scope of
those operations and because sales contracts for the Company's systems are
generally denominated in U.S. dollars. In Japan, however, the Company has
commenced direct sales operations and orders are typically denominated in
Japanese yen. This may subject the Company to a higher degree of risk from
currency fluctuations. The Company attempts to mitigate this exposure through
the use of foreign exchange contracts. The realized gains and losses on these
contracts are deferred and offset against realized and unrealized gains and
losses from the settlement of the related yen-denominated receivables. At
December 31, 1999 there were approximately $10.6 million outstanding foreign
currency forward contracts.
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<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Selected Financial Data information contained in Item 6 of Part II
hereof is hereby incorporated by reference into this Item 8 of Part II of this
form 10-K.
ULTRATECH STEPPER, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Consolidated Financial Statements included in Item 8:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Consolidated Balance Sheets--December 31, 1999 and 1998..... 35
Consolidated Statements of Operations--Years ended December
31, 1999, 1998, and 1997.................................. 36
Consolidated Statements of Cash Flows--Years ended December
31, 1999, 1998 and 1997................................... 37
Consolidated Statements of Stockholders' Equity--Years ended
December 31, 1999, 1998 and 1997.......................... 38
Notes to Consolidated Financial Statements.................. 39-54
Report of Ernst & Young LLP, Independent Auditors........... 55
</TABLE>
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<PAGE>
ULTRATECH STEPPER, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS 1999 1998
- ------------------------------------------------ ------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 46,978 $ 54,142
Short-term investments.................................... 96,566 91,965
Accounts receivable, less allowance for doubtful accounts
of $2,046 in 1999 and $2,196 in 1998.................... 19,993 11,023
Inventories............................................... 28,975 36,750
Leases receivable--current portion, less allowance for
doubtful accounts of $1,049 in 1999 and $841 in 1998.... 1,354 2,012
Prepaid expenses and other current assets................. 2,040 5,088
-------- --------
Total current assets........................................ 195,906 200,980
Equipment and leasehold improvements, net................... 20,486 23,319
Restricted investments...................................... 5,479 5,510
Leases receivable, less allowance for doubtful accounts of
$3,244 in 1999 and $5,603 in 1998......................... 282 1,536
Intangible assets, net...................................... 8,940 8,438
Other assets................................................ 5,715 5,276
-------- --------
Total assets................................................ $236,808 $245,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable............................................. $ 490 $ 1,881
Accounts payable.......................................... 7,931 8,541
Accrued expenses.......................................... 13,958 20,817
Advance billings.......................................... 4,845 1,694
Income taxes payable...................................... 5,081 1,630
-------- --------
Total current liabilities................................... 32,305 34,563
Other liabilities........................................... 289 345
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.001 par value:
2,000,000 shares authorized; none issued................ -- --
Common Stock, $.001 par value:
40,000,000 shares authorized; issued and outstanding:
21,392,117 at December 31, 1999 and 21,105,733 at
December 31, 1998....................................... 21 21
Additional paid-in capital................................ 175,573 174,155
Accumulated other comprehensive (loss) income, net........ (2,408) 779
Retained earnings......................................... 31,028 35,196
-------- --------
Total stockholders' equity.................................. 204,214 210,151
-------- --------
Total liabilities and stockholders' equity.................. $236,808 $245,059
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
35
<PAGE>
ULTRATECH STEPPER, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net sales
Products.................................................. $ 95,473 $ 65,569 $136,677
Services.................................................. 17,650 15,888 10,672
-------- -------- --------
Total net sales............................................. 113,123 81,457 147,349
Cost of sales
Cost of products sold..................................... 56,471 46,016 62,995
Cost of services.......................................... 12,232 10,352 6,676
Write-down of inventory................................... -- 20,559 --
Provision for estimated losses on purchase commitments.... -- 5,849 --
-------- -------- --------
Gross profit (loss)......................................... 44,420 (1,319) 77,678
Research, development, and engineering...................... 27,678 26,654 26,431
Selling, general, and administrative........................ 26,325 25,115 26,036
Acquired in-process research and development................ -- 5,108 3,619
Special charges............................................. -- 11,175 3,450
Amortization of goodwill.................................... 1,630 1,055 141
-------- -------- --------
Operating income (loss)..................................... (11,213) (70,426) 18,001
Interest expense............................................ (374) (445) (165)
Interest and other income, net.............................. 7,419 6,745 7,258
-------- -------- --------
Income (loss) before income taxes (benefit)................. (4,168) (64,126) 25,094
Income taxes (benefit)...................................... -- (6,182) 7,528
-------- -------- --------
Net income (loss)........................................... $ (4,168) $(57,944) $ 17,566
======== ======== ========
Net income (loss) per share--basic.......................... $ (0.20) $ (2.76) $ 0.85
Number of shares used in per share computations--basic...... 21,279 20,958 20,553
Net income (loss) per share--diluted........................ $ (0.20) $ (2.76) $ 0.81
Number of shares used in per share computations--diluted.... 21,279 20,958 21,681
</TABLE>
See accompanying notes to consolidated financial statements.
36
<PAGE>
ULTRATECH STEPPER, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
IN THOUSANDS 1999 1998 1997
- ------------ --------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (4,168) $ (57,944) $ 17,566
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation.............................................. 8,187 7,672 5,600
Amortization.............................................. 4,370 2,934 1,634
Loss on disposal of equipment............................. 390 1,179 93
Deferred income taxes..................................... -- 3,039 4,566
Write-off of acquired in-process research and
development............................................. -- 5,108 3,619
Changes in operating assets and liabilities:
Accounts receivable..................................... (8,970) 38,047 (6,102)
Inventories............................................. 7,775 10,580 (1,813)
Prepaid expenses and other current assets............... 3,048 677 (1,025)
Leases receivable--current portion...................... 658 396 (2,215)
Leases receivable--long term............................ 1,254 9,818 (10,929)
Intangible assets....................................... (133) -- (160)
Other assets............................................ (2,132) (1,747) (874)
Accounts payable........................................ (610) (6,957) 2,895
Accrued expenses........................................ (6,859) (4,751) (6,427)
Advance billings........................................ 3,151 32 226
Income taxes payable.................................... 3,451 (1,404) (251)
Other liabilities....................................... (56) 186 (761)
--------- --------- ---------
Net cash provided by operating activities................... 9,356 6,865 5,642
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures........................................ (6,948) (9,510) (9,337)
Investments in securities................................... (361,398) (430,079) (681,316)
Proceeds from sales of investments.......................... 56,047 111,106 165,192
Proceeds from maturing investments.......................... 297,823 348,407 515,342
Purchase of certain assets of Lepton Inc.................... -- -- (3,101)
Purchase of certain assets and liabilities of Integrated
Solutions Inc., net of cash acquired...................... -- (21,819) --
Purchase of licensed technology............................. (2,000) -- --
Restricted investments...................................... (71) (159) (175)
--------- --------- ---------
Net cash used in investing activities....................... (16,547) (2,054) (13,395)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) notes payable............. (1,391) 1,787 94
Proceeds from issuance of Common Stock...................... 1,418 3,646 3,786
--------- --------- ---------
Net cash provided by financing activities................... 27 5,433 3,880
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (7,164) 10,244 (3,873)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 54,142 43,898 47,771
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 46,978 $ 54,142 $ 43,898
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest................................................ $ 337 $ 445 $ 185
Income taxes (refund), net.............................. (7,015) 840 3,254
Other non-cash changes
Systems transferred from inventory to equipment and other
assets.................................................. $ 2,806 $ 4,018 $ 4,208
</TABLE>
See accompanying notes to consolidated financial statements.
37
<PAGE>
ULTRATECH STEPPER, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
-------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL ACCUMULATED OTHER TOTAL
------------------- PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
IN THOUSANDS SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS EQUITY
- ------------ -------- -------- ---------- ----------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996................... 20,310 $20 $164,288 $ 65 $75,574 $239,947
Net issuance of Common Stock under stock option
plan and employee stock purchase plan........ 476 1 3,785 -- -- 3,786
Income tax benefit from stock option and stock
purchase plan transactions................... -- -- 2,121 -- -- 2,121
Amortization of deferred compensation.......... -- -- 6 -- -- 6
Components of comprehensive income
Net unrealized gain on available-for-sale
investments, net of tax...................... -- -- -- 206 -- 206
Net Income................................... -- -- -- -- 17,566 17,566
--------
Total comprehensive income..................... 17,772
------- --- -------- ------- -------- --------
Balance at December 31, 1997................... 20,786 $21 $170,200 $ 271 $93,140 $263,632
======= === ======== ======= ======== ========
Net issuance of Common Stock under stock option
plan and employee stock purchase plan........ 320 -- 3,646 -- -- 3,646
Income tax benefit from stock option and stock
purchase plan transactions................... -- -- 309 -- -- 309
Components of comprehensive loss
Net unrealized gain on available-for-sale
investments................................ -- -- -- 508 -- 508
Net loss..................................... -- -- -- -- (57,944) (57,944)
--------
Total comprehensive loss....................... (57,436)
------- --- -------- ------- -------- --------
Balance at December 31, 1998................... 21,106 $21 $174,155 $ 779 $35,196 $210,151
======= === ======== ======= ======== ========
Net issuance of Common Stock under stock option
plan and employee stock purchase plan........ 286 -- 1,418 -- -- 1,418
Components of comprehensive loss
Net unrealized loss on available-for-sale
investments................................ -- -- -- (3,187) -- (3,187)
Net loss..................................... -- -- -- -- (4,168) (4,168)
--------
Total comprehensive loss....................... (7,355)
------- --- -------- ------- -------- --------
Balance at December 31, 1999................... 21,392 $21 $175,573 $(2,408) $31,028 $204,214
======= === ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
38
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. COMPANY AND INDUSTRY INFORMATION
On December 31, 1998 the Company adopted Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments.
MAJOR CUSTOMERS
In 1999, no single customer accounted for 10% or more of the Company's net
sales. Sales to one customer accounted for 25% and 14% of the Company's net
sales in 1998 and 1997, respectively. Additionally, in 1997, a second customer
accounted for 10% of the Company's net sales.
BUSINESS SEGMENTS
In evaluating its business segments, the Company gave consideration to the
Chief Executive Officer's review of financial information and the organizational
structure of the Company's management. Based on this review, the Company
concluded that, at the present time, resources are allocated and other financial
decisions are made based, primarily, on consolidated financial information.
Accordingly, the Company has determined that it operates in one business
segment, which is the manufacture and distribution of photolithography equipment
to manufacturers of integrated circuits, photomasks for the production of
integrated circuits, thin film heads and micromachined components.
ENTERPRISE-WIDE DISCLOSURES
The Company's products are manufactured in the United States and are sold
worldwide. The Company markets internationally through domestic and
foreign-based sales and service operations and independent sales organizations.
The following table presents enterprise-wide sales to external customers and
long-lived assets by geographic region:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998 1997
- -------------- -------- -------- --------
<S> <C> <C> <C>
Net sales:
United States of America..................... $ 51,293 $36,192 $ 96,753
Germany...................................... 1,130 10,613 5,288
Japan........................................ 13,201 11,282 7,324
Rest of world................................ 47,499 23,370 37,984
-------- ------- --------
Total...................................... $113,123 $81,457 $147,349
======== ======= ========
Long-lived assets:
United States of America..................... $ 39,458 $42,130 $ 42,030
Rest of world................................ 1,444 1,949 948
-------- ------- --------
Total...................................... $ 40,902 $44,079 $ 42,978
======== ======= ========
</TABLE>
The Company's operations in foreign countries are not currently subject to
significant exchange rate fluctuations, principally because sales contracts for
the Company's systems are generally denominated in U.S. dollars. However,
international sales expose the Company to a number of additional risk factors,
including fluctuations in the value of local currencies relative to the U.S.
dollar, which, in turn, impact the relative cost of ownership of the Company's
products.
39
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. CONCENTRATIONS OF RISKS
Sales of the Company's systems depend, in significant part, upon the
decision of a prospective customer to increase manufacturing capacity or to
restructure current manufacturing facilities, either of which typically involves
a significant commitment of capital. For this and other reasons, the Company's
systems typically have a lengthy sales cycle during which the Company may expend
substantial funds and management effort in securing a sale. Additionally, the
markets for the Company's products are subject to rapid technological change,
which requires the Company to respond with new products and enhanced versions of
existing products. Lengthy sales cycles and rapid technological change subject
the Company to a number of significant risks, including inventory obsolescence,
significant after-sales support and fluctuations in operating results, which are
difficult to estimate and over which the Company has little or no control.
Sole-source and single-source suppliers provide critical components and services
for the manufacture of the Company's products. The reliance on sole or limited
groups of suppliers may subject the Company from time to time to quality,
allocation and pricing constraints.
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of cash equivalents, short-term investments,
trade receivables and long-term customer financing. These credit risks include
the potential inability of an issuer or customer to honor their obligations
under the terms of the instrument. The Company places its cash equivalents,
short-term investments and restricted investments with high credit-quality
financial institutions. The Company invests its excess cash in commercial paper,
readily marketable debt instruments and collateralized funds of U.S. and state
government entities. The Company has established guidelines relative to credit
ratings, diversification and maturities that seek to maintain safety and
liquidity. A majority of the Company's trade receivables are derived from sales
in various geographic areas, principally the U.S., Europe, Japan, and Asia, to
large companies within the integrated circuit, thin film head and micromachining
industries. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, whenever deemed necessary. The
Company maintains an allowance for uncollectible accounts and leases receivable
based upon expected collectibility and a reserve for estimated returns and
allowances. The formation of significant long-term receivables and the granting
of extended customer payment terms exposes the Company to additional risks,
including potentially higher customer concentration and higher potential
operating expenses relating to customer defaults.
During 1998, the Company put in place a program to sell certain of its
accounts receivable to third-party financial institutions, in order to mitigate
its credit risk and to enhance cash flow. Sales of accounts receivable typically
precede final customer acceptance of the system. Among other terms and
conditions, the agreements include provisions that require the Company to
repurchase receivables if certain conditions are present including, but not
limited to, disputes with the customer regarding suitability of the product, and
from time-to-time the Company has repurchased certain accounts receivable in
accordance with these terms. At December 31, 1999, $5.6 million of sold accounts
receivable were outstanding to third-party financial institutions, as compared
with $8.6 million at December 31, 1998.
As of December 31, 1999, the Company had approximately $4.7 million of
inventories and $6.2 million of net long-lived assets related to product lines
that are outside of the Company's core technologies. As such, these assets may
be subject to a greater risk of impairment.
40
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries, all of which are wholly owned. Intercompany
balances and transactions have been eliminated.
Reclassifications have been made to the prior years' consolidated financial
statements to conform to the 1999 presentation.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity date
at acquisition of three months or less. The carrying value of cash equivalents
approximates fair value.
INVESTMENTS
Management determines the appropriate classification of its investments at
the time of purchase and re-evaluates the classification at each balance sheet
date. At December 31, 1999 and 1998, all investments in the Company's portfolio
were classified as "available for sale," in accordance with the provisions of
the Financial Accounting Standards Board (FASB) Statement No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available-for-sale
securities are stated at fair value, with the unrealized gains and losses, net
of tax, reported in accumulated other comprehensive income (loss), as a separate
component of stockholders' equity.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization, as well as
interest, dividends, realized gains and losses and declines in value judged to
be other than temporary are included in interest and other income, net. The cost
of securities sold is based on the specific identification method.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
LONG-LIVED ASSETS
Equipment and leasehold improvements are stated at cost less accumulated
depreciation and amortization. Equipment is depreciated on a straight-line basis
over the estimated useful lives (three to seven years). Leasehold improvements
are amortized on a straight-line basis over the life of the related assets or
the lease term, whichever is shorter.
Demonstration units, included in other assets, are stated at cost, less
accumulated depreciation, and are depreciated over 36 months.
Intangible assets are carried at cost less accumulated amortization, which
is being provided on a straight-line basis over the economic lives of the
respective assets, generally five to seven years. The
41
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company applies the provision of FAS No. 121, "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to be Disposed of," in evaluating
its fixed and intangible assets.
The Company is evaluating its level of spending in electron beam technology
and may decide to either continue its efforts in electron beam technology, seek
a partner for sharing future development funding in electron beam technology,
sell its electron beam technology unit, or otherwise cease operations of its
electron beam technology unit. Although management believes it will be able to
realize its approximate $10 million net investment in the technology and related
net assets. In such a scenario, significant uncertainties exist and
circumstances currently unknown may result in the need to recognize an
impairment of the Company's electron beam technology assets in future financial
periods. Should an impairment occur, the Company's financial condition and
results of operations would be materially adversely impacted.
DERIVATIVE INSTRUMENTS AND HEDGING
Off-balance-sheet transactions, consisting of forward currency contracts,
have from time to time been utilized by the Company to hedge obligations
denominated in foreign currencies. The Company does not enter into derivative
financial instruments for trading purposes. Gains and losses related to
qualified accounting hedges of firm commitments are deferred and recognized in
interest and other income, net, when the hedged transaction occurs. These gains
and losses were immaterial for the years ended December 31, 1999, 1998 and 1997.
There were approximately $10.6 million and none of foreign exchange forward
contracts outstanding as of December 31, 1999 and 1998, respectively.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS AND SEC STAFF ACCOUNTING
BULLETINS
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and requires recognition of all derivatives
as assets or liabilities in the statement of financial position and measurement
of those instruments at fair value. The statement is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Because of the
Company's minimal use of derivatives, management does not anticipate that the
adoption of the new Statement will have a significant effect on earnings or the
financial position of the Company.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, entitled "Revenue Recognition in Financial
Statements." SAB 101 is effective for the Company's first fiscal quarter, ending
on March 31, 2000. At the present time, the Company believes that the issuance
of SAB 101 will result in the Company recognizing sales of its systems based on
installation and customer acceptance, rather than its current practice of
recognizing revenue upon shipment. The Company is unsure as to the impact of SAB
101 on reported net sales and results of operations for the quarter ending
March 31, 2000. However, in accordance with the provisions of SAB 101, the
Company presently anticipates that it will report a significant cumulative
charge relative to a change in accounting principle at the beginning of the
quarter ending March 31, 2000. This charge will appear as a non-operating item
in the Company's statement of operations.
REVENUE RECOGNITION
Sales of the Company's products are generally recorded upon shipment, which
usually precedes final customer acceptance, provided that final customer
acceptance and collection of the related receivable are
42
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
probable. The Company also sells service contracts for which revenue is deferred
and recognized ratably over the contract period.
From time to time, the Company leases its products to customers, typically
as sales-type leases, in accordance with the provisions of FASB Statement
No. 13, "Accounting for Leases." These leases generally have a five-year term.
WARRANTY
The Company generally warrants its products for a period of 12 months from
the date of customer acceptance for material and labor to repair the product;
accordingly, a provision for the estimated cost of the warranty is recorded at
the time revenue is recognized.
RESEARCH, DEVELOPMENT, AND ENGINEERING EXPENSES
The Company is actively engaged in basic technology and applied research
programs designed to develop new products and product applications. In addition,
substantial ongoing product and process improvement engineering and support
programs relating to existing products are conducted within engineering
departments and elsewhere. Research, development and engineering costs are
charged to operations as incurred.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. As a result of this acquisition, the
Company recognized a charge for acquired in-process research and development
expense of $5.1 million in the consolidated statement of operation for the year
ended December 31, 1998.
The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine its
state of development and related fair value. The Company's review indicated that
the IPR&D had not reached a state of technological feasibility and the
underlying technology had no alternative future use to the Company in other
research and development projects or otherwise. In the case of IPR&D, fair
values of the corresponding technologies were determined using an income
approach, which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology is comprised of the total
present value of the anticipated net cash flows attributable to the in-process
project, discounted to net present value, taking into account the uncertainty
surrounding the successful development of the purchased IPR&D.
During the first quarter of 1997, the Company completed the acquisition of
the assets of Lepton Inc., a developer of electron beam lithography systems. As
a result of this acquisition, the Company recognized a charge in the quarter
ended March 31, 1997 for a research and development project of $3.6 million.
43
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SPECIAL CHARGES
Due primarily to the downturn in the thin film head and semiconductor
industries in 1998, the Company realized significantly lower sales and bookings
levels during 1998. As a result, the Company significantly reduced its
production demand forecast for 1999 and implemented various cost containment
measures in the third quarter of 1998. During 1998, the Company recognized
special non-cash charges in the amount of $26.4 million for the write-down of
excess inventories and provisions for estimated losses on open purchase
commitments. These charges were included in cost of sales.
During 1998, the Company recognized non-cash charges in the amount of
$8.6 million related to collection uncertainty of certain accounts and leases
receivable and provisions for sales returns and allowances. Additionally, during
1998, the Company recognized cash charges of $2.0 million and non-cash charges
of $0.6 million as a result of the reduction in the Company's workforce and the
consolidation of certain of its facilities. These charges were included in
operating expenses.
In December 1997, the Company terminated its relationship with its Japan
distributor, Innotech Corporation. This resulted in a special charge of
$3.5 million in the quarter ended December 31, 1997, related primarily to
termination fees negotiated between the Company and Innotech.
FOREIGN CURRENCY ACCOUNTING
The U.S. dollar is the functional currency for all foreign operations.
Foreign exchange gains and losses, which result from the process of remeasuring
foreign currency financial statements into U.S. dollars or from transactions
during the period, have been immaterial and are included in interest and other
income, net.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations in accounting for its employee stock options and stock purchase
plan. Pro forma information regarding net income (loss) and net income (loss)
per share are disclosed as required by the FASB's Statement No. 123, "Accounting
for Stock-Based Compensation" (FAS 123), which also requires that the
information be determined as if the Company accounted for its stock-based
compensation subsequent to December 31, 1994 under the fair value method of that
Statement.
44
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIC AND DILUTED NET INCOME (LOSS) PER SHARE
The following sets forth the computation of basic and diluted net income
(loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Numerator:
Net income (loss)......................................... $(4,168) $(57,944) $17,566
Denominator:
Denominator for basic net income (loss) per share......... 21,279 20,958 20,553
Effect of dilutive Employee Stock Options................. -- -- 1,128
------- -------- -------
Denominator for diluted net income (loss) per share....... 21,279 20,958 21,681
======= ======== =======
Net income (loss) per share--basic.......................... $ (0.20) $ (2.76) $ 0.85
======= ======== =======
Net income (loss) per share--diluted........................ $ (0.20) $ (2.76) $ 0.81
======= ======== =======
</TABLE>
For the year ended December 31, 1999, options to purchase 3,428,000 shares
of Common Stock at an average exercise price of $16.11 were excluded from the
computation of diluted net loss per share as the effect would have been
anti-dilutive. This compares to the exclusion of 3,169,000 options at an average
exercise price of $16.20 for the year ended December 31, 1998, and 392,000
options at an average exercise price of $30.35 for the year ended December 31,
1997. Options are anti-dilutive when the Company has a net loss or when the
exercise price of the stock option is greater than the average market price of
the Company's Common Stock.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130 (FAS 130)"Reporting
Comprehensive Income" is effective beginning with the Company's first fiscal
quarter of 1998. FAS 130 requires that, for all periods presented, comprehensive
income be reported with the same prominence as other financial statements.
Comprehensive income includes net income plus other comprehensive income.
Other comprehensive income for the Company is comprised of changes in unrealized
gains or losses on available-for-sale securities, net of tax. Accumulated other
comprehensive income and changes thereto at December 31 consist of:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
<S> <C> <C> <C>
Accumulated other comprehensive income at beginning of year
Unrealized gain, net of tax............................... $ 779 $271 $ 65
Change of accumulated other comprehensive income (loss)
during the year
Unrealized gain (loss) on available-for-sale securities... (3,187) 508 308
Tax effect................................................ -- -- (102)
------- ---- -----
Accumulated other comprehensive income (loss) at end of
year...................................................... $(2,408) $779 $ 271
======= ==== =====
</TABLE>
45
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS
The Company classified all of its investments as "available for sale" as of
December 31, 1999 and 1998, in accordance with the provisions of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Accordingly, the Company states its investments at estimated fair value. Fair
values are determined based on quoted market prices or pricing models using
current market rates. The Company deems all investments, except those
restricted, to be available to meet current working capital requirements.
The following is a summary of the Company's investments:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------- --------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED ------------------- ESTIMATED AMORTIZED ------------------- ESTIMATED
SHORT-TERM INVESTMENTS, IN THOUSANDS COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
- ------------------------------------ --------- -------- -------- ---------- --------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... $ 27,027 $ -- $ 803 $ 26,224 $ 18,500 $196 $26 $ 18,670
Obligations of states and political
subdivisions...................... 10,477 -- -- 10,477 36,158 481 -- 36,639
U.S. corporate debt securities...... 95,645 120 1,560 94,205 65,045 240 46 65,239
-------- ---- ------ -------- -------- ---- --- --------
$133,149 $120 $2,363 $130,906 $119,703 $917 $72 $120,548
======== ==== ====== ======== ======== ==== === ========
RESTRICTED LONG-TERM INVESTMENTS, IN THOUSANDS
- -----------------------------------------------
U.S. Treasury securities and
obligations of U.S. government
agencies.......................... $ 5,466 $ -- $ 61 $ 5,405 $ 5,471 $ 47 $11 $ 5,507
Obligations of states and political
subdivisions...................... -- -- -- -- -- -- -- --
U.S. corporate debt securities...... 74 -- -- 74 3 -- -- 3
-------- ---- ------ -------- -------- ---- --- --------
$ 5,540 $ -- $ 61 $ 5,479 $ 5,474 $ 47 $11 $ 5,510
======== ==== ====== ======== ======== ==== === ========
$138,689 $120 $2,424 $136,385 $125,177 $964 $83 $126,058
======== ==== ====== ======== ======== ==== === ========
</TABLE>
The following is a reconciliation of the Company's investments to the
balance sheet classifications at December 31:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998
- ------------ -------- --------
<S> <C> <C>
Cash equivalents........................................ $ 34,340 $ 28,583
Short-term investments.................................. 96,566 91,965
Restricted investments.................................. 5,479 5,510
-------- --------
Investments at estimated fair value..................... $136,385 $126,058
======== ========
</TABLE>
Gross realized gains and losses were not material for the years ended
December 31, 1999, 1998 and 1997.
46
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS (CONTINUED)
The amortized cost and estimated fair value of the Company's investments at
December 31, 1999, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because the issuers of the securities
may have the right to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED
IN THOUSANDS COST FAIR VALUE
- ------------ --------- ----------
<S> <C> <C>
Due in one year or less................................. $ 66,370 $ 66,414
Due after one year through five years................... 72,319 69,971
-------- --------
$138,689 $136,385
======== ========
</TABLE>
5. BALANCE SHEET DETAILS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
IN THOUSANDS 1999 1998
- ------------ -------- --------
<S> <C> <C>
Inventories:
Raw materials......................................... $ 12,589 $ 21,668
Work-in-process....................................... 13,484 6,808
Finished products..................................... 2,902 8,274
-------- --------
Total............................................... $ 28,975 $ 36,750
======== ========
Equipment and leasehold improvements, net:
Machinery and equipment............................... $ 27,703 $ 23,750
Leasehold improvements................................ 3,903 4,960
Office equipment and furniture........................ 19,548 16,543
-------- --------
$ 51,154 $ 45,253
Accumulated depreciation and amortization............. (30,668) (21,934)
-------- --------
Total............................................... $ 20,486 $ 23,319
======== ========
Accrued expenses:
Salaries and benefits................................. $ 3,369 $ 3,865
Warranty reserves..................................... 3,997 4,207
Reserve for losses on purchase order commitments...... 2,423 5,849
Provision for sales return and allowances............. 1,471 2,000
Other................................................. 2,698 4,896
-------- --------
Total............................................... $ 13,958 $ 20,817
======== ========
</TABLE>
6. STOCK BASED COMPENSATION
1993 STOCK OPTION PLAN
Under the Company's 1993 Stock Option Plan, as amended, qualified employees,
nonemployee Board members and consultants may receive options to purchase shares
of Common Stock at 85% to 100% of fair value at certain specified dates. These
options generally vest in equal monthly installments over a period of
approximately four years, with a minimum vesting period of twelve months from
grant date, and generally
47
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK BASED COMPENSATION (CONTINUED)
expire ten years from date of grant. The plan will terminate on the earlier of
January 6, 2003, or the date on which all shares available for issuance under
the Plan have been issued. The plan includes a provision to automatically
increase the shares reserved for issuance by an amount equal to 1.4% of the
total number of shares of Common Stock outstanding on the last trading day of
the immediately preceding fiscal year, through the year 2000. Under the plan,
approximately 980,000 and 733,000 options were available for issuance at
December 31, 1999 and 1998, respectively.
A summary of the Company's stock option activity, and related information
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1..... 3,168,965 $16.20 2,560,252 $14.94 2,350,208 $12.34
Granted...................... 871,800 $13.67 1,132,250 $19.04 1,017,300 $20.37
Exercised.................... (189,273) $ 1.17 (232,642) $ 9.01 (379,730) $ 6.09
Forfeited.................... (423,972) $18.50 (290,895) $21.84 (427,526) $21.49
--------- ------ --------- ------ --------- ------
Outstanding at December 31... 3,427,520 $16.11 3,168,965 $16.20 2,560,252 $14.94
</TABLE>
At December 31, 1999, options outstanding were as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------
WEIGHTED-AVERAGE OPTIONS EXERCISABLE
REMAINING ----------------------------
CONTRACTUAL LIFE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OPTIONS (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ------------------------ --------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.050 - $12.499.......... 474,631 3.43 $ 2.58 474,091 $ 2.58
$12.500 - $14.999.......... 678,640 9.03 $13.35 19,860 $13.28
$15.000 - $17.499.......... 345,131 7.38 $16.29 199,918 $16.53
$17.500 - $19.999.......... 1,473,218 7.90 $17.94 753,543 $17.96
$20.000 - $33.625.......... 455,900 6.87 $28.23 368,556 $28.66
--------- ---- ------ --------- ------
$ 0.050 - $33.625.......... 3,427,520 7.31 $16.11 1,815,968 $15.91
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In August 1995, the Company established an Employee Stock Purchase Plan. The
plan permits virtually all employees to purchase Common Stock through payroll
deductions at 85% of the lower of the fair market value of the Common Stock on
the first or last day of the offering period. The offering periods are twelve
months. Under the Plan, approximately 584,000 shares and 181,000 shares of
Common Stock were reserved and available for issuance at December 31, 1999 and
1998, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related Interpretations in
accounting for employee stock-based compensation because, as discussed below,
the alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
48
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. STOCK BASED COMPENSATION (CONTINUED)
Pro forma information regarding net income and net income per share is
required by FAS 123, which also requires that the information be determined as
if the Company had accounted for its employee stock options (including purchase
rights issued under the Employee Stock Purchase Plan) granted subsequent to
December 31, 1994 under the fair value method of that Statement. The
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. The fair value for
these options was estimated at the date of grant using a Black-Scholes option-
pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Expected life (in years): stock options............... 3.5 3.5 3.5
Expected life (in years): Employee Stock Purchase
Plan................................................ 1.0 1.0 1.0
Risk-free interest rate............................... 6.3% 4.6% 5.6%
Volatility factor..................................... 0.54 0.56 0.62
Dividend yield........................................ 0% 0% 0%
</TABLE>
The weighted-average expected life of stock options is computed assuming a
multiple-point approach with annual vesting periods. The weighted-average fair
value per share of stock options granted during 1999, 1998 and 1997 were $5.83,
$8.36, and $9.74, respectively.
The weighted average fair value of purchase rights granted under the
Company's Employee Stock Purchase Plan during 1999, 1998 and 1997 were $6.23,
$7.64, and $7.73, respectively.
For purposes of pro forma disclosures, the estimated fair value of options
granted is amortized to expense over the stock options' four-year vesting period
and the Employee Stock Purchase Plan's one year purchase period. Stock option
grants are divided into annual vesting periods, resulting in the recognition of
approximately 50% of the total compensation expense of the grant in the first
year. Additionally, the potential tax benefit associated with the issuance of
incentive stock options is not reflected until realized upon the disqualifying
disposition of the shares. The Company's pro forma information follows:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS 1999 1998 1997
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Net income (loss) as reported............................... $ (4,168) $(57,944) $17,566
Pro forma net income (loss) under FAS 123................... $(10,226) $(62,174) $14,453
Net income (loss) per share--basic, as reported............. $ (0.20) $ (2.76) $ 0.85
Pro forma net income (loss) per share--basic, under FAS
123....................................................... $ (0.49) $ (3.03) $ 0.71
Net income (loss) per share--diluted, as reported........... $ (0.20) $ (2.76) $ 0.81
Pro forma net income (loss) per share--diluted, under FAS
123....................................................... $ (0.49) $ (3.03) $ 0.67
</TABLE>
Because FAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect was not fully reflected until 1998.
49
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY--SHAREHOLDER RIGHTS PLAN
In January 1997, the Board approved the adoption of a Shareholder Rights
Plan ("Rights Plan"). Among other things, the Rights Plan provides that each
Right will be distributed as a dividend at the rate of one Preferred Share
Purchase Right on each outstanding share of the Company's Common Stock held by
stockholders of record as of the close of business on February 24, 1997. The
rights expire on February 9, 2007.
The Rights will be exercisable only if a person or group acquires 15% or
more of the Company's Common Stock or announces a tender offer the consummation
of which would result in ownership by a person or group of 15% or more of the
Company's Common Stock. Each Right will entitle stockholders to buy one
one-hundredth of a share of a new series of Junior Participating Preferred Stock
at an exercise price of $145.00 upon certain events.
The Rights are redeemable, in whole but not in part, at the option of the
Board of Directors at $.01 per Right, at any time within 10 days of the date
they become exercisable and in certain other circumstances and will not become
exercisable in certain instances where a transaction is approved by the
Company's Board of Directors. The Rights will not prevent a takeover of the
Company, but should encourage anyone seeking to acquire the Company to negotiate
with the Company's Board of Directors.
Shares reserved for issuance under the Plan were 350,000 at December 31,
1999.
8. EMPLOYEE BENEFIT PLANS
EMPLOYEE BONUS PLANS
The Company currently sponsors a profit sharing plan and an executive
incentive bonus plan that distribute employee awards based on the achievement of
predetermined operating income targets. The Company has not recognized expense
under these various employee bonus plans for 1999, 1998 and 1997.
EMPLOYEE SAVINGS AND RETIREMENT PLAN
The Company currently sponsors a 401(k) employee salary deferral plan that
allows voluntary contributions by all full-time employees of from 1% to 20% of
their pretax earnings. Company contributions will be made only if certain
predetermined operating income targets are achieved. The Company has not
recognized expense relating to this benefit plan for 1999, 1998 and 1997.
9. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes are
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
<S> <C> <C> <C>
Domestic........................................ $(5,694) $(65,582) $23,326
Foreign......................................... 1,526 1,456 1,768
------- -------- -------
Income (loss) before income taxes............... $(4,168) $(64,126) $25,094
======= ======== =======
</TABLE>
50
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Income taxes included the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
<S> <C> <C> <C>
Federal:
Current.......................................... $ -- $(9,847) $2,142
Deferred......................................... -- 2,634 3,925
------ ------- ------
-- (7,213) 6,067
State:
Current.......................................... -- -- 365
Deferred......................................... -- 263 644
------ ------- ------
-- 263 1,009
Foreign:
Current.......................................... -- 768 455
Deferred......................................... -- -- (3)
------ ------- ------
-- 768 452
------ ------- ------
Total income tax provision (benefit)............... $ -- $(6,182) $7,528
====== ======= ======
</TABLE>
The tax benefit associated with stock options and employee stock purchase
plan transactions increased tax refunds receivable by $309,000 for 1998, and
reduced taxes currently payable by $2,121,000 for 1997, respectively. Such
benefits are credited to stockholders' equity when realized.
The difference between the provision (benefit) for income taxes and the
amount computed by applying the U.S. federal statutory rate (35 percent) to
income before income taxes is explained below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
<S> <C> <C> <C>
Tax computed at statutory rate................... $(1,417) $(22,444) $ 8,783
State income taxes, net of federal benefit....... -- 171 656
Foreign sales corporation........................ -- -- (90)
Tax exempt income................................ -- (1,142) (1,747)
Credits for research and development............. -- (1,304) (612)
Losses not benefited............................. 1,320 19,775 --
Other, net....................................... 97 (1,238) 538
------- -------- -------
Income tax provision (benefit)................... $ -- $ (6,182) $ 7,528
======= ======== =======
</TABLE>
51
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
Significant components of deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
IN THOUSANDS 1999 1998 1997
- ------------ -------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............. $ 7,848 $ -- $ --
Inventory valuation........................... 12,676 11,105 3,869
Bad debt reserve.............................. 1,414 2,503 652
Fixed assets.................................. 1,539 2,404 --
Tax credit carryforwards...................... 2,196 1,696 519
Warranty reserves............................. 1,109 542 2,141
Accrued vacation.............................. 250 136 590
Other......................................... 4,323 5,419 1,290
-------- -------- -------
Total deferred tax assets....................... 31,355 23,805 9,061
Valuation allowance............................. (22,666) (19,563) --
-------- -------- -------
Net deferred tax assets......................... $ 8,689 $ 4,242 $ 9,061
======== ======== =======
Deferred tax liabilities:
Lease revenue................................. $ (1,698) $ (1,489) $(1,489)
Deferred income............................... (1,372) (1,185) (3,919)
Inventory basis difference.................... (4,778) -- --
Other......................................... (841) (1,568) (614)
-------- -------- -------
Total deferred tax liabilities.................. $ (8,689) $ (4,242) $(6,022)
-------- -------- -------
Net deferred tax assets......................... $ -- $ -- $ 3,039
======== ======== =======
</TABLE>
FASB Statement No. 109 provides for the recognition of deferred tax assets
if realization of such assets is more likely than not. Based upon the weight of
available evidence, which includes the Company's historical operating
performance and the reported cumulative net losses in all prior years, the
Company has provided a full valuation allowance against its net deferred tax
assets.
The net valuation allowance increased by $3,103,000 and $19,563,000 during
the years ended December 31, 1999 and 1998, respectively. Approximately $750,000
of the valuation allowance is attributed to stock options, the benefit of which
will be credited to additional paid in capital when realized.
As of December 31, 1999, the Company had net operating loss carryforwards
for federal and state tax purposes of $21,000,000 and $7,400,000, respectively.
The Company also had federal and state research and development tax credit
carryforwards of approximately $1,700,000 and $800,000, respectively. The
federal and state net operating loss carryforwards will expire at various dates
beginning in year 2002 through 2019, if not utilized. The tax credit
carryforwards will expire at various dates beginning in 2009 through 2019, if
not utilized.
Utilization of net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the ownership change
limitation provided by the Internal Revenue Code and similar state provisions.
The annual limitation may result in the expiration of the tax credit
carryforwards before utilization.
52
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES
The Company leases its facilities, undeveloped land and certain equipment
under operating leases expiring through December, 2015. Under certain of its
leasing arrangements, the Company is subject to letter of credit requirements,
escalation charges and also retains certain renewal and purchase options.
Additionally, the table below is presented net of subleases the Company has
executed in the amount of $388,000, expiring through December, 2000. As of
December 31, 1999, the minimum annual rental commitments are as follows:
<TABLE>
<S> <C>
2000................................... $ 5,409,000
2001................................... 4,643,000
2002................................... 4,397,000
2003................................... 3,738,000
2004................................... 3,633,000
Thereafter............................. 11,944,000
-----------
$33,764,000
</TABLE>
Rent expense was approximately $5,037,000, $5,147,000 and $3,744,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
The Company presently leases 6.4 acres of land located in San Jose,
California. This lease expires in November 2000. As part of this transaction,
the Company has segregated a portion of its securities as collateral for the
debt obligations of the lessor pertaining to this land. These securities are
restricted as to withdrawal, and are managed, subject to certain limitations, by
the Company under its investment policy. At December 31, 1999 and 1998,
$5.5 million of securities were classified as restricted investments on the
consolidated balance sheets.
The Company is not a party to any material litigation. From time to time,
however, the Company may be subject to claims and lawsuits arising in the normal
course of business.
11. ACQUISITION
On June 11, 1998, the Company completed the acquisition of substantially all
of the assets and the assumption of certain liabilities of Integrated
Solutions, Inc. (ISI), a privately held manufacturer of i-line and deep
ultra-violet reduction lithography systems. The Company accounted for this
acquisition based on the purchase method of accounting and allocated the
purchase price based on fair values of assets acquired as of the acquisition
date. As a result of this acquisition, the Company recognized a charge for
acquired in-process research and development expense of $5.1 million. The final
purchase price consisted of net cash consideration of approximately
$19.2 million, $2.6 million for transaction costs and $8.9 million for assumed
liabilities. Based on the final purchase price allocation, the excess cost over
fair value of net assets was $9.1 million, to be amortized on a straight-line
basis over a period of three to seven years. As of December 31, 1999, the
accumulated amortization related to the excess cost over fair value of this
acquisition was $1,150,000. The results of the acquired operations are included
from the date of acquisition.
53
<PAGE>
ULTRATECH STEPPER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITION (CONTINUED)
The Company's management made certain assessments with respect to the
determination of all identifiable assets resulting from, or to be used in,
research and development activities as of the acquisition date. Each of these
activities was evaluated, by both interviews and data analysis, to determine its
state of development and related fair value. The Company's review indicated that
the IPR&D had not reached a state of technological feasibility and the
underlying technology had no alternative future use to the Company in other
research and development projects or otherwise. In the case of IPR&D, fair
values of the corresponding technologies were determined using an income
approach, which included a discounted future earnings methodology. Under this
methodology, the value of the in-process technology is comprised of the total
present value of the anticipated net cash flows attributable to the in-process
project, discounted to net present value, taking into account the uncertainty
surrounding the successful development of the purchased IPR&D.
54
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To The Board Of Directors and Stockholders Of Ultratech Stepper, Inc.
We have audited the accompanying consolidated balance sheets of Ultratech
Stepper, Inc. as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1999. Our audits also included the
financial statement schedule listed in the index at Item 14(a). These financial
statements and schedule 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 auditing standards generally accepted
in the United States. 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Ultratech Stepper, Inc. at December 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ ERNST AND YOUNG LLP
San Jose, California
January 25, 2000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
55
<PAGE>
PART III
Certain information required by Part III is omitted from this Report in that
the Registrant will file a definitive proxy statement within 120 days after the
end of its fiscal year pursuant to Regulation 14A for its 2000 Annual Meeting of
Stockholders to be held June 1, 2000 and the information included therein is
incorporated herein by reference as set forth below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference from the Item captioned "Election of Directors" in the
Company's Proxy Statement for the 2000 Annual Meeting of Stockholders (the
"Proxy Statement"). The information required by this Item relating to the
Company's executive officers is included under the caption "Executive Officers
of the Registrant" in Part I, Item 4 of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference from the
Item captioned "Executive Compensation and Related Information" in the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
Items captioned "Election of Directors" and "Ownership of Securities" in the
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
item captioned "Certain Transactions" in the Proxy Statement.
56
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report on Form 10-K
(1) Financial Statements
The financial statements (including the notes thereto) listed in the
Index to Consolidated Financial Statement Schedule (set forth in Item 8
of part II of this Form 10-K) are filed within this Annual Report on Form
10-K.
(2) Financial Statement Schedules
The following consolidated financial statement schedule is included
herein:
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
Schedule II Valuation and Qualifying Accounts............... S-1
</TABLE>
Schedules other than those listed above have been omitted since they are
either not required, are not applicable, or the required information is
shown in the financial statements or related notes.
(3) Exhibits
The following exhibits are referenced or included in this report:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<S> <C>
2.1(1) Asset Purchase Agreement, dated March 8, 1993, among
Registrant, General Signal Corporation and General Signal
Technology Corporation.
3.1(1) Amended and Restated Certificate of Incorporation of the
Registrant, filed October 6, 1993.
3.1.1(12) Amended and Restated Certificate of Incorporation of the
Registrant, filed June 17, 1998.
3.2(6) Bylaws of Registrant, as amended.
3.3(6) Certified Certificate of Amendment of the Amended and
Restated Certificate of Incorporation of the Company dated
May 17, 1995.
4.5(1) Specimen Common Stock Certificate of Registrant.
4.6(7) Shareholder Rights Agreement between Registrant and the
First National Bank of Boston dated February 11, 1997.
4.6.1(9) Shareholder Rights Agreement between Registrant and the
First National Bank of Boston, filed on February 11, 1997,
as amended on March 18, 1998.
4.6.2(14) Second Amendment to Shareholder Rights Agreement dated
February 11, 1997 between Registrant and BankBoston, N.A.
(formerly known as the First National Bank of Boston) as
of October 12, 1998, and Certification of Compliance with
Section 27 thereof.
10.1(1)(2) Distributor Agreement dated June 22, 1993 between the
Company and Innotech Corporation.
10.2(1)(5) 1993 Stock Option/Stock Issuance Plan and form of
Nonstatutory Stock Option Agreement with respect to the
automatic option grant program, as amended.
10.3(8) 1993 Stock Option/Stock Issuance Plan (Amended and Restated
on August 8, 1997).
10.3.1(10) 1993 Stock Option/Stock Issuance Plan (Amended and Restated
as of April 27, 1998)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<S> <C>
10.3.1(16)(17) 1993 Stock Option/Stock Issuance Plan (Amended and Restated
as of January 4, 1999)
10.4(1) Form of Indemnification Agreement entered into between the
Registrant and each of its officers and directors.
10.5(1) Standard Industrial Lease--Single Tenant, Full Net between
The Equitable Life Assurance Society of the United States,
as Landlord, and Registrant, as Tenant, dated August 27,
1993.
10.6(3) Executive Incentive Plan.
10.7(3) Profit Sharing Plan.
10.8(4) Standard Industrial Lease Mutual Tenant, Full Net between
Orchard Investment Company Number 701, As Landlord, and
Registrant, As Tenant dated May 17, 1994 and as amended,
October 18, 1994.
10.8.1(9) Second Amendment to Lease and Agreement to Release between
the Receiver of the Estate of Orchard Investment Company
Number 701, As Original Landlord, Orchard Properties, and
Registrant, As Tenant dated May 25, 1995.
10.8.2(9) Third Amendment to Lease between Orchard Investment Company
Number 701, As Landlord, and Registrant, As Tenant dated
November 16, 1995.
10.8.3(9) Fourth Amendment to Lease between San Jose Acquisition Co.,
L.L.C. (successor of Orchard Investment Company Number
701), As Landlord, and Registrant, As Tenant dated
February 6, 1996.
10.8.4(9) Fifth Amendment to Lease between Silicon Valley Properties,
L.L.C. (successor of San Jose Acquisition Co., L.L.C., and
Orchard Investment Company Number 701), As Landlord and
Registrant, As Tenant dated December 1, 1997.
10.11(5) 1995 Employee Stock Purchase Plan.
10.11(17) 1995 Employee Stock Purchase Plan (Amended and Restated as
of March 16, 1999).
10.12(17) 1998 Supplemental Stock Option/Stock Issuance Plan.
10.12(18) 1998 Supplemental Stock Option/ Stock Issuance Plan filed on
December 27, 1999 (Amended and Restated as of October 19,
1999).
10.15(16) Employment agreement between Registrant and Mr. Bruce R.
Wright, Senior Vice President, Finance and Chief Financial
Officer.
11.1(11) Asset Purchase Agreement, dated May 19, 1998, by and among
the Registrant, Ultratech Stepper East, Inc. (formerly
known as Ultratech Acquisition Sub, Inc., formerly known
as Ultratech Capital, Inc., formerly known as Ultratech
Stepper Capital, Inc.), Integrated Solutions, Inc., and
Integrated Acquisition Corp.
11.1.1(13) Amendment to the Asset Purchase Agreement, dated May 19,
1998, by and among the Registrant, Ultratech Stepper East,
Inc. (formerly known as Ultratech Acquisition Sub, Inc.,
formerly known as Ultratech Capital, Inc., formerly known
as Ultratech Stepper Capital, Inc.), Integrated Solutions,
Inc., and Integrated Acquisition Corp.
11.2 (15) Sublease between Lam Research Corporation, as Sublessor, and
Registrant, as Sublessee dated September 16, 1998,
regarding the leased building premises known as 16 Jonspin
Road, Wilmington, Massachusetts.
11.3 Lease Agreement between Montague LLC, As Landlord, and
Registrant, As Tenant dated November 22, 1999.
11.4 Lease Agreement between Judith Ann Spinelli, as lessor, and
Registrant, as lessee dated December 28(th), 1999,
regarding the leased building premises known as 16 Jonspin
Road, Wilmington, Massachusetts.
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------------------- -----------
<S> <C>
21 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney.
27 Financial Data Schedule.
</TABLE>
- ------------------------
(1) Previously filed with the Company's Registration Statement on Form S-1
declared effective with the Securities and Exchange Commission on
September 28, 1993. File No. 33-66522.
(2) Confidential Treatment has been granted for the deleted portions of this
document.
(3) Previously filed with the Company's 1993 Annual Report on Form 10-K
(Commission File No. 0-22248).
(4) Previously filed with the Company's 1994 Annual Report on Form 10-K
(Commission File No. 0-22248).
(5) Previously filed with the Company's 1995 Annual Report on Form 10-K
(Commission File No. 0-22248).
(6) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (Commission File No. 0-22248).
(7) Previously filed with the Company's Current Report on Form 8-K, dated
February 26, 1997.
(8) Previously filed with the Company's Current Report on Form S-8, dated
August 8, 1997.
(9) Previously filed with the Company's 1997 Annual Report on Form 10-K
(Commission File No. 0-22248).
(10) Previously filed with the Company's Current Report on Form S-8, dated
April 27, 1998.
(11) Previously filed with the Company's Current Report on Form 8-K, dated
June 11, 1998.
(12) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 (Commission File No. 0-22248).
(13) Previously filed with the Company's Current Report on Form 8-K/A, dated
August 25, 1998.
(14) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 (Commission File No. 0-22248).
(15) Previously filed with the Company's 1998 Annual Report on Form 10-K
(Commission File No. 0-22248).
(16) Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 (Commission File No. 0-22248).
(17) Previously filed with the Company's Current Report on Form S-8, dated
August 13, 1999.
(18) Previously filed with the Company's Current Report on Form S-8, dated
December 27, 1999.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1999.
(c) Exhibits. See list of exhibits under (a)(3) above.
(d) Financial Statement Schedules. See list of schedules under (a)(2) above.
59
<PAGE>
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, thereunder duly authorized.
<TABLE>
<S> <C> <C> <C> <C>
ULTRATECH STEPPER, INC.
By: /s/ ARTHUR W. ZAFIROPOULO Date: March 24, 2000
---------------------------------------
Arthur W. Zafiropoulo
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
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 dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board of
/s/ ARTHUR W. ZAFIROPOULO Directors and Chief
------------------------------------------- Executive Officer (Principal March 24, 2000
Arthur W. Zafiropoulo Executive Officer)
Senior Vice President,
/s/ BRUCE R. WRIGHT Finance, Chief Financial
------------------------------------------- Officer and Secretary March 24, 2000
Bruce R. Wright (Principal Financial and
Accounting Officer)
/s/ KENNETH LEVY
------------------------------------------- Director March 24, 2000
Kenneth Levy
/s/ GREGORY HARRISON
------------------------------------------- Director March 24, 2000
Gregory Harrison
/s/ LARRY R. CARTER
------------------------------------------- Director March 24, 2000
Larry R. Carter
/s/ THOMAS D. GEORGE
------------------------------------------- Director March 24, 2000
Thomas D. George
/s/ JOEL GEMUNDER
------------------------------------------- Director March 24, 2000
Joel Gemunder
</TABLE>
60
<PAGE>
SCHEDULE II
ULTRATECH STEPPER, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) OF PERIOD
- ----------- ------------ ---------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended December 31, 1997
Trade accounts receivable...... $1,151 $2,205 $ -- $(1,098) $2,258
====== ====== ==== ======= ======
Year ended December 31, 1998
Trade accounts receivable...... $2,258 $1,907 $153 $(2,122) $2,196
Leases receivable.............. -- 6,444 -- -- 6,444
------ ------ ---- ------- ------
$2,258 $8,351 $153 $(2,122) $8,640
====== ====== ==== ======= ======
Year ended December 31, 1999
Trade accounts receivable...... $2,196 $ 6 $ -- $ (156) $2,046
Leases receivable.............. 6,444 506 529 (3,186) 4,293
------ ------ ---- ------- ------
$8,640 $ 512 $529 $(3,342) $6,339
====== ====== ==== ======= ======
</TABLE>
- ------------------------
(1) Deductions represent write-offs against reserve account balances.
S-1
<PAGE>
EXHIBIT 11.3
LEASE
BY AND BETWEEN
MONTAGUE LLC,
A CALIFORNIA LIMITED LIABILITY COMPANY
AS LANDLORD
AND
ULTRATECH STEPPER, INC.,
A DELAWARE CORPORATION
AS TENANT
NOVEMBER __, 1999
53
<PAGE>
LEASE
THIS LEASE, dated November 22, 1999, for reference purposes only, is made by and
between MONTAGUE LLC, a California limited liability company ("Landlord") and
ULTRATECH STEPPER, a Delaware corporation ("Tenant"), to be effective and
binding upon the parties as of the date the last of the designated signatories
to this Lease shall have executed this Lease (the "Effective Date of this
Lease").
ARTICLE 1
REFERENCE
1.1 REFERENCES. All references in this Lease (subject to any further
clarifications contained in this Lease) to the following terms shall have the
following meaning or refer to the respective address, person, date, time period,
amount, percentage, calendar year or fiscal year as below set forth:
<TABLE>
<S> <C>
Tenant's Address for Notice: 3050 Zanker Road
San Jose, California 95134
Tenant's Representative: BRUCE WRIGHT
CFO, ULTRATECH STEPPER, INC.
Landlord's Address for Notices: c/o Menlo Equities LLC
525 University Avenue
Suite 100
Palo Alto, California 94301
Landlord's Representative: Henry Bullock/Richard Holmstrom
Phone Number: (650) 326-9300
Intended Commencement Date: March 1, 2000
Intended Term: Ten (10) years
Lease Expiration Date: Ten (10) Years from the Actual Lease
Commencement Date, unless earlier terminated
by Landlord in accordance with the terms of
this Lease, or extended by Tenant pursuant
to Article 15.
Options to Renew: Two option(s) to renew, each for a term of
five (5) years.
First Month's Prepaid Rent $146,414.55 [plus estimated Operating
Expenses] and Operating Expenses:
Tenant's Security Deposit: Cash or check in the amount of $220,000.00
[last month's rent and estimated operating
expenses] and Letter of Credit in the amount
of $2,000,000
Late Charge Amount: Five Percent (5%) of the Delinquent Amount
Tenant's Required Liability
Coverage: $5,000,000 Combined Single Limit
Broker(s): CB Richard Ellis (Tenant's Broker)
Colliers International (Landlord's Broker)
Project: That certain real property situated in the
City of San Jose, County of Santa Clara,
State of California, improved with a total
of five (5) building(s), which real property
is shown on the Site Plan attached hereto as
Exhibit "A" and is commonly known as
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
or otherwise described as follows: Montague
Park, San Jose, California.
Property: That certain real property within the
Project with APN 097-14-069, as presently
improved with one building(s), which real
property is shown on the Site Plan attached
hereto as Exhibit "B".
Building: That certain building on the Property in
which the Leased Premises are located
commonly known as 2880 Junction Road, San
Jose, California (the "Building"), which
Building is shown outlined on Exhibit "B"
hereto.
Outside Areas: The "Outside Areas" shall mean all areas
within the Property which are located
outside the Building, such as pedestrian
walkways, parking areas, landscaped areas,
open areas and enclosed trash disposal
areas.
Leased Premises: All the interior space within the Building,
including stairwells, connecting walkways,
and atriums, consisting of approximately
79,143 square feet and, for purposes of this
Lease, agreed to contain said number of
square feet.
Parking Spaces: Tenant shall be entitled to the use of 295
parking spaces located in the parking area
of the Outside Areas. Up to 10 of such
spaces may be marked as reserved for
Tenant's visitors, employees, and vendors;
the balance shall be non-designated and
non-reserved.
Tenant's Building Expense Share: The term "Tenant's Building Expense Share"
shall mean the percentage obtained by
dividing the rentable square footage of the
Leased Premises at the time of calculation
by the rentable square footage of the
Building at the time of calculation. Such
percentage is currently 100%. In the event
that any portion of the Property is sold by
Landlord, or the rentable square footage of
the Leased Premises or the Property is
otherwise changed, Tenant's Building Expense
Share shall be recalculated to equal the
percentage described in the first sentence
of this paragraph, so that the aggregate
Tenant's Building Expense Share of all
tenants of the Property shall equal 100%.
Tenant's Building Expense Share is subject
to adjustment as set forth in Paragraphs
13.12(b) and 13.12 (c).
Tenant's Project Expense Share: The term "Tenant's Project Expense Share"
shall mean the percentage obtained by
dividing the rentable square footage of the
Leased Premises at the time of calculation
by the rentable square footage of all of the
buildings in the Project at the time of
calculation. Such percentage is currently
18.95%. In the event that any portion of the
Project is sold by Landlord, or the rentable
square footage of the Project is otherwise
changed, Tenant's Project Expense Share
shall be recalculated to equal the
percentage in the first sentence of this
paragraph, so that the aggregate Tenant's
Project Expense Share of all tenants of the
Project shall equal 100%. Tenant's Project
Expense Share is subject to adjustment as
set forth in Paragraphs 13.12(b) and
13.12(c).
Base Monthly Rent: The term "Base Monthly Rent" shall mean the
following:
</TABLE>
<TABLE>
<CAPTION>
Period Rent
------ ----
<S> <C>
Months 1-12 $146,414.55
Months 13-24 $150,806.99
Months 25-36 $155,331.20
Months 37-48 $159,991.13
Months 49-60 $164,790.87
</TABLE>
55
<PAGE>
<TABLE>
<S> <C>
Months 61-72 $169,734.59
Months 73-84 $174,826.63
Months 85-96 $180,071.43
Months 97-108 $185,473.57
Months 109-120 $191,037.78
Permitted Use: General administrative, field support
office, research and development, assembly,
manufacturing, and any other legally
permitted use compatible with office
buildings of comparable quality, subject to
Landlord's approval, which shall not be
unreasonably withheld.
Exhibits: The term "Exhibits" shall mean the Exhibits
of this Lease which are described as
follows:
Exhibit "A"- Site Plan showing the Project
Exhibit "B" - Site Plan showing the Property
and delineating the Building in which the
Leased Premises are located.
Exhibit "C" - Work Letter
Exhibit "D" - Form of Tenant Estoppel
Certificate
Exhibit "E" - Form of Letter of Credit
Exhibit "F" - Form of Bill of Sale
</TABLE>
ARTICLE 2
LEASED PREMISES, TERM AND POSSESSION
2.1 DEMISE OF LEASED PREMISES. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord for Tenant's own use in the conduct of Tenant's
business and not for purposes of speculating in real estate, for the Lease Term
and upon the terms and subject to the conditions of this Lease, that certain
interior space described in Article 1 as the Leased Premises, reserving and
excepting to Landlord the right to fifty percent (50%) of all assignment
consideration and excess rentals as provided in Article 7 below. Tenant's lease
of the Leased Premises, together with the appurtenant right to use the Outside
Areas as described in Paragraph 2.2 below, shall be conditioned upon and be
subject to the continuing compliance by Tenant with (i) all the terms and
conditions of this Lease, (ii) all Laws governing the use of the Leased Premises
and the Property, (iii) all Private Restrictions, easements and other matters
now of public record respecting the use of the Leased Premises and Property, and
(iv) all reasonable rules and regulations from time to time established by
Landlord.
2.2 RIGHT TO USE OUTSIDE AREAS. As an appurtenant right to Tenant's right to the
use and occupancy of the Leased Premises, Tenant shall have the right to use the
Outside Areas in conjunction with its use of the Leased Premises solely for the
purposes for which they were designated and intended and for no other purposes
whatsoever. Tenant's right to so use the Outside Areas shall be subject to the
limitations on such use as set forth in Article 1 and shall terminate
concurrently with any termination of this Lease.
2.3 LEASE COMMENCEMENT DATE AND LEASE TERM. Subject to Paragraph 2.4 below, the
term of this Lease shall begin, and the Lease Commencement Date shall be deemed
to have occurred, on the Intended Commencement Date, as set forth in Article 1
(the "Lease Commencement Date"). The term of this Lease shall in all events end
on the Lease Expiration Date (as set forth in Article 1). The Lease Term shall
be that period of time commencing on the Lease Commencement Date and ending on
the Lease Expiration Date (the "Lease Term").
2.4 DELIVERY OF POSSESSION. Landlord shall deliver to Tenant possession of the
Leased Premises thirty (30) days prior to the Intended Commencement Date in its
then "AS-IS" condition, WITH ALL FAULTS, except as otherwise expressly provided
in this Lease. If Landlord is unable to deliver possession of the Leased
Premises to Tenant on or before thirty (30) days before the Intended
Commencement Date, Landlord shall not be in default under this Lease, nor shall
this Lease be void, voidable or cancelable by Tenant until the lapse of ninety
(90) days after the Intended Commencement Date (the "delivery grace period");
however, if Landlord's inability to so deliver the Leased Premises to Tenant is
caused by the existing tenant's hold over in the Leased Premises beyond the term
of its current lease or by Landlord's gross negligence or willful misconduct,
the Lease Commencement Date shall not be deemed to have occurred until thirty
(30) days after the actual date of delivery. If Landlord is unable to deliver
possession of the Leased Premises in the agreed condition to Tenant within the
described
56
<PAGE>
delivery grace period (including any extension thereof by reason of Force
Majeure or the actions or inactions of Tenant), then Tenant's sole remedy shall
be to terminate this Lease, and in no event shall Landlord be liable in damages
to Tenant for such delay. Tenant may not terminate this Lease at any time after
the date Landlord notifies Tenant that the Leased Premises are available for
delivery to Tenant, unless Landlord's notice is not given in good faith.
Notwithstanding the foregoing delivery grace period, Landlord shall provide the
Leased Premises to Tenant for early occupancy no later than thirty (30) days in
advance of the Lease Commencement Date, subject to Tenant's compliance with all
of the terms and conditions of this Lease other than the payment of Base Monthly
Rent. At the time Landlord delivers the Leased Premises to Tenant, Landlord
shall also deliver to Tenant an executed Bill of Sale in the form attached as
Exhibit F and possession of the furniture described therein.
2.5 PERFORMANCE OF IMPROVEMENT WORK; ACCEPTANCE OF POSSESSION. Landlord shall
have no obligation to perform any work or make any installations in the Leased
Premises, it being agreed that Tenant accepts the Leased Premises in the
condition called for in Section 2.4 above; provided that, Landlord agrees to
deliver the Building and all Building systems and subsystems serving the
Building and Leased Premises in good working condition and in compliance with
all Laws of the date the Leased Premises are delivered to Tenant. It is agreed
that by occupying the Leased Premises, Tenant formally accepts same and
acknowledges that the Leased Premises are in the condition called for hereunder,
subject to normal punchlist items specified by Tenant to Landlord in writing
within thirty (30) days of such occupancy.
2.6 SURRENDER OF POSSESSION. Immediately prior to the expiration or upon the
sooner termination of this Lease, Tenant shall remove all of Tenant's signs from
the exterior of the Building and shall remove all of Tenant's equipment, trade
fixtures, furniture, supplies, wall decorations and other personal property from
within the Leased Premises, the Building and the Outside Areas, and shall vacate
and surrender the Leased Premises, the Building, the Outside Areas and the
Property to Landlord in the same condition, broom clean, as existed at the Lease
Commencement Date, reasonable wear and tear excepted. Tenant shall repair all
damage to the Leased Premises, the exterior of the Building and the Outside
Areas caused by Tenant's removal of Tenant's property. Tenant shall patch and
refinish, to Landlord's reasonable satisfaction, all penetrations made by Tenant
or its employees to the floor, walls or ceiling of the Leased Premises, whether
such penetrations were made with Landlord's approval or not. Tenant shall remove
all Specialized Improvements (as defined in the Work Letter) identified by
Landlord pursuant to the Work Letter and shall repair all damage to the Leased
Premises, the Building and the Property caused by such removal. Tenant shall
repair all damage caused by Tenant to the exterior surface of the Building and
the paved surfaces of the Outside Areas and, where necessary, replace or
resurface the same. Additionally, to the extent that Landlord shall have
notified or is deemed to have notified Tenant in writing at the time the
improvements were completed that it desired to have certain improvements made by
Tenant or at the request of Tenant removed at the expiration or sooner
termination of the Lease, Tenant shall, upon the expiration or sooner
termination of the Lease, remove any such improvements constructed or installed
by Landlord or Tenant and repair all damage caused by such removal. If the
Leased Premises, the Building, the Outside Areas and the Property are not
surrendered to Landlord in the condition required by this paragraph at the
expiration or sooner termination of this Lease, Landlord may, at Tenant's
expense, so remove Tenant's signs, property and/or improvements not so removed
and make such repairs and replacements not so made or hire, at Tenant's expense,
independent contractors to perform such work. Tenant shall be liable to Landlord
for all costs incurred by Landlord in returning the Leased Premises, the
Building and the Outside Areas to the required condition, together with interest
on all costs so incurred from the date paid by Landlord at the lesser of (i)
that rate quoted by Wells Fargo Bank, N.T. & S.A. from time to time as its prime
rate plus 5% or (ii) the then maximum rate of interest not prohibited or made
usurious by law until paid. Tenant shall pay to Landlord the amount of all costs
so incurred plus such interest thereon, within thirty (30) days of Landlord's
billing Tenant for same. Tenant shall indemnify Landlord against loss or
liability resulting from delay by Tenant in surrendering the Leased Premises,
including, without limitation, any claims made by any succeeding Tenant or any
losses to Landlord with respect to lost opportunities to lease to succeeding
tenants.
ARTICLE 3
RENT, LATE CHARGES AND SECURITY DEPOSITS
3.1 BASE MONTHLY RENT. Commencing on the Lease Commencement Date (as determined
pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term,
Tenant shall pay to Landlord, without prior demand therefor, in advance on the
first day of each calendar month, the amount set forth as "Base Monthly Rent" in
Article 1 (the "Base Monthly Rent").
3.2 ADDITIONAL RENT. Commencing on the Lease Commencement Date (as
determined pursuant to Paragraph 2.3 above) and continuing throughout the Lease
Term, in addition to the Base Monthly Rent and to the extent not required by
Landlord to be contracted for and paid directly by Tenant, Tenant shall pay to
Landlord as additional rent (the "Additional Rent") the following amounts:
(a) An amount equal to all Property Operating Expenses (as defined in
Article 13) incurred by Landlord. Landlord shall deliver to Tenant Landlord's
reasonable estimate of any given expense (such as Landlord's Insurance Costs or
Real Property Taxes), or group of expenses, which it anticipates will be paid or
incurred for the ensuing calendar or fiscal year, as
57
<PAGE>
Landlord may determine, and Tenant shall pay to Landlord an amount equal to the
estimated amount of such expenses for such year in equal monthly installments
during such year with the installments of Base Monthly Rent.
(b) Landlord's share of the consideration received by Tenant upon
certain assignments and sublettings as required by Article 7.
(c) Any legal fees and costs that Tenant is obligated to pay or
reimburse to Landlord pursuant to Article 13; and
(d) Any other charges or reimbursements due Landlord from Tenant
pursuant to the terms of this Lease.
Notwithstanding the foregoing, Landlord may elect by written notice to Tenant to
have Tenant pay Real Property Taxes or any portion thereof directly to the
applicable taxing authority, in which case Tenant shall make such payments and
deliver satisfactory evidence of payment to Landlord no later than five (5) days
before such Real Property Taxes become delinquent.
3.3 YEAR-END ADJUSTMENTS. If Landlord shall have elected to bill Tenant for the
Property Operating Expenses (or any group of such expenses) on an estimated
basis in accordance with the provisions of Paragraph 3.2(a)(iii) above, Landlord
shall furnish to Tenant within three months following the end of the applicable
calendar or fiscal year, as the case may be, a statement (the "Statement")
setting forth (i) the amount of such expenses paid or incurred during the just
ended calendar or fiscal year, as appropriate, and (ii) the amount that Tenant
has paid to Landlord for credit against such expenses for such period. If Tenant
shall have paid more than its obligation for such expenses for the stated
period, Landlord shall, at its election, either (i) credit the amount of such
overpayment toward the next ensuing payment or payments of Additional Rent that
would otherwise be due or (ii) refund in cash to Tenant the amount of such
overpayment. If such year-end statement shall show that Tenant did not pay its
obligation for such expenses in full, then Tenant shall pay to Landlord the
amount of such underpayment within thirty (30) days from Landlord's billing of
same to Tenant. Within thirty (30) days after receipt of the Statement, Tenant
shall have the right to commence an audit, at Tenant's expense, of Landlord's
accounts and records relating to the Property Operating Expenses. Such audit
shall be conducted by a Big Six certified public accounting firm. Such audit
shall be completed within thirty (30) days after Tenant's receipt of Landlord's
accounts and records or access has been provided thereto. If such audit reveals
that Landlord has overcharged Tenant, the amount overcharged shall be paid to
Tenant within thirty (30) days after the audit is concluded. In addition, if the
Statement exceeds the actual Property Operating Expenses which should have been
charged to Tenant by more than five percent (5%), the costs of the audit shall
be paid by Landlord. The provisions of this Paragraph shall survive the
expiration or sooner termination of this Lease.
3.4 LATE CHARGE, AND INTEREST ON RENT IN DEFAULT. Tenant acknowledges that the
late payment by Tenant of a monthly installment of Base Monthly Rent or any
Additional Rent will cause Landlord to incur certain costs and expenses not
contemplated under this Lease, the exact amounts of which are extremely
difficult or impractical to fix. Such costs and expenses will include without
limitation, administration and collection costs and processing and accounting
expenses. Therefor, if an installment of Base Monthly Rent is not received by
Landlord from Tenant within five (5) calendar days after the same becomes due,
Tenant shall immediately pay to Landlord a late charge in an amount equal to the
amount set forth in Article 1 as the "Late Charge Amount," and if any Additional
Rent is not received by Landlord when the same becomes due, Tenant shall
immediately pay to Landlord a late charge in an amount equal to 5% of the
Additional Rent not so paid; provided however, that once, but only once, in any
twelve (12) month period during the Lease Term, Tenant shall not be liable for
any Late Charge Amount or other late charge hereunder. Landlord and Tenant agree
that this late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for the anticipated loss Landlord
would suffer by reason of Tenant's failure to make timely payment. In no event
shall this provision for a late charge be deemed to grant to Tenant a grace
period or extension of time within which to pay any rental installment or
prevent Landlord from exercising any right or remedy available to Landlord upon
Tenant's failure to pay each rental installment due under this Lease when due,
including the right to terminate this Lease as provided in Paragraph 12.2
hereof. If any rent remains delinquent for a period in excess of thirty (30)
calendar days, then, in addition to such late charge, Tenant shall pay to
Landlord interest on any rent that is not so paid from said tenth day at a rate
that is the lesser of (i) that rate quoted by Wells Fargo Bank, N.T. & S.A. from
time to time as its prime rate plus 5% or (ii) the then maximum rate of interest
not prohibited or made usurious by law until paid.
3.5 PAYMENT OF RENT. Except as specifically provided otherwise in this Lease,
all rent shall be paid in lawful money of the United States, without any
abatement, reduction or offset for any reason whatsoever, to Landlord at such
address as Landlord may designate from time to time. Tenant's obligation to pay
Base Monthly Rent and all Additional Rent shall be appropriately prorated at the
commencement and expiration of the Lease Term. The failure by Tenant to pay any
Additional Rent as required pursuant to this Lease when due shall be treated the
same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord
shall have the same rights and remedies against Tenant as Landlord would have
had Tenant failed to pay the Base Monthly Rent when due.
3.6 PREPAID RENT. Tenant shall, upon execution of this Lease, pay to Landlord
the amount set forth in Article 1 as "First Month's Prepaid Rent" as prepayment
of rent for credit against the first payment of Base Monthly Rent due hereunder.
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3.7 SECURITY DEPOSIT.
(a) Tenant shall deposit with Landlord, no later than the Lease
Commencement Date, the amount set forth in Article 1 as the "Security
Deposit" as security for the performance by Tenant of the terms of this Lease
to be performed by Tenant, and not as prepayment of rent. As part of the
Security Deposit, Tenant shall deliver to Landlord a clean, unconditional,
irrevocable, transferable letter of credit in the amount of $2,000,000 (the
"Letter of Credit") in form and issued by a financial institution ("Issuer")
satisfactory to Landlord in its sole discretion, substantially in the form
attached as Exhibit E. The Letter of Credit shall permit partial draws, and
provide that draws thereunder will be honored upon receipt by Issuer of a
written statement signed by Landlord or its authorized agent stating that
Landlord is entitled to draw down on the Letter of Credit pursuant to the
terms of the Lease. The Letter of Credit shall have an expiration period of
one (1) year but shall automatically renew by its terms unless affirmatively
cancelled by either Issuer or Tenant, in which case Issuer must provide
Landlord 30 days' prior written notice of such expiration or cancellation.
Any amount drawn under the Letter of Credit shall be held or used by Landlord
in accordance with this Section 3.7. If the amount of the Letter of Credit is
reduced in accordance with the terms of this Lease, Tenant shall have the
right to replace the existing Letter of Credit with another Letter of Credit
at the reduced amount. If the Tenant fails to renew or replace the Letter of
Credit as required under this Lease at least thirty (30) days before its
stated expiration date, Landlord, after seven (7) days prior written notice
to Tenant, may draw upon the entire amount of the Letter of Credit, provided
however that no notice shall be required after the date seven (7) days prior
to the stated expiration date.
(b) In the event (i) Tenant reports net profits for eight (8)
consecutive quarters (as shown on its quarterly financial statements prepared
in accordance with generally accepted accounting principles), (ii) Tenant has
achieved a market capitalization of $500,000,000 for four (4) consecutive
quarters (based on the closing stock price at the end of each fiscal quarter)
and (iii) provided that Tenant is not then in default or would be in default
with the passage of time or notice or both, upon Tenant's written request to
Landlord (which request shall include supporting documentation), the Letter
of Credit shall be returned to Tenant.
(c) Landlord may apply such portion or portions of the Security
Deposit as are reasonably necessary for the following purposes: (i) to remedy
any default by Tenant in the payment of Base Monthly Rent or Additional Rent
or a late charge or interest on defaulted rent, or any other monetary payment
obligation of Tenant under this Lease; (ii) to repair damage to the Leased
Premises, the Building or the Outside Areas caused or permitted to occur by
Tenant; (iii) to clean and restore and repair the Leased Premises, the
Building or the Outside Areas following their surrender to Landlord if not
surrendered in the condition required pursuant to the provisions of Article
2, and (iv) to remedy any other default of Tenant to the extent permitted by
Law including, without limitation, paying in full on Tenant's behalf any sums
claimed by materialmen or contractors of Tenant to be owing to them by Tenant
for work done or improvements made at Tenant's request to the Leased
Premises. In this regard, Tenant hereby waives any restriction on the uses to
which the Security Deposit may be applied as contained in Section 1950.7(c)
of the California Civil Code and/or any successor statute. In the event the
Security Deposit or any portion thereof is so used, Tenant shall pay to
Landlord, promptly upon demand, an amount in cash sufficient to restore the
Security Deposit to the full original sum. If Tenant fails to promptly
restore the Security Deposit and if Tenant shall have paid to Landlord any
sums as "Last Month's Prepaid Rent," Landlord may, in addition to any other
remedy Landlord may have under this Lease, reduce the amount of Tenant's Last
Month's Prepaid Rent by transferring all or portions of such Last Month's
Prepaid Rent to Tenant's Security Deposit until such Security Deposit is
restored to the amount set forth in Article 1. Landlord shall not be deemed a
trustee of the Security Deposit. Landlord may use the Security Deposit in
Landlord's ordinary business and shall not be required to segregate it from
Landlord's general accounts. Tenant shall not be entitled to any interest on
the Security Deposit. If Landlord transfers the Building or the Property
during the Lease Term, Landlord may pay the Security Deposit to any
subsequent owner in conformity with the provisions of Section 1950.7 of the
California Civil Code and/or any successor statute, in which event the
transferring landlord shall be released from all liability for the return of
the Security Deposit. Tenant specifically grants to Landlord (and Tenant
hereby waives the provisions of California Civil Code Section 1950.7 to the
contrary) a period of ninety (90) days following a surrender of the Leased
Premises by Tenant to Landlord within which to inspect the Leased Premises,
make required restorations and repairs, receive and verify workmen's billings
therefor, and prepare a final accounting with respect to the Security
Deposit. In no event shall the Security Deposit or any portion thereof, be
considered prepaid rent.
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ARTICLE 4
USE OF LEASED PREMISES AND OUTSIDE AREA
4.1 PERMITTED USE. Tenant shall be entitled to use the Leased Premises solely
for the "Permitted Use" as set forth in Article 1 and for no other purpose
whatsoever. Tenant shall have the right to use the Outside Areas in conjunction
with its Permitted Use of the Leased Premises solely for the purposes for which
they were designed and intended and for no other purposes whatsoever. Tenant
shall have the right to vacate the Leased Premises at any time during the Term
of this Lease, provided Tenant maintains the Leased Premises in the same
condition as if fully occupied and as otherwise required by the terms of this
Lease.
4.2 GENERAL LIMITATIONS ON USE. Tenant shall not do or permit anything to be
done in or about the Leased Premises, the Building, the Outside Areas or the
Property which does or could (i) jeopardize the structural integrity of the
Building or (ii) cause damage to any part of the Leased Premises, the Building,
the Outside Areas or the Property. Tenant shall not operate any equipment within
the Leased Premises which does or could (i) injure, vibrate or shake the Leased
Premises or the Building, (ii) damage, overload or impair the efficient
operation of any electrical, plumbing, heating, ventilating or air conditioning
systems within or servicing the Leased Premises or the Building, or (iii) damage
or impair the efficient operation of the sprinkler system (if any) within or
servicing the Leased Premises or the Building. Except as set forth in Paragraph
4.14, Tenant shall not install any equipment or antennas on or make any
penetrations of the exterior walls or roof of the Building. Tenant shall not
affix any equipment to or make any penetrations or cuts in the floor, ceiling,
walls or roof of the Leased Premises. Tenant shall not place any loads upon the
floors, walls, ceiling or roof systems which could endanger the structural
integrity of the Building or damage its floors, foundations or supporting
structural components. Tenant shall not place any explosive, flammable or
harmful fluids or other waste materials in the drainage systems of the Leased
Premises, the Building, the Outside Areas or the Property. Tenant shall not
drain or discharge any fluids in the landscaped areas or across the paved areas
of the Property. Tenant shall not use any of the Outside Areas for the storage
of its materials, supplies, inventory or equipment and all such materials,
supplies, inventory or equipment shall at all times be stored within the Leased
Premises. Tenant shall not commit nor permit to be committed any waste in or
about the Leased Premises, the Building, the Outside Areas or the Property.
4.3 NOISE AND EMISSIONS. All noise generated by Tenant in its use of the Leased
Premises shall be confined or muffled so that it does not interfere with the
businesses of or annoy the occupants and/or users of adjacent properties. All
dust, fumes, odors and other emissions generated by Tenant's use of the Leased
Premises shall be sufficiently dissipated in accordance with sound environmental
practice and exhausted from the Leased Premises in such a manner so as not to
interfere with the businesses of or annoy the occupants and/or users of adjacent
properties, or cause any damage to the Leased Premises, the Building, the
Outside Areas or the Property or any component part thereof or the property of
adjacent property owners.
4.4 TRASH DISPOSAL. Tenant shall provide trash bins or other adequate garbage
disposal facilities within the trash enclosure areas provided or permitted by
Landlord outside the Leased Premises sufficient for the interim disposal of all
of its trash, garbage and waste. All such trash, garbage and waste temporarily
stored in such areas shall be stored in such a manner so that it is not visible
from outside of such areas, and Tenant shall cause such trash, garbage and waste
to be regularly removed from the Property. Tenant shall keep the Leased Premises
and the Outside Areas in a clean, safe and neat condition free and clear of all
of Tenant's trash, garbage, waste and/or boxes, pallets and containers
containing same at all times.
4.5 PARKING. Tenant shall have the non-exclusive use of the number of parking
spaces set forth in Article 1 of this Lease. Tenant shall not, at any time, park
or permit to be parked any recreational vehicles, storage vehicles, inoperative
vehicles, containers or equipment in the Outside Areas or on any portion of the
Property. Tenant agrees to assume responsibility for compliance by its employees
and invitees with the parking provisions contained herein. Landlord reserves the
right to grant easements and access rights to others for use of the parking
areas on the Property, provided that such grants do not materially increase
Tenant's obligations under the Lease or materially negatively impact Tenant's
use of the Leased Premises for operation of its business therein.
4.6 SIGNS. Except for business identification signs permitted by this Paragraph
4.6, Tenant shall not place or install on or within any portion of the Leased
Premises, the exterior of the Building, the Outside Areas or the Property any
sign, advertisement, banner, placard, or picture which is visible from the
exterior of the Leased Premises. So long as Tenant is the sole tenant of the
Building, Tenant shall the right to business identification signage for the
entire Building, provided that Tenant shall not place or install on or within
any portion of the Leased Premises, the exterior of the Building, the Outside
Areas or the Property any business identification sign until Landlord shall have
approved in writing and in its reasonable discretion the location, size,
content, design, method of attachment and material to be used in the making of
such sign. Any sign, once approved by Landlord, shall be installed in compliance
with all requirements of the City of San Jose and at Tenant's sole cost and
expense and only in strict compliance with Landlord's approval, using a person
approved by Landlord to install same. Landlord may remove any signs (which have
not been approved in writing by Landlord), advertisements, banners, placards or
pictures so placed by Tenant on or within the Leased Premises, the exterior of
the Building, the Outside
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Areas or the Property and charge to Tenant the cost of such removal, together
with any costs incurred by Landlord to repair any damage caused thereby,
including any cost incurred to restore the surface (upon which such sign was so
affixed) to its original condition. Tenant shall remove all of Tenant's signs,
repair any damage caused thereby, and restore the surface upon which the sign
was affixed to its original condition, all to Landlord's reasonable
satisfaction, upon the termination of this Lease. Tenant shall, in addition to
the signage rights granted above, have the nonexclusive right to have its name
displayed on a monument sign located in front of the Building and an illuminated
business identification sign on the exterior of the Building (the "Monument
Signs"). Tenant's right to maintain its name on the Monument Signs shall be
subject to the following requirements: (a) all expenses in connection with the
construction, installation, and maintenance of Tenant's Monument Signs shall be
paid by Tenant; (b) the design, size, location, materials, colors, and lighting
of the Monument Signs shall be approved, in advance and in writing, by Landlord
where such approval shall not be unreasonably withheld provided that Tenant's
Monument Signs are (1) consistent with Landlord's signage program as determined
by Landlord in its sole discretion and (2) does not unreasonably interfere with
the rights of other tenants of the Building; (c) Tenant must obtain all
applicable permits and authorizations by all necessary governmental authorities
before beginning to install the Monument Signs (Landlord agrees to cooperate
with Tenant's efforts to obtain approval from the City of San Jose for the
installation of the Monument Signs); (d) Tenant pays to Landlord, from time to
time and within ten (10) days after receipt of written demand, all expenses
incurred by Landlord attributable to the insurance, lighting (if applicable),
maintenance, and repair of the Monument Signs during the period of time that
Tenant's name is on the Monument Signs and (e) on the termination or earlier
expiration of the Lease Term, Tenant shall, at its sole cost and expense, remove
the Monument Signs, repair any damage caused by the removal of the Monument Sign
and restore the land or exterior of the Building where the Monument Signs were
located to the condition that existed before the installation of the Monument
Signs. Tenant's monument signage rights under this Paragraph 4.6 may not be
assigned to any assignee of this Lease or to any subtenant.
4.7 COMPLIANCE WITH LAWS AND PRIVATE RESTRICTIONS. Tenant shall abide by and
shall promptly observe and comply with, at its sole cost and expense, all Laws
and Private Restrictions respecting the use and occupancy of the Leased
Premises, the Building, the Outside Areas or the Property including, without
limitation, all Laws governing the use and/or disposal of hazardous materials,
and shall defend with competent counsel, indemnify and hold Landlord harmless
from any claims, damages or liability resulting from Tenant's failure to so
abide, observe, or comply. Tenant's obligations hereunder shall survive the
expiration or sooner termination of this Lease.
4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS. With respect to any insurance
policies required or permitted to be carried by Landlord in accordance with the
provisions of this Lease, Tenant shall not conduct nor permit any other person
to conduct any activities nor keep, store or use (or allow any other person to
keep, store or use) any item or thing within the Leased Premises, the Building,
the Outside Areas or the Property which (i) is prohibited under the terms of any
such policies, (ii) could result in the termination of the coverage afforded
under any of such policies, (iii) could give to the insurance carrier the right
to cancel any of such policies, or (iv) could cause an increase in the rates
(over standard rates) charged for the coverage afforded under any of such
policies. Tenant shall comply with all requirements of any insurance company,
insurance underwriter, or Board of Fire Underwriters which are necessary to
maintain, at standard rates, the insurance coverages carried by either Landlord
or Tenant pursuant to this Lease.
4.9 LANDLORD'S RIGHT TO ENTER. Landlord and its agents shall have the right to
enter the Leased Premises during normal business hours after giving Tenant
reasonable notice and subject to Tenant's reasonable security measures for the
purpose of (i) inspecting the same; (ii) showing the Leased Premises to
prospective purchasers, mortgagees or tenants; (iii) making necessary
alterations, additions or repairs; and (iv) performing any of Tenant's
obligations when Tenant has failed to do so. Landlord shall have the right to
enter the Leased premises during normal business hours (or as otherwise agreed),
subject to Tenant's reasonable security measures, for purposes of supplying any
maintenance or services agreed to be supplied by Landlord. Landlord shall have
the right to enter the Outside Areas during normal business hours for purposes
of (i) inspecting the exterior of the Building and the Outside Areas; (ii)
posting notices of nonresponsibility (and for such purposes Tenant shall provide
Landlord at least thirty days' prior written notice of any work to be performed
on the Leased Premises); and (iii) supplying any services to be provided by
Landlord. Any entry into the Leased Premises or the Outside Areas obtained by
Landlord in accordance with this paragraph shall not under any circumstances be
construed or deemed to be a forcible or unlawful entry into, or a detainer of,
the Leased Premises, or an eviction, actual or constructive of Tenant from the
Leased Premises or any portion thereof.
4.10 USE OF OUTSIDE AREAS. Tenant, in its use of the Outside Areas, shall at all
times keep the Outside Areas in a safe condition free and clear of all
materials, equipment, debris, trash (except within existing enclosed trash
areas), inoperable vehicles, and other items which are not specifically
permitted by Landlord to be stored or located thereon by Tenant. If, in the
opinion of Landlord, unauthorized persons are using any of the Outside Areas by
reason of, or under claim of, the express or implied authority or consent of
Tenant, then Tenant, upon demand of Landlord, shall restrain, to the fullest
extent then allowed by Law, such unauthorized use, and shall initiate such
appropriate proceedings as may be required to so restrain such use. Landlord
reserves the right to grant easements and access rights to others for use of the
Outside Areas provided that such easements and access rights do not
substantially diminish Tenant's rights to use the Outside Areas.
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4.11 ENVIRONMENTAL PROTECTION. Tenant's obligations under this Section 4.11
shall survive the expiration or termination of this Lease.
(a) As used herein, the term "Hazardous Materials" shall mean any
toxic or hazardous substance, material or waste or any pollutant or
infectious or radioactive material, including but not limited to those
substances, materials or wastes regulated now or in the future under any of
the following statutes or regulations and any and all of those substances
included within the definitions of "hazardous substances," "hazardous
materials," "hazardous waste," "hazardous chemical substance or mixture,"
"imminently hazardous chemical substance or mixture," "toxic substances,"
"hazardous air pollutant," "toxic pollutant," or "solid waste" in the (a)
Comprehensive Environmental Response, Compensation and Liability Act of 1990
("CERCLA" or "Superfund"), as amended by the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), 42 U.S.C. Section 9601 ET SEQ., (b)
Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C. Section
6901 ET SEQ., (c) Federal Water Pollution Control Act ("FSPCA"), 33 U.S.C.
Section 1251 ET SEQ., (d) Clean Air Act ("CAA"), 42 U.S.C. Section 7401 ET
SEQ., (e) Toxic Substances Control Act ("TSCA"), 14 U.S.C. Section 2601 ET
SEQ., (f) Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, ET
SEQ., (g) Carpenter-Presley-Tanner Hazardous Substance Account Act
("California Superfund"), Cal. Health & Safety Code Section 25300 ET SEQ.,
(h) California Hazardous Waste Control Act, Cal. Health & Safety code Section
25100 ET SEQ., (i) Porter-Cologne Water Quality Control Act ("Porter-Cologne
Act"), Cal. Water Code Section 13000 ET SEQ., (j) Hazardous Waste Disposal
Land Use Law, Cal. Health & Safety codes Section 25220 ET SEQ., (k) Safe
Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65"), Cal.
Health & Safety code Section 25249.5 ET SEQ., (l) Hazardous Substances
Underground Storage Tank Law, Cal. Health & Safety code Section 25280 ET
SEQ., (m) Air Resources Law, Cal. Health & Safety Code Section 39000 ET SEQ.,
and (n) regulations promulgated pursuant to said laws or any replacement
thereof, or as similar terms are defined in the federal, state and local
laws, statutes, regulations, orders or rules. Hazardous Materials shall also
mean any and all other biohazardous wastes and substances, materials and
wastes which are, or in the future become, regulated under applicable Laws
for the protection of health or the environment, or which are classified as
hazardous or toxic substances, materials or wastes, pollutants or
contaminants, as defined, listed or regulated by any federal, state or local
law, regulation or order or by common law decision, including, without
limitation, (i) trichloroethylene, tetrachloroethylene, perchloroethylene and
other chlorinated solvents, (ii) any petroleum products or fractions thereof,
(iii) asbestos, (iv) polychlorinated biphenyls, (v) flammable explosives,
(vi) urea formaldehyde, (vii) radioactive materials and waste, and (viii)
materials and wastes that are harmful to or may threaten human health,
ecology or the environment.
(b) Notwithstanding anything to the contrary in this Lease, Tenant,
at its sole cost, shall comply with all Laws relating to the storage, use and
disposal of Hazardous Materials; PROVIDED, HOWEVER, that Tenant shall not be
responsible for contamination of the Leased Premises by Hazardous Materials
(i) existing as of the date the Leased Premises are delivered to Tenant
unless caused or permitted by Tenant, (ii) that migrate onto the Leased
Premises so long as such migration is not caused or permitted by Tenant, or
(iii) brought, stored, handled or used on the Leased Premises by Landlord or
its agents. Tenant shall not store, use or dispose of any Hazardous Materials
except for those Hazardous Materials listed in a Hazardous Materials
management plan ("HMMP") which Tenant shall deliver to Landlord upon
execution of this Lease and update at least annually with Landlord
("Permitted Materials") which may be used, stored and disposed of provided
(i) such Permitted Materials are used, stored, transported, and disposed of
in strict compliance with applicable laws, (ii) such Permitted Materials
shall be limited to the materials listed on and may be used only in the
quantities specified in the HMMP, and (iii) Tenant shall provide Landlord
with copies of all material safety data sheets and other documentation
required under applicable Laws in connection with Tenant's use of Permitted
Materials as and when such documentation is provided to any regulatory
authority having jurisdiction, in no event shall Tenant cause or permit to be
discharged into the plumbing or sewage system of the Building or onto the
land underlying or adjacent to the Building any Hazardous Materials. Tenant
shall be solely responsible for and shall defend, indemnify, and hold
Landlord and its agents harmless from and against all claims, costs and
liabilities, including attorneys' fees and costs, arising out of or in
connection with Tenant's storage, use and/or disposal of Hazardous Materials.
If the presence of Hazardous Materials on the Leased Premises caused or
permitted by Tenant results in contamination or deterioration of water or
soil, then Tenant shall promptly take any and all action necessary to clean
up such contamination, but the foregoing shall in no event be deemed to
constitute permission by Landlord to allow the presence of such Hazardous
Materials. At any time prior to the expiration of the Lease Term if Tenant
has a reasonable basis to suspect that there has been any release or the
presence of Hazardous Materials in the ground or ground water on the Leased
Premises which did not exist upon commencement of the Lease Term, Tenant
shall have the right to conduct appropriate tests of water and soil and to
deliver to Landlord the results of such tests to demonstrate that no
contamination in excess of permitted levels has occurred as a result of
Tenant's use of the Leased Premises. Tenant shall further be solely
responsible for, and shall defend, indemnify, and hold Landlord and its
agents harmless from and against all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with any removal,
cleanup and restoration work and materials required hereunder to return the
Leased Premises and any other property of whatever nature to their condition
existing prior to the appearance of the Hazardous Materials (other than any
Hazardous Materials (i) existing as of the date the Leased Premises are
delivered to Tenant unless caused or permitted by Tenant, (ii) that migrate
onto the Leased Premises so long as such migration is not caused or permitted
by Tenant, or (iii) brought, stored, handled or used on the Leased Premises
by Landlord or its agents). Upon receipt of Tenant's written request,
Landlord shall, within thirty (30) days, provide copies of any hazardous
material audit reports regarding to Property (the "Audit Reports"), to the
extent they exist, in its possession to Tenant. Tenant agrees that any Audit
Reports provided pursuant to this Paragraph shall remain the property of
Landlord
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and Tenant represents and warrants that it will use commercially reasonable
efforts to maintain the confidentiality of any Audit Reports.
(c) Upon termination or expiration of the Lease, Tenant at its sole
expense shall cause all Hazardous Materials placed in or about the Leased
Premises, the Building and/or the Property by Tenant, its agents,
contractors, or invitees, and all installations (whether interior or
exterior) made by or on behalf of Tenant relating to the storage, use,
disposal or transportation of Hazardous Materials to be removed from the
property and transported for use, storage or disposal in accordance and
compliance with all Laws and other requirements respecting Hazardous
Materials used or permitted to be used by Tenant. Tenant shall apply for and
shall obtain from all appropriate regulatory authorities (including any
applicable fire department or regional water quality control board) all
permits, approvals and clearances necessary for the closure of the Property
and shall take all other actions as may be required to complete the closure
of the Building and the Property. In addition, prior to vacating the Leased
Premises, if in Landlord's reasonable judgment Hazardous Materials have been
used in violation of applicable Laws or have been released into the soil or
groundwater, Tenant shall undertake and submit to Landlord an environmental
site assessment from an environmental consulting company reasonably
acceptable to Landlord which site assessment shall evidence Tenant's
compliance with this Paragraph 4.11.
(d) At any time prior to expiration of the Lease term, subject to
reasonable prior notice (not less than forty-eight (48) hours) and Tenant's
reasonable security requirements and provided such activities do not
unreasonably interfere with the conduct of Tenant's business at the Leased
Premises, Landlord shall have the right to enter in and upon the Property,
Building and Leased Premises in order to conduct appropriate tests of water
and soil to determine whether levels of any Hazardous Materials in excess of
legally permissible levels has occurred as a result of Tenant's use thereof.
Landlord shall furnish copies of all such test results and reports to Tenant
and, at Tenant's option and cost, shall permit split sampling for testing and
analysis by Tenant. Such testing shall be at Tenant's expense if Landlord has
a reasonable basis for suspecting and confirms the presence of Hazardous
Materials in the soil or surface or ground water in, on, under, or about the
Property, the Building or the Leased Premises, which has been caused by or
resulted from the activities of Tenant, its agents, contractors, or invitees.
(e) Landlord may voluntarily cooperate in a reasonable manner with
the efforts of all governmental agencies in reducing actual or potential
environmental damage provided that such cooperation does not materially
decrease Tenant's rights or increase Tenant's obligations under this Lease.
Tenant shall not be entitled to terminate this Lease or to any reduction in
or abatement of rent by reason of such compliance or cooperation. Tenant
agrees at all times to cooperate fully with the requirements of governmental
agencies regulating, or otherwise involved in, the protection of the
environment.
4.12 RULES AND REGULATIONS. In the event Ultratech Stepper, Inc. is no longer
the sole tenant of the Building, Landlord shall have the right from time to time
to establish reasonable rules and regulations and/or amendments or additions
thereto respecting the use of the Leased Premises and the Outside Areas for the
care and orderly management of the Property provided that such rules and
regulations and/or amendment or additions thereto do not materially increase
Tenant's obligations or materially decrease Tenant's rights under this Lease.
Upon delivery to Tenant of a copy of such rules and regulations or any
amendments or additions thereto, Tenant shall comply with such rules and
regulations. A violation by Tenant of any of such rules and regulations shall
constitute a default by Tenant under this Lease. If there is a conflict between
the rules and regulations and any of the provisions of this Lease, the
provisions of this Lease shall prevail. Landlord shall not be responsible or
liable to Tenant for the violation of such rules and regulations by any other
tenant of the Property.
4.13 RESERVATIONS. Landlord reserves the right from time to time to grant,
without the consent or joinder of Tenant, such easements, rights of way and
dedications that Landlord deems necessary, and to cause the recordation of
parcel maps and restrictions, so long as such easements, rights of way and
dedications not unreasonably interfere with the use of the Leased Premises by
Tenant. Tenant agrees to execute any documents reasonably requested by Landlord
to effectuate any such easement rights, dedications, maps or restrictions
provided that such documents do not materially increase Tenant's obligations or
materially decrease Tenant's rights under this Lease.
4.14 ROOF. Notwithstanding any provision of this Lease to the contrary, Landlord
hereby reserves to itself and its designees rights of access, use and occupancy
of the Building roof, and Tenant shall have no right of access, use or occupancy
of the Building roof except as permitted herein and except to the extent
required in order to enable Tenant to perform Tenant's maintenance and repair
obligations pursuant to this Lease. Subject to Tenant's restoration and repair
obligations under Paragraph 2.6, Tenant shall have the right to install up to
five (5) antennae or satellite dishes for its personal use or supplemental HVAC
equipment on the Building roof in an area reasonably designated by Landlord no
larger than 30 feet by 30 feet, subject to Landlord's prior written reasonable
approval of the plans therefor and subject to all applicable Laws (including any
requirements of the City of San Jose). Nothing contained herein shall be deemed
to give Tenant the right to assign or sublet the roof rights granted herein and
Tenant agrees that, in the event Landlord elects to consent to any such
assignment or sublease, Landlord shall be entitled to all rent and other
payments made pursuant thereto.
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4.15 EXTERIOR GENERATOR AND CONDUITS. Subject to Tenant's restoration and repair
obligations under Paragraph 2.6, Tenant shall have the right to install and
maintain, at its sole costs and expense, an exterior generator directly adjacent
to the Building in a location and with screening approved by Landlord and a __"
conduit between the Building and the premises leased by Tenant at 3050 Zanker
Road, San Jose, California pursuant to that certain lease between The Equitable
Life Assurance Society of the United States and Tenant dated September 10, 1993,
as amended from time to time and assigned to Landlord on or about January 29,
1997. Notwithstanding anything to the contrary contained herein, Tenant shall
ensure that the installation, maintenance and use of the exterior generator and
conduit will not unreasonably interfere with any other tenants of the Project.
ARTICLE 5
REPAIRS, MAINTENANCE, SERVICES AND UTILITIES
5.1 REPAIR AND MAINTENANCE. Except in the case of damage to or destruction of
the Leased Premises, the Building, the Outside Areas or the Property caused by
an act of God or other peril, in which case the provisions of Article 10 shall
control, the parties shall have the following obligations and responsibilities
with respect to the repair and maintenance of the Leased Premises, the Building,
the Outside Areas, and the Property.
(a) TENANT'S OBLIGATIONS. Except for repairs or replacements that are
necessitated by Landlord or for which Landlord has received reimbursement in
full, Tenant shall, at all times during the Lease Term and at its sole cost and
expense, regularly clean and continuously keep and maintain in good order,
condition and repair the Leased Premises and every part thereof including,
without limiting the generality of the foregoing, (i) all interior walls, floors
and ceilings, (ii) all windows, doors and skylights, (iii) all electrical
wiring, conduits, connectors and fixtures, (iv) all plumbing, pipes, sinks,
toilets, faucets and drains, (v) all lighting fixtures, bulbs and lamps and all
heating, ventilating and air conditioning equipment, and (vi) all entranceways
to the Leased Premises. Tenant, if requested to do so by Landlord, shall hire,
at Tenant's sole cost and expense, a licensed heating, ventilating and air
conditioning contractor to regularly and periodically (not less frequently than
every three months) inspect and perform required maintenance on the heating,
ventilating and air conditioning equipment and systems serving the Leased
Premises, or alternatively, Landlord may, at its election, contract in its own
name for such regular and periodic inspections of and maintenance on such
heating, ventilating and air conditioning equipment and systems and charge to
Tenant, as Additional Rent, the cost thereof. Tenant, if requested to do so by
Landlord, shall hire, at Tenant's sole cost and expense, a licensed roofing
contractor to regularly and periodically (not less frequently than every three
months) inspect and perform required maintenance of the roof membrane of the
Leased Premises, or alternatively, Landlord may, at its election, contract in
its own name for such regular and periodic inspections and maintenance of the
roof membrane and charge to Tenant, as Additional Rent, the cost thereof. Tenant
shall, at all times during the Lease Term, keep in a clean and safe condition
the Outside Areas. Tenant shall regularly and periodically sweep and clean the
driveways and parking areas. Tenant shall, at its sole cost and expense, repair
all damage to the Leased Premises, the Building, the Outside Areas or the
Property caused by the activities of Tenant, its employees, invitees or
contractors promptly following written notice from Landlord to so repair such
damages. If Tenant shall fail to perform the required maintenance or fail to
make repairs required of it pursuant to this paragraph within a reasonable
period of time following notice from Landlord to do so, then Landlord may, at
its election and without waiving any other remedy it may otherwise have under
this Lease or at law, perform such maintenance or make such repairs and charge
to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All
glass within or a part of the Leased Premises, both interior and exterior, is at
the sole risk of Tenant and any broken glass shall promptly be replaced by
Tenant at Tenant's expense with glass of the same kind, size and quality.
Landlord shall assign all warranties and service contracts applicable to the
Leased Premises and not applicable other property owned by Landlord, to the
extent allowed by such warranties and service contracts.
(b) LANDLORD'S OBLIGATION. Landlord shall, at its sole cost and
expense, at all times during the Lease Term, maintain and repair the foundation,
the roof structure and the load-bearing and exterior walls of the Building
(excluding exterior painting). Landlord shall repair and maintain the roof
membrane of the Building as needed and charge to Tenant, as part of Property
Maintenance Costs, the costs incurred by Landlord in performing such maintenance
and/or making such repairs.
5.2 UTILITIES. Tenant shall arrange at its sole cost and expense and in its own
name, for the supply of gas and electricity to the Leased Premises. In the event
that such services are not separately metered, Tenant shall, at its sole
expense, cause such meters to be installed. Landlord shall maintain the water
meter(s) in its own name; provided, however, that if at any time during the
Lease Term Landlord shall require Tenant to put the water service in Tenant's
name, Tenant shall do so at Tenant's sole cost. Tenant shall be responsible for
determining if the local supplier of water, gas and electricity can supply the
needs of Tenant and whether or not the existing water, gas and electrical
distribution systems within the Building and the Leased Premises are adequate
for Tenant's needs. Tenant shall be responsible for determining if the existing
sanitary and storm sewer systems now servicing the Leased Premises and the
Property are adequate for Tenant's needs. Tenant shall pay
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all charges for water, gas, electricity and storm and sanitary sewer services as
so supplied to the Leased Premises, irrespective of whether or not the services
are maintained in Landlord's or Tenant's name.
5.3 SECURITY. Tenant acknowledges that Landlord has not undertaken any duty
whatsoever to provide security for the Leased Premises, the Building, the
Outside Areas or the Property and, accordingly, Landlord is not responsible for
the security of same or the protection of Tenant's property or Tenant's
employees, invitees or contractors. To the extent Tenant determines that such
security or protection services are advisable or necessary, Tenant shall arrange
for and pay the costs of providing same.
5.4 ENERGY AND RESOURCE CONSUMPTION. Landlord may voluntarily cooperate in a
reasonable manner with the efforts of governmental agencies and/or utility
suppliers in reducing energy or other resource consumption within the Property
provided that such cooperation does not materially decrease Tenant's rights or
materially increase Tenant's costs hereunder. Tenant shall not be entitled to
terminate this Lease or to any reduction in or abatement of rent by reason of
such compliance or cooperation. Tenant agrees at all times to cooperate fully
with Landlord and to abide by all reasonable rules established by Landlord (i)
in order to maximize the efficient operation of the electrical, heating,
ventilating and air conditioning systems and all other energy or other resource
consumption systems with the Property and/or (ii) in order to comply with the
requirements of utility suppliers and governmental agencies regulating the
consumption of energy and/or other resources.
5.5 LIMITATION OF LANDLORD'S LIABILITY. Landlord shall not be liable to Tenant
for injury to Tenant, its employees, agents, invitees or contractors, damage to
Tenant's property or loss of Tenant's business or profits, nor shall Tenant be
entitled to terminate this Lease or to any reduction in or abatement of rent by
reason of (i) Landlord's failure to provide security services or systems within
the Property for the protection of the Leased Premises, the Building or the
Outside Areas, or the protection of Tenant's property or Tenant's employees,
invitees, agents or contractors, or (ii) Landlord's failure to perform any
maintenance or repairs to the Leased Premises, the Building, the Outside Areas
or the Property until Tenant shall have first notified Landlord, in writing, of
the need for such maintenance or repairs, and then only after Landlord shall
have had a reasonable period of time following its receipt of such notice within
which to perform such maintenance or repairs, or (iii) any failure,
interruption, rationing or other curtailment in the supply of water, electric
current, gas or other utility service to the Leased Premises, the Building, the
Outside Areas or the Property from whatever cause (other than Landlord's sole
active negligence or willful misconduct), or (iv) the unauthorized intrusion or
entry into the Leased Premises by third parties (other than Landlord).
ARTICLE 6
ALTERATIONS AND IMPROVEMENTS
6.1 BY TENANT. Tenant shall not make any alterations to or modifications of the
Leased Premises or construct any improvements within the Leased Premises until
Landlord shall have first approved, in writing, the plans and specifications
therefor, which approval may be withheld in Landlord's reasonable discretion.
Landlord's approval shall be deemed given if not denied by Landlord in a written
notice to Tenant delivered within five (5) business days following receipt of
Tenant's written request. Tenant's written request shall also contain a request
for Landlord to elect whether or not it will require Tenant to remove the
subject alterations, modifications or improvements at the expiration or earlier
termination of this Lease. If such additional request is not included, Landlord
may make such election at the expiration or earlier termination of this Lease
(and for purposes of Tenant's removal obligations set forth in Section 2.6
above, Landlord shall be deemed to have made the election at the time the
alterations, modifications or improvements were completed). All such
modifications, alterations or improvements, once so approved, shall be made,
constructed or installed by Tenant at Tenant's expense (including all permit
fees and governmental charges related thereto), using a licensed contractor
reasonably approved by Landlord, in substantial compliance with the
Landlord-approved plans and specifications therefor. All work undertaken by
Tenant shall be done in accordance with all Laws and in a good and workmanlike
manner using new materials of good quality. Tenant shall not commence the making
of any such modifications or alterations or the construction of any such
improvements until (i) all required governmental approvals and permits shall
have been obtained, (ii) all requirements regarding insurance imposed by this
Lease have been satisfied, (iii) Tenant shall have given Landlord at least five
(5) business days prior written notice of its intention to commence such work so
that Landlord may post and file notices of non-responsibility, and (iv) if
requested by Landlord, Tenant shall have obtained contingent liability and broad
form builder's risk insurance in an amount satisfactory to Landlord in its
reasonable discretion to cover any perils relating to the proposed work not
covered by insurance carried by Tenant pursuant to Article 9. In no event shall
Tenant make any modification, alterations or improvements whatsoever to the
Outside Areas or the exterior or structural components of the Building
including, without limitation, any cuts or penetrations in the floor, roof or
exterior walls of the Leased Premises. As used in this Article, the term
"modifications, alterations and/or improvements" shall include, without
limitation, the installation of additional electrical outlets, overhead lighting
fixtures, drains, sinks, partitions, doorways, or the like. Notwithstanding the
foregoing, Tenant, without Landlord's prior written consent, shall be permitted
to make non-structural alterations to the Building, provided that: (a) such
alterations do not exceed $20,000 individually, (b) Tenant shall timely provide
Landlord the notice no less than ten (10) days prior to commencing such
alterations , (c) Tenant shall notify Landlord in writing within thirty (30)
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days of completion of the alteration and deliver to Landlord a set of the plans
and specifications therefor, either "as built" or marked to show construction
changes made, and (d) Tenant shall, upon Landlord's request, remove the
alteration at the termination of the Lease and restore the Leased Premises to
their condition prior to such alteration.
6.2 OWNERSHIP OF IMPROVEMENTS. All modifications, alterations and improvements
made or added to the Leased Premises by Tenant (other than Tenant's inventory,
equipment, movable furniture, wall decorations and trade fixtures) or at
Tenant's sole cost and expense, which shall not include any made within the
Tenant Improvement Allowance, shall be deemed real property and a part of the
Leased Premises, but shall remain the property of Tenant during the Lease and
Tenant shall be entitled to retain all tax benefits arising out of such
modifications, alterations and improvements. Tenant hereby covenants and agrees
not to grant a security interest in any modifications, alterations and
improvements to any party other than Landlord. Any such modifications,
alterations or improvements, once completed, shall not be altered or removed
from the Leased Premises during the Lease Term without Landlord's written
approval first obtained in accordance with the provisions of Paragraph 6.1
above. At the expiration or sooner termination of this Lease, all such
modifications, alterations and improvements other than Tenant's inventory,
equipment, movable furniture, wall decorations and trade fixtures, shall
automatically become the property of Landlord and shall be surrendered to
Landlord as part of the Leased Premises as required pursuant to Article 2,
unless Landlord shall require Tenant to remove any of such modifications,
alterations or improvements in accordance with the provisions of Article 2, in
which case Tenant shall so remove same. Landlord shall have no obligations to
reimburse Tenant for all or any portion of the cost or value of any such
modifications, alterations or improvements so surrendered to Landlord. All
modifications, alterations or improvements which are installed or constructed on
or attached to the Leased Premises by Landlord and/or at Landlord's expense
shall be deemed real property and a part of the Leased Premises and shall be
property of Landlord. All lighting, plumbing, electrical, heating, ventilating
and air conditioning fixtures, partitioning, window coverings, wall coverings
and floor coverings installed by Tenant shall be deemed improvements to the
Leased Premises and not trade fixtures of Tenant. Notwithstanding anything to
the contrary contained herein, all modifications, alterations and improvements
made prior to the Lease Commencement Date and at Landlord's expense, including
those made with the Tenant Improvement Allowance, shall be the property of
Landlord.
6.3 ALTERATIONS REQUIRED BY LAW. Tenant shall make all modifications,
alterations and improvements to the Leased Premises, at its sole cost, that are
required by any Law because of (i) Tenant's use or occupancy of the Leased
Premises, the Building, the Outside Areas or the Property, (ii) Tenant's
application for any permit or governmental approval, or (iii) Tenant's making of
any modifications, alterations or improvements to or within the Leased Premises.
If Landlord shall, at any time during the Lease Term, be required by any
governmental authority to make any modifications, alterations or improvements to
the Building or the Property, the cost incurred by Landlord in making such
modifications, alterations or improvements, including interest at a rate equal
to the greater of (a) 12%, or (b) the sum of that rate quoted by Wells Fargo
Bank, N.T. & S.A. from time to time as its prime rate, plus two percent (2%)
("Wells Prime Plus Two") (but in no event more than the maximum rate of interest
not prohibited or made usurious), shall be amortized by Landlord over the useful
life of such modifications, alterations or improvements, as determined in
accordance with generally accepted accounting principles, and the monthly
amortized cost of such modifications, alterations and improvements as so
amortized shall be considered a Property Maintenance Cost.
6.4 LIENS. Tenant shall keep the Property and every part thereof free from any
lien, and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents, employees or
contractors relating to the Property. If any such claim of lien is recorded
against Tenant's interest in this Lease, the Property or any part thereof,
Tenant shall bond against, discharge or otherwise cause such lien to be entirely
released within ten (10) days after the same has been recorded. Tenant's failure
to do so shall be conclusively deemed a material default under the terms of this
Lease.
ARTICLE 7
ASSIGNMENT AND SUBLETTING BY TENANT
7.1 BY TENANT. Tenant shall not sublet the Leased Premises or any portion
thereof or assign its interest in this Lease, whether voluntarily or by
operation of Law, without Landlord's prior written consent which shall not be
unreasonably withheld. Any attempted subletting or assignment without Landlord's
prior written consent, at Landlord's election, shall constitute a default by
Tenant under the terms of this Lease. The acceptance of rent by Landlord from
any person or entity other than Tenant, or the acceptance of rent by Landlord
from Tenant with knowledge of a violation of the provisions of this paragraph,
shall not be deemed to be a waiver by Landlord of any provision of this Article
or this Lease or to be a consent to any subletting by Tenant or any assignment
of Tenant's interest in this Lease. Without limiting the circumstances in which
it may be reasonable for Landlord to withhold its consent to an assignment or
subletting, Landlord and Tenant acknowledge that it shall be reasonable for
Landlord to withhold its consent in the following instances:
(a) the proposed assignee or sublessee is a governmental agency;
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(b) in Landlord's reasonable judgment, the use of the Leased Premises
by the proposed assignee or sublessee would involve occupancy by other than for
a Permitted Use (unless such use is permitted in other buildings of the
Project), would entail any alterations which would lessen the value of the
leasehold improvements in the Leased Premises, or would require increased
services by Landlord;
(c) the proposed assignee or sublessee (or any of its affiliates) has
been in material default under a lease, has been in litigation with a previous
landlord, or in the ten years prior to the assignment or sublease has filed for
bankruptcy protection, has been the subject of an involuntary bankruptcy, or has
been adjudged insolvent;
(d) Landlord has experienced a previous uncured default by or is in
litigation with the proposed assignee or sublessee;
(e) in Landlord's reasonable judgment, the Leased Premises, or the
relevant part thereof, will be used in a manner that will violate any negative
covenant as to use contained in this Lease;
(f) the use of the Leased Premises by the proposed assignee or
sublessee will violate any applicable law, ordinance or regulation;
(g) the proposed assignee or sublessee is, as of the date of this
Lease, a tenant in the Building;
(h) the proposed assignment or sublease fails to include all of the
terms and provisions required to be included therein pursuant to this Article 7;
or
(i) Tenant is in default of any obligation of Tenant under this Lease
(beyond any applicable notice and cure periods), or Tenant has defaulted under
this Lease on three or more occasions during the twelve (12) months preceding
the date that Tenant shall request consent.
7.2 MERGER, REORGANIZATION, OR SALE OF ASSETS. Any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale or other transfer
in the aggregate over the Lease Term of a controlling percentage of the capital
stock of Tenant, or the sale or transfer of all or a substantial portion of the
assets of Tenant, shall be deemed a voluntary assignment of Tenant's interest in
this Lease. The phrase "controlling percentage" means the ownership of and the
right to vote stock possessing more than fifty percent of the total combined
voting power of all classes of Tenant's capital stock issued, outstanding and
entitled to vote for the election of directors. If Tenant is a partnership, a
withdrawal or change, voluntary, involuntary or by operation of Law, of any
general partner, or the dissolution of the partnership, shall be deemed a
voluntary assignment of Tenant's interest in this Lease. Upon Landlord's request
from time to time, Tenant shall promptly provide Landlord with a statement
certified by the Tenant's chief financial officer, which shall provide the
following information: (a) the names of all of Tenant's shareholders and their
ownership interests at the time thereof, provided Tenant's shares are not
publicly traded; (b) the state in which Tenant is incorporated; (c) the location
of Tenant's principal place of business; (d) information regarding a material
change in the corporate structure of Tenant, including, without limitation, a
merger or consolidation; and (e) any other information regarding Tenant's
ownership that Landlord reasonably requests. Notwithstanding the foregoing,
Tenant may, without Landlord's prior written consent, sublet the Leased Premises
or assign this Lease to (individually, a "Permitted Assignee," collectively,
"Permitted Assignees"): (i) a subsidiary, affiliate, division, corporation or
joint venture controlling, controlled by or under common control with Tenant; or
(ii) a successor corporation related to Tenant by merger, consolidation,
nonbankruptcy reorganization, or government action.
7.3 LANDLORD'S ELECTION. If Tenant shall desire to assign its interest under the
Lease or to sublet the Leased Premises, Tenant must first notify Landlord, in
writing, of its intent to so assign or sublet, at least fifteen (15) days in
advance of the date it intends to so assign its interest in this Lease or sublet
the Leased Premises but not sooner than one hundred eighty days in advance of
such date, specifying in detail the terms of such proposed assignment or
subletting, including the name of the proposed assignee or sublessee, the
property assignee's or sublessee's intended use of the Leased Premises, current
financial statements (including a balance sheet, income statement and statement
of cash flow, all prepared in accordance with generally accepted accounting
principles) of such proposed assignee or sublessee, the form of documents to be
used in effectuating such assignment or subletting and such other information as
Landlord may reasonably request. Landlord shall have a period of ten (10)
business days following receipt of such notice and the required information
within which to do one of the following: (i) consent to such requested
assignment or subletting subject to Tenant's compliance with the conditions set
forth in Paragraph 7.4 below, or (ii) refuse to so consent to such requested
assignment or subletting, provided that such consent shall not be unreasonably
refused, or (iii) terminate this Lease as to the portion (including all) of the
Leased Premises that is the subject of the proposed assignment or subletting
(the "Recapture Right"). Notwithstanding anything to the contrary contained
herein, Landlord shall not exercise its Recapture Right if (i) Tenant proposes
to assign or sublet less than sixty-five percent (65%) of the Leased Premises
for sixty-five percent (65%) or less of the remaining Lease Term or (ii) Tenant
proposes to assign or sublet more than sixty-five percent (65%) of the Leased
Premises for sixty-five percent (65%) or more of the remaining Lease Term
PROVIDED that the full amount of the Letter of Credit be maintained and/or
reinstated by Tenant
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throughout the duration of the proposed assignment or sublease. In the event
Landlord refuses to consent to such requested assignment or subletting and does
not elect to terminate this Lease, then Landlord shall provide Tenant a detailed
written statement indicating its reason(s) for refusing to consent to the
proposed assignment or sublease. During such ten (10) business day period,
Tenant covenants and agrees to supply to Landlord, upon request, all necessary
or relevant information which Landlord may reasonably request respecting such
proposed assignment or subletting and/or the proposed assignee or sublessee. In
the event Tenant fails to provide all such information, Landlord's refusal to
consent to the assignment or sublease on the grounds that it was not supplied
enough information shall be deemed reasonable.
7.4 CONDITIONS TO LANDLORD'S CONSENT. If Landlord elects to consent, or shall
have been ordered to so consent by a court of competent jurisdiction, to such
requested assignment or subletting, such consent shall be expressly conditioned
upon the occurrence of each of the conditions below set forth, and any purported
assignment or subletting made or ordered prior to the full and complete
satisfaction of each of the following conditions shall be void and, at the
election of Landlord, which election may be exercised at any time following such
a purported assignment or subletting but prior to the satisfaction of each of
the stated conditions, shall constitute a material default by Tenant under this
Lease until cured by satisfying in full each such condition by the assignee or
sublessee. The conditions are as follows:
(a) Landlord having approved in form and substance the assignment or
sublease agreement and any ancillary documents, which approval shall not be
unreasonably withheld by Landlord if the requirements of this Article 7 are
otherwise complied with.
(b) Each such sublessee or assignee having agreed, in writing
satisfactory to Landlord and its counsel and for the benefit of Landlord, to
assume, to be bound by, and to perform the obligations of this Lease to be
performed by Tenant which relate to space being subleased unless such
obligations are expressly retained by Tenant.
(c) Tenant shall reimburse to Landlord within thirty (30) days all
reasonable costs and reasonable attorneys' fees incurred by Landlord in
conjunction with the processing and documentation of any such requested
subletting or assignment.
(d) Tenant having delivered to Landlord a complete and fully-executed
duplicate original of such sublease agreement or assignment agreement (as
applicable) and all related agreements.
(e) Tenant having paid to Landlord fifty percent (50%) of all
assignment consideration or excess rentals to be paid to Tenant or to any other
on Tenant's behalf or for Tenant's benefit for such assignment or subletting as
follows, following receipt of Landlord's consent:
(i) If Tenant assigns its interest under this Lease and if all or a
portion of the consideration for such assignment is to be paid by the assignee
at the time of the assignment, that Tenant shall have paid to Landlord and
Landlord shall have received an amount equal to fifty percent (50%) of the
assignment consideration so paid or to be paid (whichever is the greater) at the
time of the assignment by the assignee; or
(ii) If Tenant assigns its interest under this Lease and if Tenant is
to receive all or a portion of the consideration for such assignment in future
installments, Tenant and Tenant's assignee jointly agree to pay to Landlord an
amount equal to fifty percent (50%) of all such future assignment consideration
installments to be paid by such assignee as and when such assignment
consideration is so paid.
(iii) If Tenant subleases the Leased Premises, that Tenant and
Tenant's sublessee jointly agree to pay to Landlord fifty percent (50%) of all
excess rentals to be paid by such sublessee as and when such excess rentals are
so paid.
7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED. For purposes of this
Article, including any amendment to this Article by way of addendum or other
writing, the term "assignment consideration" shall mean all consideration to be
paid by the assignee to Tenant or to any other party on Tenant's behalf or for
Tenant's benefit as consideration for such assignment, after deduction for
reasonable leasing commissions and reasonable legal fees paid by Tenant in
connection with such assignment but without deductions for any other costs or
expenses (including, without limitation, tenant improvements, capital
improvements, building upgrades, permit fees, and other consultants' fees)
incurred by Tenant in connection with such assignment, and the term "excess
rentals" shall mean all consideration to be paid by the sublessee to Tenant or
to any other party on Tenant's behalf or for Tenant's benefit for the sublease
of all or any portion of the Leased Premises in excess of the rent due to
Landlord under the terms of this Lease for the portion so subleased for the same
period, after deduction for reasonable leasing commissions and reasonable legal
fees paid by Tenant in connection with such assignment but without deductions
for any other costs or expenses (including, without limitation, tenant
improvements, capital improvements, building upgrades, permit fees, and other
consultants' fees) incurred by Tenant in connection with such sublease. Tenant
agrees that the portion of any assignment consideration and/or excess rentals
arising from any assignment or subletting by Tenant which is to be paid to
Landlord pursuant to this Article now is and shall then be the property of
Landlord and not the property of Tenant.
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7.6 PAYMENTS. All payments required by this Article to be made to Landlord shall
be made in cash in full as and when they become due. At the time Tenant,
Tenant's assignee or sublessee makes each such payment to Landlord, Tenant or
Tenant's assignee or sublessee, as the case may be, shall deliver to Landlord an
itemized statement in reasonable detail showing the method by which the amount
due Landlord was calculated and certified by the party making such payment as
true and correct.
7.7 GOOD FAITH. The rights granted to Tenant by this Article are granted in
consideration of Tenant's express covenant that all pertinent allocations which
are made by Tenant between the rental value of the Leased Premises and the value
of any of Tenant's personal property which may be conveyed or leased generally
concurrently with and which may reasonably be considered a part of the same
transaction as the permitted assignment or subletting shall be made fairly,
honestly and in good faith. If Tenant has breached this covenant, Landlord may
immediately declare Tenant to be in default under the terms of this Lease and
terminate this Lease and/or exercise any other rights and remedies Landlord
would have under the terms of this Lease in the case of a material default by
Tenant under this Lease.
7.8 EFFECT OF LANDLORD'S CONSENT. No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant of its personal and primary obligation
to pay rent and to perform all of the other obligations to be performed by
Tenant hereunder. Consent by Landlord to one or more assignments of Tenant's
interest in this Lease or to one or more sublettings of the Leased Premises
shall not be deemed to be a consent to any subsequent assignment or subletting.
If Landlord shall have been ordered by a court of competent jurisdiction to
consent to a requested assignment or subletting, or such an assignment or
subletting shall have been ordered by a court of competent jurisdiction over the
objection of Landlord, such assignment or subletting shall not be binding
between the assignee (or sublessee) and Landlord until such time as all
conditions set forth in Paragraph 7.4 above have been fully satisfied (to the
extent not then satisfied) by the assignee or sublessee, including, without
limitation, the payment to Landlord of all agreed assignment considerations
and/or excess rentals then due Landlord.
ARTICLE 8
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
8.1 LIMITATION ON LANDLORD'S LIABILITY AND RELEASE. Landlord shall not be liable
to Tenant for, and Tenant hereby releases Landlord and its partners, principals,
members, officers, agents, employees, lenders, attorneys, and consultants from,
any and all liability, whether in contract, tort or on any other basis, for any
injury to or any damage sustained by Tenant, Tenant's agents, employees,
contractors or invitees, any damage to Tenant's property, or any loss to
Tenant's business, loss of Tenant's profits or other financial loss of Tenant
resulting from or attributable to the condition of, the management of, the
repair or maintenance of, the protection of, the supply of services or utilities
to, the damage in or destruction of the Leased Premises, the Building, the
Property or the Outside Areas, including without limitation (i) the failure,
interruption, rationing or other curtailment or cessation in the supply of
electricity, water, gas or other utility service to the Property, the Building
or the Leased Premises; (ii) the vandalism or forcible entry into the Building
or the Leased Premises; (iii) the penetration of water into or onto any portion
of the Leased Premises; (iv) the failure to provide security and/or adequate
lighting in or about the Property, the Building or the Leased Premises, (v) the
existence of any design or construction defects within the Property, the
Building or the Leased Premises; (vi) the failure of any mechanical systems to
function properly (such as the HVAC systems); (vii) the blockage of access to
any portion of the Property, the Building or the Leased Premises, except that
Tenant does not so release Landlord from such liability to the extent such
damage was proximately caused by Landlord's gross negligence, willful
misconduct, or Landlord's failure to perform an obligation expressly undertaken
pursuant to this Lease after a reasonable period of time shall have lapsed
following receipt of written notice from Tenant to so perform such obligation.
In this regard, Tenant acknowledges that it is fully apprised of the provisions
of Law relating to releases, and particularly to those provisions contained in
Section 1542 of the California Civil Code which reads 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."
Notwithstanding such statutory provision, and for the purpose of implementing a
full and complete release and discharge, Tenant hereby (i) waives the benefit of
such statutory provision and (ii) acknowledges that, subject to the exceptions
specifically set forth herein, the release and discharge set forth in this
paragraph is a full and complete settlement and release and discharge of all
claims and is intended to include in its effect, without limitation, all claims
which Tenant, as of the date hereof, does not know of or suspect to exist in its
favor.
8.2 TENANT'S INDEMNIFICATION OF LANDLORD. Tenant shall defend with competent
counsel reasonably satisfactory to Landlord any claims made or legal actions
filed or threatened against Landlord with respect to the violation of any Law,
or the death, bodily injury, personal injury, property damage, or interference
with contractual or property rights suffered by any third party occurring within
the Leased Premises or resulting from Tenant's use or occupancy of the Leased
Premises, the Building or the Outside Areas, or resulting from Tenant's
activities in or about the Leased Premises, the
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Building, the Outside Areas or the Property, and Tenant shall indemnify and hold
Landlord, Landlord's partners, principals, members, employees, agents and
contractors harmless from any loss liability, penalties, or expense whatsoever
(including any loss attributable to vacant space which otherwise would have been
leased, but for such activities) resulting therefrom, except to the extent
proximately caused by the active negligence or willful misconduct of Landlord.
This indemnity agreement shall survive the expiration or sooner termination of
this Lease.
ARTICLE 9
INSURANCE
9.1 TENANT'S INSURANCE. Tenant shall maintain insurance complying with all of
the following:
(a) Tenant shall procure, pay for and keep in full force and effect, at
all times during the Lease Term, the following:
(i) Commercial general liability insurance insuring Tenant against
liability for personal injury, bodily injury, death and damage to property
occurring within the Leased Premises, or resulting from Tenant's use or
occupancy of the Leased Premises, the Building, the Outside Areas or the
Property, or resulting from Tenant's activities in or about the Leased Premises
or the Property, with coverage in an amount equal to Tenant's Required Liability
Coverage (as set forth in Article 1), which insurance shall contain "blanket
contractual liability" and "broad form property damage" endorsements insuring
Tenant's performance of Tenant's obligations to indemnify Landlord as contained
in this Lease.
(ii) Fire and property damage insurance in so-called "fire and
extended coverage" form insuring Tenant against loss from physical damage to
Tenant's personal property, inventory, trade fixtures and improvements within
the Leased Premises with coverage for the full actual replacement cost thereof;
(iii) Business income/extra expense insurance sufficient to pay Base
Monthly Rent and Additional Rent for a period of not less than twelve (12)
months;
(iv) Plate glass insurance, at actual replacement cost;
(v) Boiler and machinery insurance, to limits sufficient to restore
the Building;
(vi) Workers' compensation insurance (statutory coverage) with
employer's liability in amounts not less than $1,000,000 insurance sufficient to
comply with all laws; and
(vii) With respect to making of any alterations or modifications or
the construction of improvements or the like undertaken by Tenant, course of
construction, commercial general liability, automobile liability and workers'
compensation (to be carried by Tenant's contractor), in an amount and with
coverage reasonably satisfactory to Landlord.
(b) Each policy of liability insurance required to be carried by Tenant
pursuant to this paragraph or actually carried by Tenant with respect to the
Leased Premises or the Property: (i) shall, except with respect to insurance
required by subparagraph (a)(vi) above, name Landlord, and such others as are
designated by Landlord, as additional insureds; (ii) shall be primary insurance
providing that the insurer shall be liable for the full amount of the loss, up
to and including the total amount of liability set forth in the declaration of
coverage, without the right of contribution from or prior payment by any other
insurance coverage of Landlord; (iii) shall be in a form satisfactory to
Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord
with Best's ratings of at least A and XI; (v) shall provide that such policy
shall not be subject to cancellation, lapse or change except after at least
thirty (30) days prior written notice to Landlord, and (vi) shall contain a
so-called "severability" or "cross liability" endorsement. Each policy of
property insurance maintained by Tenant with respect to the Leased Premises or
the Property or any property therein (i) shall provide that such policy shall
not be subject to cancellation, lapse or change except after at least thirty
(30) days prior written notice to Landlord and (ii) shall contain a waiver
and/or a permission to waive by the insurer of any right of subrogation against
Landlord, its partners, principals, members, officers, employees, agents and
contractors, which might arise by reason of any payment under such policy or by
reason of any act or omission of Landlord, its partners, principals, members,
officers, employees, agents and contractors.
(c) Prior to the time Tenant or any of its contractors enters the
Leased Premises, Tenant shall deliver to Landlord, with respect to each policy
of insurance required to be carried by Tenant pursuant to this Article, a
certificate of the insurer certifying in form satisfactory to Landlord that a
policy has been issued, premium paid, providing the coverage required by this
Paragraph and containing the provisions specified herein. With respect to each
renewal or replacement of any such insurance, the requirements of this Paragraph
must be complied with not less than thirty days prior to the expiration or
cancellation of the policies being renewed or replaced. Landlord may, at any
time and from time to time, inspect and/or copy
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any and all insurance policies required to be carried by Tenant pursuant to this
Article. If Landlord's Lender, insurance broker, advisor or counsel reasonably
determines at any time that the amount of coverage set forth in Paragraph 9.1(a)
for any policy of insurance Tenant is required to carry pursuant to this Article
is not adequate, then Tenant shall increase the amount of coverage for such
insurance to such greater amount as Landlord's Lender, insurance broker, advisor
or counsel reasonably deems adequate.
9.2 LANDLORD'S INSURANCE. With respect to insurance maintained by Landlord:
(a) Landlord shall maintain, as the minimum coverage required of it by this
Lease, fire and property damage insurance in so-called "fire and extended
coverage" form insuring Landlord (and such others as Landlord may designate)
against loss from physical damage to the Building with coverage of not less than
one hundred percent (100%) of the full actual replacement cost thereof and
against loss of rents for a period of not less than six months. Such fire and
property damage insurance, at Landlord's election but without any requirements
on Landlord's behalf to do so, (i) may be written in so-called "all risk" form,
excluding only those perils commonly excluded from such coverage by Landlord's
then property damage insurer; (ii) may provide coverage for physical damage to
the improvements so insured for up to the entire full actual replacement cost
thereof; (iii) may be endorsed to cover loss or damage caused by any additional
perils against which Landlord may elect to insure, including earthquake and/or
flood; and/or (iv) may provide coverage for loss of rents for a period of up to
twelve months. Landlord shall not be required to cause such insurance to cover
any of Tenant's personal property, inventory, and trade fixtures, or any
modifications, alterations or improvements made or constructed by Tenant to or
within the Leased Premises. Landlord shall use commercially reasonable efforts
to obtain such insurance at competitive rates.
(b) Landlord shall maintain commercial general liability insurance
insuring Landlord (and such others as are designated by Landlord) against
liability for personal injury, bodily injury, death, and damage to property
occurring in, on or about, or resulting from the use or occupancy of the
Property, or any portion thereof, with combined single limit coverage of at
least Five Million Dollars ($5,000,000). Landlord may carry such greater
coverage as Landlord or Landlord's Lender, insurance broker, advisor or counsel
may from time to time determine is reasonably necessary for the adequate
protection of Landlord and the Property.
(c) Landlord may maintain any other insurance which in the opinion of
its insurance broker, advisor or legal counsel is prudent in carry under the
given circumstances, provided such insurance is commonly carried by owners of
property similarly situated and operating under similar circumstances.
9.3 MUTUAL WAIVER OF SUBROGATION. Landlord hereby releases Tenant, and Tenant
hereby releases Landlord and its respective partners, principals, members,
officers, agents, employees and servants, from any and all liability for loss,
damage or injury to the property of the other in or about the Leased Premises or
the Property which is caused by or results from a peril or event or happening
which is covered by insurance actually carried and in force at the time of the
loss by the party sustaining such loss; PROVIDED, HOWEVER, that such waiver
shall be effective only to the extent permitted by the insurance covering such
loss and to the extent such insurance is not prejudiced thereby. Landlord shall
use commercially reasonable efforts to obtain such waiver provided such waiver
is available from an insurance carrier comparable to Landlord's current carrier
and offers comparable coverage, and provided Tenant pays any additional cost to
obtain such coverage.
ARTICLE 10
DAMAGE TO LEASED PREMISES
10.1 LANDLORD'S DUTY TO RESTORE. If the Leased Premises, the Building or the
Outside Area are damaged by any peril after the Effective Date of this Lease,
Landlord shall restore the same, as and when required by this paragraph, unless
this Lease is terminated by Landlord pursuant to Paragraph 10.3 or by Tenant
pursuant to Paragraph 10.4. If this Lease is not so terminated, then upon the
issuance of all necessary governmental permits, Landlord shall commence and
diligently prosecute to completion the restoration of the Leased Premises, the
Building or the Outside Area, as the case may be, to the extent then allowed by
law, to substantially the same condition in which it existed as of the Lease
Commencement Date. Landlord's obligation to restore shall be limited to the
improvements constructed by Landlord. Landlord shall have no obligation to
restore any alterations, modifications or improvements made by Tenant to the
Leased Premises or any of Tenant's personal property, inventory or trade
fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith
replace or fully repair all of Tenant's personal property, inventory, trade
fixtures and other improvements constructed by Tenant to like or similar
conditions as existed at the time immediately prior to such damage or
destruction.
10.2 INSURANCE PROCEEDS. All insurance proceeds available from the fire and
property damage insurance carried by Landlord shall be paid to and become the
property of Landlord. If this Lease is terminated pursuant to either Paragraph
10.3 or 10.4, all insurance proceeds available from insurance carried by Tenant
which cover loss of property that is Landlord's property or would become
Landlord's property on termination of this Lease shall be paid to and become the
property of
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Landlord, and the remainder of such proceeds (including proceeds for any
alterations Landlord has required Tenant to remove at the end of the Lease Term)
shall be paid to and become the property of Tenant. If this Lease is not
terminated pursuant to either Paragraph 10.3 or 10.4, all insurance proceeds
available from insurance carried by Tenant which cover loss to property that is
Landlord's property shall be paid to and become the property of Landlord, and
all proceeds available from such insurance which cover loss to property which
would only become the property of Landlord upon the termination of this Lease
shall be paid to and remain the property of Tenant. The determination of
Landlord's property and Tenant's property shall be made pursuant to Paragraph
6.2.
10.3 LANDLORD'S RIGHT TO TERMINATE. Landlord shall have the option to terminate
this Lease in the event any of the following occurs, which option may be
exercised only by delivery to Tenant of a written notice of election to
terminate within thirty days after the date of such damage or destruction:
(a) The Building is damaged by any peril covered by valid and
collectible insurance actually carried by Landlord and in force at the time of
such damage or destruction (an "insured peril") to such an extent that the
estimated cost to restore the Building exceeds the lesser of (i) the insurance
proceeds available from insurance actually carried by Landlord, or (ii) fifty
percent of the then actual replacement cost thereof;
(b) The Building is damaged by an uninsured peril, which peril Landlord
was not required to insure against pursuant to the provisions of Article 9 of
this Lease and for which Landlord does not in fact maintain insurance.
(c) The Building is damaged by any peril and, because of the laws then
in force, the Building (i) cannot be restored at reasonable cost or (ii) if
restored, cannot be used for the same use being made thereof before such damage.
10.4 TENANT'S RIGHT TO TERMINATE. If the Leased Premises, the Building or the
Outside Area are damaged by any peril and Landlord does not elect to terminate
this Lease or is not entitled to terminate this Lease pursuant to this Article,
then as soon as reasonably practicable, Landlord shall furnish Tenant with the
written opinion of Landlord's architect or construction consultant as to when
the restoration work required of Landlord may be complete. Tenant shall have the
option to terminate this Lease in the event any of the following occurs, which
option may be exercised only by delivery to Landlord of a written notice of
election to terminate within thirty (30) days after Tenant receives from
Landlord the estimate of the time needed to complete such restoration:
(a) If the time estimated to substantially complete the restoration
exceeds nine (9) months from and after the date the architect's or construction
consultant's written opinion is delivered; or
(b) If the damage occurred within twelve months of the last day of the
Lease Term and the time estimated to substantially complete the restoration
exceeds one hundred eighty (180) days from and after the date the damage or
destruction occurred.
10.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of Paragraph
10.4 above, captioned "Tenant's Right To Terminate", are intended to supersede
and replace the provisions contained in California Civil Code, Section 1932,
Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant
hereby waives the provisions of such Civil Code Sections and the provisions of
any successor Civil Code Sections or similar laws hereinafter enacted.
10.6 ABATEMENT OF RENT. In the event of damage to the Leased Premises which does
not result in the termination of this Lease, the Base Monthly Rent (and any
Additional Rent) shall be temporarily abated during the period of restoration in
proportion in the degree to which Tenant's use of the Leased Premises is
impaired by such damage.
ARTICLE 11
CONDEMNATION
11.1 TENANT'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph 11.4
below regarding temporary takings, Tenant shall have the option to terminate
this Lease if, as a result of any taking, (i) all of the Leased Premises is
taken, or (ii) twenty-five percent (25%) or more of the Leased Premises is taken
and the part of the Leased Premises that remains cannot, within a reasonable
period of time, be made reasonably suitable for the continued operation of
Tenant's business. Tenant must exercise such option within a reasonable period
of time, to be effective on the later to occur of (i) the date that possession
of that portion of the Leased Premises that is condemned is taken by the
condemnor or (ii) the date Tenant vacated the Leased Premises.
11.2 LANDLORD'S RIGHT TO TERMINATE. Except as otherwise provided in Paragraph
11.4 below regarding temporary takings, Landlord shall have the option to
terminate this Lease if, as a result of any taking, (i) all of the Leased
Premises is taken, (ii) twenty-five percent (25%) or more of the Leased Premises
is taken and the part of the Leased Premises that remains
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cannot, within a reasonable period of time, be made reasonably suitable for the
continued operation of Tenant's business, or (iii) because of the laws then in
force, the Leased Premises may not be used for the same use being made before
such taking, whether or not restored as required by Paragraph 11.3 below. Any
such option to terminate by Landlord must be exercised within a reasonable
period of time, to be effective as of the date possession is taken by the
condemnor.
11.3 RESTORATION. If any part of the Leased Premises or the Building is taken
and this Lease is not terminated, then Landlord shall, to the extent not
prohibited by laws then in force, repair any damage occasioned thereby to the
remainder thereof to a condition reasonably suitable for Tenant's continued
operations and otherwise, to the extent practicable, in the manner and to the
extent provided in Paragraph 10.1.
11.4 TEMPORARY TAKING. If a portion of the Leased Premises is temporarily taken
for a period of nine (9) months or less and such period does not extend beyond
the Lease Expiration Date, this Lease shall remain in effect. If any portion of
the Leased Premises is temporarily taken for a period which exceeds one year or
which extends beyond the Lease Expiration Date, then the rights of Landlord and
Tenant shall be determined in accordance with Paragraphs 11.1 and 11.2 above.
11.5 DIVISION OF CONDEMNATION AWARD. Any award made for any taking of the
Property, the Building, or the Leased Premises, or any portion thereof, shall
belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of
its right, title and interest in any such award; PROVIDED, HOWEVER, that Tenant
shall be entitled to receive any portion of the award that is made specifically
(i) for the taking of personal property, inventory or trade fixtures belonging
to Tenant, (ii) for the interruption of Tenant's business or its moving costs,
or (iii) for the value of any leasehold improvements installed and paid for by
Tenant. The rights of Landlord and Tenant regarding any condemnation shall be
determined as provided in this Article, and each party hereby waives the
provisions of Section 1265.130 of the California Code of Civil Procedure, and
the provisions of any similar law hereinafter enacted, allowing either party to
petition the Supreme Court to terminate this Lease and/or otherwise allocate
condemnation awards between Landlord and Tenant in the event of a taking of the
Leased Premises.
11.6 ABATEMENT OF RENT. In the event of a taking of the Leased Premises which
does not result in a termination of this Lease (other than a temporary taking),
then, as of the date possession is taken by the condemning authority, the Base
Monthly Rent shall be reduced in the same proportion that the area of that part
of the Leased Premises so taken (less any addition to the area of the Leased
Premises by reason of any reconstruction) bears to the area of the Leased
Premises immediately prior to such taking.
11.7 TAKING DEFINED. The term "taking" or "taken" as used in this Article 11
shall mean any transfer or conveyance of all or any portion of the Property to a
public or quasi-public agency or other entity having the power of eminent domain
pursuant to or as a result of the exercise of such power by such an agency,
including any inverse condemnation and/or any sale or transfer by Landlord of
all or any portion of the Property to such an agency under threat of
condemnation or the exercise of such power.
ARTICLE 12
DEFAULT AND REMEDIES
12.1 EVENTS OF TENANT'S DEFAULT. Tenant shall be in default of its obligations
under this Lease if any of the following events occur:
(a) Tenant shall have failed to pay Base Monthly Rent or any Additional
Rent when due; or
(b) Tenant shall have done or permitted to be done any act, use or
thing in its use, occupancy or possession of the Leased Premises or the Building
or the Outside Areas which is prohibited by the terms of this Lease; or
(c) Tenant shall have failed to perform any term, covenant or condition
of this Lease (except those requiring the payment of Base Monthly Rent or
Additional Rent, which failures shall be governed by subparagraph (a) above)
within thirty (30) days after written notice from Landlord to Tenant specifying
the nature of such failure and requesting Tenant to perform same or within such
longer period as is reasonably required in the event such default is curable but
not within such thirty (30) day period, PROVIDED such cure is promptly commenced
within such thirty (30) day period and thereafter is diligently prosecuted to
completion; or
(d) Tenant shall have sublet the Leased Premises or assigned or
encumbered its interest in this Lease in violation of the provisions contained
in Article 7, whether voluntarily or by operation of law; or
(e) Tenant shall have abandoned the Leased Premises; or
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(f) Tenant or any Guarantor of this Lease shall have permitted or
suffered the sequestration or attachment of, or execution on, or the appointment
of a custodian or receiver with respect to, all or any substantial part of the
property or assets of Tenant (or such Guarantor) or any property or asset
essential to the conduct of Tenant's (or such Guarantor's) business, and Tenant
(or such Guarantor) shall have failed to obtain a return or release of the same
within sixty (60) days thereafter, or prior to sale pursuant to such
sequestration, attachment or levy, whichever is earlier; or
(g) Tenant or any Guarantor of this Lease shall have made a general
assignment of all or a substantial part of its assets for the benefit of its
creditors; or
(h) Tenant or any Guarantor of this Lease shall have allowed (or
sought) to have entered against it a decree or order which: (i) grants or
constitutes an order for relief, appointment of a trustee, or condemnation or a
reorganization plan under the bankruptcy laws of the United States; (ii)
approves as properly filed a petition seeking liquidation or reorganization
under said bankruptcy laws or any other debtor's relief law or similar statute
of the United States or any state thereof; or (iii) otherwise directs the
winding up or liquidation of Tenant; provided, however, if any decree or order
was entered without Tenant's consent or over Tenant's objection, Landlord may
not terminate this Lease pursuant to this Subparagraph if such decree or order
is rescinded or reversed within sixty (60) days after its original entry; or
(i) Tenant or any Guarantor of this Lease shall have availed itself of
the protection of any debtor's relief law, moratorium law or other similar law
which does not require the prior entry of a decree or order.
12.2 LANDLORD'S REMEDIES. In the event of any default by Tenant, and without
limiting Landlord's right to indemnification as provided in Article 8.2,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by law or otherwise provided in this Lease, to which Landlord
may resort cumulatively, or in the alternative:
(a) Landlord may, at Landlord's election, keep this Lease in effect and
enforce, by an action at law or in equity, all of its rights and remedies under
this Lease including, without limitation, (i) the right to recover the rent and
other sums as they become due by appropriate legal action, (ii) the right to
make payments required by Tenant, or perform Tenant's obligations and be
reimbursed by Tenant for the cost thereof with interest at the then maximum rate
of interest not prohibited by law from the date the sum is paid by Landlord
until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive
relief and specific performance to prevent Tenant from violating the terms of
this Lease and/or to compel Tenant to perform its obligations under this Lease,
as the case may be.
(b) Landlord may, at Landlord's election, terminate this Lease by
giving Tenant written notice of termination, in which event this Lease shall
terminate on the date set forth for termination in such notice, in which event
Tenant shall immediately surrender the Leased Premises to Landlord, and if
Tenant fails to do so, Landlord may, without prejudice to any other remedy which
it may have for possession or arrearages in rent, enter upon and take possession
of the Leased Premises and expel or remove Tenant and any other person who may
be occupying the Leased Premises or any part thereof, without being liable for
prosecution or any claim or damages therefor. Any termination under this
subparagraph shall not relieve Tenant from its obligation to pay to Landlord all
Base Monthly Rent and Additional Rent then or thereafter due, or any other sums
due or thereafter accruing to Landlord, or from any claim against Tenant for
damages previously accrued or then or thereafter accruing. In no event shall any
one or more of the following actions by Landlord, in the absence of a written
election by Landlord to terminate this Lease constitute a termination of this
Lease:
(i) Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;
(ii) Consent to any subletting of the Leased Premises or assignment
of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise;
or
(iii) Any action taken by Landlord or its partners, principals,
members, officers, agents, employees, or servants, which is intended to mitigate
the adverse effects of any breach of this Lease by Tenant, including, without
limitation, any action taken to maintain and preserve the Leased Premises on any
action taken to relet the Leased Premises or any portion thereof for the account
at Tenant and in the name of Tenant.
(iv) In the event Tenant breaches this Lease and abandons the Leased
Premises, Landlord may terminate this Lease, but this Lease shall not terminate
unless Landlord gives Tenant written notice of termination. If Landlord does not
terminate this Lease by giving written notice of termination, Landlord may
enforce all its rights and remedies under this Lease, including the right and
remedies provided by California Civil Code Section 1951.4 ("lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject only to reasonable
limitations"), as in effect on the Effective Date of this Lease.
(v) In the event Landlord terminates this Lease, Landlord shall be
entitled, at Landlord's election, to the rights and remedies provided in
California Civil Code Section 1951.2, as in effect on the Effective Date of this
Lease. For purposes of
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computing damages pursuant to Section 1951.2, an interest rate equal to the
maximum rate of interest then not prohibited by law shall be used where
permitted. Such damages shall include, without limitation:
(i) The worth at the time of the award of the unpaid rent which had
been earned at the time of termination;
(ii) The worth at the time of award of the amount by which the unpaid
rent 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, 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; and
(iii) Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which in the ordinary course of things would be likely to
result therefrom, including without limitation, the following: (i) expenses for
cleaning, repairing or restoring the Leased Premises, (ii) expenses for
altering, remodeling or otherwise improving the Leased Premises for the purpose
of reletting, including removal of existing leasehold improvements and/or
installation of additional leasehold improvements (regardless of how the same is
funded, including reduction of rent, a direct payment or allowance to a new
tenant, or otherwise), (iii) broker's fees allocable to the remainder of the
term of this Lease, advertising costs and other expenses of reletting the Leased
Premises; (iv) costs of carrying and maintaining the Leased Premises, such as
taxes, insurance premiums, utility charges and security precautions, (v)
expenses incurred in removing, disposing of and/or storing any of Tenant's
personal property, inventory or trade fixtures remaining therein; (vi)
reasonable attorney's fees, expert witness fees, court costs and other
reasonable expenses incurred by Landlord (but not limited to taxable costs) in
retaking possession of the Leased Premises, establishing damages hereunder, and
releasing the Leased Premises; and (vii) any other expenses, costs or damages
otherwise incurred or suffered as a result of Tenant's default.
12.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES. In the event Landlord fails to
perform its obligations under this Lease, Landlord shall nevertheless not be in
default under the terms of this Lease until such time as Tenant shall have first
given Landlord written notice specifying the nature of such failure to perform
its obligations, and then only after Landlord shall have had thirty (30) days
following its receipt of such notice within which to perform such obligations;
PROVIDED THAT, if longer than thirty (30) days is reasonably required in order
to perform such obligations, Landlord shall have such longer period. In the
event of Landlord's default as above set forth, then, and only then, Tenant may
then proceed in equity or at law to compel Landlord to perform its obligations
and/or to recover damages proximately caused by such failure to perform (except
as and to the extent Tenant has waived its right to damages as provided in this
Lease). Notwithstanding anything to the contrary contained herein, if Tenant
provides notice to Landlord of an event or circumstance regarding the structural
elements of the Building that Tenant reasonably believes constitutes an
emergency and Landlord fails to take action in a commercially reasonable period
of time under the circumstances, Tenant may take the minimally required action
to abate the emergency. In the event Tenant undertakes such emergency structural
repair work, Tenant shall not be entitled to any abatement or off-set of Rent;
Tenant may then proceed in equity or at law to compel Landlord to perform its
obligations and/or to recover damages proximately caused by such failure to
perform (except as and to the extent Tenant has waived its right to damages as
provided in this Lease).
12.4 LIMITATION OF TENANT'S RECOURSE. If Landlord is a corporation, trust,
partnership, joint venture, limited liability company, unincorporated
association, or other form of business entity, Tenant agrees that (i) the
obligations of Landlord under this Lease shall not constitute personal
obligations of the officers, directors, trustees, partners, joint venturers,
members, owners, stockholders, or other principals of such business entity, and
(ii) Tenant shall have recourse only to the property of such corporation, trust,
partnership, joint venture, limited liability company, unincorporated
association, or other form of business entity for the satisfaction of such
obligations and not against the assets of such officers, directors, trustees,
partners, joint venturers, members, owners, stockholders or principals.
Additionally, if Landlord is a partnership or limited liability company, then
Tenant covenants and agrees:
(a) No partner or member of Landlord shall be sued or named as a party
in any suit or action brought by Tenant with respect to any alleged breach of
this Lease (except to the extent necessary to secure jurisdiction over the
partnership and then only for that sole purpose);
(b) No service of process shall be made against any partner or member
of Landlord except for the sole purpose of securing jurisdiction over the
partnership; and
(c) No writ of execution will ever be levied against the assets of any
partner or member of Landlord other than to the extent of his or her interest in
the assets of the partnership or limited liability company constituting
Landlord.
Tenant further agrees that each of the foregoing covenants and agreements shall
be enforceable by Landlord and by any partner or member of Landlord and shall be
applicable to any actual or alleged misrepresentation or nondisclosure made
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regarding this Lease or the Leased Premises or any actual or alleged failure,
default or breach of any covenant or agreement either expressly or implicitly
contained in this Lease or imposed by statute or at common law.
12.5 TENANT'S WAIVER. Landlord and Tenant agree that the provisions of Paragraph
12.3 above are intended to supersede and replace the provisions of California
Civil Code Sections 1932(1), 1941 and 1942, and accordingly, Tenant hereby
waives the provisions of California Civil Code Sections 1932(1), 1941 and 1942
and/or any similar or successor law regarding Tenant's right to terminate this
Lease or to make repairs and deduct the expenses of such repairs from the rent
due under this Lease.
ARTICLE 13
GENERAL PROVISIONS
13.1 TAXES ON TENANT'S PROPERTY. Tenant shall pay before delinquency any and all
taxes, assessments, license fees, use fees, permit fees and public charges of
whatever nature or description levied, assessed or imposed against Tenant or
Landlord by a governmental agency arising out of, caused by reason of or based
upon Tenant's estate in this Lease, Tenant's ownership of property, improvements
made by Tenant to the Leased Premises or the Outside Areas, improvements made by
Landlord for Tenant's use within the Leased Premises or the Outside Areas,
Tenant's use (or estimated use) of public facilities or services or Tenant's
consumption (or estimated consumption) of public utilities, energy, water or
other resources (collectively, "Tenant's Interest"). Upon demand by Landlord,
Tenant shall furnish Landlord with satisfactory evidence of these payments. If
any such taxes, assessments, fees or public charges are levied against Landlord,
Landlord's property, the Building or the Property, or if the assessed value of
the Building or the Property is increased by the inclusion therein of a value
placed upon Tenant's Interest, regardless of the validity thereof, Landlord
shall have the right to require Tenant to pay such taxes, and if not paid and
satisfactory evidence of payment delivered to Landlord at least five (5) days
prior to delinquency, then Landlord shall have the right to pay such taxes on
Tenant's behalf and to invoice Tenant for the same. Tenant shall, within the
earlier to occur of (a) thirty (30) days of the date it receives an invoice from
Landlord setting forth the amount of such taxes, assessments, fees, or public
charge so levied, or (b) the due date of such invoice, pay to Landlord, as
Additional Rent, the amount set forth in such invoice. Failure by Tenant to pay
the amount so invoiced within such time period shall be conclusively deemed a
default by Tenant under this Lease. Tenant shall have the right to bring suit in
any court of competent jurisdiction to recover from the taxing authority the
amount of any such taxes, assessments, fees or public charges so paid.
13.2 HOLDING OVER. This Lease shall terminate without further notice on the
Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant
after expiration of the Lease Term shall neither constitute a renewal nor
extension of this Lease nor give Tenant any rights in or to the Leased Premises
except as expressly provided in this Paragraph. Any such holding over to which
Landlord has consented shall be construed to be a tenancy from month to month,
on the same terms and conditions herein specified insofar as applicable, except
that the Base Monthly Rent shall be increased to an amount equal to one hundred
fifty percent (150%) of the Base Monthly Rent payable during the last full month
immediately preceding such holding over. Tenant acknowledges that if Tenant
holds over without Landlord's consent, such holding over may compromise or
otherwise affect Landlord's ability to enter into new leases with prospective
tenants regarding the Leased Premises. Therefore, if Tenant fails to surrender
the Leased Premises upon the expiration or termination of this Lease, in
addition to any other liabilities to Landlord accruing therefrom, Tenant shall
protect, defend, indemnify and hold Landlord harmless from and against all
claims resulting from such failure, including, without limiting the foregoing,
any claims made by any succeeding tenant founded upon such failure to surrender,
and any losses suffered by Landlord, including lost profits, resulting from such
failure to surrender.
13.3 SUBORDINATION TO MORTGAGES. This Lease is subject to and subordinate to all
ground leases, mortgages and deeds of trust which affect the Building or the
Property and which are of public record as of the Effective Date of this Lease,
and to all renewals, modifications, consolidations, replacements and extensions
thereof. However, if the lessor under any such ground lease or any lender
holding any such mortgage or deed of trust shall advise Landlord that it desires
or requires this Lease to be made prior and superior thereto, then, upon written
request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and
deliver any and all customary or reasonable documents or instruments which
Landlord and such lessor or lender deems necessary or desirable to make this
Lease prior thereto. Tenant hereby consents to Landlord's ground leasing the
land underlying the Building or the Property and/or encumbering the Building or
the Property as security for future loans on such terms as Landlord shall
desire, all of which future ground leases, mortgages or deeds of trust shall be
subject to and subordinate to this Lease. However, if any lessor under any such
future ground lease or any lender holding such future mortgage or deed of trust
shall desire or require that this Lease be made subject to and subordinate to
such future ground lease, mortgage or deed of trust, then Tenant agrees, within
ten (10) days after Landlord's written request therefor, to execute, acknowledge
and deliver to Landlord any and all documents or instruments requested by
Landlord or by such lessor or lender as may be necessary or proper to assure the
subordination of this Lease to such future ground lease, mortgage or deed of
trust, but only if such lessor or lender agrees to recognize Tenant's rights
under this Lease and agrees not to disturb Tenant's quiet possession of the
Leased Premises so long as Tenant is not in default (beyond any applicable
notice and cure periods) under
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this Lease. If Landlord assigns the Lease as security for a loan, Tenant agrees
to execute such documents as are reasonably requested by the lender and to
provide reasonable provisions in the Lease protecting such lender's security
interest which are customarily required by institutional lenders making loans
secured by a deed of trust. Landlord agrees that a condition precedent to this
Lease shall be obtaining a subordination, non-disturbance agreement and
attornment agreement from the existing lender holding a deed of trust on the
Property prior to Effective Date of the Lease.
13.4 TENANT'S ATTORNMENT UPON FORECLOSURE. Tenant shall, upon request, attorn
(i) to any purchaser of the Building or the Property at any foreclosure sale or
private sale conducted pursuant to any security instruments encumbering the
Building or the Property, (ii) to any grantee or transferee designated in any
deed given in lieu of foreclosure of any security interest encumbering the
Building or the Property, or (iii) to the lessor under an underlying ground
lease of the land underlying the Building or the Property, should such ground
lease be terminated; provided that such purchaser, grantee or lessor recognizes
Tenant's rights under this Lease.
13.5 MORTGAGEE PROTECTION. In the event of any default on the part of Landlord,
Tenant will give notice by registered mail to any Lender or lessor under any
underlying ground lease who shall have requested, in writing, to Tenant that it
be provided with such notice, and Tenant shall offer such Lender or lessor the
same opportunity to cure the default.
13.6 ESTOPPEL CERTIFICATE. Tenant will, following any request by Landlord,
promptly execute and deliver to Landlord an estoppel certificate substantially
in form attached as Exhibit D, (i) certifying that this Lease is unmodified and
in full force and effect, or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect, (ii) stating the date to which the rent and other charges are paid
in advance, if any, (iii) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder, or specifying
such defaults if any are claimed, and (iv) certifying such other information
about this Lease as may be reasonably requested by Landlord, its Lender or
prospective lenders, investors or purchasers of the Building or the Property.
Tenant's failure to execute and deliver such estoppel certificate within ten
days after Landlord's request therefor shall be a material default by Tenant
under this Lease, and Landlord shall have all of the rights and remedies
available to Landlord as Landlord would otherwise have in the case of any other
material default by Tenant, including the right to terminate this Lease and sue
for damages proximately caused thereby, it being agreed and understood by Tenant
that Tenant's failure to so deliver such estoppel certificate in a timely manner
could result in Landlord being unable to perform committed obligations to other
third parties which were made by Landlord in reliance upon this covenant of
Tenant. Landlord and Tenant intend that any statement delivered pursuant to this
paragraph may be relied upon by any Lender or purchaser or prospective Lender or
purchaser of the Building, the Property, or any interest in them.
13.7 TENANT'S FINANCIAL INFORMATION. Tenant shall, within ten (10) business days
after Landlord's request therefor, deliver to Landlord a copy of Tenant's (and
any guarantor's) most current publicly available (so long as Tenant is a
publicly traded on a recognized securities exchange) financial statements
(including a balance sheet, income statement and statement of cash flow, all
prepared in accordance with generally accepted accounting principles) and any
such other information reasonably requested by Landlord regarding Tenant's
financial condition. Landlord shall be entitled to disclose such financial
statements or other information to its Lender, to any present or prospective
principal of or investor in Landlord, or to any prospective Lender or purchaser
of the Building, the Property, or any portion thereof or interest therein. Any
such financial statement or other information which is marked "confidential" or
"company secrets" (or is otherwise similarly marked by Tenant) shall be
confidential and shall not be disclosed by Landlord to any third party except as
specifically provided in this paragraph, unless the same becomes a part of the
public domain without the fault of Landlord.
13.8 TRANSFER BY LANDLORD. Landlord and its successors in interest shall have
the right to transfer their interest in the Building, the Property, or any
portion thereof at any time and to any person or entity. In the event of any
such transfer, the Landlord originally named herein (and in the case of any
subsequent transfer, the transferor), from the date of such transfer, (i) shall
be automatically relieved, without any further act by any person or entity, of
all liability for the performance of the obligations of the Landlord hereunder
which may accrue after the date of such transfer and (ii) shall be relieved of
all liability for the performance of the obligations of the Landlord hereunder
which have accrued before the date of transfer if its transferee agrees to
assume and perform all such prior obligations of the Landlord hereunder. Tenant
shall attorn to any such transferee. After the date of any such transfer, the
term "Landlord" as used herein shall mean the transferee of such interest in the
Building or the Property.
13.9 FORCE MAJEURE. The obligations of each of the parties under this Lease
(other than the obligations to pay money) shall be temporarily excused if such
party is prevented or delayed in performing such obligations by reason of any
strikes, lockouts or labor disputes; government restrictions, regulations,
controls, action or inaction; civil commotion; or extraordinary weather, fire or
other acts of God.
13.10 NOTICES. Any notice required or permitted to be given under this Lease
shall be in writing and (i) personally delivered, (ii) sent by United States
mail, registered or certified mail, postage prepaid, return receipt requested,
(iii) sent by Federal Express or similar nationally recognized overnight courier
service, or (iv) transmitted by facsimile with a hard copy sent
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within one (1) business day by any of the foregoing means, and in all cases
addressed as follows, and such notice shall be deemed to have been given upon
the date of actual receipt or delivery (or refusal to accept delivery) at the
address specified below (or such other addresses as may be specified by notice
in the foregoing manner) as indicated on the return receipt or air bill:
<TABLE>
<S> <C>
IF TO LANDLORD: Montague LLC
c/o Menlo Equities LLC
525 University Avenue
Suite 100
Palo Alto, California 94301
Attention: Henry Bullock/Richard Holmstrom
Facsimile: (650) 326-9300
with a copy to: Cooley Godward LLP
One Maritime Plaza
20th Floor
San Francisco, California 94111
Attention: Paul Churchill
Facsimile: (415) 951-3699
IF TO TENANT: Ultratech Stepper, Inc.
3050 Zanker Road
San Jose, California 95134
Attention: BRUCE WRIGHT
---------------------
with a copy to: DAVE GHOSH
---------------------
ULTRATECH STEPPER
---------------------
3050 ZANKER RD
---------------------
SAN JOSE, CA 95134
---------------------
Attention:
---------------------
</TABLE>
Any notice given in accordance with the foregoing shall be deemed received upon
actual receipt or refusal to accept delivery.
13.11 ATTORNEYS' FEES. In the event any party shall bring any action,
arbitration proceeding or legal proceeding alleging a breach of any provision of
this Lease, to recover rent, to terminate this Lease, or to enforce, protect,
determine or establish any term or covenant of this Lease or rights or duties
hereunder of either party, the prevailing party shall be entitled to recover
from the non-prevailing party as a part of such action or proceeding, or in a
separate action for that purpose brought within one year from the determination
of such proceeding, reasonable attorneys' fees, expert witness fees, court costs
and other reasonable expenses incurred by the prevailing party.
13.12 DEFINITIONS. Any term that is given a special meaning by any provision in
this Lease shall, unless otherwise specifically stated, have such meaning
wherever used in this Lease or in any Addenda or amendment hereto. In addition
to the terms defined in Article 1, the following terms shall have the following
meanings:
(a) REAL PROPERTY TAXES. The term "Real Property Tax" or "Real Property
Taxes" shall each mean Tenant's Building Expense Share of (i) all taxes,
assessments, levies and other charges of any kind or nature whatsoever, general
and special, foreseen and unforeseen (including all instruments of principal and
interest required to pay any general or special assessments for public
improvements and any increases resulting from reassessments caused by any change
in ownership or new construction), now or hereafter imposed by any governmental
or quasi-governmental authority or special district having the direct or
indirect power to tax or levy assessments, which are levied or assessed for
whatever reason against the Property or any portion thereof, or Landlord's
interest herein, or the fixtures, equipment and other property of Landlord that
is an integral part of the Property and located thereon, or Landlord's business
of owning, leasing or managing the Property or the gross receipts, income or
rentals from the Property, (ii) all charges, levies or fees imposed by any
governmental authority against Landlord by reason of or based upon the use of or
number of parking spaces within the Property, the amount of public services or
public utilities used or consumed (E.G. water, gas, electricity, sewage or waste
water disposal) at the Property, the number of person employed by tenants of the
Property, the size (whether measured in area, volume, number of tenants or
whatever) or the value of the Property, or the type of use or uses conducted
within the Property, and all costs and fees (including attorneys' fees)
reasonably incurred by Landlord in contesting any Real Property Tax and in
negotiating with public authorities as to any Real Property Tax. If, at any time
during the Lease Term, the taxation or assessment of the Property prevailing as
of the Effective Date of this Lease shall be altered so that in lieu of or in
addition to any the Real
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Property Tax described above there shall be levied, awarded or imposed (whether
by reason of a change in the method of taxation or assessment, creation of a new
tax or charge, or any other cause) an alternate, substitute, or additional use
or charge (i) on the value, size, use or occupancy of the Property or Landlord's
interest therein or (ii) on or measured by the gross receipts, income or rentals
from the Property, or on Landlord's business of owning, leasing or managing the
Property or (iii) computed in any manner with respect to the operation of the
Property, then any such tax or charge, however designated, shall be included
within the meaning of the terms "Real Property Tax" or "Real Property Taxes" for
purposes of this Lease. If any Real Property Tax is partly based upon property
or rents unrelated to the Property, then only that part of such Real Property
Tax that is fairly allocable to the Property shall be included within the
meaning of the terms "Real Property Tax" or "Real Property Taxes."
Notwithstanding the foregoing, the terms "Real Property Tax" or "Real Property
Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes
of Landlord or the federal or state income tax imposed on Landlord's income from
all sources.
(b) LANDLORD'S INSURANCE COSTS. The term "Landlord's Insurance Costs"
shall mean Tenant's Project Expense Share of the costs to Landlord to carry and
maintain the policies of fire and property damage insurance for the Building and
the Property and general liability and any other insurance required or permitted
to be carried by Landlord pursuant to Article 9, together with any deductible
amounts paid by Landlord upon the occurrence of any insured casualty or loss. If
any of Landlord's Insurance Costs are partly based upon property unrelated to
the Property (e.g., another portion of the Project), then only that part of
Landlord's Insurance Costs that is fairly allocable to the Property shall be
included in Landlord's Insurance Costs hereunder.
(c) PROPERTY MAINTENANCE COSTS. The term "Property Maintenance Costs"
shall mean Tenant's Project Expense Share of all costs and expenses (except
Landlord's Insurance Costs and Real Property Taxes) paid or incurred by Landlord
in protecting, operating, maintaining, repairing and preserving the Project and
all parts thereof, including without limitation, (i) market rate professional
management fees of two and one half percent (2.5%) of all gross income from the
Project, (ii) the amortizing portion of any costs incurred by Landlord in the
making of any modifications, alterations or improvements required by any
governmental authority as set forth in Article 6, which are so amortized during
the Lease Term, and (iii) such other costs as may be paid or incurred with
respect to operating, maintaining, and preserving the Project, repairing and
resurfacing paved areas, and repairing and replacing, when necessary,
electrical, plumbing, heating, ventilating and air conditioning systems serving
the Building, provided that the cost of any capital improvement shall be
amortized over the useful life of such improvement and the amortizing portion of
the cost shall be included in Property Maintenance Costs. Notwithstanding the
foregoing provisions of this Paragraph 13.12(c), the following are specifically
excluded from the definition of Property Maintenance Costs and Tenant shall have
no obligation to pay directly or reimburse Landlord for all or any portion of
the following except to the extent any of the foregoing are caused by the
actions or inactions of Tenant, or result from the failure of Tenant to comply
with the terms of the Lease: the costs of repairing and/or replacing the
foundation, the roof structure and the load-bearing and exterior walls of the
Building; the costs incurred (less costs of recovery) for any repair or
replacement to the extent such costs are actually paid by an original
manufacturer's, materialmen's or vendors warranty; any depreciation on the
Property; costs, including legal fees and space planners' fees, incurred in
connection with the original construction or development of the Building, the
leasing of the Building, or improving space for other tenants in the Building;
costs incurred with the sale, financing, refinancing, mortgaging, selling or
change of ownership of the Project or any portion thereof, including brokerage
commissions, consultants' fees, attorneys' fees and accountants' fees, closing
costs, title insurance premiums, transfer taxes and interest charges; costs for
which Landlord is reimbursed by any tenant of the Project or by its insurance
carrier or any tenant's carrier; any bad debt loss or reserves for bad debts
loss provided such bad debt loss is not caused by Tenant; costs, fines or
penalties incurred due to violation by Landlord or any governmental rule or
authority except to the extent such compliance is assumed by Tenant pursuant to
the terms of this Lease; any costs, fees or penalties incurred in connection
with disputes with other tenants; expenses directly resulting from the gross
negligence of Landlord, its agents, servants or employees, costs arising from
Landlord's charitable or political contributions and any wages, salaries or
other compensation paid to any executive employees above the grade of property
manager or engineer. Notwithstanding the foregoing provisions of this Paragraph
13.12(c), the following are specifically excluded from the definition of
Property Maintenance Costs and Tenant shall have no obligation to pay directly
or reimburse Landlord for all or any portion of the following except to the
extent any of the foregoing are caused by the actions or inactions of Tenant, or
result from the failure of Tenant to comply with the terms of the Lease: (a)
costs associated with any monitoring, removal, remediation or otherwise related
to any Hazard Materials existing on the Leased Premises prior to the Lease
Commencement Date, or (2) costs to repair any damage caused by the gross
negligence or willful misconduct of Landlord or its agents. If any of the
Property Maintenance Costs are partly based upon property unrelated to the
Property (e.g., another portion of the Project), then only that part of Property
Maintenance Costs that is fairly allocable to the Property shall be included in
the definition of Property Maintenance Costs hereunder.
(d) PROPERTY OPERATING EXPENSES. The term "Property Operating Expenses"
shall mean and include all Real Property Taxes, plus all Landlord's Insurance
Costs, plus all Property Maintenance Costs.
(e) LAW. The term "Law" shall mean any judicial decisions and any
statute, constitution, ordinance, resolution, regulation, rule, administrative
order, or other requirements of any municipal, county, state, federal, or other
governmental
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agency or authority having jurisdiction over the parties to this
Lease, the Leased Premises, the Building or the Property, or any of them, in
effect either at the Effective Date of this Lease or at any time during the
Lease Term, including, without limitation, any regulation, order, or policy of
any quasi-official entity or body (e.g. a board of fire examiners or a public
utility or special district).
(f) LENDER. The term "Lender" shall mean the holder of any promissory
note or other evidence of indebtedness secured by the Property or any portion
thereof.
(g) PRIVATE RESTRICTIONS. The term "Private Restrictions" shall mean
(as they may exist from time to time) any and all covenants, conditions and
restrictions, private agreements, easements, and any other recorded documents or
instruments affecting the use of the Property, the Building, the Leased
Premises, or the Outside Areas.
(h) RENT. The term "Rent" shall mean collectively Base Monthly Rent and
all Additional Rent.
13.13 GENERAL WAIVERS. One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. No waiver of any provision hereof, or
any waiver of any breach of any provision hereof, shall be effective unless in
writing and signed by the waiving party. The receipt by Landlord of any rent or
payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach. No waiver of any provision of
this Lease shall be deemed a continuing waiver unless such waiver specifically
states so in writing and is signed by both Landlord and Tenant. No delay or
omission in the exercise of any right or remedy accruing to either party upon
any breach by the other party under this Lease shall impair such right or remedy
or be construed as a waiver of any such breach theretofore or thereafter
occurring. The waiver by either party of any breach of any provision of this
Lease shall not be deemed to be a waiver of any subsequent breach of the same or
any other provisions herein contained.
13.14 MISCELLANEOUS. Should any provisions of this Lease prove to be invalid or
illegal, such invalidity or illegality shall in no way affect, impair or
invalidate any other provisions hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. Any copy of this Lease which is executed by the parties shall be deemed
an original for all purposes. This Lease shall, subject to the provisions
regarding assignment, apply to and bind the respective heirs, successors,
executors, administrators and assigns of Landlord and Tenant. The term "party"
shall mean Landlord or Tenant as the context implies. If Tenant consists of more
than one person or entity, then all members of Tenant shall be jointly and
severally liable hereunder. This Lease shall be construed and enforced in
accordance with the Laws of the State in which the Leased Premises are located.
The captions in this Lease are for convenience only and shall not be construed
in the construction or interpretation of any provision hereof. When the context
of this Lease requires, the neuter gender includes the masculine, the feminine,
a partnership, corporation, limited liability company, joint venture, or other
form of business entity, and the singular includes the plural. The terms "must,"
"shall," "will," and "agree" are mandatory. The term "may" is permissive. When a
party is required to do something by this Lease, it shall do so at its sole cost
and expense without right of reimbursement from the other party unless specific
provision is made therefor. Where Landlord's consent is required hereunder, the
consent of any Lender shall also be required. Landlord and Tenant shall both be
deemed to have drafted this Lease, and the rule of construction that a document
is to be construed against the drafting party shall not be employed in the
construction or interpretation of this Lease. Where Tenant is obligated not to
perform any act or is not permitted to perform any act, Tenant is also obligated
to restrain any others reasonably within its control, including agents,
invitees, contractors, subcontractors and employees, from performing such act.
Landlord shall not become or be deemed a partner or a joint venturer with Tenant
by reason of any of the provisions of this Lease.
ARTICLE 14
CORPORATE AUTHORITY
BROKERS AND ENTIRE AGREEMENT
14.1 CORPORATE AUTHORITY. If Tenant is a corporation, each individual executing
this Lease on behalf of such corporation represents and warrants that Tenant is
validly formed and duly authorized and existing, that Tenant is qualified to do
business in the State in which the Leased Premises are located, that Tenant has
the full right and legal authority to enter into this Lease, and that he or she
is duly authorized to execute and deliver this Lease on behalf of Tenant in
accordance with its terms. Tenant shall, within five (5) days after execution of
this Lease, deliver to Landlord a certified copy of Tenant's organizational
documents indicating that Tenant has the corporate authority to lease property
without first obtaining the written authorization of its Board of Directors. In
the event Tenant fails to deliver such documents within such five (5) day
period, Tenant shall, within five (5) days, deliver to Landlord a certified copy
of the resolution of its board of directors
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authorizing or ratifying the execution of this Lease and if Tenant fails to do
so, Landlord at its sole election may elect to terminate this Lease.
14.2 BROKERAGE COMMISSIONS. Tenant represents, warrants and agrees that it has
not had any dealings with any real estate broker(s), leasing agent(s), finder(s)
or salesmen, other than the Brokers (as named in Article 1) with respect to the
lease by it of the Leased Premises pursuant to this Lease, and that it will
indemnify, defend with competent counsel, and hold Landlord harmless from any
liability for the payment of any real estate brokerage commissions, leasing
commissions or finder's fees claimed by any other real estate broker(s), leasing
agent(s), finder(s), or salesmen to be earned or due and payable by reason of
Tenant's agreement or promise (implied or otherwise) to pay (or to have Landlord
pay) such a commission or finder's fee by reason of its leasing the Leased
Premises pursuant to this Lease.
14.3 ENTIRE AGREEMENT. This Lease and the Exhibits (as described in Article 1),
which Exhibits are by this reference incorporated herein, constitute the entire
agreement between the parties, and there are no other agreements, understandings
or representations between the parties relating to the lease by Landlord of the
Leased Premises to Tenant, except as expressed herein. No subsequent changes,
modifications or additions to this Lease shall be binding upon the parties
unless in writing and signed by both Landlord and Tenant.
14.4 LANDLORD'S REPRESENTATIONS. Tenant acknowledges that neither Landlord nor
any of its agents made any representations or warranties respecting the
Property, the Building or the Leased Premises, upon which Tenant relied in
entering into the Lease, which are not expressly set forth in this Lease. Tenant
further acknowledges that neither Landlord nor any of its agents made any
representations as to (i) whether the Leased Premises may be used for Tenant's
intended use under existing Law, or (ii) the suitability of the Leased Premises
for the conduct of Tenant's business, or (iii) the exact square footage of the
Leased Premises, and that Tenant relies solely upon its own investigations with
respect to such matters. Tenant expressly waives any and all claims for damage
by reason of any statement, representation, warranty, promise or other agreement
of Landlord or Landlord's agent(s), if any, not contained in this Lease or in
any Exhibit attached hereto. Notwithstanding the foregoing, Landlord represents
that to the best of Landlord's knowledge, as of the Lease Commencement Date, the
Leased Premises will comply with current ADA regulations and Title 24
provisions.
ARTICLE 15
OPTIONS TO EXTEND
15.1 So long as Ultratech Stepper, Inc. (or a Permitted Assignee) is the Tenant
hereunder and occupies sixty five percent (65%) or more of the Leased Premises
(PROVIDED if Ultratech Stepper, Inc. (or a Permitted Assignee) does not occupy
the entirety of the Leased Premises, the full amount of the Letter of Credit
must be maintained and/or reinstated by Tenant throughout the duration of the
applicable Extension Period), and subject to the condition set forth in clause
(b) below, Tenant shall have two options to extend the term of this Lease with
respect to the entirety of the Leased Premises, the first for a period of five
(5) years from the expiration of the tenth year of the Lease Term (the "First
Extension Period"), and the second (the "Second Extension Period") for a period
of five (5) years from the expiration of the First Extension Period, subject to
the following conditions:
(a) Each option to extend shall be exercised, if at all, by notice of
exercise given to Landlord by Tenant not more than twelve (12) months nor less
than nine (9) months prior to the expiration of the tenth year of the Lease Term
or the expiration of the First Extension Period, as applicable;
(b) Anything herein to the contrary notwithstanding, if Tenant is in
default beyond any applicable cure periods under any of the terms, covenants or
conditions of this Lease, either at the time Tenant exercises either extension
option or on the commencement date of the First Extension Period or the Second
Extension Period, as applicable, Landlord shall have, in addition to all of
Landlord's other rights and remedies provided in this Lease, the right to
terminate such option(s) to extend upon notice to Tenant.
15.2 In the event the applicable option is exercised in a timely fashion, the
Lease shall be extended for the term of the applicable extension period upon all
of the terms and conditions of this Lease, provided that the Base Monthly Rent
for each extension period shall be the "Fair Market Rent" for the Leased
Premises, increased as set forth below. For purposes hereof, "Fair Market Rent"
shall mean, collectively, the Base Monthly Rent and any annual increases
determined pursuant to the process described below.
15.3 Within thirty (30) days after receipt of Tenant's notice of exercise,
Landlord shall notify Tenant in writing of Landlord's estimate of the Base
Monthly Rent for the applicable extension period, based on the provisions of
Paragraph 15.2 above. Within thirty (30) days after receipt of such notice from
Landlord, Tenant shall have the right either to (i) accept Landlord's statement
of Base Monthly Rent as the Base Monthly Rent for the applicable extension
period; or (ii) elect to arbitrate Landlord's estimate of Fair Market Rent, such
arbitration to be conducted pursuant to the provisions hereof. Failure
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on the part of Tenant to require arbitration of Fair Market Rent within such
30-day period shall constitute acceptance of the Base Monthly Rent for the
applicable extension period as calculated by Landlord. If Tenant elects
arbitration, the arbitration shall be concluded within ninety (90) days after
the date of Tenant's election, subject to extension for an additional 30-day
period if a third arbitrator is required and does not act in a timely manner. To
the extent that arbitration has not been completed prior to the expiration of
any preceding period for which Base Monthly Rent has been determined, Tenant
shall pay Base Monthly Rent at the rate calculated by Landlord, with the
potential for an adjustment to be made once Fair Market Rent is ultimately
determined by arbitration.
15.4 In the event of arbitration, the judgment or the award rendered in any such
arbitration may be entered in any court having jurisdiction and shall be final
and binding between the parties. The arbitration shall be conducted and
determined in the City of San Jose in accordance with the then prevailing rules
of the American Arbitration Association or its successor for arbitration of
commercial disputes except to the extent that the procedures mandated by such
rules shall be modified as follows:
(a) Tenant shall make demand for arbitration in writing within thirty
(30) days after service of Landlord's determination of Fair Market Rent given
under Paragraph 15.3 above, specifying therein the name and address of the
person to act as the arbitrator on its behalf. The arbitrator shall be qualified
as a real estate appraiser familiar with the Fair Market Rent of similar
industrial, research and development, or office space in the Silicon Valley area
who would qualify as an expert witness over objection to give opinion testimony
addressed to the issue in a court of competent jurisdiction. Failure on the part
of Tenant to make a proper demand in a timely manner for such arbitration shall
constitute a waiver of the right thereto. Within fifteen (15) days after the
service of the demand for arbitration, Landlord shall give notice to Tenant,
specifying the name and address of the person designated by Landlord to act as
arbitrator on its behalf who shall be similarly qualified. If Landlord fails to
notify Tenant of the appointment of its arbitrator, within or by the time above
specified, then the arbitrator appointed by Tenant shall be the arbitrator to
determine the issue.
(b) In the event that two arbitrators are chosen pursuant to Paragraph
15.4(a) above, the arbitrators so chosen shall, within fifteen (15) days after
the second arbitrator is appointed determine the Fair Market Rent. If the two
arbitrators shall be unable to agree upon a determination of Fair Market Rent
within such 15-day period, they, themselves, shall appoint a third arbitrator,
who shall be a competent and impartial person with qualifications similar to
those required of the first two arbitrators pursuant to Paragraph 15.4(a). In
the event they are unable to agree upon such appointment within seven days after
expiration of such 15-day period, the third arbitrator shall be selected by the
parties themselves, if they can agree thereon, within a further period of
fifteen (15) days. If the parties do not so agree, then either party, on behalf
of both, may request appointment of such a qualified person by the then Chief
Judge of the United States District Court having jurisdiction over the County of
Santa Clara, acting in his private and not in his official capacity, and the
other party shall not raise any question as to such Judge's full power and
jurisdiction to entertain the application for and make the appointment. The
three arbitrators shall decide the dispute if it has not previously been
resolved by following the procedure set forth below.
(c) Where an issue cannot be resolved by agreement between the two
arbitrators selected by Landlord and Tenant or settlement between the parties
during the course of arbitration, the issue shall be resolved by the three
arbitrators within 15 days of the appointment of the third arbitrator in
accordance with the following procedure. The arbitrator selected by each of the
parties shall state in writing his determination of the Fair Market Rent
supported by the reasons therefor with counterpart copies to each party. The
arbitrators shall arrange for a simultaneous exchange of such proposed
resolutions. The role of the third arbitrator shall be to select which of the
two proposed resolutions most closely approximates his determination of Fair
Market Rent. The third arbitrator shall have no right to propose a middle ground
or any modification of either of the two proposed resolutions. The resolution he
chooses as most closely approximating his determination shall constitute the
decision of the arbitrators and be final and binding upon the parties.
(d) In the event of a failure, refusal or inability of any arbitrator
to act, his successor shall be appointed by him, but in the case of the third
arbitrator, his successor shall be appointed in the same manner as provided for
appointment of the third arbitrator. The arbitrators shall decide the issue
within fifteen (15) days after the appointment of the third arbitrator. Any
decision in which the arbitrator appointed by Landlord and the arbitrator
appointed by Tenant concur shall be binding and conclusive upon the parties.
Each party shall pay the fee and expenses of its respective arbitrator and both
shall share the fee and expenses of the third arbitrator, if any, and the
attorneys' fees and expenses of counsel for the respective parties and of
witnesses shall be paid by the respective party engaging such counsel or calling
such witnesses.
(e) The arbitrators shall have the right to consult experts and
competent authorities to obtain factual information or evidence pertaining to a
determination of Fair Market Rent, but any such consultation shall be made in
the presence of both parties with full right on their part to cross-examine. The
arbitrators shall render their decision and award in writing with counterpart
copies to each party. The arbitrators shall have no power to modify the
provisions of this Lease.
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ARTICLE 16
TELEPHONE SERVICE
Notwithstanding any other provision of this Lease to the contrary:
(a) So long as the entirety of the Building is leased to Tenant:
(i) Landlord shall have no responsibility for providing to Tenant any
telephone equipment, including wiring, within the Leased Premises or for
providing telephone service or connections from the utility to the Leased
Premises; and
(ii) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to the extent caused by the grossly negligent or willful act
or omission by Landlord, its agents or employees. Tenant accepts the telephone
equipment (including, without limitation, the INC, as defined below) in its
"AS-IS" condition, and Tenant shall be solely responsible for contracting with a
reliable third party vendor to assume responsibility for the maintenance and
repair thereof (which contract shall contain provisions requiring such vendor to
inspect the INC periodically (the frequency of such inspections to be determined
by such vendor based on its experience and professional judgment), and requiring
such vendor to meet local and federal requirements for telecommunications
material and workmanship). Landlord shall not be liable to Tenant and Tenant
waives all claims against Landlord whatsoever, whether for personal injury,
property damage, loss of use of the Leased Premises, or otherwise, due to the
interruption or failure of telephone services to the Leased Premises. Tenant
hereby holds Landlord harmless and agrees to indemnify, protect and defend
Landlord from and against any liability for any damage, loss or expense due to
any failure or interruption of telephone service to the Leased Premises for any
reason. Tenant agrees to obtain loss of rental insurance adequate to cover any
damage, loss or expense occasioned by the interruption of telephone service.
(b) At such time as the entirety of the Building is no longer leased to
Tenant, Landlord shall in its sole discretion have the right, by written notice
to Tenant, to elect to assume limited responsibility for INC, as provided below,
and upon such assumption of responsibility by Landlord, this subparagraph (b)
shall apply prospectively.
(i) Landlord shall provide Tenant access to such quantity of pairs in
the Building intra-building network cable ("INC") as is determined to be
available by Landlord in its reasonable discretion. Tenant's access to the INC
shall be solely by arrangements made by Tenant, as Tenant may elect, directly
with Pacific Bell or Landlord (or such vendor as Landlord may designate), and
Tenant shall pay all reasonable charges as may be imposed in connection
therewith. Pacific Bell's charges shall be deemed to be reasonable. Subject to
the foregoing, Landlord shall have no responsibility for providing to Tenant any
telephone equipment, including wiring, within the Leased Premises or for
providing telephone service or connections from the utility to the Leased
Premises, except as required by law.
(ii) Tenant shall not alter, modify, add to or disturb any telephone
wiring in the Leased Premises or elsewhere in the Building without the
Landlord's prior written consent. Tenant shall be liable to Landlord for any
damage to the telephone wiring in the Building due to the act, negligent or
otherwise, of Tenant or any employee, contractor or other agent of Tenant.
Tenant shall have reasonable access to the telephone closets within the Building
provided such access is in compliance with the procedures established by
Landlord. Tenant shall promptly notify Landlord of any actual or suspected
failure of telephone service to the Leased Premises.
(iii) All costs incurred by Landlord for the installation,
maintenance, repair and replacement of telephone wiring in the Building shall be
a Property Maintenance Cost.
(iv) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to the extent caused by the grossly negligent or willful act
or omission by Landlord, its agents or employees. Tenant acknowledges that
Landlord meets its duty of care to Tenant with respect to the Building INC by
contracting with a reliable third party vendor to assume responsibility for the
maintenance and repair thereof (which contract shall contain provisions
requiring such vendor to inspect the INC periodically (the frequency of such
inspections to be determined by such vendor based on its experience and
professional judgment), and requiring such vendor to meet local and federal
requirements for telecommunications material and workmanship). Subject to the
foregoing, Landlord shall not be liable to Tenant and Tenant waives all claims
against Landlord whatsoever, whether for personal injury, property damage, loss
of use of the Leased Premises, or otherwise, due to the interruption or failure
of telephone services to the Leased Premises. Tenant hereby holds Landlord
harmless and agrees to indemnify, protect and defend Landlord from and against
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any liability for any damage, loss or expense due to any failure or interruption
of telephone service to the Leased Premises for any reason. Tenant agrees to
obtain loss of rental insurance adequate to cover any damage, loss or expense
occasioned by the interruption of telephone service.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
respective dates below set forth with the intent to be legally bound thereby as
of the Effective Date of this Lease first above set forth.
LANDLORD:
MONTAGUE LLC, a California limited liability company
<TABLE>
<S> <C>
By: Montague Park Corporation, a California corporation
Date: 11/12/99 /s/ HENRY D. BULLOCK
-------- ------------------------------------------
Henry D. Bullock
President
</TABLE>
TENANT:
ULTRATECH STEPPER, INC., a Delaware corporation
<TABLE>
<S> <C>
Dated: 22 NOV 99 By: /s/ BRUCE R. WRIGHT
------------------- -----------------------------
Title: CHIEF FINANCIAL OFFICER
--------------------------
Dated: 11/22/99 By: /s/ DANIEL H. BERRY
------------------- -----------------------------
Title: PRESIDENT
--------------------------
</TABLE>
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EXHIBIT A
PROJECT
85
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EXHIBIT B
SITE PLAN
(to be attached)
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EXHIBIT C
WORK LETTER
THIS WORK LETTER, dated November ___, 1999, is entered into by and MONTAGUE LLC,
a California limited liability company ("Landlord") and ULTRATECH STEPPER, INC.,
a Delaware corporation ("Tenant"). On or about the date hereof, Landlord and
Tenant entered into that certain Lease (the "Lease") for the Premises, as
defined in the Lease. This Work Letter sets forth the agreement of Landlord and
Tenant with respect to the improvements to be constructed in the Premises. In
the event of any inconsistency between the terms of this Work Letter and the
terms of the Lease, the terms of the Lease shall control. All defined terms used
herein shall have the meanings set forth in the Lease, unless otherwise defined
in this Work Letter.
1. IMPROVEMENT WORK. Tenant shall construct, furnish or install all
improvements, equipment or fixtures, that are necessary for Tenant's use and
occupancy of the Premises, including, but not limited to, supplemental HVAC
equipment in the plenum and the Building roof, an exterior generator,
directional signage and a conduit between the Building and the building at 3050
Zanker Road (the "Improvement Work"). Tenant shall also be responsible for the
cost of any alterations to the Building required as a result of the Improvement
Work. The Improvement Work shall be in conformity with drawings and
specifications submitted to and approved by Landlord (as set forth below) and
shall be performed in accordance with the following provisions:
(a) Tenant shall prepare and submit to Landlord for its approval (which
approval shall not be unreasonably withheld) two sets of fully dimensioned scale
drawings (suitable for submission with a building permit application) for the
Improvement Work (including plans, elevations, critical sections and details)
and a specification of Tenant's utility requirements. Tenant shall cause all
drawings and specifications for the Improvement Work to be prepared by licensed
architects and where appropriate, mechanical, electrical and structural
engineers.
(b) Within five (5) business days after receipt of Tenant's drawings
Landlord shall return one set of prints thereof with Landlord's approval and/or
suggested modifications noted thereon as well as a list of those items of the
Improvement Work which Tenant, notwithstanding anything to the contrary
contained in the Lease, shall be required to remove, in accordance with Section
2.6 of the Lease, at the expiration of the Lease (the "Specialized
Improvements"). An initial list of the Specialized Improvements (which have been
approved by Landlord subject to receipt and approval of the plans and
specifications as provided herein) is included on Schedule 1 attached hereto. If
Landlord has approved Tenant's drawings subject to modifications, such
modifications shall be deemed to be acceptable to and approved by Tenant unless
Tenant shall prepare and resubmit revised drawings for further consideration by
Landlord. If Landlord has suggested modifications without approving Tenant's
drawings Tenant shall prepare and resubmit revised drawings within seven days
for consideration by Landlord. All revised drawings shall be submitted, with
changes highlighted, to Landlord within seven (7) days following Landlord's
return to Tenant of the drawings originally submitted, and Landlord shall
approve or disapprove such revised drawings within three (3) business days
following receipt of the same.
(c) Tenant shall obtain all building and other permits necessary in
connection with the Improvement Work prior to the commencement of such work. The
Improvement Work shall (i) be constructed in compliance with all of the terms
and conditions of the Lease and with all applicable laws and regulations, (ii)
not involve changes to structural components of the Building nor involve any
floor, roof, or wall penetrations unless approved by Landlord, and (iii) not
require any material modifications of the Building's mechanical or electrical
systems unless approved by Landlord.
(d) Prior to commencing construction, Tenant shall deliver to Landlord
the following:
(i) The address of Tenant's general contractor, and the names of the
primary subcontractors Tenant's contractor intends to engage for the
construction of the Improvement Work.
(ii) The actual commencement date of construction and the estimated
date of completion of the work, including fixturization.
(iii) Evidence of insurance as called for hereinbelow.
(iv) An executed copy of the applicable building permit for such
work.
(e) After final approval of Tenant's drawings by Landlord, Tenant shall
proceed promptly to commence performance of the Improvement Work. Tenant's
contractors and subcontractors shall be acceptable to and approved in writing by
Landlord, which approval shall not be unreasonably withheld or delayed, and
shall, at Landlord's option, be subject to administrative supervision by
Landlord in their use of the Building (at no additional expense to Tenant).
Tenant
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shall furnish to Landlord a copy of the executed contract between Tenant and
Tenant's general contractor covering all of Tenant's obligations under this Work
Letter. Tenant shall use commercially reasonable efforts to cause such work to
be performed in as efficient a manner as is commercially reasonable. Tenant
shall immediately, upon demand, repair any damage to the Building caused by
Tenant or its contractors during performance of the Improvement Work. Tenant's
contractors shall conduct their work and employ labor in such manner as to
maintain harmonious labor relations. Tenant's general contractor ("Contractor")
shall obtain a builder's risk policy of insurance in an amount and form and
issued by a carrier reasonably satisfactory to Landlord, and Tenant's general
contractor and subcontractors shall carry worker's compensation insurance for
their employees as required by law. The builder's risk policy of insurance shall
name Landlord as an additional insured and shall not be cancelable without at
least 30 days' prior written notice to Landlord.
(f) Any changes in the Improvement Work from the final drawings
approved by Landlord shall be subject to Landlord's prior written approval,
which shall not be unreasonably withheld. Any deviation in construction from the
design specifications and criteria set forth herein or from Tenant's plans and
specifications as approved by Landlord shall constitute a default for which
Landlord may, within ten (10) days after giving written notice to Tenant, elect
to exercise the remedies available in the event of default under the provisions
of this Lease, unless such default is cured within such ten (10) day period, or,
if the cure reasonably requires more than ten (10) days, unless such default is
cured as soon as reasonably practicable but in no event later than thirty (30)
days after Landlord's notice to Tenant. Only new materials shall be used in the
construction of the Improvement Work, except with the written consent of
Landlord.
(g) Storage of Tenant's contractors' construction materials, tools and
equipment shall be confined within the Building, and in no event shall any
materials or debris be stored outside of the Building.
(h) Tenant acknowledges that if it engages an architect, it shall be
solely responsible for the actions and omissions of its architects and for any
loss, liability, claim, cost, damage or expense suffered by Landlord or any
other entity or person as a result of the acts or omissions of its architects or
for delays caused by its architects. Landlord's approval of any of Tenant's
architects or engineers and of any documents prepared by any of them shall not
be for the benefit of Tenant or any third party, and Landlord shall have no duty
to Tenant or to any third parties for the actions or omissions of Tenant's
architects or engineers. Tenant shall indemnify and hold harmless Landlord
against any and all losses, costs, damages, claims and liabilities arising from
the actions or omissions of Tenant's architects and engineers.
(i) Landlord shall have the right to post in a conspicuous location on
the Building or the Premises, as well as record with the County of Santa Clara,
a Notice of Nonresponsibility.
(j) Without limiting the generality of the foregoing, any work to be
performed outside of the Building shall be coordinated with Landlord, and shall
be subject to reasonable scheduling requirements of Landlord.
(k) Tenant shall, upon completion of its work, submit to Landlord two
(2) complete sets of plans (one (1) reproducible) and specifications covering
all of the Improvement Work, including architectural, electrical, and plumbing,
as built.
Upon full execution of the Lease, Landlord shall provide Tenant with a
complete set of base building shell drawings and the site plan for Tenant's
review and use in connection with the Improvement Work.
2. PAYMENT OF COSTS OF THE IMPROVEMENT WORK.
(a) Landlord shall bear and pay the cost of the Improvement Work up to
a maximum of $356,143.50, (the "Improvement Allowance"). The Improvement
Allowance shall be utilized only for building improvements to the Building (and
Tenant's architect fees), and not for any other personal property, furniture
costs, any third party consulting or contracting fees, any telecom/cabling
costs, or any other purpose. Tenant shall bear and pay the cost of the
Improvement Work in excess of the Improvement Allowance, if any. So long as
Tenant manages the construction process, Landlord shall not charge Tenant a
construction management fee. Based upon applications for payment prepared,
certified and submitted by Tenant, Landlord shall make progress payments from
the Improvement Allowance to Tenant in accordance with the provisions of this
paragraph 2.
(b) Not later than the twenty-fifth (25th) day of each month Tenant
shall submit applications for payment to Landlord in a form reasonably
acceptable to Landlord, certified as correct by an officer of Tenant and by
Tenant's architect, for payment of that portion of the cost of the Improvement
Work allocable to labor, materials and equipment incorporated in the Building
during the period from the first day of the same month projected through the
last day of the month. Each application for payment shall set forth such
information and shall be accompanied by such supporting documentation as shall
be reasonably requested by Landlord, including the following:
(i) Invoices and canceled checks.
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(ii) Fully executed conditional lien releases in the form prescribed
by law from the Contractor and all subcontractors and suppliers furnishing labor
or materials during such period and fully executed unconditional lien releases
from all such entities covering the prior payment period.
(iii) Contractor's worksheets showing percentages of completion.
(iv) Contractor's certification as follows:
"There are no known mechanics' or materialmen's liens outstanding at
the date of this application for payment, all due and payable bills with
respect to the Building have been paid to date or shall be paid from the
proceeds of this application for payment, and there is no known basis for the
filing of any mechanics' or materialmen's liens against the Building or the
Property, and, to the best of our knowledge, waivers from all subcontractors
are valid and constitute an effective waiver of lien under applicable law to
the extent of payments that have been made or shall be made concurrently
herewith."
(c) Tenant shall submit with each application for payment all documents
necessary to effect and perfect the transfer of title to the materials or
equipment for which application for payment is made.
(d) On or before the 15th day of the month following submission of the
application for payment, Landlord shall pay a share of such payment determined
by multiplying the amount of such payment by a fraction, the numerator of which
is the the amount of the Improvement Allowance, and the denominator of which is
the sum of (i) estimated construction cost of all Improvement Work, and (ii) the
estimated cost of all professional services, fees and permits in connection
therewith. Tenant shall pay the balance of such payment, provided that at such
time as Landlord has paid the entire Improvement Allowance on account of such
Improvement Work, all billings shall be paid entirely by Tenant. If upon
completion of the Improvement Work and payment in full to the Contractor, the
architect and engineer, and payment in full of all fees and permits, the portion
of the cost of the Improvement Work, architects' and engineers' fees, permits
and fees theretofore paid by Landlord is less than the Improvement Allowance,
Landlord shall reimburse Tenant for costs expended by Tenant for Improvement
Work up to the amount by which the Improvement Allowance exceeds the portion of
such cost theretofore paid by Landlord. Landlord shall have no obligation to
advance the Improvement Allowance to the extent it exceeds the total cost of the
Improvement Work. In no event shall Landlord have any responsibility for the
cost of the Improvement Work in excess of the Improvement Allowance. Landlord
shall have no obligation to make any payments to Contractor's material suppliers
or subcontractors or to determine whether amounts due them from Contractor in
connection with the Improvement Work have, in fact, been paid.
3. EVIDENCE OF COMPLETION OF IMPROVEMENT WORK. Upon the completion of the
Improvement Work, Tenant shall:
(a) Submit to Landlord a detailed breakdown of Tenant's final and total
construction costs, together with receipted evidence showing payment thereof,
satisfactory to Landlord.
(b) Submit to Landlord all evidence reasonably available from
governmental authorities showing compliance with any and all other laws, orders
and regulations of any and all governmental authorities having jurisdiction over
the Building, including, without limitation, authorization for physical
occupancy of the Building.
(c) Submit to Landlord the as-built plans and specifications referred
to above.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Work Letter as of the
respective dates indicated below.
LANDLORD:
MONTAGUE LLC, a California limited liability company
By: Montague Park Corporation, a California corporation
<TABLE>
<S> <C>
Date: 11/12/99 By: /s/ HENRY D. BULLOCK.
-------- ---------------------------------------------------
Henry D. Bullock
President
</TABLE>
89
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TENANT:
ULTRATECH STEPPER, INC., a Delaware corporation
<TABLE>
<S> <C>
Dated: 22 NOV 99 By: /s/ BRUCE R. WRIGHT
-------------------- ----------------------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------------------
Dated: 11/22/99 By: /s/ DANIEL H. BERRY
-------------------- ----------------------------------------
Title: PRESIDENT
-------------------------------------
</TABLE>
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SCHEDULE 1 TO WORK LETTER
SPECIALIZED IMPROVEMENTS
- - Clean Room to be constructed on the Leased Premises.
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EXHIBIT D
FORM OF ESTOPPEL CERTIFICATE
__________________, 19___
___________________________
___________________________
___________________________
___________________________
Re 2880 Junction Avenue
San Jose, California
Ladies and Gentlemen:
Reference is made to that certain Lease, dated as of _______________, 1999,
between MONTAGUE LLC, a California limited liability company ("Landlord"), and
the undersigned (herein referred to as the "Lease"). A copy of the Lease [and
all amendment thereto] is [are] attached hereto as EXHIBIT A. At the request of
Landlord in connection with [State reasons for request for estoppel
certificate], the undersigned hereby certifies to Landlord and to [State names
of other parties requiring certification] and each of your respective
successors and assigns as follows:
1. The undersigned is the tenant under the Lease.
2. The Lease is in full force and effect and has not been amended,
modified, supplemented or superseded except as indicated in Exhibit A.
3. There is no defense, offset, claim or counterclaim by or in favor of
the undersigned against Landlord under the Lease or against the obligations of
the undersigned under the Lease. The undersigned has no renewal, extension or
expansion option, no right of first offer or right of first refusal and no other
similar right to renew or extend the term of the Lease or expand the property
demised thereunder except as may be expressly set forth in the Lease.
4. The undersigned is not aware of any default now existing of the
undersigned or of Landlord under the Lease, nor of any event which with notice
or the passage of time or both would constitute a default of the undersigned or
of Landlord under the Lease.
5. The undersigned has not received notice of a prior transfer,
assignment, hypothecation or pledge by Landlord of any of Landlord's interest in
the Lease.
6. The monthly rent due under the Lease is $____________ and has been
paid through __________________, and all additional rent due and payable under
the Lease has been paid through _________________.
7. The term of the Lease commenced on __________________, and expires on
___________________, unless sooner terminated pursuant to the provisions of the
Lease. Landlord has performed all work required by the Lease for the
undersigned's initial occupancy of the demised property.
8. The undersigned has deposited the sum of $____________ with Landlord
as security for the performance of its obligations as tenant under the Lease,
and no portion of such deposit has been applied by Landlord to any obligation
under the Lease.
9. There is no free rent period pending, nor is Tenant entitled to any
Landlord's contribution.
The above certifications are made to Landlord and Lender knowing that Landlord
and Lender will rely thereon in accepting an assignment of the Lease.
Very truly yours,
ULTRATECH STEPPER, INC.
By: ___________________________
Name: ___________________________
Title: ___________________________
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EXHIBIT E
FORM OF LETTER OF CREDIT
Date: ____________________, 1999
Irrevocable Standby Letter of Credit Number: ____________
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Beneficiary: Applicant:
Montague LLC Ultratech Stepper, Inc.
525 University Avenue, Suite 100 __________________________________
Palo Alto, California 94301 __________________________________
__________________________________
__________________________________
Amount:
USD $2,000,000.00 (TWO MILLION AND
00/100 U.S. DOLLARS)
Expiration:_______________________
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We hereby establish our Irrevocable Standby Letter of Credit No. ______________
in your favor for the account of_______________________________________________,
________________________________, on behalf of_________________________________,
available for drawings for up to an aggregate amount of U.S. $2,000,000.00 (TWO
MILLION AND 00/100 U.S. DOLLARS). This Letter of Credit is available by payment
upon your draft drawn at sight on us, submitted at the office of
____________________________________________________________, Attention: Letter
of Credit Services, and expires at our close of business on the expiration date
or any automatically extended expiration date as hereinafter set forth.
This Letter of Credit shall expire on ________________________, but such
expiration date shall be automatically extended for a period of one (1) year on
______________________ and on each successive expiration date, unless at least
sixty (60) days before the current expiration date we notify you by overnight
courier that this Letter of Credit is not extended beyond the current expiration
date. In the event you are so notified, any unused portion of the Letter of
Credit shall be available upon presentation of a sight draft by Montague LLC,
within the current expiration date.
We give our undertaking to the Beneficiary that sums drawn under and in
compliance with the terms of this Letter of Credit will be duly honored by our
bank on presentation of drawings in accordance with the terms of this credit.
This Letter of Credit is transferable by the Beneficiary. Transfer of this
Letter of Credit is subject to our consent and receipt of Beneficiary's
instructions in the form attached hereto as Exhibit A accompanied by the
original Letter of Credit and amendment(s) if any. Cost or expenses of such
transfer shall be for the account of the Beneficiary.
This Letter of Credit is subject to the Uniform Customs and Practices for
Documentary Credits (1993 Revision) International Chamber of Commerce
Publication No. 500 and engages us to the terms herein.
Yours very truly,
Authorized Signature
Letter of Credit Services
(_____) ____________
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EXHIBIT A
- ---------
- -------------------------------------
- -------------------------------------
- -------------------------------------
- -------------------------------------
Attention: Letter of Credit Services
Re: Irrevocable Letter of Credit No. ______________
Dear Sirs:
The undersigned acknowledges receipt of your advice No. ____________________ of
a credit issued in our favor, the terms of which are satisfactory. We now return
the original advice of the said credit with all amendments and extensions, if
any, and hereby irrevocably transfer the said credit and all amendments and
extensions thereof, if any, to:
------------------------------------------
[Name of Transferee]
------------------------------------------
[Address]
You are to inform the transferee of this transfer and such transferee shall have
sole rights as beneficiary under the credit, including any amendments, extension
or increases thereof, without notice to or further assent from us.
Yours very truly,
Yours very truly,
By:
--------------------------------------------------
(The above signature with title as stated with that
on file with us and is authorized for execution of
this instrument.)
-----------------------------------------------------
(Bank)
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EXHIBIT F
SCHEDULE 1
- All video Conference Room furniture and fixtures.
- All Board Room furniture and fixtures.
EXHIBIT F
FORM OF BILL OF SALE
FOR VALUABLE CONSIDERATION, the receipt and sufficiency of which are hereby
expressly acknowledged, MONTAGUE LLC, a California limited liability company
("Landlord"), hereby assigns, transfers and conveys to ULTRATECH STEPPER, INC.
("Tenant"), WITHOUT WARRANTY, EXPRESS OR IMPLIED, all of Seller's right, title
and interest in and to that certain personal property described in the attached
SCHEDULE 1.
IN WITNESS WHEREOF, Landlord has executed this Bill of Sale as of
_______________, ______.
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ARTICLE 1 REFERENCE............................................................1
1.1 References.................................................................1
ARTICLE 2 Leased Premises, Term And Possession................................2
2.1 Demise Of Leased Premises.................................................2
2.2 Right To Use Outside Areas................................................2
2.3 Lease Commencement Date And Lease Term....................................3
2.4 Delivery Of Possession....................................................3
2.5 Performance Of Improvement Work; Acceptance Of Possession.................3
2.6 Surrender Of Possession...................................................3
ARTICLE 3 Rent, Late Charges And Security Deposits............................4
3.1 Base Monthly Rent.........................................................4
3.2 Additional Rent...........................................................4
3.3 Year-End Adjustments......................................................4
3.4 Late Charge, And Interest On Rent In Default..............................4
3.5 Payment Of Rent...........................................................5
3.6 Prepaid Rent..............................................................5
3.7 Security Deposit..........................................................5
ARTICLE 4 Use Of Leased Premises And Outside Area.............................6
4.1 Permitted Use.............................................................6
4.2 General Limitations On Use................................................6
4.3 Noise And Emissions.......................................................6
4.4 Trash Disposal............................................................6
4.5 Parking...................................................................6
4.6 Signs.....................................................................6
4.7 Compliance With Laws And Private Restrictions.............................7
4.8 Compliance With Insurance Requirements....................................7
4.9 Landlord's Right To Enter.................................................7
4.10 Use Of Outside Areas......................................................7
4.11 Environmental Protection..................................................7
4.12 Rules And Regulations.....................................................9
4.13 Reservations..............................................................9
4.14 Roof......................................................................9
ARTICLE 5 Repairs, Maintenance, Services And Utilities........................9
5.1 Repair And Maintenance.....................................................9
(a) Tenant's Obligations.......................................................9
(b) Landlord's Obligation......................................................9
5.2 Utilities.................................................................10
5.3 Security..................................................................10
5.4 Energy And Resource Consumption...........................................10
5.5 Limitation Of Landlord's Liability........................................10
ARTICLE 6 Alterations And Improvements.......................................10
6.1 By Tenant.................................................................10
6.2 Ownership Of Improvements.................................................11
6.3 Alterations Required By Law...............................................11
6.4 Liens.....................................................................11
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ARTICLE 7 Assignment And Subletting By Tenant................................11
7.1 By Tenant................................................................11
7.2 Merger, Reorganization, or Sale of Assets................................12
7.3 Landlord's Election......................................................12
7.4 Conditions To Landlord's Consent.........................................12
7.5 Assignment Consideration And Excess Rentals Defined......................13
7.6 Payments.................................................................13
7.7 Good Faith...............................................................13
7.8 Effect Of Landlord's Consent.............................................13
ARTICLE 8 Limitation On Landlord's Liability And Indemnity...................14
8.1 Limitation On Landlord's Liability And Release...........................14
8.2 Tenant's Indemnification Of Landlord.....................................14
ARTICLE 9 Insurance...........................................................14
9.1 Tenant's Insurance.......................................................14
9.2 Landlord's Insurance.....................................................15
9.3 Mutual Waiver Of Subrogation.............................................15
ARTICLE 10 Damage To Leased Premises.........................................16
10.1 Landlord's Duty To Restore..............................................16
10.2 Insurance Proceeds......................................................16
10.3 Landlord's Right To Terminate...........................................16
10.4 Tenant's Right To Terminate.............................................16
10.5 Tenant's Waiver.........................................................16
10.6 Abatement Of Rent.......................................................16
ARTICLE 11 Condemnation.......................................................17
11.1 Tenant's Right To Terminate.............................................17
11.2 Landlord's Right To Terminate...........................................17
11.3 Restoration.............................................................17
11.4 Temporary Taking........................................................17
11.5 Division Of Condemnation Award..........................................17
11.6 Abatement Of Rent.......................................................17
11.7 Taking Defined..........................................................17
ARTICLE 12 Default And Remedies..............................................17
12.1 Events Of Tenant's Default..............................................17
12.2 Landlord's Remedies.....................................................18
12.3 Landlord's Default And Tenant's Remedies................................19
12.4 Limitation Of Tenant's Recourse.........................................19
12.5 Tenant's Waiver.........................................................19
ARTICLE 13 General Provisions................................................19
13.1 Taxes On Tenant's Property..............................................19
13.2 Holding Over............................................................20
13.3 Subordination To Mortgages..............................................20
13.4 Tenant's Attornment Upon Foreclosure....................................20
13.5 Mortgagee Protection....................................................20
13.6 Estoppel Certificate....................................................20
13.7 Tenant's Financial Information..........................................21
13.8 Transfer By Landlord....................................................21
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13.9 Force Majeure...........................................................21
13.10 Notices.................................................................21
13.11 Attorneys' Fees.........................................................21
13.12 Definitions.............................................................22
(a) Real Property Taxes......................................................22
(b) Landlord's Insurance Costs...............................................22
(c) Property Maintenance Costs...............................................22
(d) Property Operating Expenses..............................................23
(e) Law......................................................................23
(f) Lender...................................................................23
(g) Private Restrictions.....................................................23
(h) Rent.....................................................................23
13.13 General Waivers.........................................................23
13.14 Miscellaneous...........................................................23
ARTICLE 14 Corporate Authority Brokers And Entire Agreement..................24
14.1 Corporate Authority.....................................................24
14.2 Brokerage Commissions...................................................24
14.3 Entire Agreement........................................................24
14.4 Landlord's Representations..............................................24
ARTICLE 15 Options To Extend.................................................24
ARTICLE 16 Telephone Service.................................................26
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EXHIBIT 11.4 LEASE AGREEMENT
LEASE
In consideration of the covenants herein contained, JUDITH ANN SPINELLI,
Middlesex County, Massachusetts, a proprietorship, hereinafter called LESSOR,
does hereby lease to ULTRATECH STEPPER, INC., a Delaware Corporation having an
office at 3050 Zanker Road, San Jose, California 95134, hereinafter called
LESSEE, the following described premises, hereinafter called the leased
premises: a building known as 16 Jonspin Road, Wilmington, Massachusetts
containing approximately 65,240 rentable square feet, and as shown on the
attached plan prepared by Dana F. Perkins & Associates, Inc., together with the
exclusive right to use the parking lot on the property as shown on the attached
plan entitled "site layout" and parking plan entitled Exhibit D. The premises is
located on Lot 36 which is located in and forms a part of the North Wilmington
Industrial Park as shown on the attached plan entitled Exhibit B.
TO HAVE AND HOLD the leased premises for a term of five (5) years commencing on
January 1, 2000 ("commencement date") and ending on December 31, 2004
("expiration date") unless sooner terminated as herein provided. LESSOR and
LESSEE now covenant and agree that the following terms and conditions shall
govern this lease during the term hereof and for such further time, as LESSEE
shall hold the lease premises.
1. RENT. LESSEE shall pay to LESSOR base rent at the rate of
$472,990.00 U.S. dollars per year drawn on a U.S. bank, payable in
advance in monthly installments of $39,415.83 on the first day in each calendar
month in advance, for lease year ONE (1)
$472,990.00 U.S. dollars per year drawn on a U.S. bank, payable in
advance in monthly installments $39,415.83 on the first day in each calendar
month in advance, for lease year TWO (2)
$554,540.00 U.S. dollars per year drawn on a U.S. bank, payable in
advance in monthly installments of $46,211.66 on the first day in each calendar
month in advance, for lease year THREE (3)
$554,540.00 U.S. dollars per year drawn on a U.S. bank, payable in
advance in monthly installments $46,211.66 on the first day in each calendar
month in advance, for lease year FOUR (4)
$570,850.00 U.S. dollars per year drawn on a U.S. bank, payable in
advance in monthly installments $47,570.83 on the first day in each calendar
month in advance, for lease year FIVE (5)
the first monthly payment to be made upon LESSEE's execution of this lease,
including payment in advance of appropriate fractions of a monthly payment to
be of a monthly payment for any portion of a month at the commencement or end
of said lease term. All payments shall be made to the LESSOR or agent at 745
Concord Ave., Cambridge, MA 02138, or at such other place as LESSOR shall
from time to time in writing designate.
2. SECURITY DEPOSIT. INTENTIONALLY OMITTED
3. USE OF PREMISES. LESSEE's use of the leased premises shall include
any configuration of a.) all lawful general office purposes, b.) all lawful
light industrial purposes, c.) all lawful light manufacturing and light assembly
purposes, d.) electronics, semiconductor capital equipment manufacturing and e.)
all lawful purposes related to the business operations of LESSEE.
4. ADDITIONAL RENT. LESSEE shall pay to LESSOR as additional rent all
real estate taxes levied against the land and building of which the leased
premises are a part and those common area maintenance (CAM) charges as set forth
in Exhibit E which is incorporated herein by reference. LESSEE shall make
payment within thirty (30) days of written notice from LESSOR that such taxes
are payable, and any additional rent shall be prorated should the lease
terminate before the end of any tax year.
5. UTILITIES. LESSEE shall pay all charges for any electricity and gas
used on the leased premises, provided that gas and electric meters have been
installed by LESSOR. LESSEE shall pay LESSOR for all water and sewer use as
determined by LESSOR either by a separate water meter serving the leased
premises, or as a proportionate share of water and sewer charges for the entire
building of which the leased premises are a part if not separately metered, and
LESSEE shall pay LESSOR a proportionate share of any other fees and charges
relating in any way to water or sewer use at the building. No plumbing,
construction or electrical work of any type shall be done without LESSOR's prior
written approval and appropriate municipal permit.
6. COMPLIANCE WITH LAWS. LESSOR represents that the leased premises are
currently in compliance with all applicable statutes, regulations, ordinances
and bylaws. LESSEE acknowledges that no trade, occupation, activity
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or work shall be conducted in the leased premises or use made thereof which may
be unlawful, improper, offensive, or contrary to any applicable statute,
regulation, ordinance or bylaw. LESSEE shall keep all LESSEE's employees working
in the leased premises covered with Worker's Compensation Insurance and shall
obtain any licenses and permits necessary for LESSEE's use. LESSEE shall be
responsible for causing the leased premises and any alterations by LESSEE which
are allowed hereunder to be in full compliance with any applicable statute,
regulation, ordinance or bylaw.
7. FIRE, CASUALTY, EMINENT DOMAIN. Should a substantial portion of the
leased premises, or of the property of which they are a part be substantially
damaged by fire or other casualty, or be taken by eminent domain, LESSOR may
elect to terminate this lease. When such fire, casualty, or taking renders the
leased premises substantially unsuitable for LESSEE's intended use, a just and
proportionate abatement of rent shall be made, and LESSEE may elect to terminate
this lease unless: (a) within thirty (30) days of such fire, casualty or taking
LESSOR provides written notice to Lessee of its intention to restore the leased
premises or (b) LESSOR fails to restore the leased premises to a condition
substantially suitable for their intended use within ninety (90) days of said
fire, casualty or taking. LESSOR reserves all rights for damages or injury to
the leased premises for any taking by eminent domain, except for damage to
Lessee's property or equipment. A just and proportionate abatement of rent shall
be made for any period of time for which Lessee is unable to utilize all or any
portion of the leased premises. For the purpose of this section 7, a
"substantial portion" of the leased premises shall mean more the 50% of the
building. If less, Lessor shall have an obligation to promptly repair and
restore the leased premises.
8. MAINTENANCE OF PREMISES. LESSOR will be responsible for the
structural (including the roof and exterior facade of the building) maintenance
of the leased premises. LESSOR at LESSEE'S expense shall be responsible for the
normal day time maintenance of all sprinklers, plumbing, septic and electrical
wiring, but specifically excluding damaged caused by the careless, malicious,
willful, or negligent acts of LESSEE or others, chemical, water or corrosion
damage from any source, and maintenance of any non "building standard" leasehold
improvements. LESSEE at LESSEE's expense shall be responsible for the
maintenance of all heating and cooling equipment. LESSEE agrees to maintain at
its expense all other aspects of the leased premises in the same condition as
they are at the commencement of the term or as they may be put in during the
term of this lease, normal wear and tear and damage by fire or other casualty
only excepted, and whenever necessary, to replace light bulbs, plate glass and
other glass therein, acknowledging the leased premises are now in good order and
the light bulbs and glass whole. LESSEE will properly control or vent all
solvents, degreasers, smoke, odors, etc. and shall not cause the area
surrounding the leased premises to be in anything other than a neat and clean
condition, depositing all waste in appropriate receptacles. LESSEE shall be
solely responsible for any damage to plumbing equipment, sanitary lines, or any
other portion of the building which results from the discharge or use of any
acid or corrosive substance by LESSEE. LESSEE shall not permit the leased
premises to be overloaded, damaged, stripped or defaced, not suffer any waste,
and will not keep animals within the leased premises. If the leased premises
include any wooden mezzanine type space, the floor capacity of such space is
suitable only for office use, light storage or assembly work. If the leased
premises are carpeted or partially carpeted, LESSEE will protect carpet with
plastic or masonite chair pads under any rolling chairs. Unless heat is provided
at LESSOR's expense, LESSEE shall maintain sufficient heat to prevent freezing
of pipes or damage. Any increase in air conditioning equipment or electrical
capacity, or any installation and/or maintenance of equipment which is
necessitated by some specific aspect of LESSEE's use of the leased premises
shall be at LESSEE's expense. All maintenance provided by LESSOR shall be during
LESSOR's normal business hours except in a case of emergency.
9. ALTERATIONS. LESSEE shall not make structural alterations or
additions of any kind to leased premises, but may make nonstructural alterations
provided LESSOR consents thereto in writing, which consent shall not be
unreasonably withheld, conditioned or delayed. Notwithstanding the foregoing,
Lessee may make nonstructural alterations, which cost less than $10,000.00
without Lessor's consent. All such allowed alterations shall be at LESSEE's
expense and shall conform to LESSOR's construction specifications. LESSOR shall
respond to LESSEE's request for consent within three (3) days of the request. If
LESSOR provides any services or maintenance for LESSEE in connection with such
alterations or otherwise under this lease, any just invoice will be promptly
paid. LESSEE shall not permit any mechanics' liens, or similar liens, to remit
upon the leased premises in connection with work of any character performed or
claimed to have been performed at the direction of LESSEE and shall cause any
such lien to be released or removed forthwith without cost to LESSOR. Any
alterations or additions shall become part of the leased premises and the
property of LESSOR. LESSEE shall have the right to remove same provided that any
resultant damage is restored or repaired prior to the termination hereof.
LESSEE's trade fixtures and equipment are the property of LESSEE as set forth in
Exhibit A. Any alterations completed by LESSOR shall be LESSOR's "building
standard" unless noted otherwise. LESSOR shall have the right at any time to
change the arrangement of parking areas, stairs, walkways or other common areas
of the
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building of which the leased premises are a part provided such changes do not
affect access or use of the leased premises.
10. ASSIGNMENT OR SUBLEASING. LESSEE shall not assign this lease or
sublet or allow any other firm or individual to occupy the whole or any part of
the leased premises without LESSOR's approval which shall not be unreasonably
withheld, conditioned or delayed. LESSOR will respond to LESSEE's request with
ten (10) days. LESSOR shall not be able to with hold approval for assignment or
sublet based on the fact that LESSOR has prime space within the park available
for lease. Notwithstanding such assignment or subleasing, LESSEE shall remain
liable to LESSOR for the payment of all rent and for the full performance of the
covenants and conditions of this lease. LESSEE shall reimburse LESSOR promptly
for reasonable legal and administrative expenses incurred by LESSOR in
connection with any consent requested hereunder by LESSEE. Such approval shall
not be required if such assignment or sublease is to a parent, subsidiary or
other organization affiliated with LESSEE. In the event such assignment or
sublease shall result in excess profits after reasonable administrative expenses
have been deducted, such profits shall be split equally between LESSEE and
LESSOR. Said administrative costs shall not include vacancy, promotional
materials, A & E fees, permits or commissions that are related to said sublease.
11. SUBORDINATION. This lease shall be subject and subordinate to any
and all mortgages and other instruments in the nature of a mortgage, now or at
any time hereafter, and LESSEE shall, when requested, promptly execute and
deliver such written instruments as shall be necessary to show the subordination
of this lease to said mortgages or other such instruments in the nature of a
mortgage. Notwithstanding the foregoing Lessor shall obtain a non-disturbance
agreement from all current mortgagees and as a condition to the subordination of
the lease to future mortgagees. The substance of the agreements shall be that
the relevant lender agrees to recognize Lessee's right under the lease. Lessor
and Lessee shall execute a Memorandum of Lease in recordable form, which Lessee
shall record with the county clerk's office.
12. LESSOR'S ACCESS. LESSOR or agents of LESSOR may at any reasonable
time enter to view the leased premises, to make repairs and alterations as
LESSOR should elect to do for the leased premises, the common areas or any other
portions of the building of which the leased premises are a part, to make
repairs which LESSEE is required but has failed to do, and to show the leased
premises to others. LESSOR agrees to give 24-hour notice except for making
emergency repairs and be subject to LESSEE's security requirements. LESSOR's
access for marketing and leasing purposed shall be limited to the last six (6)
months of the lease term or as soon as LESSEE has given notice of its intention
to vacate.
13. SNOW REMOVAL. The plowing of snow from all roadways, access ways and
unobstructed parking and loading areas shall be the sole responsibility of
LESSOR at the sole expense of LESSEE. The control of snow and ice on all steps
serving the leased premises and all other areas not readily accessible to plows
shall be the sole responsibility of LESSEE. Notwithstanding the foregoing,
however, LESSEE shall hold LESSOR harmless from any and all claims by LESSEE's
agents, representatives, employees, callers or invitees for damage or personal
injury resulting from LESSEE's failure to maintain same in a safe condition.
14. ACCESS AND PARKING. LESSEE shall have the exclusive right without
additional charge to use parking facilities on the leased premises in common
with others entitled to the use thereof. Said parking areas plus any stairs,
walkways, or other common areas shall in all cases by considered a part of the
leased premises, or LESSEE's employees, agents, callers, invitees or security
services for the leased premises. LESSEE will not obstruct in any manner any
portion of the building or the walkways or approaches to said building, and will
conform to all rules and regulations now or hereafter made by LESSOR for
parking, and for the care, use, or alteration of the building, its facilities
and approaches. LESSEE further warrants the LESSEE will not permit any employee
or visitor to violate this or any other covenant or obligation of LESSEE. No
unattended parking will be permitted between 7:00 PM and 7:00 AM without
LESSOR's prior written approval, and from December 1 through March 31 annually,
such parking shall be permitted only in those areas specifically designated for
assigned overnight parking. Unregistered or disabled vehicles, or storage
trailers of any type, may not be parked at any time. LESSOR may tow, at LESSEE's
sole risk and expense, any misparked vehicle belonging to LESSEE or LESSEE's
agents, employees, invitees or callers, at any time. LESSOR shall not be
responsible for providing any security services for the leased premises.
15. LESSEE'S LIABILITY AND INSURANCE. Except for death, personal
injuries, or property damage directly resulting from the negligence of the
LESSOR. LESSEE shall be solely responsible as between LESSOR and LESSEE for
deaths or personal injuries to all persons whomsoever occurring in or on the
leased premises (including any
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extension thereof) from whatever cause arising and damage to property to
whomsoever belonging arising out of the use, control, condition or occupation
of the leased premises by LESSEE. LESSEE agrees to indemnify and save
harmless LESSOR from any and all liability, including but not limited to
expenses, damage, causes of action, suits, claims or judgments caused by or
in any way growing out of any matters aforesaid, except for death, personal
injuries or property damage directly resulting for the sole negligence of
LESSOR. LESSEE will secure and carry at its own expense a comprehensive
general liability policy insuring LESSEE and LESSOR against any claims based
on bodily injury (including death) or property damage arising out of the
condition of the leased premises or their use by LESSEE, such policy to
insure LESSEE and LESSOR against any claim up to One Million ($1,000,000)
dollars in the case of any one accident involving bodily injury (including
death), and up to One Million ($1,000,000) Dollars against any claim for
damage to property. LESSOR shall be included in each such policy as
additional insureds. LESSEE will file with LESSOR prior to occupancy
certificates and any applicable riders or endorsements showing that such
insurance is in force, and thereafter will file renewal certificates prior to
the expiration of any such policies. All such insurance certificates shall
provide that such policies shall not be canceled without at least ten (10)
days prior written notice to each insured. In the event LESSEE shall fail to
provide or maintain such insurance at any time during the term of this lease
then LESSOR may elect to contract for such insurance at LESSEE's expense.
LESSEE shall maintain contractual and comprehensive general liability
insurance, including public liability and property damage, with a minimum
confined single limit of liability of One Million ($1,000,000) Dollars for
personal injuries or deaths of persons occurring in or abut the building and
leased premises.
Each party waives claims arising in any manner in its ("Injured
Party's") favor and against the other party for loss or damage to Injured
Party's property located within or constituting a part or all of the building.
This waiver applies to the extent the loss or damage is cover by:
(i) the Injured Party's insurance; or
(ii) the insurance the Injured Party is required to carry under
this lease, which ever is greater.
The waiver also applies to each party's directors, officers, employees,
shareholders, and agents. The waiver does not apply to claims caused by a
party's willful misconduct.
16. FIRE INSURANCE. LESSEE shall not permit any use of the leased
premises which will adversely affect or make voidable any insurance on the
property of which the leased premises are a part, or on the contents of the said
property, or which shall be contrary to any law or regulation from time to time
established by the Insurance Services Office (or successor), local Fire
Department, LESSOR's insurer, or any similar body. LESSEE shall on demand
reimburse LESSOR, and all other tenants, all extra insurance premiums caused by
LESSEE's use of the leased premises. LESSEE shall not vacate the leased premises
or permit it to be unoccupied other than during LESSEE's customary non-business
days of hours.
17. BROKERAGE. Each party hereby warrants and represents to the other
that it has not utilized, the services of any broker or finder with respect to
this lease. Each party shall hold harmless and indemnify the other against any
brokerage claims for commissions or similar fees from any person.
18. SIGNS. LESSOR authorizes, and LESSEE at LESSEE's expense agrees to
erect, signage for the leased premises in accordance with LESSOR's building
standards for style, size, location. etc. LESSEE shall obtain the prior written
consent of LESSOR before erecting any sign on the leased premises, which consent
shall include approval as to size, wording, design and location. LESSOR may
remove and dispose of any sign not approved erected or displayed in conformance
with this lease.
19. DEFAULT AND ACCELERATION OF RENT. In the event that: (a) LESSEE
shall default in the observance or performance of any of LESSEE's covenants,
agreements, or obligations hereunder, other than substantial monetary payments
as provided below, and such default shall not be corrected within twenty (20)
days after written notice thereof, or (b) LESSEE vacates the leased premises,
then LESSOR shall have the right thereafter, while such default continues and
without demand or further notice, to re-enter and take possession of the leased
premises, to declare the term of this lease ended, and to remove LESSEE's
effects, without being guilty of any manner of trespass, provided such LESSOR
entry complies with all applicable statutes and without prejudice to any
remedies which might be otherwise used for arrears of rent or other default
shall continue for twenty (20) days after written notice thereof, and, because
both parties agree that nonpayment of said sums when due is substantial breach
of the lease, and, because the payment of rent in monthly installments is for
the sole benefit and convenience of LESSEE, then in addition to the foregoing
remedies the entire balance of rent which is due hereunder shall become
immediately due and payable as liquidated damages. LESSOR, without being under
any obligation to do so and without thereby waving any default may remedy same
for the
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account and at the expense of LESSEE. If LESSOR pays or incurs any obligations
payment of money in connection therewith, such sums paid or obligations incurred
plus interest and costs, shall be paid to LESSOR by LESSEE as additional rent.
Any sums received by LESSOR from or on behalf of LESSEE at any time shall be
applied first to any unamortized improvements completed for LESSEE's occupancy,
then to offset any outstanding invoice or other payment due to LESSOR, with the
balance applied to outstanding rent. LESSEE agrees to pay reasonable attorney's
fees and/or administrative costs incurred by LESSOR in enforcing any or all
obligations of LESSEE under this lease at any time provided that LESSOR is the
prevailing party. LESSEE shall pay LESSOR interest at the rate of eighteen (18%)
percent per annum on any payment from LESSEE to LESSOR which is past due.
20. NOTICE. Any notice from LESSOR to LESSEE relating to the leased
premises or to the occupancy thereof shall be deemed duly served when served by
constable, or sent to the leased premises by certified mail, return receipt
requested, postage prepaid, addressed to LESSEE. Any notice from LESSEE to
LESSOR relating to the leased premises or to the occupancy thereof shall be
deemed duly served when served by constable, or delivered to LESSOR by certified
mail, return receipt requested, postage prepaid, addressed to LESSOR at 745
Concord Avenue, Cambridge, MA 02138 or at LESSOR's last designated address. No
oral notice or representation shall have any force or effect. Time is of the
essence in service of any notice.
21. OCCUPANCY. In the event that LESSEE takes possession of said leased
premises prior to the start of said term, LESSEE will perform and observe all of
LESSEE's covenants from the date upon which LESSEE takes possession except for
the obligation for the payment of extra rent for any period less than one month.
LESSEE shall not remove any goods or property from the leased premises other
than in the ordinary and usual course of business, without having first paid and
satisfied LESSOR for all rent which may become due during the entire term of
this lease. In the event that LESSEE continues to occupy or control all or any
part of the leased premises after the agreed termination of this lease without
the written permission of LESSOR, then LESSEE shall be liable to LESSOR for any
and all loss, damages or expenses incurred by LESSOR, and all other terms of
this lease shall continue to apply except that the rent shall be due in full
monthly installments at a rate of two hundred (200) percent of that which would
otherwise be due under this lease, it being understood between the parties that
such extended occupancy is as a tenant as sufferance and is solely for the
benefit and convenience of LESSEE and as such has greater rental value. LESSEE's
control of occupancy of all or any part of the leased premises beyond noon on
the last day of the monthly rental period shall constitute LESSEE's occupancy
for an entire additional month, and increased rent as provided in this section
shall be due and payable immediately in advance. LESSOR's acceptance of any
payments from LESSEE during such extended occupancy shall not alter LESSEE's
status as a tenant at sufferance.
22. FIRE PREVENTION. LESSEE agrees to use every reasonable precaution
against fire and agrees to provide and maintain approved, labeled fire
extinguishers, emergency lighting equipment, and exit sign and complete any
other modifications within the leased premises as required or recommended by the
Insurance Services Office (or successor organization), OSHA, the local Fire
Department, or any similar body.
23. OUTSIDE AREA. No goods, equipment, or things of any type or
description shall be held or stored outside the leased premises at any time
without prior written consent from LESSOR. Any goods, equipment or things left
outside the leased premises without LESSOR's prior written consent shall be
deemed abandoned and may be removed at LESSEE's expense without notice by
LESSOR. A single ten-yard capacity dumpster is hereby authorized for the
disposal of trash, provided that the location of said receptacle is approved by
LESSOR.
24. ENVIRONMENT. LESSEE will so conduct and operate its business within
the leased premises as not to interfere in any way with the use and enjoyment of
their portions of the same or neighboring buildings by others by reason of
odors, smoke, smells, noise, pets, accumulation of garbage or trash, vermin or
other pests, or otherwise, and will at its expense employ a professional pest
control service if necessary. LESSEE agrees to maintain efficient and effective
devices for preventing damage to heating equipment from solvents, degreasers,
cutting oils, propellants, etc. which may be present at the leased premises.
Except for small quantities of normal cleaning or other solvent typically
associated with office uses no hazardous materials or wastes shall be stored,
disposed of, or allowed to remain at the leased premises at any time, and LESSEE
shall be solely responsible for any and all corrosion or other damage associated
with the use, storage and/or disposal of same by LESSEE.
Lessor shall have the right upon reasonable notice to Lessee to inspect
the demised premises with regard to any materials being used by Lessee in its
business operation and with respect to any wastes being generated as a result of
use of those materials for the purpose of ascertaining whether environmentally
hazardous conditions exist at the demised premises as result of use by Lessee of
certain materials in its business operation.
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If Lessor determines in her reasonable judgment that hazardous wastes
are being generated by Lessee at the subject premises, then, in that event,
Lessor shall notify Lessee forth with of that fact and Lessee shall be obligated
to engage the services of a recognized and certified environmental firm for the
purpose of performing a 21E and/or other environmental study in order to
determine the extent of contamination which has occurred at the demised
premises. It shall be Lessee's responsibility to pay for the services of the
environmental firm with regard to the aforementioned study and Lessee and Lessor
shall mutually agree upon the identity of the environmental firm, which is going
to conduct the 21E and/or other environmental study. Notwithstanding the
foregoing, Lessor recognizes that Lessee may use and store on site certain
controlled and hazardous substances (a list of these substances incorporated
herein by reference entitled Exhibit F) in the ordinary course of business and
such continued use will at all times be permitted subject to all local, state
and federal laws.
25. RESPONSIBILITY. Neither LESSOR or OWNER shall be held liable to
anyone for loss or damage caused in any way by the use, leakage, seepage or
escape of water from any source, or for the cessation of any service rendered
customarily to said premises or buildings, or agreed to by the terms of this
lease, due to any accident, the making of repairs, alterations and/or
improvements, labor difficulties, weather conditions, mechanical breakdowns,
trouble or scarcity in obtaining fuel, electricity, service or supplies from the
sources from which they are usually obtained for said building or any cause
beyond LESSOR's immediate control.
26. SURRENDER. LESSEE shall at the termination of this lease remove all
of the LESSEE's goods and effects from the leased premises. LESSEE shall deliver
to LESSOR the leased premises and all keys and locks thereto, all fixtures and
equipment connected therewith, except for Lessee's trade fixtures and equipment
and all alterations, additions and improvements made to or upon the leased
premises, whether completed by LESSEE, LESSOR or others, including but not
limited to any offices, partitions, window blinds, floor coverings (including
computer floors), plumbing and plumbing fixtures, air conditioning equipment and
ductwork of any type, exhaust fans or heaters, water coolers, burglar alarms,
telephone wiring, telephone equipment, air or gas distribution piping,
compressors, overhead cranes, hoists, trolleys or conveyors, counters, shelving
or signs attached to walls or floors, all electrical work, including but not
limited to lighting fixtures of any type, wiring, conduit, EMT, transformers,
distribution panels, bus ducts, raceways, outlets and disconnects, and
furnishings or equipment which have bolted, welded, nailed, screwed, glued or
otherwise attached to any wall, floor or ceiling, or which have been directly
wired to any portion of the electrical system or which have been plumbed to the
water supply, drainage or venting systems serving the leased premises. LESSEE
shall deliver the leased premises sanitized from chemicals or other contaminants
introduced by Lessee, and broom clean and in the same condition as they were at
the commencement of this lease or any prior lease between the parties of the
leased premises, or as they were modified during said term with LESSOR's written
consent reasonable wear and tear and damage by fire or other casualty or for
which Lessee has no repair obligation hereunder excepted. In the event of
LESSEE's failure to remove any of LESSEE's property from the leased premises
upon termination of the lease, LESSOR is hereby authorized, without liability to
LESSEE for loss or damage thereto, and at the sole risk of LESSEE, to remove and
store any such property at LESSEE's expense, or to retain same under LESSOR's
control, or to sell at public or private sale (without notice), any or all of
the property not so removed and to apply the net proceeds of such sale to the
payment and sum due hereunder, or to destroy such abandoned property. In no case
shall the leased premises be deemed surrendered to LESSOR until the termination
date provided herein or such other date as may be specified in a written
agreement between the parties, notwithstanding the delivery of any keys to
LESSOR.
27. GENERAL. (a) The invalidity or unenforceability of any provision of
this lease shall not affect or render invalid or unenforceable any other
provision hereof. (b) The obligations of this lease shall run with the land, and
this lease shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that LESSOR be liable only
for obligations occurring which LESSOR, or master LESSEE of the premises. (c)
Any action or proceeding arising out of the subject matter of this lease shall
be brought by LESSEE within one year after the cause of action has occurred and
only in a court of the Commonwealth of Massachusetts. (d) If LESSOR is acting
under or as agent for any trust or corporation, but not upon any trustee,
officer, director, shareholder, or any beneficiary of the trust or corporation
individually. (e) If LESSOR is not the OWNER of the leased premises, LESSOR
represents that said OWNER has agreed to be bound by the terms of this lease
unless LESSEE is in default hereof. (f) This lease is made and delivered in the
Commonwealth of Massachusetts, and shall be interpreted, construed, and enforced
in accordance with the laws thereof. (g) This lease was the result of
negotiations between parties of equal bargaining strength, and when executed by
both parties shall constitute the entire agreement between said parties. No
other oral or written representation shall have any effect hereon, and this
agreement may not be altered, extended or amended except by written agreement
attached hereto or as otherwise provided herein. (h) Notwithstanding any other
statements herein, LESSOR makes no warranty, express or implied, concerning the
suitability of the leased premises for LESSEE's intended use. (i) LESSEE
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agrees that if LESSOR does not deliver possession of the leased premises as
herein provided for any reason, LESSOR shall not be liable for any damages to
LESSEE for such failure, but LESSOR agrees to use reasonable efforts to deliver
possession to LESSEE at the earliest possible date, and a proportionate
abatement of rent for such time as LESSEE may be deprived of possession of said
leased premises shall be LESSEE's sole remedy. (j) Neither the submission of
this lease form, nor the prospective acceptance of the security deposit and/or
rent shall constitute a reservation of or option for the leased premises, or an
offer to lease, it being expressly understood and agreed that this lease shall
not bind either party in any manner whatsoever until it has been executed by
both parties. (k) LESSEE shall not be entitled to exercise any option contained
herein if LESSEE is in default of any terms or conditions hereof beyond the
applicable notice or grace periods. (l) The headings in this lease are for
convenience only and shall not be considered part of the terms hereof. (m) No
endorsement by LESSEE on any check shall bind LESSOR in any way.
28. SECURITY AGREEMENT. INTENTIONALLY DELETED
29. WAIVERS, ETC. No consent or waiver, express or implied, by LESSOR,
to or of any breach of any covenant, condition or duty of LESSEE shall be
construed as a consent or waiver to or of any other breach of the same or any
other covenant, condition or duty. If LESSEE is several persons, several
corporations or a partnership, LESSEE's obligations are joint or partnership and
also several. Unless repugnant to the context, "LESSOR" and "LESSEE" mean the
person or persons, natural or corporate, named above as LESSOR and as LESSEE
respectively, and their respective heirs, executors, administrators, successors
and assigns.
30. QUIET ENJOYMENT. LESSEE shall reasonably and quietly have, hold and
enjoy the premises for the term hereof without hindrance or molestation from
LESSOR, provided LESSEE is not in arrears of any rent or invoice payment and is
in full compliance with all terms, conditions and obligation provided herein.
31. ADDITIONAL PROVISIONS: (a) Lessee its employees and agents shall
have access to the leased premises twenty for (24) hours per day, seven (7) days
per week. (b) Lessee shall have the right at its sole expense, in its own name
or in the name of Lessor, to make and prosecute application(s) for abatement of
real estate taxes or appeals for correction of assessment, Lessor agrees to
cooperate fully with Lessee in this regard; provided, however, that Lessor shall
not be required to provide, and Lessee shall not utilize any information about
other properties owned by Lessor. (c) Lessee's access to the roof is limited to
maintenance of HVAC equipment serving the leased premises. Lessee further agrees
that no other work shall be carried on or any other equipment installed on the
roof without the prior written consent of Lessor. Lessee shall be fully
responsible for, and agrees to indemnify and hold Lessor harmless from, any
property damage and personal injury associated in any way with the activities of
Lessee and Lessee's agents, employees and contractors on the roof and/or the
location installation or maintenance of Lessee's equipment on the roof
including, but not limited to, damage to watertight integrity of the roof and
the roof membrane from whatever cause.
32. LESSEE shall have the option to extend the lease for two (2)
additional five (5) year terms upon the same terms and conditions of this lease
except that the rent shall be based upon a CPI increase in accordance with the
procedure attached hereto as Exhibit G. LESSEE must give LESSOR six (6) months
written notice of its intention to exercise these options to extend.
IN WITNESS WHEREOF, LESSOR AND LESSEE have hereunto set their hands and
common seals and intend to be legally bound hereby this 28TH day of December
1999.
<TABLE>
<S> <C>
LESSOR: JUDITH ANN SPINELLI LESSEE:
By: /s/JUDITH ANN SPINELLI By: /s/BRUCE R. WRIGHT
-------------------------------- Chief Financial Officer
</TABLE>
105
<PAGE>
[Ultratech Stepper, Inc logo] Ultratech Stepper
EXHIBIT A
ULTRATECH STEPPER TRADE FIXTURES
24 September 1999
<TABLE>
<S> <C> <C>
50 HZ. Generator M/n 50PF-303H S/n 90501
Air Handler Unit 1 Demo & Apps RTU
Air Handler Unit 2 Demo & Apps RTU
Air Handler Unit 3 MAU(Plab) Ceiling
Air Handler Unit 4 RAU(Plab) Ceiling
Alarm (Honeywell) Vector 300 AS/PS3-BFS-2
CDA-Compressor 1 m/n 705 s/n 5-78-s94
CDA-Compressor 2 m/n 242-5c3 s/n 30T-504075
CDA-Compressor 3 m/n 705 s/n 5-A-128-Z88
Clark Lift m/n SP 30 s/n SP30-0160
Chiller Sys.-Trane m/n RTAA1304 s/n U92F09623
Chilled Water Distribution 6 pump sets
DI Water System m/n HP-1200 W5A242419
DI Water System m/n ZWIp00150 s/n 96020
Energy Mgmt Sys (Computer, VFD and 5 panels)
Environmental Chambers Qty 12-20
Fan/Blower Units (Ceiling Mounted) Qty 12
Gas Detection System 10 detectors, 2 panels
Hepa Filters 2x4 (Ceiling) Qty 200
Housekeeping Vacuums Systems Qty 2
Humidifiers Demo & Apps Qty 2
Phone System (w/phones) Meridian
PictureTel m/n 4500ZX s/n 13065
Process Gas Cabinets 6 Units
Process Exhaust System Solvent RTU
Process Exhaust System Acid RTU
Security System m/n GN8DMM9330 s/n 99012103
Security Panels Qty 7
Security Cameras Qty 4 (w/enclosures)
Security Monitor m/n TC215 s/n 16034489
Truck Dock Lift Packaging Dock
UPS Comp Room m/n FE4.3KVA s/n FE43K03526
UPS Phone Room Best FER
Vacuum Syst. Siemens dual water cooled
VFD(MAU) ABB ALS500 s/n 261322
VFD(RAU) ALS501 s/n 185851
VFD (Demo & Apps) ABB ALS500
Voice Mail Meridian
Yale Fork Truck ESC030s45077 s/n N397972
</TABLE>
106
<PAGE>
John T.
Judith A. Spinelli
Industrial & Commercial Development
745 Concord Avenue
Cambridge, MASS. 02138
TEL: 868-5200
[BUILDING PLAN LAYOUT]
NORTH WILMINGTON INDUSTRIAL PARK
EXHIBIT B
EXHIBIT E
COMMON AREA MAINTENANCE CHARGES
Pursuant to Paragraph 4, the CAM charges are defined as the following items:
Landscaping
Snowplowing
Insurance
Septic system maintenance
*HVAC maintenance
*HVAC is being maintained by Lessee at Lessee's expense. Lessee will provide
Lessor with a copy of the service contract.
EXHIBIT G
Rent for the option period shall be increased to the rate computed by dividing
the total rent payable during the year five (5) by the Base index and
multiplying that amount by the Comparison Index. The Terms used herein shall be
defined as follows:
(a) "Price Index" shall mean the Consumer Price Index for all Urban
Consumers, Boston, Massachusetts, All Items-Series A (1967=100) as
published by the Bureau of Labor Statistics of the United States
Department of Labor, or if the publication of said Index shall be
discontinued, any similar statistical Index which may be used in lieu
thereof for the purpose of measuring the cost of living in the Boston
urban area.
(b) "Comparison Index" is defined as the last price index issued during the
initial term of the lease.
(c) "Base Index" shall mean the last Price Index issued prior to the term
commencement date.
107
<PAGE>
SITE PLAN
LAM RESEARCH CORPORATION
LOADING DOCK
16 JONSPIN ROAD
WILMINGTON, MA
[SITE PLAN]
[Seal of the Commonwealth of Massachusetts Professional Engineering Paul F.
Grasewicz Civil No. 35306 Registered]
/s/ Paul F. Grasewicz
---------------------
DATE: 1/9/96
108
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ULTRATECH STEPPER, INC.
The following is a list of Ultratech Stepper Inc.'s subsidiaries including their
states of incorporation as of December 31, 1999:
<TABLE>
<CAPTION>
SUBSIDIARIES STATE AND COUNTRY OF INCORPORATION
------------ -----------------------------------
<S> <C>
Integrated Lithography Systems, Inc. Korea
Integrated Semiconductor Solutions, Ltd. United Kingdom
Ultratech Stepper International, Inc. State of Delaware, USA
Ultratech Stepper UK Limited United Kingdom
Ultratech Stepper Foreign Sales Corp. Barbados
Ultratech Kabushiki Kaisha Japan
Ultratech Stepper East, Inc. (formerly UTS Acquisition State of Delaware, USA
Sub, Inc., Ultratech Capital, Inc. and Ultratech
Stepper Capital, Inc.)
Ultratech Stepper (Thailand) Co. LTD. Thailand
U.S. Advanced Lithography LLC State of Delaware, USA
</TABLE>
109
<PAGE>
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-93653 and 333-85161) pertaining to the 1993 Stock
Option/Stock Issuance Plan of Ultratech Stepper, Inc. of our report dated
January 25, 2000, with respect to the consolidated financial statements and
schedule of Ultratech Stepper, Inc. included in the Annual Report (Form 10-K)
for the year ended December 31, 1999.
/s/ ERNST AND YOUNG LLP
San Jose, California
March 23, 2000
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
The undersigned directors and officers of Ultratech Stepper, Inc. (the
"Company"), a Delaware corporation, hereby constitute and appoint Arthur W.
Zafiropoulo and Bruce R. Wright, and each of them with full power to act without
the other, the undersigned's true and lawful attorney-in-fact, with full power
of substitution and resubstitution, for the undersigned and in the undersigned's
name, place and stead in the undersigned's capacity as an officer and/or
director of the Company, to execute in the name and on behalf of the undersigned
an annual report of the Company on Form 10-K for the fiscal year ended December
31, 1999 (the "Report"), under the Securities and Exchange Act of 1934, as
amended, and to file such Report, with exhibits thereto and other documents in
connection therewith and any and all amendments thereto, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done and to take any other action of any type
whatsoever in connection with the foregoing which, in the opinion of such
attorney-in-fact, may be of benefit to, in the best interest of, or legally
required of, the undersigned, it being understood that the documents executed by
such attorney-in-fact on behalf of the undersigned pursuant to this Power of
Attorney shall be in such form and shall contain such terms and conditions as
such attorney-in-fact may approve in such attorney-in-fact's discretion.
IN WITNESS WHEREOF, I have hereunto set my hand this 24th day of March,
2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ARTHUR W. ZAFIROPOULO Chairman of the Board of Directors, Chief March 24, 2000
- ------------------------- Executive Officer (Principal Executive
Arthur W. Zafiropoulo Officer)
/s/ BRUCE R. WRIGHT Senior Vice President, Finance, Chief March 24, 2000
- ------------------------- Financial Officer and Secretary (Principal
Bruce R. Wright Financial and Accounting Officer)
/s/ KENNETH LEVY Director March 24, 2000
- -------------------------
Kenneth Levy
/s/ GREGORY HARRISON Director March 24, 2000
- -------------------------
Gregory Harrison
/s/ LARRY R. CARTER Director March 24, 2000
- -------------------------
Larry R. Carter
/s/ THOMAS D. GEORGE Director March 24, 2000
- -------------------------
Thomas D. George
/s/ JOEL GEMUNDER Director March 24, 2000
- -------------------------
Joel Gemunder
</TABLE>
111
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ULTRATECH
STEPPER INC., FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> OCT-01-1999 JAN-01-1999
<PERIOD-END> DEC-31-1999 DEC-31-1999
<CASH> 46,978 46,978
<SECURITIES> 96,566 96,566
<RECEIVABLES> 22,039 22,039
<ALLOWANCES> 2,046 2,046
<INVENTORY> 28,975 28,975
<CURRENT-ASSETS> 195,906 195,906
<PP&E> 51,154 51,154
<DEPRECIATION> 30,668 30,668
<TOTAL-ASSETS> 236,808 236,808
<CURRENT-LIABILITIES> 32,305 32,305
<BONDS> 0 0
0 0
0 0
<COMMON> 21 21
<OTHER-SE> 204,193 204,193
<TOTAL-LIABILITY-AND-EQUITY> 236,808 236,808
<SALES> 23,397 95,473
<TOTAL-REVENUES> 27,647 113,123
<CGS> 13,320 56,471
<TOTAL-COSTS> 16,331 68,703
<OTHER-EXPENSES> 7,382 27,678
<LOSS-PROVISION> 344 512
<INTEREST-EXPENSE> 74 374
<INCOME-PRETAX> (999) (4,168)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (999) (4,168)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (999) (4,168)
<EPS-BASIC> (0.05) (0.20)
<EPS-DILUTED> (0.05) (0.20)
</TABLE>
