<PAGE>
==============================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10 - Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
- -
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
- - TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from......................to........................
Commission file number: 0-26312
TELCOM SEMICONDUCTOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3186995
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1300 Terra Bella, Mt. View, California 94039
(address of principal executive offices)
(Zip Code)
Telephone Number (650) 968-9241
(Registrant's telephone number, including area code)
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 __
-
The number of shares outstanding of the registrant's Common Stock as of November
2, 1999 was 14,386,233.
===============================================================================
<PAGE>
TELCOM SEMICONDUCTOR, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
PAGE
NO.
Part I. Financial Information........................................... 3
Item 1. Financial Statements....................................... 3
Condensed Consolidated Statements of Operations............ 3
Condensed Consolidated Balance Sheets..................... 4
Condensed Consolidated Statements of Cash Flows............ 5
Notes To Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................... 20
Signatures.............................................................. 21
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales $14,851 $12,702 $41,526 $42,199
Cost of sales 8,099 8,790 23,225 26,592
--------------- --------------- --------------- ---------------
Gross profit 6,752 3,912 18,301 15,607
--------------- --------------- --------------- ---------------
Operating expenses:
Research and development 1,478 1,440 5,150 4,131
Selling, general and administrative 2,579 2,159 7,415 7,443
Restructuring and other - 6,781 269 6,781
--------------- --------------- --------------- ---------------
Total operating expenses 4,057 10,380 12,834 18,355
--------------- --------------- --------------- ---------------
Income (loss) from operations 2,695 (6,468) 5,467 (2,748)
Interest income (expense), net 154 106 226 318
Gain on sale of investment - - 5,819 -
--------------- --------------- --------------- ---------------
Income (loss) before income taxes 2,849 (6,362) 11,512 (2,430)
Provision (benefit) for income taxes 542 (250) 2,438 811
--------------- --------------- --------------- ---------------
Net income (loss) $ 2,307 $(6,112) $ 9,074 $(3,241)
=============== =============== =============== ===============
Per share data:
Net income (loss)
Basic $ 0.16 $ (0.38) $ 0.63 $ (0.20)
=============== =============== =============== ===============
Diluted $ 0.14 $ (0.38) $ 0.58 $ (0.20)
=============== =============== =============== ===============
Number of shares used to compute per
share data
Basic 14,279 16,111 14,300 16,375
=============== =============== =============== ===============
Diluted 16,216 16,111 15,514 16,375
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
---------------------------- -----------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 19,409 $14,059
Short term investments 1,651 -
Accounts receivable 8,397 6,944
Inventory 6,508 6,377
Deferred income taxes 674 1,099
Other current assets 1,235 799
---------------------------- -----------------------
Total current assets 37,874 29,278
Property and equipment, net 6,611 10,388
Other assets - 1,500
---------------------------- -----------------------
$ 44,485 $41,166
============================ =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ - $ 1,886
Accounts payable 2,511 3,247
Accrued liabilities 2,812 2,982
Deferred distributor income 1,869 1,484
Income taxes payable 2,991 2,571
---------------------------- -----------------------
Total current liabilities 10,183 12,170
Notes payable and other long term obligations, net
of current portion - 2,678
Deferred income taxes 400 400
---------------------------- -----------------------
Total liabilities 10,583 15,248
---------------------------- -----------------------
Stockholders' equity:
Common stock 17 17
Additional paid-in capital 36,667 35,355
Treasury stock (10,964) (7,925)
Accumulated other comprehensive income 637 -
Retained earnings 7,545 (1,529)
---------------------------- -----------------------
Total stockholders' equity 33,902 25,918
---------------------------- -----------------------
$ 44,485 $41,166
============================ =======================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
TELCOM SEMICONDUCTOR, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------------
Sept. 30,
-----------------------------------------------------
1999 1998
--------------------- ------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,074 $ (3,241)
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sale of investment (5,819) -
Restructuring & other - 6,781
Depreciation and amortization 2,086 4,277
Changes in assets and liabilities:
Accounts receivable (1,453) (104)
Inventory (131) 1,172
Other current assets (436) 116
Accounts payable (736) (240)
Accrued liabilities (41) 96
Deferred distributor income 385 311
Income taxes payable 420 (671)
--------------------- ------------------------
Net cash provided by operating activities 3,349 8,497
--------------------- ------------------------
Cash flows from investing activities:
Purchases of property and equipment (566) (5,453)
Net proceeds from sale of equipment 1,260 -
Sale of investment, net 6,730 -
Sales of marketable securities, net - 2,469
Net cash provided by (used for) investing activities 7,424 (2,984)
--------------------- ------------------------
Cash flows from financing activities:
Proceeds from sale of common stock 1,312 672
Repurchase of common stock (3,039) (5,816)
Payments on notes payable (3,696) (1,979)
Net cash used for financing activities (5,423) (7,123)
--------------------- ------------------------
Net increase in cash and cash equivalents 5,350 (1,610)
Cash and cash equivalents at the beginning of period 14,059 17,110
--------------------- ------------------------
Cash and cash equivalents at the end of period $19,409 $ 15,500
===================== ========================
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
TELCOM SEMICONDUCTOR, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)
(Unaudited)
Note 1. The Company and Basis of Presentation:
- -----------------------------------------------
TelCom Semiconductor, Inc. ("TelCom" or the "Company") designs, develops,
manufactures and markets a diversified portfolio of high performance analog
integrated circuits for use in a wide variety of electronic systems. The Company
operates and reports financial results on a 52-53 week fiscal year ending on the
Friday closest to the last day of December. For convenience, the Company has
presented its fiscal year as ending December 31, and its fiscal quarter as
ending September 30.
In the opinion of management, the unaudited condensed consolidated interim
financial statements have been prepared on the same basis as the December 31,
1998 financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary to fairly state the information set forth
herein.
This report on Form 10-Q for the period ended September 30, 1999 should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and Form 10-Q for the periods ended March 31, 1999 and
June 30, 1999.
Note 2. Net Income per Share:
- -----------------------------
Basic EPS is computed by dividing net income available to common
stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted EPS gives effect to all
dilutive potential common shares outstanding during the period including stock
options, using the treasury stock method. In computing Diluted EPS, the average
stock price for the period is used in determining the number of shares assumed
to be purchased from the exercise of stock options.
6
<PAGE>
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------------- -----------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Net income (loss) available to
common shareholders $ 2,307 $(6,112) $ 9,074 $(3,241)
=============== ============== =============== ==============
Weighted average common stock
Outstanding (basic) 14,279 16,111 14,300 16,375
Effect of dilutive warrants and options 1,937 - 1,214 -
--------------- -------------- --------------- --------------
Weighted average common stock
Outstanding (diluted) 16,216 16,111 15,514 16,375
=============== ============== =============== ==============
Income (loss) per share:
Basic $ 0.16 $ (0.38) $ 0.63 $ (0.20)
=============== ============== =============== ==============
Diluted $ 0.14 $ (0.38) $ 0.58 $ (0.20)
=============== ============== =============== ==============
</TABLE>
Due to the company's net loss from operations for the three month and nine
month periods ended September 30, 1998, a calculation of EPS assuming dilution
is not required. At September 30, 1998 there were 2,925,075 options and warrants
outstanding to purchase common stock at a weighted average exercise price of
$3.78 per share.
7
<PAGE>
Note 3. Balance Sheet Details:
- ------------------------------
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1999 1998
----------------- --------------------
Inventory:
<S> <C> <C> <C>
Raw material $ 161 $ 108
Work in process 3,974 4,331
Finished goods 2,373 1,938
----------------- --------------------
$6,508 $ 6,377
================= ====================
Property and equipment:
Equipment $13,413 $15,077
Leasehold improvements 123 81
----------------- --------------------
13,536 15,158
Accumulated depreciation (7,658 (8,313)
----------------- --------------------
5,878 6,845
Construction in progress 375 949
Carrying value of assets to be
disposed of 358 2,594
----------------- -------------------
$ 6,611 $10,388
================= ===================
Accrued liabilities:
Payroll and related $ 2,311 $ 2,074
Other 501 908
------------------- -------------------
$ 2,812 $ 2,982
=================== ===================
</TABLE>
Note 4. Restructuring and Other Charges:
- ----------------------------------------
During 1998, the Company recorded restructuring and other charges totaling
$7,258, consisting of $6,515 of items relating to the closure of the Company's
wafer fabrication facility, and $743 relating to other one-time charges.
In August 1998, the Company announced its plans to shut down its five-inch
wafer fabrication facility in Mountain View, California and use third party
foundries for all of its wafer fabrication. In conjunction with the shut-down
of its wafer fabrication foundry, the Company recorded fab closure charges
totaling $6,515 to write down and write off manufacturing equipment and
facilities improvements; accrue for future idle facility space; accrue severance
of manufacturing and other personnel and other costs.
A majority of the Company's new products that have been developed in the
past year utilize sub-micron wafer technology and are currently fabricated by
outside foundries. All other remaining wafers were fabricated in the Mountain
View facility. In January 1999, the wafer fabrication facility was shut-down and
the fabrication equipment is no longer in use and is being held for sale. By
the end of the first quarter of 1999, all fabrication of wafers was transferred
to third party foundries. The facility shutdown was a result of developments in
the semiconductor industry, primarily the availability of low cost wafer
fabrication capacity and the willingness of outside foundries to offer non-
standard processes. Competitive designs use submicron technology which allows
for more die per wafer than the five inch wafer fabrication currently in the old
8
<PAGE>
Mountain View facility. The restructuring charge relating to the write down of
the carrying value of the Company's fabrication equipment to its estimated fair
value was $4,458. The cost and accumulated depreciation of the fabrication
equipment prior to the write down was $13,027 and $6,330, respectively. The fair
value of the fabrication equipment was estimated to be $2,239 and was recorded
as "assets to be disposed of". The fair value of the fabrication equipment was
based on third party estimates of fair value. Separately, during 1998 the
Company recorded a one time charge relating to, amongst other items, the write-
off of certain equipment in Mountain View, California. The fair value of the
equipment was estimated to be $355 and is recorded as "assets to be disposed
of". During the first nine months of 1999, net proceeds for the sale of the
equipment was $978. Due to the weakness in the market for used semiconductor
equipment, the Company booked an additional charge in the period ending
September 30, 1999 of $997. This adjustment lowers the carrying value of the
remaining equipment to $358. Given the continued weakness of the market for
semiconductors, and the resulting oversupply in the used semiconductor equipment
market, the Company is unable to predict the time needed to dispose of the
assets classified as "assets to be disposed of".
The restructuring charge for 1998 also included charges for idle facilities
of $1,406, severance payments totaling $519 for employees terminated upon
closing of the facility and environmental and related clean up costs of $132.
Additional restructuring charges were included in the first quarter of 1999 for
employee severance costs of $243 and environmental and related clean up costs of
$26. During the period ending September 30, 1999, the Company renegotiated its
lease for the Mt. View facility by terminating its lease with Teledyne
Industries in exchange for a sublease of the facility from Clontech
Laboratories, Inc. The new sublease provides for a reduction in the square
footage currently occupied by the company by June 1, 2000 which will eliminate
the idle facility. As a result, the Company reversed idle facility costs of
$1,047, previously accrued in 1998, leaving a remaining balance of $161 that
will be amortized through May 2000. Additionally, the Company recorded
additional restructuring charges in the third quarter 1999 of $50 for additional
costs associated with the facility clean up and removal of the fabrication
equipment.
The following table sets forth the Company's activity for the restructuring
accrual and charges taken against the accrual and the resulting accrued
restructuring cost balance at September 30, 1999:
<TABLE>
<CAPTION>
Restructuring Cost
(in thousands)
------------------------------------------------------------------------------------------
Nine months ended
Balance Sept. 30, 1999 Balance
----------------------------------------
Dec. 31, Sept. 30,
1998 Expense Utilized 1999
----------------- --------------- ------------------ --------------------
<S> <C> <C> <C> <C>
Idle facility charge $1,406 $(1,047) $ (198) $ 161
Employee severance and other 651 319 882 88
----------------- --------------- ------------------ --------------------
$2,057 $ (728) $(1,080) $ 249
================= =============== ================== ====================
</TABLE>
Note 5. Gain on Sale of Investment:
- -----------------------------------
At the end of the quarter ended March 31, 1999, the Company recognized a
gain of $5,006 on the sale of its investment in IC WORKS. IC WORKS was
purchased by Cypress Semiconductor, Inc., a publicly held company and, as part
of the purchase agreement between IC WORKS and Cypress Semiconductor, the
Company's preferred shares, with a book value of $1,500, were exchanged for
common shares of Cypress Semiconductor with a fair market value of $6,506. As
part of the agreement, ten percent of the common shares received by the Company
are held in escrow pending final closure of the purchase of IC Works by
9
<PAGE>
Cypress Semiconductor or one year from the date of purchase. During the quarter
ended June 30, 1999, the company sold all of the shares it held, except the
shares held in escrow, for $6,730 and recognized an additional gain on the sale
of $813 representing the increase in the fair value between the date the shares
were received and the date the shares were sold. The value of the shares held in
escrow at September 30, 1999 is $1,651 and is presented as short term
investments. These shares are accounted for as an available for sale security in
accordance with FAS 115.
Note 6. Comprehensive Income:
- -----------------------------
The following are the components of comprehensive income (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------- ---------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $2,307 $(6,112) $9,074 $(3,241)
Unrealized gain on short term investment
(net of deferred taxes of $152 and $425
Respectively) 228 - 637 -
-------------- ------------- -------------- -------------
Comprehensive income (loss) $2,535 $(6,112) $9,711 $(3,241)
============== ============= ============== =============
</TABLE>
The components of accumulated other comprehensive income are as follows (in
thousands):
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
<S> <C> <C>
1999 1998
-------------- ----------------
Unrealized gain on short term investment
(net of deferred taxes of $425) $ 637 $ -
============== ================
</TABLE>
Note 6. Subsequent Event:
- -------------------------
On October 7, 1999, the Company entered into a Common Stock Agreement and a
Stockholder Purchase Agreement with Silicon Aquarius, Inc. (SAI). In accordance
with the Common Stock Agreement the Company purchased 1.3 million shares of
common stock of SAI for $3.0 million. In addition, the Common Stock Agreement
provides the Company with an option to purchase an additional 1.7 million shares
for $4.0 million on or before October 7, 2000. The Stockholder Purchase
Agreement gives the Company an option to purchase the remaining outstanding
shares from the major stockholders of SAI on or before November 30, 2001 at the
then fair market value of SAI's stock. Notwithstanding this determination, the
fair market value shall not be less than $3.34 or greater than $9.00 per share.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements as a result of the risk
related factors set forth herein.
Overview
TelCom Semiconductor, Inc. ("TelCom" or the "Company") was founded in
December 1993 as the result of a management buyout of the Teledyne Components
Division of Teledyne Industries Inc. The Company designs, manufactures and sells
a variety of analog and mixed-signal integrated circuits. The Company's product
offerings are divided into four primary categories: (1) Power Management, (2)
Thermal Management (3) Data Converters, and (4) Linear Building Blocks. Over the
last several years, the Company has been transitioning its product portfolio
away from the legacy products associated with the Teledyne Division to higher
value proprietary solutions. As a result, the Company's current product offering
consists of both proprietary and second source products. While the primary
emphasis is developing proprietary products, the Company does offer second
source products to enhance its total product portfolio. Average selling prices
for the Company's proprietary products have generally tended to decline at a
slower rate than have those for the Company's second source products, which are
more susceptible to competitive pricing pressures. The Company generally
recognizes higher gross margins on its proprietary products than on its second
source products.
As the Company transitioned from the legacy products manufactured using
older process technology, it became necessary to develop a source of supply for
more advanced wafer processing technology for its newer, proprietary products.
This transition began at a time when advanced semiconductor capacity was in
short supply and long term forecasts for additional capacity was not improving.
Therefore, in November 1995, the Company entered into certain agreements with IC
WORKS, Inc., a privately-held wafer foundry company. Pursuant to such
agreements, the Company purchased $3.0 million of preferred stock of IC WORKS
and provided $10.4 million in capital equipment. In return for this investment,
TelCom received a guarantee of submicron wafer capacity at specified prices for
a period of five years, projected to start in late 1997. Since then, the wafer
capacity shortage projected in late 1995 diminished. Since late 1995,
substantial foundry capacity became available worldwide while overall demand did
not increase proportionately. Consequently, wafer pricing decreased
dramatically, which changed the economic viability of the foundry business in
which the Company invested. The IC WORKS wafer foundry was subsequently sold to
a captive supplier and as a result, in 1997, the Company recorded a loss of $8.3
million on its foundry investment which consists of a $3.0 million write down of
the preferred stock, a loss on the sale of the equipment of $5.2 million, and
$.1 million of costs associated with prepayment penalties on financing of the
equipment and legal fees. Pursuant to an agreement with IC WORKS, in the fourth
quarter of 1997, the Company sold the $10.4 million of equipment at IC WORKS for
$5.2 million and invested an additional $1.5 million in preferred stock of IC
WORKS. This agreement terminated the Company's operating agreement with IC
WORKS.
At the end of the quarter ended March 31, 1999, the Company recognized a
gain of $5.0 million on the sale of its investment in IC WORKS. IC WORKS was
purchased by Cypress Semiconductor, Inc., a publicly held company and, as part
of the purchase agreement between IC WORKS and Cypress Semiconductor, the
Company's preferred shares, with a book value of $1.5 million, were exchanged
for common shares of Cypress Semiconductor with a fair market value of $6.5
million. As part of the agreement, ten percent of the common shares received by
the Company are held in escrow pending final closure of the purchase of IC Works
by Cypress Semiconductor or one year from the date of purchase. During the
quarter ended June 30, 1999, the company sold all of the shares it held, except
the shares held in escrow, for $6.7 million and recognized an additional gain on
the sale of $.8 million representing the increase in the fair value between the
date the shares were received and the date the shares were sold. The value of
the shares held in
11
<PAGE>
escrow at September 30, 1999 is $1.7 million and is presented as short term
investments. These shares are accounted for as an available for sale security in
accordance with FAS 115.
In August 1998, the Company announced its plans to shut down its five-inch
wafer fabrication facility in Mountain View, California and use third party
foundries for all of its wafer fabrication. This change was desirable because
of continuing market conditions that made it more economical to purchase wafers
than to produce them internally. A majority of the Company's new products that
have been developed in the past year utilize sub-micron wafer technology and are
currently fabricated by outside foundries. All other remaining wafers were
fabricated in the Mountain View facility. In January 1999, the wafer fabrication
facility was shut-down and the fabrication of wafers has been transferred to
third party foundries. In connection with the closure of its wafer fabrication
facility, the Company recognized restructuring charges for the Mountain View,
California fabrication facility of $6.5 million. The restructuring charge
includes a write down of fabrication equipment of $4.5 million, costs associated
with idle facility space of $1.4 million, employee severance costs of $.5
million and clean up and environmental related charges of $.1 million. During
the first quarter of 1999, restructuring costs were $.3 million, which was
primarily additional employee severance cost. During the third quarter 1999, the
Company booked an additional charge of $1.0 million for an additional write down
of fabrication equipment. This adjustment lowers the carrying value of the
remaining equipment to $.4 million. The Company also renegotiated its lease for
the Mt. View facility by terminating its lease with Teledyne Industries in
exchange for a sublease of the facility from Clontech Laboratories, Inc. The new
sublease provides for a reduction in the square footage currently occupied by
the company by June 1, 2000 which will eliminate the idle facility. As a result,
the Company reversed idle facility costs of $1.0 million previously accrued in
1998, leaving a remaining balance of $.2 million that will be amortized through
May 2000.
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect net sales, gross
margins and operating income. These factors include the volume and timing of
orders received, changes in the mix of proprietary and second source products
sold, market acceptance of the Company's and its customers' products,
competitive pricing pressures, the Company's ability to introduce new products
on a timely basis, the timing and extent of research and development expenses,
fluctuations in manufacturing yields, cyclical semiconductor industry
conditions, the Company's access to advanced process technologies and the timing
and extent of process development costs. Historically in the semiconductor
industry, average selling prices of products have decreased over time. If the
Company is unable to introduce new products with higher margins, maintain its
product mix between proprietary and second source products or reduce
manufacturing costs to offset decreases in the prices of its existing products,
the Company's operating results will be adversely affected. The Company's
business is characterized by short term orders and shipment schedules, and
customer orders typically can be canceled or rescheduled without penalty to the
customer. Since most of the Company's backlog is cancelable without penalty, the
Company typically plans its production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, because of the high fixed costs in the semiconductor
industry, the Company is limited in its ability to reduce costs quickly in
response to any revenue shortfalls. As a result of the forgoing or other
factors, the Company may experience material adverse fluctuations in future
operating results on a quarterly or annual basis, which would materially and
adversely affect the Company's business, financial condition and results of
operations.
Results of Operations
Net Sales
Net sales for the three month and nine month periods ended September 30,
1999 increased $2.1 million or 17% and decreased $.7 million or 1.6%,
respectively, from the corresponding periods in the prior fiscal year. The
increase in sales for the three month period was primarily due to higher sales
volume in the Company's power management and sensor product lines. The decrease
in sales for the nine month period was primarily due to lower sales volume in
the Company's power management product lines. International sales
12
<PAGE>
for the three month and nine month periods ended September 30, 1999 were 71% and
69% of total sales, respectively, compared to 67% and 65% of total sales for the
corresponding periods in the prior fiscal year. For the three month and nine
month periods ended September 30, 1999, an OEM customer, Motorola, accounted for
approximately 41% and 33%, respectively, of net sales compared to 40% and 38%,
respectively, of net sales for the same periods in the prior year. Future
Electronics, one of the Company's distributors, accounted for 8% and 13%,
respectively, of the Company's net sales for the three month and nine month
periods ended September 30, 1999 compared to 13% and 12% of net sales for each
of the for the corresponding periods in the prior fiscal year.
Gross Margin
Gross margin as a percentage of sales for the three month and nine month
periods ended September 30, 1999 increased to 45.5% and 44.1%, respectively,
from 30.8% and 37.0%, respectively, in the corresponding periods in the prior
year. The increase in gross margin was primarily caused by the lower costs of
utilizing outside wafer foundries. The Company's ability to increase gross
margins will depend on the successful introduction of its new proprietary
products and controlling its manufacturing costs. Thus, future wafer costs will
depend on the volume and availability of wafers from the Company's wafer
foundries.
Research and Development Expenses
Research and development expenses for the three month and nine month
periods ended September 30, 1999 increased to $1.5 million and $5.2 million,
respectively, compared to $1.4 million and $4.1 million, respectively, for the
corresponding period in the prior year. This increase was primarily due to an
increase in salaries and wages for additional design and application engineers
and increased costs associated with test wafers and masks for new products. Such
expenses as a percent of sales in the three month and nine month periods ended
September 30, 1999 decreased to 10.0% and increased to 12.4%, respectively, of
sales compared to 11.3% and 9.8%, respectively, of sales for the corresponding
period in the prior year. The Company expects research and development expenses
generally to increase in absolute dollars in future periods although such
expenses may fluctuate as a percentage of net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three month period
ended September 30, 1999 increased to $2.6 million compared to $2.2 million for
the corresponding period in the prior year. For the nine month period ended
September 30, 1999, these expenses remained at $7.4 million compared to the same
period in the prior year. This increase for the three month period was primarily
due to increases in salaries and staffing in sales and administration. Such
expenses as a percent of sales increased in the three month and nine month
periods ended September 30, 1999 to 17.2% and 17.8% of sales compared to 17.0%
and 17.6% of sales for the corresponding periods in the prior year. The Company
expects selling, general and administrative expenses generally to increase in
absolute dollars in future periods although such expenses may continue to
fluctuate as a percentage of net sales.
Interest Income (Expense), Net
For the three month and nine month periods ended September 30, 1999, net
interest income was $154,000 and $226,000, respectively, compared to $106,000
and $318,000, respectively, for the corresponding periods in the prior year. The
increase in net interest income for the three month period is due to no interest
expense in the three month period ending September 30, 1999 because of the
elimination of debt in the prior quarter. Interest expense for the corresponding
period in 1998 was $111,000. The decrease in net interest income for the nine
month period is due to lower interest income of $273,000 offset by lower
interest expense of $181,000 compared to the corresponding period of the prior
fiscal year.
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Gain on Sale of Investment
At the end of the quarter ended March 31, 1999, the Company recognized a
gain of $5.0 million on the sale of its investment in IC WORKS. IC WORKS was
purchased by Cypress Semiconductor, Inc., a publicly held company and, as part
of the purchase agreement between IC WORKS and Cypress Semiconductor, the
Company's preferred shares, with a book value of $1.5 million, were exchanged
for common shares of Cypress Semiconductor with a fair market value of $6.5
million. As part of the agreement, ten percent of the common shares received by
the Company are held in escrow pending final closure of the purchase of IC Works
by Cypress Semiconductor or one year from the date of purchase. During the
quarter ended June 30, 1999, the company sold all of the shares it held, except
the shares held in escrow, for $6.7 million and recognized an additional gain on
the sale of $.8 million representing the increase in the fair value between the
date the shares were received and the date the shares were sold. The value of
the shares held in escrow at September 30, 1999 is $1.7 million and is presented
as short term investments. These shares are accounted for as an available for
sale security in accordance with FAS 115.
Income Taxes
The effective tax rate for the three month and nine month periods ended
September 30, 1999 was 19.0% and 21.0%, respectively, which reflects a 23%
blended rate of United States, Hong Kong, and German tax rates, offset by the
tax rate applicable to the gain on sale of investment. This effective rate
compares to 4% and (33%) for the corresponding periods in the prior year which
was a result of the blended rate of United States, Hong Kong, and German tax
rates.
Liquidity and Capital Resources
As of September 30, 1999, the Company had $19.4 million of cash and cash
equivalents. The Company generated $3.3 million of cash from operating
activities during the nine months ended September 30, 1999 primarily reflecting
net income of $9.1 million offset by the non cash gain on sale of investments of
$5.8 million. The net increase in working capital items primarily reflects an
increase in accounts receivable of $1.5 million, an increase in other current
assets of $.4 million, an increase in inventory of $.1 million and a decrease in
accounts payable and accrued liabilities of $.8 million, offset by an increase
if deferred distributor income of $.4 million and an increase in taxes payable
of $.4 million
The Company generated $7.4 million of cash from investing activities during
the nine months ended September 30, 1999 primarily reflecting net proceeds from
the sale of investments of $6.7 million, the sale of equipment of $1.3 million,
offset by purchases of property and equipment of $.6 million. During the nine
months ended September 30, 1998, the Company used $3.0 million of cash for
investing activities primarily reflecting purchases of property and equipment of
$5.5 million and offset by the sale of marketable securities of $2.5 million.
The Company used $5.4 million of cash for financing activities during the
nine months ended September 30, 1999 primarily reflecting the repurchase of
common stock of $3.0 million, the payment of notes payable and other long term
obligations of $3.7 million, offset by proceeds from the issuance of common
stock of $1.3 million. During the nine months ended September 30, 1998, the
Company used $7.1 million of cash for financing activities primarily reflecting
the repurchase of common stock of $5.8 million, the repayment of notes payable
of $2.0 million, offset by proceeds from the sale of common stock of $.7
million.
The Company believes that its current cash and cash equivalent balances,
together with anticipated cash flow from operations, will be sufficient to meet
the Company's needs for the next twelve months.
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Certain Factors Affecting Future Results of Operations
The Company's future results of operations are dependent upon a number of
factors, including those described below:
Dependence on New Products. The Company's success depends upon its ability
to develop new analog circuits for existing and new markets, to introduce such
products in a timely manner and to have such products gain market acceptance.
The development of new analog circuits is highly complex and from time to time
the Company has experienced delays in developing and introducing new products.
Successful product development and introduction depends on a number of factors
including proper new product definition, timely completion of design and testing
of new products, achievement of acceptable manufacturing yields and market
acceptance of the Company's and its customers' products. Moreover, successful
product design and development is dependent on the Company's ability to attract,
retain and motivate qualified analog design engineers, of which there is a
limited number. There can be no assurance that the Company will be able to meet
these challenges or adjust to changing market conditions as quickly and cost-
effectively as necessary to compete successfully. Due to the complexity and
variety of analog circuits, the limited number of analog circuit designers and
the limited effectiveness of computer-aided design systems in the design of
analog circuits, there can be no assurance that the Company will be able to
continue to successfully develop and introduce new products on a timely basis.
Although the Company seeks to design products that have the potential to become
industry standard products, there can be no assurance that any products
introduced by the Company will be adopted by such market leaders, or that any
product initially accepted by the Company's customers that are market leaders
will become industry standard products. The Company's failure to continue to
develop and introduce new products successfully could materially and adversely
affect its business and operating results.
The Company's results of operations are dependent on the balance between
sales of relatively higher margin but lower volume proprietary products and
relatively higher volume but lower margin second source products. In order to
improve its margins, sales of proprietary products must in the future represent
a greater percentage of the Company's net revenues, requiring the Company to
successfully develop, introduce and market new proprietary products. There can
be no assurance that the Company will be successful in developing new
proprietary products with the features and functionality that customers in its
key markets will demand.
Manufacturing Risks. The Company utilizes CMOS, Silicon Gate, Bipolar and
BiCMOS process technologies, which are tailored to meet product specifications
and customer requirements. Outside wafers are purchased from one of five
foundries and market conditions could result in wafers being in short supply and
prevent the Company from having adequate supply to meet its customer
requirements. There can be no assurances going forward that the Company will
have the ability to acquire all the wafers it desires.
Dependence on New Technologies; Technological Change. The markets for the
Company's products are characterized by rapid technological change and frequent
new product introductions. To remain competitive, the Company must develop or
obtain access to new semiconductor process technologies in order to reduce die
size, increase die performance and functional complexity and improve
manufacturing yields. Semiconductor designs and process methodologies are
subject to rapid technological change, requiring large expenditures for research
and development. If the Company is unable to define, design, develop and
introduce competitive new products on a timely basis, its future operating
results will be materially and adversely affected. In addition, the Company's
ability to compete successfully depends on being able to use advanced analog
process technologies to manufacture its products. There can be no assurance
that the analog process technology utilized by the Company will not become
obsolete.
Intense Competition. The analog semiconductor industry is highly
competitive and subject to rapid technological change. Significant competitive
factors in the analog market include product features, performance, price, the
timing of product introductions, the emergence of new computer standards and
other customer systems, product quality and customer support. Because the
standard products market for analog
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integrated circuits is diverse and highly fragmented, the Company encounters
different competitors in its various product markets. The Company's principal
competitors include Linear Technology Corporation, Maxim Integrated Products and
Harris Semiconductor in one or more of its product areas. Other competitors
include Motorola, National Semiconductor Corporation, Unitrode Corporation and
certain Japanese manufacturers. Each of these competitors has substantially
greater technical, financial and marketing resources and greater name
recognition than the Company. The Company expects intensified competition from
existing analog circuit suppliers and the possible entry of new competition.
Increased competition could adversely affect the Company's financial condition
or results of operations. There can be no assurance that the Company will be
able to compete successfully in the future or that competitive pressures will
not adversely affect the Company's financial condition and results of
operations. Competitive pressures could reduce market acceptance of the
Company's products and result in price reductions and increases in expenses that
could adversely affect the Company's financial condition or results of
operations.
Dependence on International Sales and Operations. International sales for
the three month and nine month periods ended September 30, 1999 were 71% and 69%
of total sales, respectively, compared to 67% and 65% of total sales for the
corresponding periods in the prior fiscal year. The Company expects
international sales to continue to represent a significant portion of product
sales. International sales and operations involve various risks, including
unexpected changes in regulatory requirements, delays resulting from difficulty
in obtaining export licenses for certain technology, tariffs and other barriers
and restrictions, and the burdens of complying with a variety of foreign laws.
The Company is also subject to general political risks in connection with its
international operations, such as political and economic instability and changes
in diplomatic and trade relationships. In addition, because a substantial
majority of the Company's international sales are denominated in United States
dollars, increases in the value of the dollar would increase the price in local
currencies of the Company's products in foreign markets and make the Company's
products relatively more expensive than competitors' products, the sales of
which are denominated in local currencies. There can be no assurance that
regulatory, political and other factors will not adversely affect the Company's
operations in the future or require the Company to modify its current business
practices.
Customer and Distributor Concentration. A limited number of customers and
distributors has accounted for a significant portion of the Company's net sales.
For the three month and nine month periods ended September 30, 1999, an OEM
customer, Motorola, accounted for approximately 41% and 33%, respectively, of
net sales compared to 40% and 38%, respectively, of net sales for the same
period in the prior year. Future Electronics, one of the Company's distributors,
accounted for 8% and 13%, respectively, of the Company's net sales for the three
month and nine month periods ended September 30, 1999 compared to 13% and 12% of
net sales for the corresponding periods in the prior fiscal year. The Company
anticipates that it will continue to be dependent or may increase its dependence
on a number of key customers and distributors for a significant portion of its
net sales. The reduction, delay or cancellation of orders from one or more
significant customers for any reason could materially and adversely affect the
Company's operating results. The Company is also dependent on sales
representatives and distributors for the sale of its products to many of its
customers. Such distributors sell competitors' products and are not within the
control of the Company. Loss of one or more of the Company's current
distributors or disruption of the Company's sales and distribution channels
could materially and adversely affect the Company's business and operating
results.
Dependence on Key Suppliers; Outsourcing of Assembly Operations. The
packaging of the Company's products is performed by a limited group of
subcontractors and certain of the raw materials included in such products are
obtained from a limited group of suppliers. A prolonged inability to obtain raw
materials could have a material adverse effect on the Company's financial
condition or results of operations and could result in damage to customer
relationships.
The Company depends on and may in the future depend on third party
subcontractors. For example, all of the Company's products are currently
assembled by independent third parties in Asia. In the event that any of the
Company's subcontractors were to experience financial, operational, production
or quality assurance difficulties resulting in a reduction or interruption in
supply to the Company, the Company's operating results would be adversely
affected until alternative subcontractors, if any, became available.
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Patents and Intellectual Property. The Company's success depends in part
in its ability to obtain patents and licenses and to preserve other intellectual
property rights covering its manufacturing processes, products and development
and testing tools. The Company seeks patent protection for those inventions and
technologies for which it believes such protection is suitable and is likely to
provide a competitive advantage to the Company. The process of seeking patent
protection can be long and expensive and there can be no assurance that its
current patents or any new patents that may be issued will be of sufficient
scope or strength to provide any meaningful protection or any commercial
advantage to the Company. The Company may in the future be subject to or
initiate interference proceedings in the United States Patent and Trademark
office, which can demand significant financial and management resources.
The Company regards elements of its manufacturing process, product design
and equipment as proprietary and seeks to protect its proprietary rights through
a combination of employee and third party non-disclosure agreements, internal
procedures and patent protection. Notwithstanding the Company's attempts to
protect its proprietary rights, the Company believes that its future success
will depend primarily upon the technical expertise, creative skills and
management abilities of its officers and key employees rather than on patent and
copyright ownership. The Company also relies substantially on trade secrets and
proprietary technology to protect technology and manufacturing know-how, and
works actively to foster continuing technological innovation to maintain and
protect its competitive position. There can be no assurance that the Company's
competitors will not independently develop or patent substantially equivalent or
superior technologies.
Although the Company is not currently a party to any material litigation,
the semiconductor industry is characterized by frequent litigation regarding
patent and other intellectual property rights. There can be no assurance that
any patent owned by the Company will not be invalidated, circumvented or
challenged, that the rights granted thereunder will provide competitive
advantages to the Company or that any of the Company's pending or future patent
applications will be issued with the scope of the claims sought by the Company,
if at all. In addition, effective copyright and trade secret protection may be
unavailable or limited in certain foreign countries.
As is typical in the semiconductor industry, the Company has from time to
time received, and may in the future receive, communications from third parties
asserting patents, mask work rights, or copyrights on certain of the Company's
products and technologies. Although the Company is not currently a party to any
material litigation, in the event a third party were to make a valid
intellectual property claim and a license was not available on commercially
reasonable terms, the Company's operating results could be materially and
adversely affected. Litigation, which could result in substantial cost to the
Company and diversion of its resources, may also be necessary to enforce patents
or other intellectual property rights of the Company or to defend the Company
against claimed infringement of the rights of others. The failure to obtain
necessary licenses or the occurrence of litigation relating to patent
infringement or other intellectual property matters could have a material
adverse effect on the Company's business and operating results. There can be no
assurance that the steps taken by the Company to protect its intellectual
property will be adequate to prevent misappropriation or that others will not
develop competitive technologies or products.
Environmental and Other Governmental Regulations. Federal, state and local
regulations impose various controls on the storage, handling, discharge and
disposal of chemicals and gases used in the Company's manufacturing process and
on the facility leased by the Company in Mountain View, California. The Company
believes that its activities conform to present governmental regulations
applicable to its operations and its current facilities including those related
to environmental, land use, public utility utilization and fire code matters.
The Company acquired the semiconductor manufacturing operations of
Teledyne, Inc. previously conducted at the Company's facility. The
semiconductor manufacturing operations conducted by Teledyne at the facility
allegedly contaminated the soil and groundwater of the facility and the
groundwater of properties located down-gradient of the facility. Although the
Company was indemnified by Teledyne as part of the acquisition transaction
against, among other things, any liabilities arising from any such
17
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contamination, there can be no assurance that claims will not be made against
the Company or that such indemnification will be available or will provide
meaningful protection at the time any such claim is brought. To the extent the
Company is subject to a claim which is not covered by the indemnity from
Teledyne or as to which Teledyne is unable to provide indemnification, the
Company's financial condition or results of operations could be materially and
adversely affected.
Semiconductor Industry. The semiconductor industry is characterized by
rapid technological change, cyclical market patterns, significant price erosion,
periods of over-capacity and production shortages, variations in manufacturing
costs and yields and significant expenditures for capital equipment and product
development. The industry has from time to time experienced depressed business
conditions. There can be no assurance that any future downturn in the industry
will not be severe or that any such downturn will not have a material adverse
effect on the Company's results of operations. There can be no assurance that
the Company will not experience substantial period-to-period fluctuations in
operating costs due to general semiconductor industry conditions or other
factors.
Year 2000 Issues
- ----------------
The "Year 2000 Issue" is the result of computer programs that were written
using two digits rather than four to define the applicable year. If the
Company's computer programs with date-sensitive functions are not Year 2000
compliant, they may recognize a date using "00" as the Year 1900 rather than the
Year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities. The Company has identified its Year 2000 risk in four categories:
internal information systems; internal non-financial software and imbedded chip
technology; product compliance; and external noncompliance by third parties.
1) Internal Information Systems. During 1997, the Company inventoried all
of its mission critical systems, programs and databases. Such systems, if
failure occurred, could result in a disruption in business operations that could
have a material adverse affect on the Company's operations. During 1998, the
Company completed an assessment of these mission critical systems. As a result
of the assessment, the Company does not anticipate any significant issues from
its internal information systems. Certain software packages will require
upgrading to Year 2000 compliant versions. These upgrades should be completed
by November 1999. The costs incurred to-date for the assessment performed as
well as the costs to upgrade to the Year 2000 compliant software packages are
not expected to be material to the Company's financial condition or results of
operations. These expenses will continue to be expensed in the periods
incurred. Since the Company has completed its assessment and is in the process
of making the necessary changes, the Company has not developed a contingency
plan for its internal information systems.
2)Internal Non-Financial Software and Imbedded Chip Technology. During
1998, the Company completed an assessment of its non-financial software and
imbedded chip technology regarding the impact of the Year 2000 on such non-
financial systems as manufacturing equipment, and security equipment. As a
result of the assessment, the Company does not anticipate any significant issues
from its non-financial software and imbedded chip technology. If the Company is
unable to achieve Year 2000 compliance for its major non-financial systems, the
Year 2000 could have a material impact on the operations of the Company. The
costs incurred to-date for the assessment performed and any anticipated costs to
be incurred in the future related to internal non-financial software and
imbedded chip technology are not expected to be material to the Company's
financial condition or results of operations and will continue to be expensed in
the periods incurred. Since the Company has completed its assessment and has
not found any significant issues, the Company has not developed a contingency
plan for its internal non-financial software and imbedded chip technology.
3) Product Compliance. The Company designs, develops, manufactures and
markets a wide portfolio of high performance integrated circuits. During 1998,
the Company completed an assessment of its
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current products regarding its compliance with the Year 2000 issue. As a result
of the assessment, the Company believes its products are Year 2000 compliant and
does not anticipate any significant Year 2000 compliance issues. If the
Company's products were found not to be Year 2000 compliant, the Year 2000 issue
could have a material impact on the operations of the Company. The costs
incurred to-date, for the assessment performed and any anticipated costs to be
incurred in the future are not expected to be material to the Company's
financial condition and will continue to be expensed in the periods incurred.
Since the Company has completed its assessment and has not found any significant
issues, the Company has not developed a contingency plan for its products.
4) External Noncompliance By Customers and Suppliers. The Company has
contacted its critical suppliers, service providers and contractors to determine
the extent to which the Company's interface systems are vulnerable to those
third parties' failure to remedy their own Year 2000 issues. Based on input
from the suppliers and contractors the Company believes any noncompliance issues
in this area will be completed prior to December of 1999. To date no responses
to Year 2000 readiness have been unsatisfactory and no changes to suppliers,
service providers or contractors appear warranted. There can be no assurance
that the suppliers and contractors have identified all possible Year 2000
issues. The costs incurred to-date for the assessment performed and any
anticipated costs to be incurred in the future are not expected to be material
to the Company's financial condition or results of operations and will continue
to be expensed in the periods incurred. In the event that any of the Company's
significant customers and suppliers do not successfully achieve Year 2000
compliance, and the Company is unable to replace them with new customers or
alternate suppliers, the Company's business or operations could be materially
adversely affected.
During 1998, the Company incurred costs of $.2 million related to Year 2000
issues. The Company estimates that it will incur costs of approximately $.3
million during 1999 for costs related to Year 2000 issues.
Market Risk Disclosure.
Interest Rate Risk - The Company does not use derivative financial
instruments in its investment portfolio. The Company's investment portfolio is
generally comprised of municipal government securities that mature within one
year. The Company places investments in instruments that meet high credit
quality standards. These securities are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the short duration and
conservative nature of the Company's investment portfolio, the Company does not
expect any material loss with respect to its investment portfolio.
Foreign Currency Exchange Rate Risk- Certain of the Company's sales, cost
of manufacturing and marketing are transacted in local currencies. As a result,
the Company's international results of operations are subject to foreign
exchange rate fluctuations. The Company does not currently hedge against foreign
currency rate fluctuations. Gains and losses from such fluctuations have not
been material to the Company's consolidated results of operations.
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are being filed as part of this report.
10.19 Lease Agreement dated August 16, 1999 related to
the premises located at 1300 Terra Bella Avenue,
Mountain View, California
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed during the fiscal quarter
for which this report is filed.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TELCOM SEMICONDUCTOR, INC.
(Registrant)
Date: November 4, 1999 By: /s/ Phillip M. Drayer
-------------------
Phillip M. Drayer
President
Chief Executive Officer
Date: November 4, 1999 By: /s/ Robert G. Gargus
------------------
Robert G. Gargus
Chief Financial Officer
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Exhibit 10.19
- --------------
SUBLEASE
1300 Terra Bella Avenue
Mountain View, California
This Sublease ("Sublease"), dated August 16, 1999 for reference purposes
only, is entered into by and between Clontech Laboratories, Inc., a California
corporation ("Sublessor") and TelCom Semiconductor, Inc. ("Sublessee").
Recitals
A. Sublessor leases certain premises consisting of an industrial building
containing approximately 42,565 square feet, located at 1290 and 1300 Terra
Bella Avenue, Mountain View, California (the "Master Premises"), pursuant to
that certain Agreement of Lease dated April 28th, 1997 by and between Teledyne
Industries, Inc., as landlord (the "Master Lessor") and Sublessor, as tenant
(the "Master Lease").
B. Concurrently herewith Sublessor and Master Lessor are amending the
Master Lease to add certain premises (the "Additional Premises") pursuant to an
Amendment to Agreement of Lease dated of even date herewith (the "Lease
Amendment"). The Additional Premises are currently leased to TelCom pursuant to
an existing lease (the "TelCom Lease"), which lease will be terminated by
separate agreement (the "TelCom Lease Termination Agreement") between Sublessee
and Master Lessor. The Master Lease, as amended by the Lease Amendment, is
referred to herein as the "Master Lease" and a true and correct copy thereof is
attached hereto as Exhibit "A." Capitalized terms used but not defined herein
have the same meanings as they have in the Master Lease.
C. Sublessor desires to sublease a portion of the Master Premises to
Sublessee, and Sublessee desired to sublease such portion of the Master Premises
from Sublessor, on and subject to the terms and provisions hereof. That portion
of the Master Premises to be subleased hereunder (the "Premises") is more
particularly described in Exhibit "B" attached hereto and incorporated herein by
this reference.
Now, Therefore, in consideration of the mutual covenants and conditions
contained herein, Sublessor and Sublessee covenant and agree as follows:
Agreement
1. Premises. On and subject to the terms and conditions below, Sublessor
hereby leases to Sublessee, and Sublessee hereby leases from Sublessor, the
Premises.
2. Term. This Sublease shall commence on August 23, 1999 (the
"Commencement Date"), provided Sublessor has theretofore obtained the consent of
Master Lessor, the TelCom Lease is terminated and the Lease Amendment has been
executed, and shall expire May 31, 2003, unless sooner terminated pursuant to
any provision hereof. This Sublease may be
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<PAGE>
extended on a month-to-month basis following its expiration, upon written
agreement of both Sublessor and Sublessee.
3. Rent.
(a) Base Rent.
(1) Commencing on the Commencement Date and continuing through
May 31, 2000, Sublessee shall pay rent ("Base Rent") to Sublessor an
amount equal to one hundred percent (100%) of the amount of Base Rent
Sublessee would have been paying under the TelCom Lease if the TelCom
Lease had not been terminated, as such amount may be adjusted in
accordance with the provisions of the TelCom Lease (the "TelCom
Rent"). As of the Commencement Date, the amount of Base Rent payable
by Sublessee hereunder is $100,111.95 per month and shall adjust, in
accordance with the provisions of the TelCom Lease, effective December
23, 1999 and annually thereafter.
(2) Commencing June 1, 2000 (or on the Delivery Date [as that
term is defined in paragraph 8 below], if such date is later) and
continuing throughout the balance of the term of this Sublease, Base
Rent shall be adjusted to equal TelCom's Share (as that term is
defined below) of the TelCom Rent, as the same may be adjusted from
time to time in accordance with the provisions of the TelCom Lease.
For purposes of this Sublease, TelCom's Share shall equal a fraction,
the numerator of which is the square footage of the Premises and the
denominator of which is 70,254 square feet.
(b) Additional Rent. Commencing on the Commencement Date and
continuing throughout the term of this Sublease, Sublessee will also pay
additional rent ("Additional Rent") in the following amounts:
(1) Commencing on the Commencement Date and continuing through
May 31, 2000, Additional Rent shall be equal to sixty-two and 17/100
percent (62.17%) of all costs payable by Sublessee pursuant to the
Master Lease, for insurance premiums, taxes, assessments, operating
charges, utilities, maintenance charges, common area expenses and any
other charges, costs and expenses which arise or may be contemplated
under the Master Lease with regard to the Master Premises (but not
including any Capital Improvement amortization and associated interest
charge, if any, relating to improvements made on or prior to August
23, 1999) (herein, "Operating Costs").
(2) Commencing June 1, 2000 (or on the Delivery Date, if such
date is later) and continuing for the balance of the Sublease term,
Additional Rent shall be equal to Sublessee Pro Rata Share of
Operating Costs.
(c) Sublessee's Pro Rata Share. For purposes of this Sublease,
Sublessee's Pro Rata Share shall be equal to a fraction, the numerator of
which is the square footage of the Premises, and the denominator of which
is equal to 113,000 square feet. On or
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<PAGE>
prior to the Delivery Date, Sublessor's architect or construction
consultant shall determine the square footage of the Premises and shall
notify Sublessee in writing.
Base Rent, Additional Rent and all other amounts payable by Sublessee
hereunder are referred to collectively as "Rent." Additional Rent shall be
payable to Sublessor as and when payments are due from Sublessor pursuant
to the Master Sublease, but at least five (5) business days prior to the
date Sublessor must pay such amounts to Master Lessor.
(c) Payment. If the Commencement Date does not fall on the first day
of a calendar month, Rent for the first month shall be prorated on a daily
basis based upon a calendar month. Rent shall be payable to Sublessor in
lawful money of the United States, in advance, without prior notice,
demand, or offset. Base Rent shall be payable on or before the first day of
each calendar month during the term hereof. Additional Rent shall be
payable three (3) business days prior to the date Additional Rent is
payable by Sublessor under the Master Lease. All Rent shall be paid to
Sublessor at the address specified for notices to Sublessor in paragraph
15, below.
(d) Late Charges. Sublessee recognizes that late payment of any Rent
will result in administrative expenses to Sublessor, the extent of which
additional expenses are extremely difficult and economically impractical to
ascertain. Sublessee therefore agrees that if any Rent shall remain unpaid
ten (10) days after such amounts are due, the amount of such Rent shall be
increased by a late charge to be paid to Sublessor by Sublessee in an
amount equal to the greater of five hundred dollars ($500) or ten percent
(10%) of the amount of the delinquent Rent.
(e) Deposits. On August 20, 1999, Sublessee shall pay to Sublessor
the sum of $100,111.95, constituting payment in advance of the first
month's Base Rent, plus the cash balance of the Security Deposit in the
amount of $24,212,33.
(f) Abatement. In the event of any casualty or condemnation affecting
the Premises, Rent payable by Sublessee shall be abated hereunder, but only
to the extent that rent under the Master Lease is abated, and Sublessee
waives any right to terminate this Sublease in connection with such
casualty or condemnation, except to the extent the Master Lease is also
terminated as to the Premises or any portion thereof.
4. Utilities. Sublessee shall pay for all water, gas, heat, light, power,
telephone, sewer and other utilities supplied to the Premises during the entire
term of this Sublease or the Additional Premises from the Commencement Date
through June 1, 1999 ("Utilities"), together with any fees, surcharges and taxes
thereon. In the event that Utilities to the Premises are not separately
metered, Sublessee shall reimburse Sublessor for Sublessee's Pro Rata Share of
the cost of utilities furnished to the Master Premises.
5. Security Deposit. Sublessee shall assign and does hereby assign to
Sublessor its interest in its current security deposit with Master Lessor in the
amount of $28,596.67 and agrees to deliver cash in the amount of $24,212,33, so
that Sublessor will hold the aggregate amount of $52,809, as security for the
full and faithful performance of its obligations hereunder ("Security Deposit").
If Sublessee fails to pay Rent or other charges when due under this Sublease, or
fails
3
<PAGE>
to perform any of its other obligations hereunder, Sublessor may use or apply
all or any portion of the Security Deposit for the payment of any Rent or other
amount then due hereunder and unpaid, for the payment of any other sum for which
Sublessor may become obligated by reason of Sublessee's default or breach, or
for any loss or damage sustained by Sublessor as a result of Sublessee's default
or breach. If Sublessor so uses any portion of the Security Deposit, Sublessee
shall restore the Security Deposit to the full amount originally deposited
within ten (10) days after Sublessor's written demand. Sublessor shall not be
required to keep the Security Deposit separate from its general accounts, and
shall have no obligation or liability for payment of interest on the Security
Deposit. The Security Deposit, or so much thereof as had not theretofore been
applied by Sublessor, shall be returned to Sublessee within thirty (30) days of
the expiration or earlier termination of this Sublease, provided Sublessee has
vacated the Premises and surrendered the Premises in the condition required
hereunder.
6. Assignment and Subletting. Sublessee may not assign, sublet, transfer,
pledge, hypothecate or otherwise encumber the Premises, in whole or in part, or
permit the use or occupancy of the Premises by anyone other than Sublessee,
unless Sublessee has obtained Sublessor's consent thereto (which shall not be
unreasonably withheld) and the consent of Master Lessor. Regardless of
Sublessor's consent, no subletting or assignment shall release Sublessee of its
obligations hereunder. Any rent or other consideration payable to Sublessee
pursuant to any sublease or assignment permitted by this paragraph which is in
excess of the Rent payable to Sublessor pursuant hereto ("Sublease Bonus Rent")
shall be divided equally between Sublessor and Sublessee.
7. Condition of Premises. Sublessee has used due diligence in inspecting
the Premises and agrees to accept the Premises in "as-is" condition and with all
faults as of the date of Sublessee's execution of this Sublease, without any
representation or warranty of any kind or nature whatsoever, or any obligation
on the part of Sublessor to modify, improve or otherwise prepare the Premises
for Sublessee's occupancy. Except as otherwise provided in paragraph 9 below,
by entry hereunder, Sublessee accepts the Premises in their present condition
and without representation or warranty of any kind by Sublessor. Sublessee
hereby expressly waives the provisions of subsection 1 of Section 1932 and
Sections 1941 and 1942 of the California Civil Code and all rights to make
repairs at the expense of Sublessor as provided in Section 1942 of said Civil
Code.
8. Surrender of Additional Premises.
(a) Commencing on the Commencement Date and continuing through December 31,
1999, Sublessee shall be entitled to retain possession and occupancy of the
Additional Premises for purposes of wrapping up its operations therein. Such
occupancy shall be subject to all of the provisions of this Sublease, including,
without limitation, the provisions of paragraph 13 below. In addition, during
such period, Sublessee shall allow Sublessor access to the Additional Premises
for purposes of planning its tenant improvements to the space.
(b) On or before January 1, 2000, Sublessee shall vacate and surrender that
portion of the Additional Premises that does not contain the Premises
("Clontech's Premises"), and shall deliver such portion of the Additional
Premises to Sublessor free of all equipment and personal property, in broom-
clean condition, and in the condition required for surrender set forth in the
4
<PAGE>
TelCom Lease. In any case, and not by way of limitation, Sublessee shall be
responsible for decertification of the Additional Premises, and satisfaction
with all regulatory requirements and requirements of Master Lessor for surrender
thereof on or prior to January 1, 2000. Sublessee agrees to indemnify, defend
and hold Sublessor harmless from any and all loss, cost, liability or expense
(including, without limitation, any and all attorneys' fees and court costs)
arising out of or relating to Sublessee's failure to so surrender the Additional
Premises. If for any reason Sublessee shall fail to surrender possession of
Clontech's Premises on or before January 1, 2000, Base Rent, Additional Rent and
the costs of utilities shall remain payable at their initial rates, and such
rates shall not be reduced until possession of Clontech's Premises is delivered
to Sublessor in the condition required by this paragraph. The date on which
Sublessee delivers possession of Clontech's Premises in the condition required
by this paragraph is sometimes referred to herein as the "Delivery Date."
9. Use. Sublessee may use the Premises only for the uses permitted under
the Master Lease and for no other purpose. Sublessee shall promptly comply with
all applicable statutes, ordinances, rules, regulations, orders, restrictions of
record, and requirements in effect during the term of this Sublease governing,
affecting and regulating the Premises, including but not limited to, the use
thereof. Sublessee shall not use or permit the use of the Premises in a manner
that will create waste or a nuisance, interfere with or disturb other tenants in
the Building or violate the provisions of the Master Lease.
10. Hazardous Substances.
(a) Certain Definitions.
(1) The term "Hazardous Substances" shall mean pollutants,
contaminants, chemicals, or industrial, toxic or hazardous constituents,
substances or wastes, including, but not limited to, asbestos and asbestos
containing materials, polyclorinated biphenyls, petroleum based-products or
other wastes, chemicals or substances the presence of which requires
investigation or remediation under any Environmental Law.
(2) The term "environmental law" shall mean the common law
and all federal, state, local and foreign laws of regulations, codes,
orders, decrees, judgments, or injunctions issued, promulgated, approved or
entered thereunder, relating to pollution or protection of the environment,
including, but not limited to, laws relating to (i) emissions, discharges,
releases or threatened releases of hazardous Substances into the
environment (including, but not limited to, ambient air, surface water,
ground water, land surface or surface strata), (ii) the manufacture,
processing, distribution, use, generation, treatment, storage, disposal,
transport, or handling of Hazardous Substances, and (iii) underground
storage tanks containing Hazardous Substances, and related piping,
emissions, discharges, releases or threatened releases thereon.
(3) The term "Losses" shall mean any and all costs and
expenses (including, but not limited to, reasonable attorneys' fees),
damages and other losses actually incurred by the party seeking
indemnification, net of any insurance
5
<PAGE>
proceeds to which the party seeking indemnification is entitled by virtue
of such costs, expenses, damages and losses.
(4) The term "Claim of Liability" shall mean any and all
claims, liabilities, obligations, Losses or damages suffered or incurred as
a result of (i) any suit, action, legal or administrative proceeding
(including any investigation), or demand asserted, threatened or instituted
by any party, and including but not limited to any governmental agency or
authority, (ii) failure to comply with requirements imposed by all federal,
state and local environmental laws and regulations, including but not
limited to all costs of the investigation, remediation or costs otherwise
incurred in complying with applicable laws and regulations and (iii) any
and all judgments, liens, court costs, legal fees, and other costs of
discovery and defense, all net of any insurance proceeds to which the party
seeking indemnification is entitled by virtue of such claim, liability,
obligation, loss or damage.
(b) Hazardous Substances Used by Sublessee. During the term of
the Sublease, Sublessee may use certain limited types and quantities of
Hazardous Substances on the Premises. These Hazardous Substances, along
with their quantitative limits, are listed in Exhibit "C" hereto.
(c) Other Hazardous Substances. Except as to those Hazardous
Substances listed in Exhibit "C" in the limited quantities set forth in
Exhibit "C", and such Hazardous Substances as are intended for and used for
normal building cleaning, maintenance and repair, Sublessee shall not use
or store any Hazardous Substance on the Premises without the prior written
consent of the Sublessor. With regard to other Hazardous Substances that
Sublessee proposes to use on the Premises, and with regard to Hazardous
Substances listed in Exhibit "C" which Sublessee proposes to use in
quantities exceeding the limits set forth in Exhibit "C", Sublessor, taking
into account such factors as Sublessor may reasonably determine to be
relevant, including, without limitation, any consents required from Master
Lessor, shall promptly grant or withhold consent to the proposed use of
such Hazardous Substances in the quantities proposed (and in any case,
failure to grant or withhold consent within 21 days of a written request
from Sublessee shall be deemed to be Sublessor's consent). In addition,
Sublessor may condition its consent to the use or presence of any Hazardous
Substance by Sublessee upon Sublessee's giving Sublessor such additional
assurances as Sublessor reasonably deems necessary to protect itself, the
public, the Premises, and the environment against damage, contamination or
injury and/or liability therefrom or therefor, including, but not limited
to, the installation (and removal on or before Sublease expiration or
earlier termination) of reasonably necessary protective modifications to
the Premises and/or the deposit of a reasonable additional Security
Deposit.
(d) Applicable Laws. Any handling, use or storage by Sublessee of
Hazardous Substances on the Premises (whether or not such use is identified
on Exhibit "C" or is otherwise consented to by Sublessor,) shall be
conducted in strict compliance with applicable Environmental Laws.
6
<PAGE>
(e) Release of Substances. Sublessee shall not cause any
Hazardous Substance to be spilled, discharged or released in, on, under or
about the Premises, or allow any Hazardous Substance to be spilled,
discharged or released in, on or under the Premises; provided, however,
that Sublessee shall not be responsible pursuant to this provision for
Hazardous Substances in or from the ambient air or groundwater spilled,
discharged or released off the Premises and not caused by Sublessee or its
affiliates, officers, employees, agents, contractors, contractors'
subcontractors or business invitees; and provided, further, that this
paragraph shall not prohibit Sublessee from causing or allowing (w) air
emissions on the Premises in the ordinary course of its business and in
compliance with applicable Environmental Laws and any applicable permits
(but Sublessee in not hereby released from its obligations for any Losses
or Claims of Liability resulting from, relating to or arising from such
emissions) or (x) the use of the plumbing or sanitary sewer for movement of
Hazardous Substances in the ordinary course of its business and in
compliance with applicable Environmental Laws and any applicable permits
(but Sublessee in not hereby released from its obligations for any Losses
or Claims of Liability resulting from, relating to or arising from spills,
releases or discharges to the environment from such use).
(f) Other Restrictions. Sublessee shall not cause or allow on the
Premises: (i) any concrete vaults, sumps or containment channels to be used
as primary containment for any liquid containing Hazardous Substances or as
secondary containment for any volatile organic compounds; (ii) installation
of any underground storage tanks; or (iii) any activity requiring a
hazardous waste treatment, storage or disposal permit under the federal
Resource Conservation and Recovery Act or the California Health and Safety
Code Div. 20, Chapter 6.5 (Hazardous Waste Control); provided, however,
that this paragraph 10 shall not prohibit activities or conditions subject
to and in compliance with the conditional authorization or conditional
exemption provisions of the California Health and Safety Code as currently
set forth at Sections 25200.3 or 25201.5.
(g) Termination. In addition to its rights hereunder, Sublessor
shall have the option of terminating this Sublease if at any time Sublessee
has failed to comply with any of its obligations under this paragraph 10
and (i) an imminent and substantial endangerment to public health or
welfare or the environment has resulted or (ii) the failure consists of a
refusal or failure, after written notice and the passage of seven (7) days,
to provide documents or information or access to the Premises as required;
provided, however, that Sublessee's obligations under this paragraph 10
shall survive such termination of this Sublease.
(h) Duty to Inform Sublessor; Duty to Monitor.
(1) If Sublessee knows, or has reasonable cause to believe
that a Hazardous Substance has been released or otherwise come to be
located in, on, under or about the Premises, under circumstances
constituting a default by Sublessee under paragraph 10 or otherwise under
this Sublease, and which (i) reaches soil or groundwater or (ii) is subject
to a reporting or recording requirement under applicable Environmental Law,
Sublessee shall give notice of such fact to Sublessor an soon as reasonably
possible without interfering with emergency response and government
notification activities. In
7
<PAGE>
such event, Sublessee will furnish to Sublessor a copy of any and all
reports that are generated, and correspondence with governmental agencies
relating to the release, within two (2) business days of generation,
transmission or receipt of the material. Sublessee shall also give
Sublessor a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action or proceeding
given to, or received from, any governmental authority or private party, or
persons entering or occupying the Premises, concerning any Hazardous
Substance or contamination in, on, or about the Premises, promptly (and in
any event within two (2) business days) upon request after any such
materials are given or received. Sublessee shall as soon as practicable
upon receipt notify Sublessor in writing of the existence of any matter
that constitutes a claim of Liability asserted, threatened or instituted by
any third party against Sublessee in connection with the presence of
Hazardous Substances upon, about or beneath the Promises or migrating to or
from the Premises, or arising out of the violation of any Environmental
Laws pertaining to the Premises or the activities thereon. In addition,
Sublessee shall notify Sublessor of and provide a copy of the following
environmental reports or inquiries relating to the Premises: citations,
environmental inquiries, reports filed pursuant to any environmental
reporting requirements imposed by any Environmental Law, including reports
filed pursuant to any Environmental Law relating to underground tanks. Upon
request of Sublessor, Sublessee will furnish to Sublessor a copy of any and
all environmental reports, correspondence or inquires relating to the
Premises, including but not limited to all permit applications, permits and
reports, an well as reports concerning conditions on the Premises,
including those which may be characterized as confidential.
(2) Sublessee covenants that it shall actively and
diligently monitor all aspects of its operations and activities (and those
of its agents, constructors, employees or invitees) which involve in any
way the use, production, generation or other handling of Hazardous
Substances on the Premises. Sublessee shall promptly advise Sublessor of
any material changes in operations involving Hazardous Substances.
11. Parking. Sublessee shall be entitled to use Sublessee's Pro Rata
Share of any parking spaces to which Sublessor is entitled pursuant to the
Master Lease.
12. Incorporation of Sublease.
(a) All of the terms and provisions of the Master Lease, except as provided
in subparagraph (b) below, are incorporated into and made a part of this
Sublease and the rights and obligations of the parties under the Master Lease
are hereby imposed upon the parties hereto with respect to the Premises,
Sublessor being substituted for the "Landlord" in the Master Lease, and
Sublessee being substituted for the "Tenant" in the Master Lease. It is further
understood that where reference is made in the Master Lease to the "Premises,"
the same shall mean the Premises as defined herein; where reference is made to
the "Commencement Date," the same shall mean the Commencement Date as defined
herein; and where reference is made to the "Lease," the same shall mean this
Sublease.
(b) The following paragraphs of the Master Lease are not incorporated
herein: 1, 3, 4, 5, 6, 8, 11, 23, 24, 35, 36, 38, and the Lease Amendment.
8
<PAGE>
(c) Sublessee hereby assumes and agrees to perform for
Sublessor's benefit, during the term of this Sublease, all of Sublessor's
obligations with respect to the Premises under the Master Lease, except as
otherwise provided herein. Sublessee shall not commit or permit to be committed
any act or omission which violates any term or condition of the Master Lease.
Except as otherwise provided herein, this Sublease shall be subject and
subordinate to all of the terms of the Master Lease.
13. Insurance. Sublessee shall be responsible for compliance with the
insurance provisions of the Master Lease. Such insurance shall insure the
performance by Sublessee of its indemnification obligations hereunder and shall
name Master Lessor and Sublessor as additional insureds. All insurance required
under this Sublease shall contain an endorsement requiring thirty (30) days
written notice from the insurance company to Sublessee and Sublessor before
cancellation or change in the coverage, insureds or amount of any policy.
Sublessee shall promptly provide Sublessor with certificates of insurance
evidencing such coverage.
14. Default. In addition to defaults contained in the Master Lease,
failure of Sublessee to make any payment of Rent when due hereunder shall
constitute an event of default hereunder.
15. Notices. The addresses specified in the Master Lease for receipt of
notices to each of the parties are deleted and replaced with the following:
To Sublessor at: Clontech Laboratories, Inc.
1020 East Meadow Circle
Palo Alto, CA 94303-4230
Attn: CEO and CFO
With copy to: Cooley Godward LLP
5 Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306
Attn: Toni P. Wise
To Sublessee at:
TelCom Semiconductor, Inc.
1300 Terra Bella Avenue
Mountain View, CA 94303
Attn: CEO and CFO
16. Sublessor's Obligations.
(a) To the extent that the provision of any services or the performance of
any maintenance or any other act respecting the Premises or Building is the
responsibility of Master Lessor (collectively "Master Lessor Obligations"), upon
Sublessee's request, Sublessor shall make reasonable efforts to cause Master
Lessor to perform such Master Lessor Obligations, provided, however, that in no
event shall Sublessor be liable to Sublessee for any liability, loss or damage
whatsoever in the event that Master Lessor should fail to perform the same, nor
shall Sublessee be entitled to withhold the payment of Rent or terminate this
Sublease. It is expressly
9
<PAGE>
understood that the services and repairs which are incorporated herein by
reference, including but not limited to the maintenance of exterior walls,
structural portions of the roof, foundations, walls and floors, will in fact be
furnished by Master Lessor and not by Sublessor, except to the extent otherwise
provided in the Master Lease. In addition, Sublessor shall not be liable for any
maintenance, restoration (following casualty or destruction) or repairs in or to
the Building or Premises, other than its obligation hereunder to use reasonable
efforts to cause Master Lessor to perform its obligations under the Master
Lease. With respect to any maintenance or repair to be performed by Master
Lessor respecting the Premises, the parties expressly agree that Sublessee shall
have the right to contact Master Lessor directly to cause it to so perform.
(b) Except as otherwise provided herein, Sublessor shall have no other
obligations to Sublessee with respect to the Premises or the performance of the
Master Lessor Obligations.
17. Early Termination of Sublease. If, without the fault of Sublessor,
the Master Lease should terminate prior to the expiration of this Sublease,
Sublessor shall have no liability to Sublessee on account of such termination.
To the extent that the Master Lease grants Sublessor any discretionary right to
terminate the Master Lease, whether due to casualty, condemnation, or otherwise,
Sublessor shall be entitled to exercise or not exercise such right in its
complete and absolute discretion.
18. Consent of Master Lessor and Sublessor. If Sublessee desires to take
any action which requires the consent or approval of Sublessor pursuant to the
terms of this Sublease, prior to taking such action, including, without
limitation, making any alterations, then, notwithstanding anything to the
contrary herein, (a) Sublessor shall have the same rights of approval or
disapproval as Master Lessor has under the Master Lease, and (b) Sublessee shall
not take any such action until it obtains the consent of Sublessor and Master
Lessor, as may be required under this Sublease or the Master Lease. This
Sublease shall not be effective unless and until any required written consent of
the Master Lessor shall have been obtained.
19. Indemnity. Sublessee shall indemnify, defend, protect, and hold
Sublessor and Master Lessor harmless from and against all actions, claims,
demands, costs liabilities, losses, reasonable attorneys' fees, damages,
penalties, and expenses (collectively "Claims") which may be brought or made
against Sublessor or which Sublessor may pay or incur to the extent caused by
(i) a breach of this Sublease by Sublessee, (ii) any violation of law by
Sublessee or its employees, agents, contractors or invitees (collectively,
"Agents") relating to the use or occupancy of the Premises, (iii) any act or
omission by Sublessee or its Agents resulting in contamination of any part or
all of the Premises by Hazardous Materials, or (iv) the negligence or willful
misconduct of Sublessee or its Agents.
20. Brokers. Each party hereto represents and warrants that it has dealt
with no broker in connection with this Sublease and the transactions
contemplated herein. Each party shall indemnify, protect, defend and hold the
other party harmless from all costs and expenses (including reasonable
attorneys' fees) arising from or relating to a breach of the foregoing
representation and warranty.
10
<PAGE>
21. Surrender of Premises. Upon the expiration or earlier termination of
this Sublease, Sublessee shall surrender the Premises in the same condition as
they were in on the Commencement Date, except for ordinary wear and tear, and
except that Sublessee will remove those items specified in Schedule B to the
TelCom Termination Agreement.
22. No Third Party Rights. The benefit of the provisions of this Sublease
is expressly limited to Sublessor and Sublessee and their respective permitted
successors and assigns. Under no circumstances will any third party be
construed to have any rights as a third party beneficiary with respect to any of
said provisions.
23. Contingency. The Sublease Agreement between the Sublessor and the
Sublessee is contingent upon execution by Sublessor and Master Lessor of the
Lease Amendment and consent by Master Lessor of this Sublease.
24. Counterparts. This Sublease may be signed in two or more
counterparts, each of which shall be deemed an original and all of which shall
constitute one agreement.
In Witness Whereof, the parties have executed this Sublease as of the date
first written above.
"Sublessor" "Sublessee"
Clontech laboratories, Inc. TelCom Semiconductor, Inc.
By:__________________________ By:__________________________
Title: ______________________ Title: _____________________
11
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<PERIOD-START> JAN-01-1999
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<CURRENT-ASSETS> 37,874
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