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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
x_| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1996
|_| 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 0-27712
INTEGRATED PACKAGING ASSEMBLY CORPORATION
(Exact Name of Registrant as Specified in its Charter)
California 77-0309372
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification Number)
2221 Oakland Road 95131
San Jose, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number including area code: (408) 321-3600
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by persons other than
those who may be deemed affiliates of the Company as of March 19, 1997, was
approximately $19,700,000. Shares of Common Stock held by each executive officer
and director and by each person who owns 5% or more of the outstanding Common
Stock have been excluded in that such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares of the Registrant's Common Stock outstanding as of
March 19, 1997 was 13,923,403.
DOCUMENT INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1996 Annual Meeting of
Stockholders to be held June 17, 1997 are incorporated by reference in Part III
of this Form 10-K.
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TABLE OF CONTENTS
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PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 10
Item 3. Legal Proceedings................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............... 10
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................................. 11
Item 6. Selected Financial Data........................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 13
Item 8. Financial Statements and Supplementary Data....................... 20
Item 9. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure ........................................ 38
PART III
Item 10. Directors and Executive Officers of the Registrant............... 39
Item 11. Executive Compensation........................................... 39
Item 12. Security Ownership of Certain Beneficial Owners and Management... 39
Item 13. Certain Relationships and Related Transactions................... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 40
SIGNATURES...................................................................... 42
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PART I
This Report on Form 10-K 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.
Item 1. Business
Integrated Packaging Assembly Corporation ("IPAC") is a leading
independent North American semiconductor packaging foundry. The Company receives
wafers from its customers and assembles each integrated circuit in a protective
plastic package. The Company's close proximity to its customers and the
end-users of its customers' products allows it to provide quick turnaround
design and prototype production and timely delivery of products in high volume.
Industry Background
Semiconductor Manufacturing Process
The manufacture of semiconductors requires complex and precise steps
which can be broadly characterized as wafer fabrication, packaging and testing.
Wafer fabrication begins with raw silicon wafers and ends with devices in the
form of die on wafers. Since the die must be packaged to protect them and
facilitate their use in electronic systems, the fabricated wafers are
transferred to packaging facilities. The packaging facility dices the wafer into
individual die, and through a series of processes connects wire leads to the die
and encapsulates the die in a protective casing. The packaged semiconductor die
must then be tested to ensure functionality before shipment for use.
Semiconductor companies in North America utilize various business
models for the design and manufacture of semiconductors. Certain vertically
integrated companies perform all stages of the manufacturing process. Other
companies outsource certain aspects of the manufacturing process, including
wafer fabrication and packaging. Wafers fabricated by or for North American
semiconductor companies are often tested in North America and then shipped for
packaging to captive or independent packaging foundries in Asia. The packaged
semiconductors are often returned to North America for final test and
distribution to customers. The shipment to and from Asia for packaging can
lengthen the semiconductor manufacturing process significantly.
Semiconductor Packaging Market
The growth in the worldwide semiconductor market has created a
significant demand for semiconductor packaging capacity. Different types of
devices such as microprocessors, logic devices and memory devices require
different packaging solutions to accommodate different requirements for heat
dissipation and signal propagation. Semiconductor packages are categorized
largely by the technology employed to interconnect the packaged circuits to
printed circuit boards. Surface mount technology ("SMT"), in which the leads on
integrated circuits are soldered to the surface of the printed circuit board, is
a newer and more advanced technology than pin through hole ("PTH") technology,
in which the leads are inserted into holes in the printed circuit board. SMT
allows components to be placed on both sides of the board, which permits a
higher degree of system integration, increases system performance and reduces
system cost.
The package types used to accommodate SMT include small outline ("SO")
packages, quad flat packages ("QFP"), thin quad flat packages ("TQFP") and ball
grid array ("BGA") packages. QFPs and TQFPs are primarily
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used for logic devices, such as field programmable gate arrays ("FPGAs") and
application specific integrated circuits ("ASICs"), which have lead counts of up
to 376 leads per device, while SO packages are primarily used for memory and
analog devices that have much lower lead counts. BGA is an emerging packaging
technology that can accommodate up to 1,000 leads per device.
To meet their packaging requirements, semiconductor companies have
relied on captive or independent packaging foundries, principally located in
Asia. These packaging foundries were initially located in Asia in the 1970s to
take advantage of low labor costs. Competition among independent packaging
foundries during this period was based largely on price and the availability of
capacity because the large feature sizes of the semiconductors did not present
significant technological challenges or opportunities for differentiation among
packaging techniques. During the 1980s, semiconductor packaging commenced a
transition from a labor intensive operation to a capital intensive,
technologically advanced operation as packaging facilities were forced to
automate to accommodate significantly more complex devices while achieving
consistency, quality and reliability. These trends accelerated in the 1990s at
the same time that intense competition among semiconductor companies shortened
product life cycles for many devices. As a result, cycle time has become a
critical factor in the semiconductor packaging industry.
The Company believes that the use of independent packaging foundries
enables semiconductor companies to reduce costs and shorten production cycles.
By packaging a greater volume of semiconductors than a given semiconductor
company is likely to do internally, an independent packaging foundry can reduce
costs by employing technically advanced equipment and by procuring raw materials
more cost-effectively. The use of independent packaging foundries also enables
semiconductor companies to avoid the high cost of capital equipment required for
advanced semiconductor packaging. In addition, semiconductor companies are
realizing that the expertise of independent packaging foundries can be a source
for advanced packaging technologies that can satisfy their requirements for
miniaturization, high lead counts and thermal and electrical performance.
Strategy
The Company's objective is to be the leading independent semiconductor
packaging foundry in North America. The principal elements of the Company's
strategy are set forth below.
Locate Facilities in North America Near Customers and End-Users
The Company's packaging facility is located in San Jose, California in
close proximity to its customers and the end-users of its customers' products.
Due to intense competitive pressures in the electronics industry, semiconductor
companies are faced with increasingly shorter product life cycles and therefore
have a need to reduce the time it takes to bring a product to market. The
Company believes that its close proximity to its customers promotes quicker
turnaround design, prototype production and final product delivery to its North
American customers, compared to its principal competitors which are all
currently located in Asia.
Provide High Quality Customer Service
The Company believes that the principle components of quality customer
service are time to market, reliability and quality. Since the product life
cycles of integrated circuits continue to contract, IPAC offers short packaging
cycles as a principal benefit to its customers. In addition, the Company has
established a quality control system that is designed to enable it to maintain
reliable services, high product quality and high production yields. The Company
also maintains a flexible production capability which enables it to react
quickly to changes in customer requirements as well as industry developments.
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Focus on Selected High Growth Markets
The Company focuses on QFPs and TQFPs which are used for complex, high
pin-count products, such as FPGAs and ASICS. The Company is also developing
capacity for BGA packages. The Company expects QFPs, TQFPs and BGAs to be growth
areas of the packaging market, and generally command higher margins than most
other packages.
Manufacturing
Semiconductor Packaging Services
The Company has focused on packages designed for assembly using the
newer and technologically advanced SMT. Within the SMT market, the Company
focuses on high pin-count packages, such as QFPs and TQFPS. The Company offers
nine different QFP and TQFP families with body sizes ranging from 10x10 mm to
32x32 mm, and with the number of leads available in certain package families
ranging from 44 to 376 leads. Integrated circuits packaged by the Company are
used in the following applications: personal computers, modems, disk drives and
telecommunications, among others. The Company also offers a limited number of
packages for emerging packaging technologies, such as BGA packages. Since
inception, QFPs and TQFPs have accounted for substantially all of the Company's
packaging revenues.
Packaging involves several manufacturing operations which are highly
automated to facilitate high volume production. The assembly process begins with
the mounting of a finished, tested wafer onto a carrier. After a dicing saw cuts
the wafer into individual die, the cut wafer is moved to a die bonder which
picks each good die off the wafer and bonds it to a lead frame with epoxy resin.
A lead frame is a miniature sheet of metal, generally made of copper with
selective silver plating on which the pattern of input/output (I/0) leads has
been cut. Next, very fine (typically 0.001 inches in diameter) gold wires are
connected to the die and the leads through the use of automated machines known
as wire bonders. These wire leads provide the electrical path necessary for the
device to function. Each die is then encapsulated in a plastic casing and
marked. The leads protruding from the finished casing are then plated with a tin
and lead composition to permit the leads to be connected to the printed circuit
board. At the end of the packaging process, the leads are trimmed and formed
into requisite shapes. After this packaging process is complete, the devices
undergo final inspection and are prepared for shipment.
The Company has expended substantial resources to significantly expand
its production capacity over the past three years. The Company shipped
approximately 1.6 million devices in 1994, approximately 10.5 million devices in
1995 and approximately 18.1 million devices in 1996. Since the fourth quarter of
1996, the Company has had available manufacturing capacity. The Company's
manufacturing capacity utilization is a function of the mix of different package
types produced by the Company at any one time and the proportion of standard
production runs compared to expedited production runs. Thus, as the Company
shifts its production among different package types or allocates a different
amount of available capacity to standard production runs, the rate of the
Company's capacity utilization changes, at times significantly.
The Company believes that its competitive position depends on its
ability to have sufficient capacity to meet anticipated customer demand.
Accordingly, although the Company currently has available manufacturing
capacity, the Company is continuing to make significant investments to expand
such capacity, particularly through the acquisition of capital equipment and the
training of new personnel. There can be no assurance that the Company will be
able to utilize such capacity, to expand its manufacturing capacity in a timely
manner, that the cost of such expansion will not exceed management's current
estimates or that such capacity will not exceed the demand for the Company's
services. In addition, expansion of the Company's manufacturing capacity will
continue to significantly
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increase its fixed costs, and the future profitability of the Company will
depend on its ability to utilize its manufacturing capacity in an effective
manner. The Company's inability to generate the additional production volume
necessary to fully utilize its capacity would have a material adverse effect on
the Company's business, financial condition and results of operations.
The semiconductor packaging business is capital intensive and requires
a substantial amount of highly automated, expensive capital equipment which is
manufactured by a limited number of suppliers, many of which are located in Asia
or Europe. The Company's operations are significantly dependent upon the
Company's ability to obtain capital equipment for its manufacturing operations
in a timely manner. In this regard, the Company currently expects to spend up to
$7.0 million to purchase capital equipment in 1997. The Company currently
purchases capital equipment from a limited group of suppliers including Dai-Ichi
Seiko Co., Ltd., ESEC SA and Kaijo Corporation. The Company has no long term
agreement with any such supplier and acquires such equipment on a purchase order
basis. The market for capital equipment used in semiconductor packaging has been
and is expected to continue to be characterized by intense demand, limited
supply and long delivery cycles. The Company's dependence on such equipment
suppliers poses substantial risks. Should any of the Company's major suppliers
be unable or unwilling to provide the Company with high quality capital
equipment in amounts necessary to meet the Company's requirements, the Company
would experience severe difficulty locating alternative suppliers in a timely
fashion and its operations could be materially adversely affected. In this
regard, in the second half of 1996, the Company experienced problems with the
performance of certain capital equipment which resulted in manufacturing
inefficiencies. These equipment problems had a material adverse effect on the
Company's financial results in the fourth quarter of 1996. Any further problems
with such capital equipment or any prolonged delay in equipment shipments by key
suppliers or an inability to locate alternative equipment suppliers could have a
material adverse effect on the Company's business, financial condition and
results of operations and could result in damage to customer relationships.
Moreover, increased levels of demand in the capital equipment market may cause
an increase in the price of equipment, further lengthen delivery cycles and
limit the ability of suppliers to adequately service equipment following
delivery, any of which could have an adverse effect on the Company's business,
financial condition or results of operations. In addition, adverse fluctuations
in foreign currency exchange rates, particularly the Japanese yen, could result
in increased prices for capital equipment purchased by the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company currently outsources electroplating of the copper leads
protruding from the plastic moldings with a tin and lead composition from
International Lead Frame Corporation, a subsidiary of Mitsui High-Tec, Inc., and
Hytek Finishes, Inc. The Company has no long term agreement with either supplier
and such services are provided on a purchase order basis. From time to time, the
Company's plating subcontractors have experienced significant manufacturing
problems. In particular, such problems resulted in delayed customer shipments
by, and increased costs to, the Company during the second and third quarters of
1995. There can be no assurance that the Company's subcontractors will not
experience manufacturing problems in the future or that such problems will not
result in increased costs or production delays which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has placed orders for advanced electroplating systems
which it currently plans to install at a leased facility in San Jose, California
which will be operated by the Company. The Company currently expects its plating
facility to be in operation in the second quarter of 1997, although there can be
no assurance that equipment delivery delays or other factors will not adversely
impact such schedule.
Quality Control
The Company believes that total quality management is a vital component
of customer satisfaction and internal productivity. The Company has established
quality control systems which are designed to maintain acceptable manufacturing
yields at high volume production. The Company has also developed a sophisticated
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proprietary software program for material resource planning, shop floor control,
work in process tracking, statistical process control and product costing. The
Company obtained certification for its packaging operations pursuant to ISO 9002
in December 1996.
As of December 31, 1996, the Company's quality control staff consisted
of 11 engineers, technicians and other employees who monitor the Company's
design and production processes in order to ensure high quality. These employees
include line inspectors who work with members of the production staff to conduct
examination, testing and fine-tuning of products during the production process.
Quality control personnel are involved from initial design to production. The
quality control staff also collects and analyzes data from various stages of the
production process which is used by the Company for statistical process control.
The semiconductor packaging process is complex and product quality and
reliability is subject to a wide variety of factors. Defective packaging can
result from a number of factors, including the level of contaminants in the
manufacturing environment, human error, equipment malfunction, use of defective
raw materials, defective plating services and inadequate sample testing. From
time to time, the Company expects to experience lower than anticipated
production yields as a result of such factors. For example, in the second half
of 1996, the Company identified a problem with certain elements of the
manufacturing process for lead frames which resulted in reduced yields for the
affected products and substantially reduced orders from a major customer which
adversely impacted the Company's operating results. The Company's failure to
maintain high quality production standards or acceptable production yields would
likely result in loss of customers, delays in shipments, increased costs,
cancellation of orders and product returns for rework, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Raw Materials and Suppliers
The Company's packaging operations depend upon obtaining adequate
supplies of raw materials on a timely basis. The principal raw materials used in
the Company's packaging process are lead frames, gold wire and molding compound.
The semiconductors used by the Company are supplied by its customer or the
customer's wafer foundry; consequently, the Company incurs no inventory costs
relating to the silicon wafers used in its packaging process. The Company does
not maintain large inventories of lead frames, gold wire or molding compound,
and has from time to time experienced difficulty in obtaining acceptable
materials on a timely basis.
The Company maintains a supplier quality program that includes
qualification, performance measurement and corrective action requirements. The
Company chooses its suppliers based on quality, delivery, service and price. The
Company sources most of its raw materials, including critical materials such as
lead frames and die attach compound, from a limited group of suppliers,
including Sumitomo Metal Mining Co., Ltd., Dai Nippon Printing, Acqutek
International and Tokyo Printing Ink Manufacturing Co., Ltd. Molding compound, a
critical raw material, is obtained from Sumitomo Bakelite Co., Ltd., a sole
source supplier. From time to time, vendors have extended lead times or limited
the supply of required materials to the Company because of vendor capacity
constraints and, consequently, the Company has experienced difficulty in
obtaining acceptable raw materials on a timely basis. In addition, from time to
time, the Company may reject materials from those vendors that do not meet its
specifications, resulting in declines in output or yield. Any interruption in
the availability or quality of materials from these suppliers would materially
adversely affect the Company's business, financial condition and results of
operations. The Company purchases all of its materials on a purchase order basis
and has no long term contracts with any of its suppliers. There can be no
assurance that the Company will be able to obtain sufficient quantities of raw
materials and other supplies. The Company's business financial condition and
results of operations would be materially adversely affected if it were unable
to obtain sufficient quantities of raw materials and other supplies in a timely
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manner or if there were significant increases in the costs of raw
materials that the Company could not pass on to its customers.
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Marketing and Sales
The Company's marketing and sales efforts are focused on North American
semiconductor companies that design or manufacture logic devices which are used
in applications such as personal computers, modems, disk drives and
telecommunications. Within such markets, the Company emphasizes packaging
complex, high pin- count products. The Company sells its services directly
through its sales and customer support organization. The Company assists its
customers in evaluating designs with respect to manufacturability and when
appropriate recommends design changes to reduce manufacturing costs and lead
times. The Company also offers lead frame design services for a fee.
To date, the Company has been substantially dependent on a relatively
small number of customers. Specifically, Cirrus Logic, Tseng Laboratories, and
Intel Corporation accounted for 32%, 17% and 14%, respectively, of the Company's
revenues in 1996, Cirrus Logic and Sierra Semiconductor accounted for 29% and
20%, respectively, of the Company's revenues in 1995, and Sierra Semiconductor,
Orbit Semiconductor and Standard Microsystems accounted for 27%, 18%, and 18%,
respectively, of the Company's revenues in 1994. The Company anticipates that
significant customer concentration will continue at least through 1997, although
the companies which constitute the Company's largest customers may change from
period to period.
All of the Company's customers operate in the cyclical semiconductor
business and their order levels may vary significantly from period to period. In
addition, there can be no assurance that such customers or any other customers
will continue to place orders with the Company in the future at the same levels
as in prior periods. There can be no assurance that adverse developments in the
semiconductor industry will not adversely affect the Company's business,
financial condition and results of operations. The loss of one or more of the
Company's customers, or reduced orders by any of its key customers, could
adversely affect the Company's business, financial condition and results of
operations. The Company ships its products in accordance with customer purchase
orders and upon receipt of semiconductor wafers from its customers. The Company
generally ships products within one to seven days after receiving the customer's
wafers, and, accordingly, the Company has not to date had a material backlog of
orders. The Company expects that revenues in any quarter will be substantially
dependent upon orders received in that quarter. The Company's expense levels are
based in part on its expectations of future revenues and the Company may be
unable to adjust costs in a timely manner to compensate for any revenue
shortfall.
Competition
The semiconductor packaging industry is highly competitive. The Company
currently faces substantial competition from established packaging foundries
located in Asia, such as Advanced Semiconductor Assembly Technology in Hong
Kong, Advanced Semiconductor Engineering, Inc. in Taiwan, ANAM in Korea, PT
Astra in Indonesia and Swire Technologies in Hong Kong. Each of these companies
has significantly greater manufacturing capacity, financial resources, research
and development operations, marketing and other capabilities than the Company
and has been operating for a significantly longer period of time than the
Company. Such companies have also established relationships with many large
semiconductor companies which are current or potential customers of the Company.
The Company could face substantial competition from Asian packaging foundries
should one or more of such companies decide to establish foundry operations in
North America. The Company could also face competition from emerging
independent, North American packaging foundries. The Company also competes
against companies which have in-house packaging capabilities as current and
prospective customers constantly evaluate the Company's capabilities against the
merits of in-house packaging. Many of the Company's customers are also customers
of one or more of the Company's principal competitors. The principal elements of
competition in the semiconductor packaging market include delivery cycle times,
price, product performance, quality, production yield, responsiveness and
flexibility, reliability and the ability to design and incorporate product
improvements. The Company believes it principally competes on the basis of
shorter delivery cycle times it can offer customers due to
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the close proximity of its manufacturing facility to its customers' operations
and the end users of its customers' products.
Research and Development
The Company's research and development efforts are focused on improving
the efficiency and capabilities of its production processes, and on developing
new packages by making improvements upon commercially available materials and
technology. The Company's research and development efforts are focused on
improving existing technology, such as developing thermally enhanced QFPs that
result in better heat dissipation, and emerging packaging technologies, such as
BGA packages that provide for an increased number of leads per device without
increasing the size of the functional integrated circuit. Although the Company
did not ship commercial quantities of BGA devices in 1996, it believes that the
increased pin count made available by BGA technology is an important technology
that will enable the Company to provide new packaging services to its customers.
The Company also works closely with the manufacturers of its packaging equipment
in designing and modifying the equipment used in the Company's production
process.
As of December 31, 1996, the Company employed 8 persons in research and
development activities. In addition, other management and operational personnel
are involved in research and development activities. The Company supplements its
research and development efforts with alliances and technology licensing
agreements. For example, the Company is a member of an ARPA-TRP consortium
working to enhance cooperation and participation by United States companies in
assembly and packaging technology. In 1996, 1995 and 1994, the Company's
research and development expenses were approximately $1,053,000, $694,000 and
$170,000, respectively. The Company expects to continue to invest significant
resources in research and development.
The Company has focused its manufacturing resources on plastic quad
flat packages ("QFPs") for use with surface mount technology ("SMT"), and the
Company has neither the capability nor the intent to provide services to other
substantial segments of the semiconductor packaging market. For example, the
Company has no capacity to manufacture packages for use with pin through hole
("PTH") technology, nor does the Company presently intend to manufacture
packages using materials other than plastic, such as ceramic. BGA packaging
currently represents a very small portion of the Company's overall revenues and
a relatively small portion of the overall semiconductor packaging market.
Technological change in the semiconductor packaging industry is continuous and
in the future semiconductor manufacturers are expected to require increased
technological and manufacturing expertise. The introduction of new packaging
technologies, a reduction or shift away from QFP's, or the failure of the market
for BGA packaging to develop could result in a material adverse effect on the
Company's business, financial condition and results of operations.
Intellectual Property
The Company's success depends in part on its ability to obtain patents
and licenses and to preserve other intellectual property rights relating to its
manufacturing processes. As of December 31, 1996, the Company held four U.S.
patents which expire in 2012 and 2013, and six additional patent applications
have been filed and are pending. The Company expects to continue to file patent
applications when appropriate to protect its proprietary technologies; however,
the Company believes that its continued success depends primarily on factors
such as the technological skills and innovation of its personnel rather than on
its patents. The process of seeking patent protection can be expensive and time
consuming. There can be no assurance that patents will issue from pending or
future applications or that, if patents are issued, they will not be challenged,
invalidated or circumvented, or that rights granted thereunder will provide
meaningful protection or other commercial advantage to the Company. Moreover,
there can be no assurance
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that any patent rights will be upheld in the future or that the Company will be
able to preserve any of its other intellectual property rights.
As is typical in the semiconductor industry, the Company may receive
communications from third parties asserting patents on certain of the Company's
technologies. Although the Company has not received any such letters or been a
party to any intellectual property litigation, in the event any third party were
to make a valid claim and a license were not available on commercially
reasonable terms, the Company's business, financial condition and results of
operations could be materially and adversely affected. Litigation, which could
result in substantial cost to and diversion of resources of the Company, 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,
financial condition and results of operations.
Environmental Matters
The semiconductor packaging process involves a significant amount of
chemicals and gases which are subject to extensive governmental regulations. For
example, liquid waste is produced at the stage at which silicon wafers are diced
into chips with the aid of diamond saws and cooled with running water. In
addition, excess materials on leads and moldings are removed from packaged
semiconductors in the trim and form process. The Company has installed equipment
to collect certain solvents used in connection with its manufacturing process
and has contracted with independent waste disposal companies to remove such
hazardous material.
The Company has placed orders for advanced electroplating systems which
it currently plans to install at a leased facility in San Jose, California which
will be operated by the Company. This plating operation will involve the use of
significant quantities of certain hazardous substances. Although the Company has
designed procedures to ensure such materials are handled in compliance with
applicable regulations, there can be no assurance that the operation of such
facility will not expose the Company to additional costs in complying with
environmental regulations or result in future liability to the Company.
Federal, state and local regulations impose various controls on the
storage, handling, discharge and disposal of chemicals used in the Company's
manufacturing process and on the facility owned and occupied by the Company. The
Company believes that its activities conform to present environmental and land
use regulations applicable to its operations and its current facility.
Increasing public attention has, however, been focused on the environmental
impact of semiconductor manufacturing operations and the risk to neighbors of
chemical releases from such operations. There can be no assurance that
applicable land use and environmental regulations will not in the future impose
the need for additional capital equipment or other process requirements upon the
Company or restrict the Company's ability to expand its operations. The adoption
of new ordinances or similar measures or any failure by the Company to comply
with applicable environment and land use regulations or to restrict the
discharge of hazardous substances could subject the Company to future liability
or cause its manufacturing operations to be curtailed or suspended.
Employees
As of December 31, 1996, the Company had 215 full-time employees, 180
of whom were engaged in manufacturing, 8 in research and development, 8 in sales
and customer service and 19 in finance and administration. The Company's
employees are not represented by any collective bargaining agreement, and the
Company has never experienced a work stoppage. The Company believes that its
employee relations are good. The success of the Company's future operations
depends in large part on the Company's ability to attract and retain highly
skilled
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technical, manufacturing and management personnel. There can be no assurance
that the Company will be successful in attracting and retaining key personnel.
Executive Officers
The executive officers of the Company are as follows:
Name Age Position(s)
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Victor A. Batinovich............ 47 President, Chief Executive Officer
and Chairman of the Board
Joel J. Camarda................. 48 Vice President, Operations
Gerald K. Fehr.................. 59 Vice President, Technology
Tony Lin........................ 48 Vice President, Finance and Chief
Financial Officer
Victor Batinovich is a co-founder of the Company and has served as the
Company's President and Chief Executive Officer and a director since April 1992.
He has also served as Chairman of the Board since November 1995. Prior to 1992,
Mr. Batinovich founded Advanced Semiconductor Assembly Technology, a
semiconductor packaging firm, and served as President from October 1988 to
December 1991. Prior to 1988, Mr. Batinovich founded Swire Technologies, a
semiconductor packaging firm, serving as Executive Vice President and Chief
Operating Officer from April 1984 to August 1988.
Joel Camarda has served as Vice President, Operations of the Company
since July 1994. From April 1988 to July 1994, Mr. Camarda served as Director of
Worldwide Assembly Operations for Cypress Semiconductor. From January 1985 to
April 1988, Mr. Camarda served as Manager of Advanced Package Engineering for
Rockwell Semiconductor Corporation.
Gerald Fehr is a co-founder of the Company and has served as Vice
President, Technology of the Company since April 1992. From January 1991 to
April 1992, Dr. Fehr served as an independent consultant in the semiconductor
packaging industry. From March 1981 to January 1991, Dr. Fehr served as Director
of Packaging and Assembly for LSI Logic, Inc., a semiconductor company. From
June 1978 to March 1981, Dr. Fehr served as Manager of Packaging Operations of
Burroughs, a semiconductor company. From May 1975 to June 1978, Dr. Fehr served
as Manager of Packaging Operations of Fairchild, a semiconductor corporation.
From 1968 to 1975, Dr. Fehr served as Manager of Assembly and Packaging for
Intel Corporation.
Tony Lin has served as Vice President, Finance and Chief Financial
Officer of the Company since June 1993. From July 1992 to June 1993, Mr. Lin
worked as an independent financial consultant for a number of technology
companies. From July 1990 to July 1992, Mr. Lin served as Vice President,
Finance for Acer America, Inc., a personal computer manufacturer. From August
1989 to June 1990, Mr. Lin served as Controller for Micronics Computers, Inc., a
personal computer board manufacturer. From January 1980 to August 1989, Mr. Lin
worked for Wang Laboratories and held several senior positions, including
Controller of Wang Australia, Area Controller for the Asia/Pacific region and
International Manufacturing Controller. Mr. Lin is a Certified Public
Accountant.
The Company's success depends to a significant extent upon the
continued service of its key management and technical personnel, including
Victor Batinovich, the Company's President and Chief Executive Officer, as well
as other senior management, each of whom would be difficult to replace. The
competition for qualified employees is intense, and the loss of the services of
Mr. Batinovich or any other key personnel or the inability to attract, retain
and motivate qualified new personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
-10-
<PAGE>
Officers serve at the discretion of the Board and are appointed
annually. There are no family relationships between the directors or officers of
the Company.
Item 2. Properties
In December 1996, the Company purchased the 140,000 square feet
building complex in which it had operated since 1993. The Company currently
occupies 55,000 square feet in one of the two buildings in the complex, which it
uses for its manufacturing operations, executive offices and product
development. The Company believes its existing facility is adequate to meet its
needs for the foreseeable future. Since the Company does not currently operate
multiple facilities in different geographic areas, a disruption of the Company's
manufacturing operations resulting from various factors, including sustained
process abnormalities, human error, government intervention or a natural
disaster such as fire, earthquake or flood, could cause the Company to cease or
limit its manufacturing operations and consequently would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
-11-
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company effected the initial public offering of its Common Stock on
February 27, 1996. As of March 19, 1997, there were approximately 300 holders of
record of the Company's Common Stock. The Company's Common Stock is listed for
quotation in the Nasdaq National Market under the Symbol "IPAC." The following
table sets forth for the periods indicated, the high and low prices of the
Company's Common Stock as quoted in the Nasdaq National Market.
Fiscal Year Ended December 31, 1996 High Low
- ------------------------------------------- -------- -------
First Quarter (from February 27, 1996).... $10 1/8 $7 1/2
Second Quarter............................ 14 1/2 5 1/2
Third Quarter............................. 10 1/4 7
Fourth Quarter............................ 10 1/4 7 1/2
The trading price of the Company's Common Stock is expected to continue
to be subject to wide fluctuations in response to quarter-to-quarter variations
in operating results, announcements of technological innovations or new products
by the Company or its competitors, general conditions in the semiconductor
industry, changes in earnings estimates or recommendations by analysts, the
failure of the Company to meet or exceed published earnings estimates or other
events or factors. In addition, the public stock markets have experienced
extreme price and trading volume volatility in recent months. This volatility
has significantly affected the market prices of securities of many high
technology companies for reasons frequently unrelated to the operating
performance of the specific companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.
The Company has not paid any cash dividends on its Common Stock and
currently intends to retain any future earnings for use in its business.
Accordingly, the Company does not anticipate that any cash dividends will be
declared or paid on the Common Stock in the foreseeable future.
-12-
<PAGE>
Item 6. Selected Financial Data
Year Ended December 31,(1)
-----------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
Statement of Operations Data:
Revenues............................. $36,402 $20,764 $ 3,451 $ --
Cost of Revenues..................... 28,840 15,627 3,438 --
------ ------ ------ ------
Gross profit......................... 7,562 5,137 13 --
Operating expenses:..................
Selling, general and administrative. 3,488 2,229 1,309 777
Research and development............ 1,053 694 170 77
------ ------ ------ ------
Total operating expenses......... 4,541 2,923 1,479 854
------ ------ ------ ------
Operating income (loss)............. 3,021 2,214 (1,466) (854)
Interest and other income........... 1,210 551 54 65
Interest expense.................... (1,384) (1,074) (674) (42)
------ ------ ------ ------
Income (loss) before income taxes.... 2,847 1,691 2,086 (831)
Provision for income taxes........... (530) (141) -- --
------ ------ ------ ------
Net income (loss).................... $ 2,317 $ 1,550 $(2,086) $ (831)
====== ====== ====== ======
Net income (loss) per share(2)....... $ 0.16 $ 0.14 $ (0.22) $ (0.10)
====== ====== ====== ======
Weighted average common shares
and equivalents(2)................... 14,157 11,256 9,490 8,285
As of December 31,
-----------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
Balance Sheet Data:
Working capital..................... $15,614 $ 4,773 $ 2,075 $ 2,325
Total assets........................ 69,639 28,260 13,310 7,476
Long-term obligation................ 16,926 7,015 5,371 3,074
Mandatorily redeemable
convertible preferred stock........ -- 15,981 8,020 4,360
Total shareholders' equity (deficit) 40,761 (918) (2,764) (809)
- --------------
(1) The years ended December 31, 1996, 1995, 1994 and 1993 consisted of
52 weeks, 52 weeks, 53 weeks and 52 weeks, respectively.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
method used to determine shares used in computing per share amounts.
-13-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
From its inception in April 1992 through December 1993, IPAC focused on
developing manufacturing capacity at its facility in San Jose, California. The
Company commenced commercial production and recognized its initial revenues in
the quarter ended March 31, 1994. The Company has derived substantially all of
its revenues to date from QFPs. The Company has expanded its manufacturing
capacity every year since it began operations in early 1994. The Company
believes that its competitive position depends on its ability to have sufficient
capacity to meet anticipated customer demand. Accordingly, the Company made
significant investments in capital equipment and facilities improvements in 1995
and 1996 by acquiring equipment with a cost of $10 million and $19 million,
respectively. In 1996, the Company spent an additional $9.2 million to acquire
the building complex in which it has operated since 1993. The Company currently
occupies approximately 55,000 square feet of the 140,000 square feet in the
building complex. The Company believes that its current manufacturing base of
installed equipment, plus additional spending for capital equipment and
facilities improvements in 1997 of up to $7 million should be sufficient to meet
anticipated 1997 capacity requirements.
The Company's operating results are affected by a wide variety of
factors that could materially and adversely affect revenues, gross profit and
operating income. These factors include the short-term nature of its customers'
commitments, timing and volume of orders relative to the Company's production
capacity, long lead times for the manufacturing equipment required by the
Company, evolutions in the life cycles of customers' products, timing of
expenditures in anticipation of future orders, lack of a meaningful backlog,
effectiveness in managing production processes, changes in costs and
availability of labor, raw materials and components, costs to obtain materials
on an expedited basis, mix of orders filled, the impact of price competition on
the Company's average selling prices and changes in economic conditions.
Unfavorable changes in any of the above factors may adversely affect the
Company's business, financial condition and results of operations.
The Company's business is substantially affected by market conditions
in the semiconductor industry, which is highly cyclical and, at various times,
has been subject to significant economic downturns and characterized by reduced
product demand, rapid erosion of average selling prices and production
overcapacity. In addition, the markets for integrated circuits are characterized
by rapid technological change, evolving industry standards, intense competition
and fluctuations in end-user demand. Since the Company' s business is entirely
dependent on the requirements of semiconductor companies for independent
packaging foundries, any future downturn in the semiconductor industry is
expected to have an adverse effect on the Company's business, financial
condition and results of operations.
The Company has recently experienced a decline in the average selling
prices for its services and expects that average selling prices for its services
may decline in the future, principally due to intense competitive conditions. A
decline in average selling prices of the Company's services, if not offset by
reductions in the cost of performing those services, would decrease the
Company's gross margins and could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to reduce its cost per unit.
The Company has experienced substantial growth in the number of its
employees and the scope of its operations. This growth is expected to continue
to strain the Company's managerial, financial, manufacturing and other
resources. In addition, although the Company believes its current controls are
adequate, in order to manage its growth, the Company must continue to implement
additional operating and financial controls and hire and train additional
personnel. In particular, the Company must hire and train significant numbers of
additional personnel to
-14-
<PAGE>
operate the highly complex capital equipment required by its manufacturing
operations. There can be no assurance that the Company will be able to hire and
properly train sufficient numbers of qualified personnel or to effectively
manage such growth and its failure to do so could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, any failure to improve the Company's operational, financial and
management systems could have a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, since the
Company's expense levels are based in part on anticipated future revenue levels,
if revenue were to fall below anticipated levels, the Company's operating
results would be materially adversely affected.
Anticipated First Quarter Results
On March 18, 1997, the Company announced that based on orders received
to date, it expected revenues for the first quarter of 1997 to be from $5
million to $6 million. At such revenue levels, the Company announced that it
expected to post a loss between $2 million to $2.5 million. The Company's
operating results were adversely impacted in the first quarter of 1997 due to
lower orders from major customers. This reduced level of orders coupled with
problems in the quality of certain capital equipment and raw materials
contributed to lower than anticipated sales. These expected results are forward
looking statements and are subject to a number of risks and uncertainties which
could cause actual results to differ materially from those projected. Such risks
and uncertainties include, in particular, fluctuations in orders during the
remainder of the quarter, the level of capacity utilization, the pricing of the
Company's services, market conditions in the semiconductor industry and
financial adjustments in connection with the closing of the results for the
quarter. Accordingly, there can be no assurance that the Company's actual
results for the first quarter will be within the above ranges expected by the
Company.
-15-
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, certain
items in the Company's statement of operations as a percentage of revenues:
Year Ended December 31,
-------------------------------
1996 1995 1994
---- ---- ----
Revenues................................. 100.0% 100.0% 100.0%
Cost of revenues......................... 79.2 75.3 99.6
----- ----- -----
Gross profit............................. 20.8 24.7 0.4
Operating expenses:
Selling, general and administrative..... 9.6 10.7 38.0
Research and development................ 2.9 3.3 4.9
----- ----- -----
Total operating expenses.............. 12.5 14.0 42.9
----- ----- -----
Operating income (loss).................. 8.3 10.7 (42.5)
Interest and other income................ 3.3 2.7 1.6
Interest expense......................... (3.8) (5.2) (19.5)
----- ----- -----
Income (loss) before income taxes........ 7.8 8.2 (60.4)
Provision for income taxes............... (1.4) (0.7) --
----- ----- -----
Net income............................... 6.4% 7.5% 60.4%
===== ===== =====
Revenues
The Company recognizes revenues upon shipment of products to its
customers. Revenues increased 75% to $36.4 million in 1996, from $20.8 million
in 1995. In 1995, revenues increased 502% from $3.5 million in 1994. The growth
in 1996 revenues reflected increased order levels from the Company's three
largest customers and revenues earned from the Company's thermally enhanced
packages. The largest portions of the 1996 revenue growth occurred during the
first three quarters. In the fourth quarter of 1996, revenues declined to $9.5
million from $10.4 million for the third quarter. This decline resulted from
reduced orders from one of the Company's largest customers, and from quality
problems with respect to certain raw materials and capital equipment. The growth
in 1995 reflected the Company's emergence from its initial start up phase and
its qualification by, and orders received from, a number of customers.
Gross Profit
Cost of revenues includes materials, labor, depreciation and overhead
costs associated with semiconductor packaging. Gross profit increased to $7.6
million in 1996, from $5.1 million in 1995, and from $13,000 in 1994. Gross
profit as a percentage of revenues, or gross margin, was 20.8% in 1996 compared
with 24.7% in 1995, and 0.4% in 1994.
In 1996, the Company incurred higher labor and manufacturing overhead
expenses from adding manufacturing manpower and infrastructure, which reduced
its gross margin. In the fourth quarter of 1996, gross margins were also
adversely affected by a drop in average selling prices, caused by industry
competition. The Company's 1996 revenue growth was largely from the growth of
high volume production orders, as low volume prototype orders constituted only a
small percentage of overall volume. Gross margin in 1995 reflected a higher
proportion of low volume prototype orders which carry significantly higher gross
margins compared to high volume production orders. The Company believes that any
further decline in such prototype orders as a percentage of overall revenues
would not have a material adverse impact on future financial results. The low
gross margin in 1994 reflected the low volumes and start up costs incurred in
the Company's first year of production.
-16-
<PAGE>
Depreciation for machinery and equipment is calculated using the units
of production method, in which depreciation is calculated based upon the units
produced in a given period divided by the estimate of total units to be produced
over its life following commencement of use. Such estimate is reassessed when
facts and circumstances suggest a revision may be necessary. Based upon reduced
utilization of machinery and equipment in relation to plan, the estimate for
total throughput was reduced in late 1996 causing the depreciation rate per unit
to increase in late 1996. Such higher depreciation rate will continue into 1997.
In all cases, the asset will be fully depreciated by the end of its estimated
six year life. Compared with straight line depreciation, the units of production
method generally results in lower depreciation expense during the early life of
the equipment and relatively higher depreciation expense once the equipment is
in full production. Had the Company utilized straight line depreciation, its
depreciation expense for 1996, 1995, and 1994 would have been approximately $4.3
million, $2.0 million, and $900,000, respectively, compared to approximately
$3.2 million, $1.5 million, and $330,000, respectively, utilizing the units of
production method of production for production machinery and equipment.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of costs
associated with sales, customer service, finance, administration and management
personnel, as well as advertising, public relations, legal and facilities costs.
Selling, general and administrative expenses increased 56% to $3.5 million in
1996, from $2.2 million in 1995. In 1995, selling, general and administrative
expenses increased 70% from $1.3 million in 1994. The increases in both years
were due primarily to increases in staff, marketing efforts, and facilities to
support the Company's expansion.
As a percentage of revenues, selling, general and administrative
expenses decreased to 9.6% in 1996, compared with 10.7% in 1995, and 38% in
1994. The decrease in such expenses as a percentage of revenues in both years
reflects the spreading of relatively fixed costs over a larger revenue base. The
Company anticipates that its selling, general and administrative expenses will
continue to increase in absolute dollars in future periods, although such
expenses may fluctuate as a percentage of revenues.
Research and Development
Research and development expenses consist primarily of the costs
associated with research and development personnel, the cost of related
materials and services, and the depreciation of development equipment. Research
and development expenses increased 52% to $1.1 million in 1996, from $0.7
million in 1995. In 1995, research and development expenses increased 308%
percent from $170,000 in 1994. The increase in 1996 was due primarily to the
Company's expanded efforts in developing BGA, chip scale, and thermally enhanced
packages. The increase in 1995 was due primarily to the Company's expanded
efforts in refining production of thin QFP's ("TQFP's"), thermally enhanced
QFP's, and improving capabilities in various production processes.
As a percentage of revenues, research and development expenses
decreased to 2.9% in 1996, compared with 3.3% in 1995, and 4.9% in 1994. The
decrease in such expenses as a percentage of revenues reflected higher revenue
levels in 1995 and 1996.
Interest and Other Income
Interest income in 1996, 1995, and 1994 was $982,000, $209,000 and
$54,000, respectively. The increase in interest income for 1996, was the result
of interest earned on proceeds from the Company's initial public offering which
was completed in March 1996 and which raised $23.1 million, net of expenses. In
1996, other income was $228,000, all of which was earned for development work
with the semiconductor industry consortium. In 1995, other
-17-
<PAGE>
income consisted of $342,000 earned for development work, of which $318,000 was
earned from participation in a semiconductor industry consortium. Interest and
other income consisted solely of interest income in 1994.
Interest Expense
Interest expense consists primarily of interest payable on capital
leases and term loans secured by equipment. In 1993 and 1994, the Company
financed its manufacturing equipment primarily through capital leases with terms
ranging from four to five years, and carrying imputed interest rates ranging
from 9.5% to 15.5% per annum. The Company financed its acquisition of equipment
in 1996 and 1995 through term loans secured by equipment. The interest rates on
the loans range from 7.75% to 8.75% per annum. Interest expense in 1996, 1995,
and 1994 was $1.4 million, $1.1 million, and $674,000, respectively.
Provision for Income Taxes
The Company's provision for taxes in 1996 was $530,000, representing an
effective tax rate of approximately 19%. The effective tax rate represents
alternative minimum tax ("AMT") resulting from limits on the use of net
operating loss carryforwards for AMT purposes and tax accelerated depreciation
on all machinery and equipment. The Company's provision for taxes in 1995 was
$141,000, representing an effective tax rate of approximately 8%. There was no
tax provision prior to 1995 as the Company operated at a loss.
Liquidity and Capital Resources
Prior to its initial public offering in March 1996, the Company
satisfied its liquidity needs principally from the sale of its Preferred Stock,
equipment financing through leases and equipment secured term loans, and to a
lesser extent, cash flow from operations. Prior to its initial public offering,
the Company raised approximately $16 million from issuance of its Preferred
Stock, $7.8 million from equipment financing, and $4.9 million from term loans.
The Company completed its initial public offering in March 1996. Proceeds from
this offering, net of underwriters' commissions and offering expenses, was $23.1
million.
Prior to 1995, the Company's production equipment had been funded
through capital leases. The Company acquired $3.7 and $4.0 million of production
equipment through capital leases in 1993 and 1994, respectively, which leases
expire between December 1997 to January 1999.
In 1996 and 1995, the Company entered into borrowing facilities with a
number of lenders, allowing the Company to finance 70% to 80% of the cost of
collateralized machinery and equipment. Borrowings under these facilities
accrued interest at rates ranging from 7.75% to 8.75% with terms ranging from 36
to 48 months. The Company borrowed an aggregate of $9.8 million and $4.9 million
through these facilities in 1996 and 1995, respectively. At December 31, 1996,
the aggregate principal amount outstanding under all equipment loans was $12.5
million. Certain of the credit facilities require the Company to maintain
certain financial covenants including minimum tangible net worth, a ratio of
total liabilities to tangible net worth, and quarterly profits. At December 31,
1996 and 1995, the Company was in compliance with such covenants.
In March 1997, the Company secured a mortgage loan with an insurance
company, which provided the Company with a $6.7 million five year term loan. The
loan is secured by the real estate and buildings purchased by the Company in
December 1996. The loan accrues interest at 8.5%, and is payable in equal
monthly installments of $58,000, with a balloon payment of $5.9 million due
after five years. The proceeds of this mortgage loan were used to pay off and
retire the $6.5 million real estate loan which was entered into in December 1996
to provide temporary
-18-
<PAGE>
financing for the acquisition of the Company's building complex. The loan
accrued interest at 2.25% over the rate for 30 day certificates of deposit and
was collateralized by a certificate of deposit of equivalent value.
In May 1996, the Company renewed its line of credit agreement with a
bank which provides, through July 15, 1997, for borrowings up to the lesser of
$2,000,000 or 80% of eligible accounts receivable. At December 31, 1996 and
1995, no amounts were outstanding under this line of credit. However, the
Company has issued $775,000 and $1,300,000 of standby commercial letters of
credit for purchases of equipment against this line of credit at December 31,
1996 and 1995, respectively. Borrowings under the line of credit accrue interest
at the bank's prime rate (8.25% at December 31, 1996) and are collateralized by
the assets of the Company. The agreement requires the Company to maintain
certain financial covenants, including a minimum quick ratio, minimum tangible
net worth, maximum debt to tangible net worth, quarterly profitability and
prohibits the Company from the payment of dividends without prior approval by
the bank. At December 31, 1996, the Company was in compliance with such
covenants.
Capital additions totaled approximately $27.9 million, $10.2 million,
and $4.4 million in 1996, 1995, and 1994, respectively. The $27.9 million of
capital additions in 1996 was comprised of $9.2 million for the acquisition of
the building complex the Company acquired in December 1996, and $18.7 million
for equipment and facilities improvements. The Company is planning to spend up
to $7 million for production equipment and facilities improvements in 1997. The
Company expects to borrow approximately $3 to $4 million through equipment
secured borrowings in 1997. At December 31, 1996, the Company had approximately
$6 million of unused borrowing facilities from its equipment lenders. At
present, the Company does not have any agreement regarding the extension of
these facilities beyond the expiration dates.
On March 18, 1997, the Company announced that it expected to report a
loss for the first quarter of 1997. In the event such a loss is incurred, it is
likely that the Company would be out of compliance with certain financial
covenants under its borrowing faciliites as of the end of the first quarter of
1997. In this event, the Company anticipates receipt of a waiver of the
covenants in default from the respective financial institutions. If the waiver
were not received, certain debt would become currently due and payable and the
line of credit would no longer be available for use.
The Company believes that its existing cash balances, expected cash
flow from operations and available equipment lease financing and bank
borrowings, will be sufficient to meet its projected working capital and other
cash requirements through 1997. There can be no assurance, however, that lower
than expected revenues, increased expenses, increased costs associated with the
purchase or maintenance of capital equipment, or other events will not cause the
Company to seek more capital, or capital sooner than currently expected. The
timing and amount of the Company's actual capital requirements will depend on a
number of factors, including demand for the Company's services, the level of
cash flow from operations, availability of capital equipment, adverse
fluctuations in foreign currency exchange rates, changes in semiconductor
industry conditions and competitive factors. There can be no assurance that such
additional financing will be available when needed or, if available, will be
available on satisfactory terms.
-19-
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Financial Statement:
Report of Independent Accoutants........................... 21
Balance Sheet as of December 31, 1996 and 1995............. 22
Statement of Operations for the Years Ended December 31,
1996, 1995 and 1994....................................... 23
Statement of Shareholders' Equity (Deficit) for the
Years Ended December 31, 1996, 1995 and 1994.............. 24
Statement of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994....................................... 25
Notes to Financial Statements.............................. 26
Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
-20-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Integrated Packaging Assembly Corporation
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Integrated
Packaging Assembly Corporation at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
January 13, 1997 except as to Note 5,
which is as of March 25, 1997
21
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE DATA)
December 31,
-----------------
1996 1995
------- --------
ASSETS
Current assets:
Cash and cash equivalents.................. $15,817 $ 5,424
Short term investments..................... 3,025 --
Accounts receivable, net of allowance
for doubtful accounts of $145 and $50.... 6,141 2,903
Inventory.................................. 1,977 2,141
Prepaid expenses and other current assets.. 606 487
Total current assets..................... 27,566 10,955
------- -------
Property and equipment, net.................. 41,776 17,050
Other assets................................. 297 255
------- -------
Total assets............................... $69,639 $28,260
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of notes payable........... $ 3,893 $ 1,390
Current portion of capital lease
obligations............................... 2,225 1,558
Accounts payable........................... 2,534 1,855
Accrued expenses and other liabilities..... 3,300 1,379
------- -------
Total current liabilities................ 11,952 6,182
------- -------
Long term portion of notes payable........... 15,155 3,130
------- -------
Long term of capital lease obligations....... 1,771 3,885
Commitments and contingencies
(notes 4, 5, and 10)
Mandatorily Redeemable Convertible
Preferred Stock............................. -- 15,981
------- -------
Shareholders' equity (deficit)
Common Stock, no par value, 75,000,000 and
14,000,000 shares authorized; 13,862,342
and 2,530,774 shares issued and
outstanding................................. 39,811 449
Accumulated earnings (deficit)................. 950 (1,367)
------- -------
Total shareholders' equity (deficit)........... 40,761 (918)
------- -------
Total liabilities and shareholders'
equity (deficit)............................ $69,639 $28,260
======= =======
The accompanying notes are an integral part of these financial statements.
22
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31,
--------------------------
1996 1995 1994
------- -------- ---------
Revenues...................................... $36,402 $20,764 $ 3,451
Cost of revenues.............................. 28,840 15,627 3,438
------ ------- -------
Gross profit.................................. 7,562 5,137 13
------ ------- -------
Operating expenses:
Selling, general and administrative... 3,448 2,229 1,309
Research & development................ 1,053 694 170
Total operating expenses............ 4,541 2,923 1,479
Operating income (loss)....................... 3,021 2,214 (1,466)
Interest & other income....................... 1,210 551 54
Interest expense.............................. (1,384) (1,074) (674)
------ ------- -------
Income (loss) before income taxes............. 2,847 1,691 (2,086)
Provision for income taxes.................... (530) (141) --
------ ------- -------
Net income (loss)............................. $2,317 $ 1,550 ($2,086)
====== ======= =======
Net income (loss) per share................... $ 0.16 $ 0.14 ($0.22)
====== ======= =======
Weighted average common
shares and equivalents...................... 14,157 11,256 9,490
====== ======= =======
The accompanying notes are an integral part of these financial statements.
23
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stock Accumulated
---------------- Earnings
Shares Amount (Deficit) Totals
-------- ------- ---------- ---------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1993.................. 2,495 $ 22 ($831) ($809)
Repurchase of common stock.................... (562) - - -
Issuance of warrants.......................... - 131 - 131
Net loss...................................... - - (2,086) (2,086)
------ ------- ------ -------
BALANCE AT DECEMBER 31, 1994.................. 1,933 153 (2,917) (2,764)
Common stock issued under stock plans......... 597 125 - 125
Issuance of warrants.......................... - 144 - 144
Amortization of deferred compensation......... - 27 - 27
Net income.................................... - - 1,550 1,550
------ ------- ------ -------
BALANCE AT DECEMBER 31, 1995.................. 2,530 449 (1,367) (918)
Sale of common stock, net of issuance
costs of $935............................... 3,450 23,111 - 23,111
Conversion of mandatorily Redeemable
Convertible Preferred Stock into
common stock................................ 7,862 15,981 - 15,981
Common stock issued under stock plans......... 93 182 - 182
Common stock repurchased under stock plan..... (73) (17) - (17)
Issuance of warrants.......................... - 57 - 57
Amortization of deferred compensation......... - 48 - 48
Net income.................................... - - 2,317 2,317
------ ------- ------ -------
BALANCE AT DECEMBER 31, 1996.................. 13,862 $39,811 $ 950 $40,761
====== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
STATEMENT OF CASH FLOWS
INCREASE (DECREASE) CASH
($ THOUSANDS)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)....................................... $ 2,317 $ 1,550 ($2,086)
ADJUSTMENTS:
Depreciation and amortization........................... 3,316 1,541 331
Changes in assets and liabilities:
Accounts receivable................................... (3,238) (2,061) (842)
Inventory............................................. 164 (1,382) (488)
Prepaid expenses and other assets..................... (161) (415) (235)
Accounts payable...................................... 679 953 826
Accrued expenses and other liabilities................ 1,921 950 275
------- ------- -------
Net cash provided by (used in) operating activities..... 4,998 1,136 (2,219)
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Acquisition of property and equipment................... (27,744) (10,126) (404)
Purchase of short-term investments...................... (25,025) -- --
Sale & redemption of short-term investments............. 22,000 -- --
------- ------- -------
Net cash used in investing activities................... (30,769) (10,126) (404)
------- ------- -------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments under capital lease obligations................ (1,593) (1,358) (820)
Principal payments on note payable...................... (1,819) (234) --
Proceeds from note payable.............................. 16,300 4,890 --
Proceeds from issuance of Mandatorily Redeemable
Convertible Preferred Stock........................... -- 7,961 3,660
Proceeds from issuance of common stock, net............. 23,276 125 --
------- ------- -------
Net cash provided by financing activities............... 36,164 11,384 2,840
------- ------- -------
NET INCREASE IN CASH.................................... 10,393 2,394 217
Cash and cash equivalents at beginning of period........ 5,424 3,030 2,813
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.............. $15,817 $ 5,424 $ 3,030
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.................................. $ 1,240 $ 1,008 $ 671
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES
Acquisition of equipment under capital leases........... $ 147 $ 40 $ 3,979
Issuance of warrants.................................... $ 57 $ 144 $ 131
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Integrated Packaging Assembly Corporation (the ''Company''), an independent
semiconductor packaging foundry, was incorporated in California on April 28,
1992. The Company assembles and packages integrated circuits from wafers
consigned by its customers. The Company's focus is on quad flat packages
("QFP's"), thin quad flat packages ("TQFP's"), and ball grid array packages
("BGA's"), which are used in complex integrated circuits with high pin-counts in
the personal computer and telecommunications industries.
FISCAL YEAR
The Company's fiscal quarters and year end on the Sunday nearest the calendar
quarter end and December 31, respectively. For purposes of financial statement
presentation, each fiscal year is presented as having ended on December 31 and
each fiscal quarter is presented as having ended on the calendar quarter end.
Fiscal year 1994 consisted of 53 weeks; 1995 and 1996 each consisted of 52
weeks.
CASH EQUIVALENTS AND SHORT TERM INVESTMENTS
The Company considers all highly liquid investments purchased with an initial
maturity of 90 days or less to be cash equivalents, and investments with
original maturities of greater than 90 days to be short term investments. As of
December 31, 1996, the Company had short term investments primarily comprised of
fixed maturity securities of $3.0 million, all of which have been classified as
available for sale and have contractual maturities of less than one year. These
securities are stated at fair market value. Unrealized gains and losses were
immaterial at December 31, 1996.
INVENTORY
Inventory, which primarily consists of raw material supplies such as gold wire,
lead frames and plastics, is stated at the lower of cost, determined by the
first-in, first-out basis, or market. The Company holds product on consignment
from its customers while services are being performed.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation for production
machinery and equipment is calculated using the units of production method, in
which depreciation is calculated based upon the units produced in a given period
divided by the estimate of total units to be produced over its life following
commencement of use. Such estimate is reassessed when facts and circumstances
suggest a revision may be necessary. In all cases the asset will be fully
depreciated by the end of its estimated six-year life. In late 1996, in light of
lower than expected utilization, the Company reduced its estimates of the number
of units to be produced over the useful equipment life. Accordingly, the
depreciation rate per unit was increased and was not material to 1996 results.
The higher rate will continue into 1997. Depreciation for all other property and
equipment is computed using the straight-line method over the estimated useful
lives of the assets, generally 3 to 6 years.
In December 1996, the Company acquired the real estate parcel and facilities on
which it had operated since 1993 for $9.2 million. The Company has allocated
its purchase cost between land, buildings and improvements in proportion to fair
market value. The building is depreciated over 30 years, with building
improvements depreciated over 5 to 15 years.
26
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS --(CONTINUED)
REVENUE RECOGNITION
Revenue is generally recognized upon shipment. A provision for estimated future
returns is recorded at the time revenue is recognized.
INCOME TAXES
The Company accounts for income taxes using the asset and liability approach
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or income tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactments of changes in the tax law or rates.
STOCK OPTIONS
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees".
Accordingly, compensation for stock options is generally measured as the excess,
if any, of the quoted market price of the Company's stock at the date of the
grant over the amount an employee must pay to acquire the stock. In January
1996, the Company adopted the disclosure only requirements of SFAS 123.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options and warrants using the treasury stock
method, except when antidilutive. Pursuant to the requirements of the Securities
and Exchange Commission, common stock equivalent shares relating to stock
options and warrants, using the treasury stock method, and the Mandatorily
Redeemable Convertible Preferred Stock, using the as if-converted method, issued
subsequent to December 31, 1994, through the date of its initial public
offering, are included in the computation of net income (loss) per share whether
anti-dilutive or not. The Company completed its initial public offering on
February 28, 1996 and the shares issued are included in the weighted average
computation only from the date of issuance. Accordingly, these shares resulted
in a greater amount of average shares outstanding in 1996 compared to 1995.
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could vary from these
estimates.
27
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS:
(In thousands)
December 31
---------------------
1996 1995
--------- ----------
Inventory
Raw materials.................. $ 1,839 $ 1,906
Work in progress............... 138 235
------- -------
$ 1,977 $ 2,141
======= =======
Property and equipment
Land.......................... $ 3,827 $ --
Buildings and improvements... $ 7,175 405
Machinery and equipment....... 34,624 17,583
Office and computer equipment 613 348
Furniture and fixtures........ 268 208
Deposits on machinery and
equipment................... 250 322
------- -------
46,757 18,866
Less accumulated depreciation (4,981) (1,816)
------- -------
$41,776 $17,050
======= =======
Property and equipment acquired under
capital leases included above
Machinery and equipment...... 7,819 7,672
Office and computer equipment 36 36
Furniture and fixtures....... 57 57
------- -------
7,912 7,765
Less accumulated depreciation (2,699) (1,240)
------- -------
$ 5,213 $ 6,525
======= =======
Accrued expenses and other liabilities
Accrued payroll and related
expenses................... $ 642 $ 488
Accrued income tax........... 621 140
Other accrued liabilities.... 2,037 751
------- -------
$ 3,300 $ 1,379
======= =======
NOTE 3--RESEARCH AND DEVELOPMENT ARRANGEMENT:
In February 1995, the Company joined a consortium (the ''Consortium'') of
semiconductor companies which entered into a research and development contract
with the Advance Research Projects Agency (ARPA), a United States Government
agency. Under this agreement, ARPA will provide funds based on the completion of
milestones approved by ARPA and the Consortium. The agreement extends into 1997
and could provide future payments of up to $185,000. Income generated from the
research and development contract is recognized upon the completion of
milestones, which approximates the
28
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--RESEARCH AND DEVELOPMENT ARRANGEMENT (CONTINUED):
percentage of completion method. Accordingly, amounts totaling $228,000 and
$318,000 were recognized under this agreement during 1996 and 1995,
respectively, and included in interest and other income. Additionally during
1996, the Company received $289,000 from ARPA which it used to reduce the cost
of equipment acquired. The Company is not obligated to repay funding regardless
of the outcome of its development efforts; however, the agreement requires the
Company to use its best efforts to achieve specified results as per the
agreement. The Company retains ownership of the intellectual property developed
under the contract.
NOTE 4--LEASING ARRANGEMENTS AND COMMITMENTS:
The Company leases certain machinery and equipment, office and computer
equipment, and furniture and fixtures under long-term lease agreements which are
reported as capital leases. The terms of the leases range from three to five
years, with purchase options at the end of the respective lease terms. The
Company intends to exercise such purchase options, which will require payments
estimated at approximately $400,000 and $800,000 in 1997 and 1998, respectively.
The Company incurred rent expense under a noncancelable operating lease until
December 1996 when the Company purchased the facility it had been leasing. Rent
expense was $216,000, $180,000, and $166,000 in 1996, 1995, and 1994,
respectively. At December 31, 1996, the Company has future minimum lease
commitments under operating leases of $49,000 payable in 1997.
The Company leases part of its facility to a third party. The lease, through
August 1997, provides annual rental income ranging from $320,000 to $350,000,
which the Company records as other income, net of Company expenses related to
the leased portion of the facility. In 1996, rental income related to this
lease was minimal.
Future minimum lease payments under capital leases, including capitalized
purchase options at December 31, 1996 are as follows (in thousands):
CAPITAL
LEASES
---------
Year ending December 31:
1997.......................................... $ 2,617
1998.......................................... 1,962
1999.......................................... 9
---------
Total minimum payments........................ $ 4,588
Less imputed interest and unamortized charges. (592)
---------
Present value of payments under capital leases 3,996
Less current portion.......................... (2,225)
---------
Long-term lease obligations................... $ 1,771
=========
29
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--LEASING ARRANGEMENTS AND COMMITMENTS (CONTINUED):
In 1996, 1994 and 1993, in connection with arranging capital leases, the Company
issued to the lessors warrants to purchase an aggregate of 457,550 shares of
Series A Mandatorily Redeemable Convertible Preferred Stock at exercise prices
ranging from $1.50 to $8.00. As a result of the Company's initial public
offering, the warrants are now exercisable to purchase the same number of shares
of Common Stock at the same exercise price. The estimated value of these
warrants at the time of issuance, as determined by the Company, is being
amortized as interest expense over the period the lease is outstanding. The
warrants are exercisable at any time prior to 2003 (200,000 shares) and 2004
(257,550 shares). None of the warrants had been exercised at December 31, 1996.
NOTE 5--NOTES PAYABLE:
DECEMBER 31,
-------------------
1996 1995
-------- ---------
Notes payable (in thousands):
Bank term note payable....... $ 3,375 $ 1,853
Equipment notes payable...... 9,173 2,667
Real estate loan............. 6,500 --
------- --------
Total notes payable.......... 19,048 4,520
Less current portion......... (3,893) (1,390)
------- -------
$15,155 $ 3,130
======= =======
BANK TERM NOTE PAYABLE
The Company fully utilized a borrowing facility by borrowing $2.0 million in
1995 and an additional $2.0 million in 1996. The facility provides financing
for up to the lesser of $4.0 million or 80% of the cost of collaterized
machinery and equipment. The loans accrue interest at the London Interbank
Bank Rate (LIBOR) plus 2.5% and requires 48 equal monthly principal payments.
The agreement requires the Company to maintain certain financial covenants,
including a minimum liquidity ratio and a debt service coverage ratio, and
prohibits the payment of dividends without prior approval by the bank. At
December 31, 1996 and 1995, the Company was in compliance with such covenants.
In conjunction with the Company's utilization of this borrowing facility in
1995, the Company issued a warrant to purchase 21,740 shares of the Company's
Series A Mandatorily Redeemable Convertible Preferred Stock at an exercise price
of $4.60 per share. As a result of the Company's initial public offering, this
warrant can be exercised to purchase the same number of shares of Common Stock
at the same exercise price. The $26,000 value of this warrant at the time of
issuance, as determined by the Company and supported by an independent
appraisal, is being amortized as interest expense over the period the note is
outstanding. The warrant is exercisable at any time prior to July 2000. The
warrant had not been exercised at December 31, 1996.
EQUIPMENT NOTES PAYABLE
In 1995 and 1996, the Company entered into borrowing facilities with a number of
lenders, allowing the Company to finance 70% to 80% of the cost of collaterized
machinery and equipment. Borrowings under these facilities accrued interest at
rates ranging from 7.75% to 8.75% per annum with terms ranging from
30
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
36 to 48 months. At December 31, 1996, the Company had approximately $6 million
of unused borrowing facilities. The borrowing facilities expire between March
and June 1997. Certain of the credit facilities require the Company to maintain
certain financial covenants including minimum tangible net worth, a ratio of
total liabilities to tangible net worth, and quarterly profitability. At
December 31, 1996 and 1995, the Company was in compliance with such covenants.
In accordance with the borrowing facility agreement entered in 1995, the Company
issued a warrant to purchase 97,826 shares of the Company's Series A Mandatorily
Redeemable Convertible Preferred Stock at an exercise price of $4.60 per share.
As a result of the Company's initial public offering, this warrant can be
exercised to purchase the same number of shares of Common Stock at the same
exercise price. The $118,000 value of this warrant at the time of issuance, as
determined by the Company and supported by an independent appraisal, is being
amortized as interest expense over the period the notes are outstanding. The
warrant is exercisable at any time prior to 2005. The warrant had not been
exercised at December 31, 1996.
REAL ESTATE LOANS
In December, 1996, the Company borrowed $6.5 million from a bank to provide
temporary financing for the acquisition of its facilities. The loan accrues
interest at 2.25% over the rate for 30 day certificates of deposit and was
collateralized by a certificate of deposit of equivalent value. The Company has
classified this loan as long-term at December 31, 1996 based on the refinancing
disclosed below.
On March 25, 1997, the Company closed a mortgage loan with an insurance company,
which provided the Company with a $6.7 million five year term loan. The loan is
secured by the land, buildings and improvements purchased in December 1996. The
loan accrues interest at 8.5%, and is payable in equal monthly installments of
$58,000, with a balloon payment of $5.9 million due after five years. The
proceeds of this mortgage loan was used to pay off and retire the $6.5 million
real estate loan.
MATURITIES OF LOANS AND NOTES PAYABLE
The aggregate maturities of notes payable at December 31, 1996 are as follows
(in thousands):
1997...................... $ 3,893
1998...................... 3,963
1999...................... 3,055
2000...................... 2,325
2001...................... 5,902
-------
Total..................... 19,138
Less unamortized charges.. (90)
Less current portion...... (3,893)
-------
Long-term borrowings...... $15,155
=======
31
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
LINE OF CREDIT
In May, 1996, the Company renewed its line of credit agreement with a bank which
provides, through July 15, 1997, for borrowings up to the lesser of $2,000,000
or 80% of eligible accounts receivable. At December 31, 1996 and 1995, no
amounts were outstanding under this line of credit. However, the Company has
issued $775,000 and $1,300,000 of standby commercial letters of credit for
purchases of equipment against this line of credit at December 31, 1996 and
1995, respectively. Borrowings under the line of credit accrue interest at the
bank's prime rate (8.25% at December 31, 1996) and are collateralized by the
assets of the Company. The agreement requires the Company to maintain certain
financial covenants, including a minimum quick ratio, minimum tangible net
worth, maximum debt to tangible net worth, quarterly profitability and prohibits
the Company from the payment of dividends without prior approval by the bank.
At December 31, 1996, the Company was in compliance with such covenants.
NOTE 6--COMMON STOCK AND MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
On February 28, 1996, the Company issued 3,000,000 shares of Common Stock at
$7.50 per share in the Company's initial public offering ("IPO"). In addition,
the underwriters exercised their overallotment option to purchase 450,000 shares
of Common Stock. Proceeds net of discounts, commissions and offering expenses,
total approximately $23.1 million.
Mandatorily Redeemable Convertible Preferred Stock, no par value, which was
converted into the same number of common shares at the Company's IPO consisted
of the following at December 31, 1995, (in thousands, except share data):
DEC. 31
1995
----------
Series A, 5,100,000 shares authorized. 4,373,000 shares
issued and outstanding at Dec. 31, 1995.................... $ 4,360
Series B, 500,000 shares authorized. 500,000 shares
issued and outstanding at Dec. 31, 1995.................... 988
Series C, 1,250,000 shares authorized. 1,250,000 shares
issued and outstanding at Dec. 31, 1995.................... 2,672
--------
Series D, 1,739,130 shares authorized. 1,739,130 shares
issued and outstanding at Dec. 31, 1995.................... $ 15,981
========
NOTE 7--STOCK OPTIONS:
1993 STOCK OPTION PLAN
In April 1993, the Board of Directors and shareholders adopted the 1993 Stock
Option Plan (the "Plan") which as amended, provides for the grant of incentive
stock options (ISOs) and nonqualified stock options (NSOs) to purchase up to
2,014,921 shares of Common Stock. ISOs may be granted to employees and NSOs may
be granted to either employees or consultants. In accordance with the Plan, the
stated exercise price shall not be less than 100% and 85% of the estimated fair
market value of Common Stock on the date of grant for ISOs and NSOs,
respectively, as determined by the Board of Directors. The Plan provides that
32
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the options shall be exercisable over a period not to exceed ten years and shall
vest as determined by the Board of Directors. Substantially all of the options
vest 25% one year after the date of grant and 1/48th each month thereafter.
Compensation expense of approximately $200,000 was recognized on stock options
granted between June and November, 1995, and is being amortized over the four-
year vesting period.
DIRECTOR STOCK OPTION PLAN
In connection with the initial public offering, the Company adopted a Director
Stock Option Plan (the "Director Plan"). A total of 100,000 shares of Common
Stock have been authorized for issuance under the Director Plan. The Director
Plan provides for the grant of NSOs to non-employee directors of the Company.
The Director Plan provides that each non-employee director who joins the Board
will automatically be granted an NSO to purchase 20,000 shares of Common Stock
on the date upon which such person first becomes a non-employee director (the
"Initial Grant"). In addition, each non-employee director will automatically
receive an NSO to purchase 5,000 shares of Common Stock upon such director's
annual re-election to the Board, provided the director has been a member of the
Board for at least six months upon the date of such re-election (the
"Subsequent Grant"). The Initial Grant vests and becomes exercisable as to 25%
of the shares one year after the date of grant and as to 1/48th of the shares
each month thereafter, and each Subsequent Grant shall become exercisable as to
1/12th of the shares each month following the date of grant, both subject to
the director's continuous service. The exercise price of all stock options
granted under the Director Plan is equal to the fair market value of the
Company's Common Stock on the date of grant. Options granted under the Director
Plan have a term of ten years. Unless terminated sooner, the Director Plan will
terminate in 2006. No options were issued in 1996 under the Director Plan.
RESTRICTED COMMON STOCK
In September 1995, 398,333 shares of restricted Common Stock were sold to
employees upon exercise of stock options then outstanding. Each unvested share
of this restricted Common Stock is subject to repurchase by the Company at the
employees' exercise price if an employee terminates before such shares vest;
vesting occurs over the same period as the former options. At December 31, 1995,
50,209 shares of such restricted Common Stock were vested. At December 31,
1996, 170,312 vested shares had been converted into unrestricted shares, 73,750
shares were repurchased by the Company from terminated employees, and of the
remaining 154,271 restricted shares outstanding, 29,272 were vested.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Stock Purchase Plan (the "Purchase Plan") was adopted by
the Company's Board of Directors and shareholders in December 1995, and became
effective upon the closing of the Company's initial public offering on February
28, 1996. Under the Purchase Plan, a total of 400,000 shares of Common Stock
has been reserved for issuance to eligible employees. The Purchase Plan allows
employees to purchase shares through payroll deductions at 85% of the fair
market value of the Common Stock at the beginning or the end of the applicable
twelve-month purchase period. The Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the U.S. Internal Revenue
Code. Unless terminated sooner, the Purchase Plan will terminate ten years from
its effective date. During 1996, 25,062 shares were issued under the Plan.
33
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
SUMMARY OF OPTION ACTIVITY
The following table summarizes the Company's stock option activity and related
weighted average exercise price within each category for each of the years ended
December 31, 1994, 1995, and 1996.
<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------ -----------------
AVERAGE AVERAGE AVERAGE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at Jan. 1... 550,633 $1.04 612,500 $0.18 138,500 $0.10
Options granted................. 484,848 $8.74 615,000 $0.98 491,000 $0.20
Options canceled................ (68,126) $0.33 (547,294) $0.21 (17,000) $0.11
Options exercised............... (77,155) $6.04 (129,573) $0.20 -- --
--------- ----- ------- ----- ------- -----
Options outstanding at Dec. 31 890,200 $4.85 550,633 $1.04 612,500 $0.18
========= ===== ======= ===== ======= =====
Options exercisable at Dec. 31 147,944 $0.88 17,043 $0.24 42,125 $0.10
========= ===== ======= ===== ======= =====
</TABLE>
Significant option groups outstanding at December 31, 1996, and the related
weighted average exercise price and remaining contractual life information are
as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
OPTIONS WITH EXERCISE -------------------------------- REMAINING
PRICES RANGING FROM: SHARES PRICE SHARES PRICE LIFE (YEARS)
- ------------------------- ---------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.10 - $0.46.......... 357,289 $0.25 122,297 $0.24 8
$1.50 - $3.50.......... 45,500 $2.17 12,439 $2.08 9
$5.50 - $7.50.......... 94,563 $6.59 13,208 $5.66 9
$7.63 - $9.50.......... 392,848 $8.94 0 -- 9
------- ----- ------- ----- ---------
Options outstanding at Dec. 31 890,200 $4.85 147,944 $0.88 9
====== ===== ======= ===== =========
</TABLE>
FAIR VALUE OF STOCK OPTIONS AND EMPLOYEE PURCHASE RIGHTS
The Company has two stock option plans which reserve shares of Common Stock for
issuance to employees, officers and directors. The Company applies APB Opinion
25 and related interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in the accompanying statement of
operations for the stock option plans, except for $200,000 which was recognized
on stock options granted between June and November 1995, and which is being
amortized over a four year vesting period. In January 1996, The Company adopted
the disclosure only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation".
For the Stock Option Plan, the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions used for grants in 1996 and 1995
respectively: dividend yield of 0% in both years; expected life of 3 years for
each year; expected volatility of 57% and 56%; and risk-free interest rates of
6.2% and 6.4%. The weighted-average fair value of those stock options granted in
1996 and 1995 was $4.33 and $0.54 per option respectively.
34
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The fair value of the employees' purchase rights for the Purchase Plan, which
was initiated on February 28, 1996, was estimated at the beginning of the
offering period using the Black-Scholes option pricing model with the following
assumptions used for 1996: dividend yield of 0%; an expected life of six
months; expected volatility of 56%; and risk-free interest rate of 5.3%. The
weighted-average fair value of these purchase rights granted in 1996 was $2.20
per right.
FAIR VALUE OF STOCK OPTIONS AND EMPLOYEE PURCHASE RIGHTS (CONTINUED)
Had the Company recorded compensation costs based on the estimated grant date
fair value, as defined by SFAS 123, for awards granted under its stock option
plans and stock purchase plan, the Company's net income and income per share
would have been reduced to the pro forma amounts below for the years ended
December 31, 1996 and 1995:
1996 1995
------ ------
Net income as reported (in $2,317 $1,550
thousands).......................
Net income, pro forma............. $1,923 $1,521
Net income per share as reported.. $ 0.16 $ 0.14
Net income per share, pro forma... $ 0.14 $ 0.14
The pro forma amounts reflect compensation expense related to 1996 and 1995
stock option grants and purchase rights only. In future years, the annual pro
forma compensation expense will increase relative to the fair value of stock
options granted in those future years.
NOTE 8--INCOME TAXES:
Through December 31, 1994, the Company incurred net operating losses and
recorded no provision for income taxes. The tax provision for 1996 and 1995
current taxes consists of the following (in thousands):
DECEMBER 31,
---------------
1996 1995
------ -------
Current:
Federal.. $ 13 $ 48
State.... 169 93
----- -----
182 141
----- -----
Deferred:
Federal.. 489 --
State.... (141) --
----- -----
348 --
----- -----
$ 530 $ 141
===== =====
35
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax provision reconciles to the amount computed by multiplying income before
tax by the U.S. statutory rate (34%) as follows (in thousands):
DECEMBER 31,
-------------
1996 1995
----- -----
Provision at statutory rate........ $ 968 $ 575
Benefits of carryforwards.......... (68) (527)
State taxes, net of federal benefit 175 93
Use of valuation allowance Stat (475) --
Other.............................. (70) --
----- -----
$ 530 $ 141
===== =====
Deferred income tax assets comprise the following (in thousands):
DECEMBER 31,
-----------------
1996 1995
------- -------
Federal and state credit $ 397 $ --
carryforwards.....................
Federal and state net operating 1,575 988
loss carryforwards................
Organization costs................. 102 156
Leases, treated as operating for (3,072) (1,185)
tax...............................
Inventory capitalization........... 144 200
Reserves and accruals.............. 476 316
------ -------
Deferred tax assets (liability).... (378) 475
Less valuation allowance........... -- (475)
------ -------
Net deferred tax asset
(liability).................... ($ 378) $ --
====== =======
The Tax Reform Act of 1996 limits the use of net operating loss and tax credit
carryforwards ("NOL's") in certain situations where changes occur in the stock
ownership of a company. The Company experienced such an ownership change as a
result of the Company's IPO. Accordingly, as of December 31, 1996, the Company
had federal and state NOL's (reflecting limitations resulting from change in
ownership) of approximately $4,600,000 and $31,000, respectively, which can be
used to reduce future taxable income. These NOL's expire through 2011, if not
utilized.
36
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS:
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash in money market accounts, certificates
of deposit, investments in financial instruments with a maturity of less than
one year, and accounts receivable. At December 31, 1996 and 1995, the Company
had $7.4 million and $5.2 million invested in money market accounts with a bank.
At December 31, 1996, the Company had a certificate of deposit of $6.5 million
invested with a bank, and other investments in short term financial instruments
of $3.0 million invested with a securities firm.
The Company performs ongoing credit evaluations of its customers, which are
semiconductor companies, and maintains reserves for estimated credit losses.
Write-offs of accounts receivable were insignificant in all periods presented.
At December 31, 1995, five customers accounted for 19%, 17%, 14%, 13% and 12%,
respectively, of accounts receivable. At December 31, 1996, two customers
accounted for 51% and 16%, respectively, of accounts receivable.
SIGNIFICANT CUSTOMERS
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
-----------------------
Customers comprising 10% or more of the
Company's revenues for the periods indicated:
A......................... 32% 29% 5%
B......................... 17% 8% -
C......................... 14% 3% -
D......................... 4% 20% 27%
E......................... 3% 8% 18%
F......................... 1% 7% 18%
NOTE 10--LITIGATION:
The Company is involved in various litigation and potential claims which
management believes, based on facts presently known, will not have a material
adverse effect on the results of operations or the financial position of the
Company.
37
<PAGE>
Item 9. Changes in and Disagreement with Accountants on Accounting
and Financial Disclosure
Not applicable.
-38-
<PAGE>
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K in that the Registrant will file its definitive Proxy Statement for
its Annual Meeting of Stockholders to be held on June 17, 1997, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended (the "Proxy
Statement"), not later than 120 days after the end of the fiscal year covered by
this Report, and certain information included in the Proxy Statement is
incorporated herein by reference.
Item 10. Directors and Executive Officers of the Registrant
(a) Executive Officers -- See the section entitled "Executive
Officers" in Part I, Item 1 hereof.
(b) Directors -- The information required by this Item is
incorporated by reference to the section entitled "Election of
Directors" in the Proxy Statement.
The disclosure required by Item 405 of Regulation S-K is incorporated
by reference to the section entitled "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to
the sections entitled "Compensation of Executive Officers" and "Compensation of
Directors" in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to
the sections entitled "Principal Share Ownership" and "Security Ownership of
Management" in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to
the section entitled "Certain Transactions" in the Proxy Statement.
-39-
<PAGE>
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
14(a) Exhibits
Exhibit
Number Description of Document
- -------- -----------------------------------------------------------------
3.1+ Restated Articles of Incorporation.
3.4+ Bylaws, as amended.
10.1+ Form of Indemnification Agreement.
10.2+* 1993 Stock Option Plan and form of Stock Option Agreement.
10.3+* 1996 Employee Stock Purchase Plan and form of Subscription Agreement.
10.4+* 1996 Director Stock Option Plan and form of Stock Option Agreement.
10.5+ Registration Rights Agreement dated March 24, 1993, as amended.
10.6+ Lease Agreement dated June 16, 1993 between the Company
and WVP Income Plus VI.
10.7+ Sublease Agreement dated July 15, 1995 between the Company
and Peripheral Computer Support, Inc.
10.8+ Loan and Security Agreement dated June 21, 1995 between the
Company and Silicon Valley Bank, as amended.
10.9+ Loan and Security Agreement dated September 15, 1995 between
the Company and The CIT Group/Equipment Financing, Inc.
10.10+ Warrant to Purchase Series A Preferred Stock, issued to
MMC/GATX Partnership No. 1 as of October 7, 1993, as amended.
10.11+ Warrant to Purchase Series A Preferred Stock, issued to
Phoenix Leasing Incorporated as of October 7, 1993.
10.12+ Warrant to Purchase Series A Preferred Stock, issued to Comdisco,
Inc. as of March 10, 1994.
10.13+ Warrant to Purchase Series A Preferred Stock, issued to
Silicon Valley Bank as of July 10, 1995.
10.14+ Warrant to Purchase Series A Preferred Stock, issued to
Silicon Valley Bank as of July 10, 1995.
10.15+ Warrant to Purchase Series A Preferred Stock, issued to
The CIT Group/Equipment Financing, Inc. as of September 15, 1995.
10.16+ Warrant to Purchase Series A Preferred Stock, issued to Comdisco,
Inc. as of January 3, 1996.
10.17++ Sublease Agreement between the Company and Peripheral Computer
Support dated March 8, 1996.
10.18 Deed of Trust, Financing Statement, Security Agreement and Fixture
Filing by IPAC Properties, as Trustor, to Chicago Title Company, as
Trustee, for the Benefit of Sun Life Assurance Company of
Canada (U.S.) dated March 24, 1997.
10.19 Promissory Note dated March 24, 1997 payable by IPAC Properties to
Sun Life Assurance Company of Canada (U.S.).
10.20 Agreement of Guaranty dated March 24, 1997 by the Company to
Sun Life Assurance Company of Canada (U.S.).
10.21 Environmental Agreement and Indemnity dated March 24, 1997 by IPAC
Properties to Sun Life Assurance Company of Canada (U.S.).
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney (see page 41)
27.1 Financial Data Schedule
-40-
<PAGE>
- ---------------------------
+ Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 (file no. 333-326-LA), as amended, filed on
January 17, 1996.
++ Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1996.
* Management contract or compensatory plan or arrangement required to
be filed as an exhibit to this form.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See Item 14(a) hereof.
(d) Financial Statement Schedules.
All financial statement schedules have been omitted because they are not
applicable or the required information is shown in the financial statements or
the notes thereto.
-41-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934 (the "Exchange Act"), the Registrant caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Jose, State of California, on March 27, 1997.
INTEGRATED PACKAGING, ASSEMBLY
CORPORATION
By: /s/ TONY LIN
-----------------------------------
Tony Lin
Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and points Victor A. Batinovich and Tony Lin,
and each of them acting individually, as his attorney-in-fact, each with full
power of substitution, for him in any and all capacities, to sign any and all
amendments to this Report on Form 10-K, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorney to any and all amendments to said Report.
In accordance with the Exchange Act, this report has been signed below on
March 27, 1997 by the following persons on behalf of the Registrant and in the
capacities indicated.
Signature Title
- ------------------------------ -----------------------------------------
/s/ VICTOR A. BATINOVICH
- --------------------------------- Chairman, Chief Executive Officer
Victor A. Batinovich and President (Principal Executive
Officer)
/s/ TONY LIN
- ---------------------------------
Tony Lin Chief Financial Officer (Principal
Financial and Accounting Officer)
/s/ PAUL R. LOW
- --------------------------------- Director
Paul R. Low
/s/ GILL COGAN
- --------------------------------- Director
Gill Cogan
/s/ PHILIP R. CHAPMAN
- --------------------------------- Director
Philip R. Chapman
/s/ ERIC A. YOUNG
- --------------------------------- Director
Eric A. Young
-42-
<PAGE>
INTEGRATED PACKAGING ASSEMBLY CORPORATION
Index to Exhibits
Sequentially
Exhibit Numbered
Number Description of Document Page
- --------- --------------------------------------------- ---------------
10.18 Deed of Trust, Financing Statement, Security
Agreement and Fixture Filing by IPAC Properties,
as Trustor, to Chicago Title Company, as Trustee,
for the Benefit of Sun Life Assurance Company of
Canada (U.S.) dated March 24, 1997.
10.19 Promissory Note dated March 24, 1997 payable by
IPAC Properties to Sun Life Assurance Company
of Canada (U.S.).
10.20 Agreement of Guaranty dated March 24, 1997 by
the Company to Sun Life Assurance Company of
Canada (U.S.).
10.21 Environmental Agreement and Indemnity dated
March 24, 1997 by IPAC Properties to
Sun Life Assurance Company of Canada (U.S.).
11.1 Statement Regarding Computation of Earnings Per Share.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
24.1 Power of Attorney (see page 41)
27.1 Financial Data Schedule
<PAGE>
Exhibit 10.18
CHICAGO TITLE
SS COMM. #767376.8
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
c/o Graham & James
One Maritime Plaza, Suite 300
San Francisco, CA 94111-3492
Attn: Bruce W. Hyman, Esq.
DEED OF TRUST, FINANCING STATEMENT, SECURITY AGREEMENT
AND FIXTURE FILING (WITH ASSIGNMENT OF RENTS AND LEASES)
--------------------------------------------------------
BY
IPAC PROPERTIES,
a California corporation
as Trustor,
TO
CHICAGO TITLE COMPANY, a corporation
as Trustee,
for the benefit of
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.),
a Delaware corporation,
as Beneficiary
March 24, 1997
<PAGE>
DEED OF TRUST, FINANCING STATEMENT, SECURITY AGREEMENT
AND FIXTURE FILING (WITH ASSIGNMENT OF RENTS AND LEASES)
--------------------------------------------------------
THIS DEED OF TRUST, FINANCING STATEMENT, SECURITY AGREEMENT AND FIXTURE
FILING (WITH ASSIGNMENT OF RENTS AND LEASES) (this "Deed of Trust") is made as
of the 24th day of March, 1997 by IPAC PROPERTIES, a California corporation
("Trustor"), having an office at 2221 Old Oakland Road, San Jose, California
95131 ("Trustor") in favor of CHICAGO TITLE COMPANY, a corporation ("Trustee")
for the benefit of SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware
corporation ("Beneficiary") having an office at One Sun Life Executive Park,
Wellesley Hills, MA 02181.
W I T N E S S E T H :
WHEREAS, Trustor has executed and delivered to Beneficiary that certain
Promissory Note (the "Note") dated the date hereof made by Trustor and payable
to Beneficiary in the original principal amount of Six Million Seven Hundred
Thousand and NO/100 Dollars ($6,700,000.00) lawful money of the United States,
which Note is secured by this Deed of Trust and the terms, covenants and
conditions of which Note are hereby incorporated herein and made a part hereof
(the "Loan");
NOW, THEREFORE, in consideration of the sum of One Dollar ($1.00) this
day paid and other good and lawful consideration, the receipt and sufficiency of
which is hereby acknowledged, Trustor does hereby irrevocably bargain, sell,
transfer, grant, convey, assign and warrant to Trustee, the property described
in the Granting Clauses below in order to secure the following obligations
(collectively, the "Obligations"): the full and prompt payment and performance
of all of the indebtedness, obligations, covenants, agreements and liabilities
of Trustor to Beneficiary, together with all interest and other charges thereon,
whether direct or indirect, existing, future, contingent or otherwise, due or to
become due, under or arising out of or in connection with the Note, this Deed of
Trust, the Absolute Assignment of Leases, Rents, Income and Cash Collateral
dated the date hereof from Trustor as assignor, to Beneficiary, as assignee,
(the "Assignment"), the Environmental Agreement and Indemnity (the "Indemnity"),
and any other instrument now or hereafter given to evidence or secure or
guaranty Trustor's obligations hereunder (the Note, this Deed of Trust, the
Assignment, the Indemnity and such other instruments are herein collectively
called the "Loan Documents"); any and all modifications, extensions and renewals
of any of the foregoing; and any and all expenses and costs of collection or
enforcement, including, without limitation, attorneys' fees incurred by
Beneficiary in the collection or enforcement of any of the foregoing, or in the
exercise of any of the rights or remedies under the Loan Documents or applicable
law.
GRANTING CLAUSE ONE
All that tract or parcel of land more particularly described in
Schedule A hereto and made a part hereof (the "Land").
- ----------
GRANTING CLAUSE TWO
TOGETHER WITH, any and all buildings and real property improvements now
or hereafter located or erected on the Land, including, without limitation, any
and all machinery, apparatus, equipment and fixtures now or hereafter used or
procured for use in connection with the operation of building utilities and/or
maintenance of, any building, structure or other real property improvement
(including, without limitation, all shades, awnings, venetian blinds, screens,
screen doors, storm doors and windows, curtain fixtures, attached floor
coverings, or
<PAGE>
articles used to supply sprinkler protection and office area heating,
ventilation and cooling equipment, but excluding trade fixtures and personal
property of tenants under Leases (as hereinafter defined) which do not become
the property of Trustor upon expiration or termination of the term of such
Leases), and all renewals and replacements thereof and articles in substitution
therefor used or procured for use in the operation of any and all such
buildings, structures and improvements, provided, in all cases, that, whether or
--------
not any of the foregoing are attached to said buildings, structures or other
improvements in any manner, all such items shall be deemed to be fixtures, part
of the real estate and security for the Obligations (collectively, the
"Improvements", and the Land and Improvements are herein collectively called the
"Premises"). To the extent any of the Improvements are not deemed real estate
under the laws of the State of California they shall be deemed personal property
("Personal Property") and this Deed of Trust is and shall be deemed to be a
Security Agreement for the purposes of creating hereby a security interest under
the California Commercial Code in Beneficiary as Secured Party in the Personal
Property as hereinafter provided. Notwithstanding anything to the contrary
herein or in any other Loan Document the term "Improvements" shall not include
and in no event shall Beneficiary have any lien, interest or other right
whatsoever in any item of process heating, ventilating, cooling, plumbing, or
electrical equipment, communications equipment, production machinery or
equipment, moveable partitions, or any other equipment, machinery, inventory,
furniture or fixtures located within the building improvements which may be
removed from the Premises without any material permanent damage to the Premises
or the building systems thereof. Upon request Beneficiary shall executed such
documents as Trustor shall reasonably request to evidence the foregoing to any
prospective purchaser or lender of Trustor of such property.
GRANTING CLAUSE THREE
TOGETHER WITH, all easements, rights-of-way, strips and gores of land,
streets, ways, alleys, passages, sewer rights, waters, water courses, water
rights and powers, and all estates, rights, titles, interests, privileges,
liberties, tenements, hereditaments, air rights, development rights and credits
and appurtenances of any nature whatsoever, in any way belonging, relating or
pertaining to, or above or below the Premises.
GRANTING CLAUSE FOUR
TOGETHER WITH, all right, title and interest of Trustor, now owned or
hereafter acquired, in and to any land lying within the right-of-way of any
street, opened or proposed, adjoining the Premises, and any and all sidewalks,
alleys and strips and gores of land adjacent to or used in connection with the
Premises.
GRANTING CLAUSE FIVE
TOGETHER WITH, all right, title and interest of Trustor in and to all
options to purchase or lease the Premises or any portion thereof or interest
therein, and any greater estate in the Premises owned or hereafter acquired by
Trustor.
GRANTING CLAUSE SIX
TOGETHER WITH, all accounts receivable, contract rights, interests,
estates and other claims, both in law and in equity, which Trustor now has or
may hereafter acquire in the Premises.
2
<PAGE>
GRANTING CLAUSE SEVEN
TOGETHER WITH, all the estate, interest, right, title and other claim or
demand which Trustor now has or may hereafter acquire in any and all awards or
payments made for the taking by eminent domain, or by any proceeding or purchase
in lieu thereof, of the whole or any part of the Premises, including, without
limitation, any awards resulting from a change or grade of streets and awards
for severance damages together, in all cases, with any interest thereon.
GRANTING CLAUSE EIGHT
TOGETHER WITH, all proceeds of and any unearned premiums on any
insurance policies covering the Premises, including, without limitation, the
right to receive and apply the proceeds of any insurance or judgments, or
settlements made in lieu thereof, for damage to the Premises.
GRANTING CLAUSE NINE
TOGETHER WITH, all the estate, interest, right, title and other claim or
demand which Trustor now has or may hereafter acquire against anyone with
respect to any damage to all or any part of the Premises, including, without
limitation, damage arising or resulting from any defect in or with respect to
the design or construction of all or any part of the Improvements.
GRANTING CLAUSE TEN
TOGETHER WITH, all deposits or other security or advance payments,
including rental payments, made by or on behalf of Trustor to others in
connection with the ownership or operation of all or any part of the Premises
including, without limitation, any such deposits or payments made with respect
to (i) insurance policies for loss or damage to the Premises or rentals
therefrom, (ii) utility service, (iii) maintenance, repair or similar services
supplied for the Premises, (iv) refuse removal or sewer service, and (v) parking
or similar services or rights appurtenant to the use of the Premises.
GRANTING CLAUSE ELEVEN
TOGETHER WITH, all remainders, reversions, leasehold estate, other
estate, right, title, interest and other claim or demand of Trustor in and to
all leases or subleases covering the Premises or any portion thereof now or
hereafter existing or entered into, and all right, title and interest of Trustor
thereunder, including, without limitation, all cash or security deposits,
advance rentals and deposits or payments of similar nature (including, without
limitation, termination payments, damages or other payments in lieu thereof).
GRANTING CLAUSE TWELVE
TOGETHER WITH, absolutely and presently, all rents, issues, profits,
cash collateral, royalties, income and other benefits, including, without
limitation, benefits accruing from all present and future oil, gas and mineral
leases and agreements derived from the Premises (collectively, the "Rents"),
subject to the right, power and authority given in the Assignment of Leases and
hereinafter given to Trustor as a licensee to collect and apply such Rents prior
to the occurrence of an Event of Default under the Loan Documents. The foregoing
Premises, Personal Property and the real property and personal property rights
set forth in Granting Clause Three
3
<PAGE>
through Granting Clause Twelve, inclusive, hereinabove described or mentioned
are hereinafter collectively referred to as the "Secured Property".
TO HAVE AND TO HOLD the Secured Property unto Trustee, its successors
and assigns, in trust, for the benefit of Beneficiary, its successors and
assigns, subject, however, to the terms, covenants and conditions contained
herein.
PROVIDED, HOWEVER, if Trustor shall pay or cause to be paid to
Beneficiary in full the Obligations, at the times and in the manner stipulated
in the Loan Documents, and shall keep, perform and observe all and singular the
covenants and promises of Trustor in the Loan Documents, then this Deed of Trust
and all the properties, interests and rights hereby granted, encumbered,
transferred or assigned shall be released by Trustee and/or Beneficiary in
accordance with the laws of the State of California.
ARTICLE I
COVENANTS AND AGREEMENTS
------------------------
Trustor hereby covenants and agrees for the benefit of Beneficiary and
Trustee as follows:
1.1 Performance by Trustor.
----------------------
Trustor shall pay the Obligations evidenced by the Note to Beneficiary and
shall keep and perform each and every other Obligation.
1.2 Payment of Taxes, Assessments, Etc.
-----------------------------------
A. Impositions. Trustor shall pay when due and payable, before
-----------
any fine, penalty, interest or cost for the non-payment thereof may be added
thereto, all taxes, assessments, water and sewer rents, rates and charges,
transit taxes, county taxes, charges for public utilities, excises, levies,
vault and all other license and permit fees and other governmental charges,
general and special, ordinary and extraordinary, unforeseen and foreseen, of any
kind and nature whatsoever which at any time prior to or during the term of this
Deed of Trust may be assessed, levied, confirmed, imposed upon or become due and
payable out of or in respect to, or become a lien on, the Secured Property or
any part thereof or any appurtenance thereto, prior to or on a parity with the
Obligations or the lien of this Deed of Trust, as the case may be (all such
taxes, assessments, water and sewer rents, rates and charges, transit taxes,
county taxes, charges for public utilities, excises, levies, vault and all other
license and permit fees and other governmental charges including all interest,
penalties, costs and charges accrued or accumulated thereon, are herein
collectively called "Impositions", and individually, an "Imposition").
B. Installments. Notwithstanding anything to the contrary
------------
contained in subsection A of this Section 1.2, if by law any Impositions may at
------------ -----------
the option of the taxpayer be paid in installments (whether or not interest
shall accrue on the unpaid balance of such Impositions), Trustor may exercise
the option to pay the same (and any accrued interest on the unpaid balance of
such Impositions) in installments and, in such event, shall pay such
installments as the same respectively become due and before any fine, penalty,
further interest or cost may be added thereto.
C. Receipts. Trustor, upon request of Beneficiary, will furnish
--------
to Beneficiary within five (5) days after the date when any Imposition would
become delinquent, official
4
<PAGE>
receipts of the appropriate taxing authority, or other evidence reasonably
satisfactory to Beneficiary evidencing the payment thereof.
D. Evidence of Payment. The certificate, advice or bill
-------------------
issued by the appropriate official (designated by law either to make or issue
the same or to receive payment of any Imposition) of non-payment of an
Imposition shall be prima facie evidence that such Imposition is due and unpaid
at the time of the making or issuance of such certificate, advice or bill.
Trustor agrees to pay Beneficiary, on demand, all charges, costs and expenses of
every kind incurred by Beneficiary in connection with obtaining evidence
satisfactory to Beneficiary that the payment of all Impositions is current and
that there is no Imposition due and owing or which has become or given rise to a
lien on the Secured Property or any part thereof or any appurtenance thereto.
E. Payment by Beneficiary. Subject to subsection G of this
---------------------- ------------
Section 1.2, if Trustor shall fail to pay any Imposition in accordance with the
- ------------
provisions of this Section 1.2, Beneficiary may, at its option (but shall be
under no obligation to do so), pay such Imposition and Trustor will repay to
Beneficiary on demand any amount so paid by Beneficiary, with interest thereon
at the rate of four percent (4%) per annum greater than the interest rate set
forth in the Note (the "Increased Rate") to the date of repayment and all such
amounts shall be secured by this Deed of Trust. In no event shall the Increased
Rate be greater than the highest applicable interest rate permissible by law, if
any.
F. Change in Law. In the event of the passage after the date of
-------------
this Deed of Trust of any law of the State of California deducting the
Obligations from the value of the Secured Property or any part thereof for the
purpose of taxation or resulting in any lien thereon, or changing in any way the
laws now in force for the taxation of this Deed of Trust or the Obligations for
state or local purposes, or the manner of the operation of any such taxes so as
to affect the interest of Beneficiary, then, and in such event, Trustor shall
bear and pay the full amount of such taxes, provided that if for any reason
payment by Trustor of any such new or additional taxes would be unlawful or if
the payment thereof would constitute usury or render the loan or Obligations
wholly or partially usurious under any of the terms or provisions of the Note,
this Deed of Trust or otherwise, Beneficiary may, at its option, declare the
whole sum secured by this Deed of Trust with interest thereon to be immediately
due and payable, or Beneficiary may, at its option, pay that amount or portion
of such taxes as renders the loan or Obligations unlawful or usurious, in which
event Trustor shall concurrently therewith pay the remaining lawful and non-
usurious portion or balance of said taxes. Notwithstanding the foregoing, in no
event shall Trustor be liable for any tax imposed on the net income of
Beneficiary from all sources, or any business license or franchise taxes
generally imposed on the conduct of Beneficiary's business.
G. Permitted Contest. Provided that there is no existing Event
-----------------
of Default under any of the Loan Documents, Trustor shall have the right to
contest the amount or the validity, in whole or in part, of any Imposition by
appropriate proceedings diligently conducted in good faith. Notwithstanding the
provisions of this Section 1.2, but subject to the provisions of subsection
----------- ----------
1.2H, Trustor may postpone or defer payment of such Imposition if Trustor, on or
- ----
before the due date thereof, shall (1) deposit or cause to be deposited with
Beneficiary a surety bond issued by a surety company of recognized
responsibility acceptable to Beneficiary conditioned upon and securing the
payment in full of such Imposition, pending the determination of such contest,
or (2) deposit or cause to be deposited with Beneficiary an amount equal to one
hundred (100%) percent of such Imposition or any balance thereof remaining
unpaid, and from
5
<PAGE>
time to time, but not more frequently than quarterly, deposit amounts in order
to keep in deposit at all such times an amount equal to one hundred (100%)
percent of the Imposition remaining unpaid, or (3) furnish or cause to be
furnished to Beneficiary other security reasonably satisfactory to Beneficiary.
If such deposit is made or such security furnished and Trustor continues in good
faith to contest the validity of such Imposition by appropriate legal
proceedings which shall operate to prevent the collection of such Imposition so
contested and the sale of the Secured Property or any part thereof to satisfy
such Imposition, Trustor shall be under no obligation to pay such Imposition
until such time as it has been finally determined to be a valid lien on the
Secured Property. Upon termination of any such proceedings, Trustor shall pay in
full the amount of such Imposition or part thereof as shall have been finally
determined in such proceedings together with any liabilities in connection
therewith. Beneficiary shall have the full power and authority to apply or
require the application of any amounts that may have been deposited pursuant to
this subsection 1.2G to payment of any unpaid Imposition without liability,
---------------
however, for any failure to apply any amount so deposited unless Trustor or the
person making such deposit had requested in writing the application of such
amount to the payment of the particular Imposition with respect to which it was
deposited in which event Beneficiary shall apply such amounts in accordance with
such request. Any surplus remaining in the hand of the Beneficiary after the
Imposition for which the deposit was made has been paid in full shall be repaid
to Trustor or the person making such deposit unless Trustor shall be in default
under any of the Loan Documents, and in case of such default such surplus shall
be applied to cure such default, and the remainder of such surplus, if any,
shall be repaid to Trustor.
H. No Lease Default. If contesting the validity or amount of
----------------
any Imposition shall cause a breach of any of the terms, conditions or covenants
required to be performed by Trustor as lessor under any Lease (as hereinafter
defined), then Trustor shall not have the right to contest the same as provided
in subsection 1.2G, and payment of such Imposition shall be made pursuant to
---------------
subsection 1.2A of this Section 1.2.
- --------------- -----------
I. Joint Assessment. Trustor covenants and agrees not to
----------------
suffer, permit or initiate the joint assessment of the Premises and Personal
Property, or any other procedure whereby the lien of the personal property taxes
shall be assessed or levied or charged to the Secured Property together with
real property taxes.
1.3 Insurance.
---------
A. Extended Coverage. Trustor, at its sole cost and expense,
-----------------
shall keep the Personal Property and the Improvements insured during the term of
this Deed of Trust against loss or damage by fire and against loss or damage by
other risks now embraced by "Extended Coverage," so called, in amounts, forms
and substance satisfactory to Beneficiary, but in no event shall the amounts be
less than the greater of (1) 100% of the full replacement cost of the Personal
Property and the Improvements, including work performed for tenants, without
deduction for depreciation; (2) the amounts required to prevent any insured from
becoming a co-insurer; or (3) the amounts required under any Lease.
B. Additional Coverage. Trustor, at its sole cost and expense,
-------------------
shall also maintain:
(1) Personal injury and property damage liability
insurance against claims for bodily injury, death or property damage, occurring
on, in or about the Secured
6
<PAGE>
Property or in or about the adjoining streets, sidewalks and passageways; such
insurance to afford protection, during the term of this Deed of Trust, as is
commonly insured against and generally available in the case of premises
similarly situated and otherwise in amounts and in form and substance reasonably
satisfactory to Beneficiary;
(2) If there are any Leases, rent or business
interruption insurance in an amount equal to one year's aggregate rentals
(including, without limitation, minimum rentals, escalation charges, percentage
rents, based on sales projections acceptable to Beneficiary, and other
additional rentals, and any other amounts payable by tenants or other occupants
under Leases or otherwise) payable by all tenants and other occupants at the
Premises, which amount shall be increased from time to time upon the leasing of
space at the Premises or upon the increase in aggregate rentals (including the
other items referred to above);
(3) War risk insurance upon the building and other
Improvements as and when such insurance is obtainable at reasonable rates from
the United States of America or any agency or instrumentality thereof for the
maximum amount of insurance obtainable;
(4) Such other insurance, including, without
limitation, all risk in such amounts and in form and substance as may from time
to time be reasonably required by Beneficiary against other insurable hazards,
including, but not limited to, malicious mischief, vandalism, windstorm, nuclear
reaction or radioactive contamination (excluding earthquake), which at the time
are commonly insured against and generally available in the case of premises
similarly situated, due regard being or to be given to the height and type of
Improvement, its location, construction, use and occupancy;
(5) If the Improvements are located in a flood
hazard area, flood insurance on the Improvements in an amount equal to the
lesser of "full replacement cost" thereof or the maximum amount of insurance
obtainable; and
(6) Insurance against loss or damage from (a)
leakage of sprinkler systems and (b) explosion of steam boilers, air
conditioning equipment, pressure vessels or similar apparatus now or hereafter
installed in or on the Premises in such amounts as Beneficiary shall from time
to time reasonably require.
(7) Trustor shall pay all premiums and other charges
required to maintain or replace Beneficiary's title insurance policy insuring
the lien of this Deed of Trust in an amount equal to the Obligations.
C. Separate Insurance. Trustor shall not carry separate
------------------
insurance, concurrent in kind or form, and contributing, in the event of loss,
with any insurance required hereunder. Trustor may, however, effect for its own
account any insurance not required under the provisions of this Deed of Trust
but any such insurance effected by Trustor on the Secured Property whether or
not required under this Section 1.3 shall be for the mutual benefit of Trustor
-----------
and Beneficiary, as their respective interests may appear, and shall be subject
to all other provisions of this Section 1.3.
-----------
D. Insurers; Policies. All insurance provided for in this
------------------
Section 1.3 shall be effected under valid and enforceable policies issued by
- -----------
financially responsible insurers authorized to do business in the State of
California, which are approved in writing by
7
<PAGE>
Beneficiary. All such policies shall be deposited with and held by Beneficiary.
All casualty insurance policies and rent insurance policies shall be payable to
Beneficiary pursuant to a standard non-contributory mortgage endorsement in
favor of Beneficiary, and such policies shall contain a waiver of subrogation
endorsement, all in form and content satisfactory to Beneficiary. All original
policies shall contain a provision that such policies will not be canceled or
materially amended, which term shall include any reduction in the scope or
limits of coverage, without at least thirty (30) days' prior written notice to
Beneficiary. Not less than fifteen (15) days prior to the expiration dates of
the policies theretofore furnished pursuant to this Deed of Trust, originals of
the policies bearing notations evidencing the payment of premiums or accompanied
by other evidence satisfactory to Beneficiary of such payment, shall be
delivered by Trustor to Beneficiary. In the event of a change in ownership of
the Secured Property immediate notice thereof shall be delivered to all insurers
by Trustor.
E. Beneficiary's Right to Provide Coverage. In the event
---------------------------------------
Trustor fails to provide, maintain, keep in force or deliver and furnish to
Beneficiary the original policies of insurance required by this Section 1.3,
-----------
Beneficiary may, at its sole option, procure such insurance and Trustor will pay
all premiums thereon promptly upon demand by Beneficiary with interest thereon
at the Increased Rate to the date of repayment and all such amounts shall be
secured by this Deed of Trust.
F. Damage or Destruction. After the happening of any casualty
---------------------
to the Secured Property or any part thereof, Trustor shall give prompt written
notice thereof to Beneficiary and the following shall apply:
(1) In the event of any damage or destruction of all
or any part of the Secured Property, all proceeds of insurance shall be payable
to Beneficiary, so long as Beneficiary is Sun Life Assurance Company of Canada
(U.S.) or a financial institution of comparable credit or, alternatively to an
escrow account at a national bank of sound financial reputation, and Trustor
hereby authorizes and directs any affected insurance company to make payment of
such proceeds directly to Beneficiary. Insurance proceeds held by Beneficiary
may be commingled with other funds in Beneficiary's possession, shall constitute
additional security for the Obligations and Trustor shall not be entitled to the
payment of interest thereon. So long as no Event of Default exists, Trustor is
hereby authorized and empowered by Beneficiary, subject to the approval of
Beneficiary, to settle, adjust or compromise any claims for loss, damage or
destruction under any policy or policies of insurance; provided, however, that
Trustor shall give notice to and consult with Beneficiary prior to any such
action.
(2) In the event of any such damage or
destruction,subject to subsection 1.3G Beneficiary shall have the option in its
---------------
sole and absolute discretion and without regard to the adequacy of its security
hereunder, of applying all or part of the insurance proceeds (a) to the
Obligations, whether or not then due, in the inverse order of maturity, or (b)
to the repair or restoration of the Secured Property, or (c) to cure any then
current default under any of the Loan Documents, or (d) to reimburse the
Beneficiary for its costs and expenses in connection with the recovery of such
insurance proceeds, or (e) any combination of the foregoing. Provided, however,
that if the Obligations are paid in full by such application then no prepayment
premium shall be due or payable.
(3) Nothing herein contained shall be deemed to excuse
Trustor from repairing or maintaining the Secured Property as provided in
Section 1.5 hereof or restoring all
- -----------
8
<PAGE>
damage or destruction to the Secured Property, regardless of whether there are
insurance proceeds available or whether such proceeds are sufficient in amount,
and the application or release by Beneficiary of any insurance proceeds shall
not cure or waive any Event of Default (as hereinafter defined) or notice of
default under this Deed of Trust or invalidate any act done pursuant to such
notice.
G. Trustor's Use of Proceeds.
-------------------------
(1) Notwithstanding the provisions of Section 1.3(F)(2)
-----------------
above (except for any destruction which occurs during the last six (6) months of
the loan term), upon full satisfaction of all of the conditions set forth below,
the insurance proceeds shall be made available to Trustor for repair and
restoration after deducting and payment to Beneficiary of Beneficiary's costs of
collection and disbursement of such proceeds (which costs shall not include
Beneficiary's overhead or the compensation of Beneficiary's employees),
provided:
(a) The proceeds are deposited in accordance with
Section 1.3 (F)(1);
(b) No default shall have occurred and be
continuing under the terms of any of the Loan Documents;
(c) The insurance carrier does not deny liability
to Trustor and Beneficiary;
(d) If Beneficiary so requests, Beneficiary is
furnished with an estimate of the cost of restoration accompanied
by a certificate of an architect or registered engineer approved
by Beneficiary, which approval shall not be unreasonably withheld
("Beneficiary's Architect") as to such costs;
(e) The value of the Secured Property so
restored or rebuilt shall be at least equal to what was
originally erected;
(f) Trustor furnishes Beneficiary with evidence
reasonably satisfactory to Beneficiary that all Improvements to
be restored and/or reconstructed and their use shall fully comply
with all (i) applicable easements, covenants, conditions,
restrictions or other private agreements affecting the Premises,
(ii) zoning and building laws, ordinances and regulations and
(iii) all other applicable federal, state and municipal laws,
regulations and requirements;
(g) If the estimated cost of reconstruction
exceeds the proceeds available, at Beneficiary's option, Trustor
shall (i) furnish a bond of completion or provide such other
evidence reasonably satisfactory to Beneficiary of Trustor's
ability to meet such excess costs or (ii) deposit with
Beneficiary additional funds equal to such excess;
(h) If such damage is in excess of
$100,000.00, Beneficiary shall have received notice of
destruction caused by such fire or other hazard from the Trustor
within thirty (30) days from the date thereof,
9
<PAGE>
which notice shall state the date of such fire or other hazard
and a request to Beneficiary to make the insurance proceeds
available to Trustor;
(i) The aggregate monthly net income under all
Leases remaining in full force and effect with respect to the
Secured Property after restoration shall be in an amount
sufficient to pay the monthly installments of principal and
interest required to be paid upon the Obligations as well as all
escrows for taxes and insurance as estimated by Beneficiary
hereunder;
(j) Beneficiary shall have reasonably determined
that such damage or destruction is fully reparable prior to the
Maturity Date (as defined in the Note).
(2) Disbursement of the proceeds during the course of
reconstruction shall be conditioned upon the certification of Beneficiary's
Architect as to the cost of the work done and the conformity of the work to
plans and specifications approved by Beneficiary, which approval shall not be
unreasonably withheld and evidence supplied by a title insurance company
acceptable to Beneficiary that there are no asserted liens arising out of the
reconstruction or otherwise. Notwithstanding the above, a portion of the
proceeds may be released prior to the commencement of reconstruction to pay for
items approved by Beneficiary in its sole discretion. Disbursements shall be
made within ten (10) business days after a request by Trustor. No payment made
prior to the final completion of work shall exceed ninety percent (90%) of the
value of the work performed from time to time, and at all times the undisbursed
balance of said proceeds remaining with the Beneficiary must be at least
sufficient to pay for the cost of completion of the work free and clear of
liens. Final payment shall be upon a certification of Beneficiary's Architect as
to completion in accordance with plans and specifications approved by
Beneficiary.
(3) At such time as Beneficiary's Architect shall certify to
Beneficiary that the damaged or destroyed portion of the Secured Property has
been put in a state of repair equivalent to or better than that existing prior
to the date of such fire or other casualty, the work shall be deemed completed.
With Beneficiary's prior written consent, which may be granted or withheld in
Beneficiary's sole discretion, any certification required to be made by an
architect or registered engineer may be made by a reputable contractor approved
by Beneficiary. The balance of the insurance proceeds so deposited with
Beneficiary after full disbursement in accordance with subsection 1.3G, at the
---------------
sole option of Beneficiary, shall be either (a) returned to Trustor, it being
understood that such obligation or reimbursement shall not exceed the amount of
insurance proceeds for such restoration and/or repair, or (b) applied to the
payment of installments of the Obligations in inverse order of maturity whether
or not such installments shall be due and payable, without imposition of a
prepayment charge or premium.
(4) In all cases where any destruction to the Secured
Property by fire or other casualty occurs during the last six (6) months of the
loan term, or in Beneficiary's reasonable judgment, Trustor is not proceeding
with the repair or restoration in a manner that would entitle Trustor to have
the proceeds disbursed to it, or for any other reason Beneficiary determines in
its reasonable judgment that Trustor shall not be entitled to such proceeds
pursuant to the terms of this Deed of Trust, Beneficiary shall have the options
set forth in subsection F(2) above.
---------------
10
<PAGE>
(5) Under no circumstances shall Beneficiary become
personally liable for the fulfillment of the terms, covenants and conditions
contained in any of the Leases or obligated to take any action to restore the
Secured Property.
H. Transfer of Interest in Policies. In the event of
--------------------------------
foreclosure of this Deed of Trust or other transfer of title or assignment of
the Secured Property in extinguishment, in whole or in part, of the Obligations,
all right, title and interest of Trustor in and to all policies of insurance
required by this Section 1.3 shall inure to the benefit of and pass to the
-----------
successor in interest to Trustor or the purchaser or grantee of the Secured
Property. If any claim under any insurance policy shall be paid after the
extinguishment of the Obligations, and if such foreclosure of this Deed of
Trust, or other transfer of title to or assignment of the Secured Property,
shall have resulted in extinguishing the Obligations for an amount less than the
total of the amount of the unpaid Obligations, with interest thereon at the
Increased Rate, plus counsel fees, costs and other disbursements incurred by
Beneficiary at the time of the extinguishment of the Obligations, then the
portion of the payment in satisfaction of the claim which is equal to the
difference between the total amount above referred to and the amount theretofore
paid to Beneficiary shall belong to and be the property of Beneficiary and shall
be paid to said Beneficiary, and Trustor hereby assigns, transfers and sets over
to Beneficiary all of Trustor's right, title and interest in and to said sum.
The balance, if any, shall be paid to Trustor. Notwithstanding the above,
Trustor shall retain an interest in the insurance policies above-described
during any redemption period.
1.4 Escrow Deposits. To further secure the payment of the Impositions
---------------
and the premiums for the insurance required by this Deed of Trust, Trustor will
deposit with Beneficiary, so long as Beneficiary is Sun Life Assurance Company
of Canada (U.S.) or a financial institution of comparable credit or,
alternatively to an escrow account at a national bank of sound financial
reputation, on the due date of each monthly installment of principal and
interest under the Note, a sum which shall be equal to one-twelfth (1/12) of the
annual total of the Impositions and such insurance premiums required to pay the
next installment of Impositions or insurance premiums, as estimated by
Beneficiary, one month prior to the date when such Impositions and insurance
premiums shall become due and payable. Beneficiary agrees that the holder of the
Escrow Deposits may pay all interest accrued on such Escrow Deposits semi-
annually to Trustor. Such deposits shall be held by Beneficiary, or its
designee, free of any liens or claims on the part of creditors of Trustor and as
a part of the security of Beneficiary, and shall be used by Beneficiary, or its
designee, to pay current Impositions and insurance premiums as the same shall
become payable. Said deposits shall not be, nor be deemed to be, trust funds but
may, be commingled with general funds of Beneficiary, or its designee. If at any
time and for any reason Beneficiary determines that said deposits are
insufficient to pay the Impositions and insurance premiums in full as they
become payable, Trustor will deposit with Beneficiary, or its designee, within
ten (10) days after demand therefor, such additional sum or sums as may be
required in order for Beneficiary, or its designee, to pay such Impositions and
insurance premiums in full. It shall be the responsibility of Trustor to furnish
bills to Beneficiary in sufficient time for Beneficiary to pay the Impositions
and insurance premiums before any penalty attaches and before the policies
lapse. Transfer of legal title to the Secured Property shall automatically
transfer to the new owner of the beneficial interest in all sums deposited under
the provisions of this Section 1.4.
-----------
This Section 1.4 is intended to provide additional security for the
-----------
payment of all amounts now and in the future payable for the items set forth
above. To that end, Trustor hereby grants, pledges, transfers and assigns to
Beneficiary a continuing security interest in and right of set-off
11
<PAGE>
against the following, whether now existing or hereafter acquired or arising:
all right, title and interest, in, to and under (i) all instruments, securities,
documents, accounts, general intangibles, money, and other property and contents
therein and thereof, and all rights relating thereto and proceeds therefrom and
thereof, including, without limitation, the deposits made into any account from
time to time at any time or from time to time in the possession or control of
the agent of Beneficiary, (ii) all books and records relating to the types and
items of property described in the foregoing clause (i), and (iii) all proceeds
(whether cash or non-cash, and including, without limitation, insurance
proceeds) and products of the property described in the foregoing clause (i),
and all replacements and substitutions therefor and all additions and accessions
thereto.
In addition to all rights and remedies given to Beneficiary by this
Deed of Trust, Beneficiary shall have the rights and remedies of a secured party
under the Uniform Commercial Code and any other applicable law. Upon notice
from Beneficiary, Trustor will promptly execute such financing statements,
continuation statements and other documents as may be necessary or convenient to
perfect, continue or otherwise evidence said security interest and pay all
reasonable expenses and fees for the preparation and filing thereof.
Upon occurrence of an Event of Default (as defined herein), all funds
held in any such account shall immediately be paid over to Beneficiary.
Beneficiary and Trustor agree that Beneficiary shall be entitled to apply such
funds to the balance of the Loan in its sole discretion, without payment of a
prepayment premium or charge.
1.5 Care and Use of Premises.
------------------------
A. Maintenance and Repairs. Trustor, at its sole cost and
-----------------------
expense, will take good care of the Secured Property and the sidewalks and curbs
adjoining the Secured Property and will keep the same in good order and
condition, and make all necessary repairs thereto, interior and exterior,
structural and nonstructural, ordinary and extraordinary, unforeseen and
foreseen, and will not commit or suffer to be committed any waste of the Secured
Property and will not do or suffer to be done anything which will increase the
risk of fire or other hazard to the Secured Property or any part thereof.
B. Standard of Repairs. The necessity for and adequacy of
-------------------
repairs to the Improvements pursuant to subsection 1.5A shall be measured by the
---------------
standard which is appropriate for two (2) research and development/industrial
buildings containing 138,366 square feet and related facilities of similar
construction and class, provided that Trustor shall in any event make all
repairs necessary to avoid any structural damage to the Improvements and to keep
the Improvements in a proper condition for their intended use. When used in this
Section 1.5, the terms "repair" and "repairs" shall include all necessary
- -----------
renewals and replacements. All repairs made by Trustor shall be made with first-
class materials and in a good, substantial and workmanlike manner and shall be
equal or better in quality and class to the original work.
C. Notice to Trustor. Trustor will notify Beneficiary promptly
-----------------
of any damage to the Secured Property in excess of $100,000.00.
D. Removal of Equipment. Trustor shall have the right, at any
--------------------
time and from time to time, to remove and dispose of equipment which is Secured
Property and which may have become obsolete or unfit for use or which is no
longer useful in the operation of the Secured Property. Trustor will promptly
replace any such equipment so disposed of or removed with
12
<PAGE>
other equipment of a value and serviceability equal to or greater than the
original value and serviceability of the equipment so disposed of or removed,
free of superior title, liens and claims; except that, if by reasons of
technological or other developments in the operation and maintenance of
buildings of the general character of the Improvements, no replacement of the
building equipment so removed or disposed of is necessary or desirable in the
proper operation or maintenance of said Improvements, Trustor shall not be
required to replace same. All such replacements or additional equipment shall be
covered by the security interest herein granted.
E. Compliance With Laws and Insurance. Trustor shall promptly
----------------------------------
comply, or cause another party to comply, with all present and future laws,
ordinances, orders, rules, regulations and requirements of all federal, state
and municipal governments, courts, departments, commissions, boards and
officers, any national or local Board of Fire Underwriters, including, without
limitation, all zoning, building code, environmental protection and equal
employment opportunity statutes, ordinances, regulations, orders and
restrictions, foreseen or unforeseen, ordinary as well as extraordinary, which
may be applicable to the Secured Property and the sidewalks and curbs adjoining
the Secured Property or to the use or manner of use of the Secured Property
(collectively, "Regulations") whether or not such Regulations shall necessitate
structural changes or improvements. Trustor shall not bring or keep any article
upon any of the Secured Property or cause or permit any condition to exist
thereon which would be prohibited by or could invalidate any insurance coverage
maintained, or required hereunder to be maintained, by Trustor on or with
respect to any part of the Secured Property, and further shall do all other acts
which from the character or use of the Secured Property may be necessary to
protect the security hereof, the specific enumerations herein not excluding the
general.
F. Permitted Contests. Trustor shall have the right, after
------------------
prior notice to Beneficiary, to contest by appropriate legal proceedings
diligently conducted in good faith, without cost or expense to Beneficiary, the
validity or application of any Hazardous Materials Law (as defined in the
Indemnity) and any other Regulation, and which does not subject Beneficiary to
any civil or criminal liability, subject to the following:
(1) If by the terms of any such Hazardous Materials Law
(as defined in the Indemnity) or any applicable Regulation, compliance therewith
pending the prosecution of any such proceeding may legally be delayed without
incurring any lien or charge of any kind against the Secured Property, Trustor
may delay compliance therewith until the final determination of such proceeding.
(2) If any lien or charge against the Secured Property
would be incurred by reason of any such delay, Trustor, may contest as aforesaid
and delay as aforesaid, provided Trustor (a) furnishes to Beneficiary security,
reasonably satisfactory to Beneficiary, against any loss or injury by reason of
such contest or delay, and (b) prosecutes the contest with due diligence.
Anything in subsection 1.5E or this subsection 1.5F to the contrary
--------------- ---------------
notwithstanding, if the contesting of the validity or legality of any such
Hazardous Materials Law (as defined in the Indemnity) or any other Regulation
shall cause a breach of any of the terms, conditions or covenants of any Lease
on Trustor's part, as lessor therein, to be performed, then Trustor shall not
have the right to contest the same as herein provided but compliance therewith
must be made pursuant to subsection 1.5E hereof.
---------------
G. Compliance With Instruments of Record. Trustor will promptly
-------------------------------------
perform and observe, or cause to be performed and observed, all of the terms,
covenants and conditions of
13
<PAGE>
all instruments of record affecting the Secured Property, non-compliance with
which may affect the priority of the lien of this Deed of Trust, or which may
impose any duty or obligation upon Trustor or any lessee or other occupant of
the Secured Property or any part thereof, and Trustor shall do or cause to be
done all things necessary to preserve intact and unimpaired any and all
easements, appurtenances and other interests and rights in favor of or
constituting any portion of the Secured Property. The foregoing notwithstanding,
Trustor shall have the right to contest any such instruments affecting the
Secured Property, provided that Trustor incurs no lien or charge of any kind
against the Secured Property.
H. Alteration of Secured Property. Except as provided in
------------------------------
Section 1.5, Trustor will not demolish, remove, construct, restore, add to or
alter any Improvement or any extension thereof, nor consent to or permit any
such demolition, removal, construction, restoration, addition or alteration
without Beneficiary's prior written consent, except for (1) non-structural
alterations or improvements which do not reduce the value of the Secured
Property and which are required for the conduct of Trustor's business; (2)
ordinary, non-structural maintenance work, and (3) structural repairs and
restorations having a cost of less than $100,000.00.
I. Parking. Trustor will grant no parking rights in the
-------
Secured Property other than those provided for in existing Leases except with
Beneficiary's prior written consent. The Secured Property shall contain at all
times not less than 490 on-site parking spaces for standard-size American
automobiles, said parking spaces to be located upon the Land. If any part of the
automobile parking areas included within said Secured Property is taken by
condemnation or said areas are otherwise reduced, Trustor will provide parking
facilities in kind, size and location to comply with all Leases, and before
making any contract therefor will furnish to Beneficiary satisfactory assurance
of completion thereof free of liens and in conformity with all governmental
zoning ordinances and regulations.
J. Entry on Secured Property. Beneficiary or its representative
-------------------------
is hereby authorized to enter upon and inspect the Secured Property at all
reasonable times.
K. No Consent to Alterations or Repairs. Nothing contained
------------------------------------
in this Deed of Trust shall be deemed or construed in any way as constituting
the consent or request of Beneficiary, express or implied by inference or
otherwise to any contractor, subcontractor, laborer or materialman for the
performance of any labor or the furnishing of any materials for any specific
improvement, alteration to or repair of the Secured Property or any part
thereof.
L. Mechanics Liens. Trustor will discharge, pay, or bond, or
---------------
cause to be discharged, paid or bonded, from time to time when the same shall
become due, all lawful claims and demands of mechanics, materialmen, laborers
and others which, if unpaid, might result in, or permit the creation of, a lien
on the Secured Property or any part thereof, or on the revenues, rents, issues,
income and profits arising therefrom, and Trustor will do or cause to be done
everything necessary so that the lien of this Deed of Trust shall be fully
preserved, at the cost of Trustor without expense to Beneficiary.
M. Use of Secured Property by Trustor. Trustor will use, or
----------------------------------
cause to be used, the Secured Property principally and continuously as and for
research and development/industrial buildings uses. Trustor shall not use, or
permit the use of the Secured Property or any part thereof for any other
principal use without the prior written consent of Beneficiary.
14
<PAGE>
N. Use of Secured Property by Public. Trustor shall not
---------------------------------
suffer or permit the Secured Property, or any portion thereof, to be used by the
public as such, without restriction or in such manner as might impair Trustor's
title to the Secured Property or any portion thereof, or in such manner as might
make possible a claim or claims of adverse usage or adverse possession by the
public, or of implied dedication of the Secured Property or any portion thereof.
1.6 Financial Information.
---------------------
A. Audit. Trustor will keep and maintain complete and accurate
-----
books and records of the earnings and expenses of the Secured Property and,
without expense to Beneficiary, furnish to Beneficiary, within ninety (90) days
after the end of each fiscal year of Trustor, the following statements prepared
and certified by Trustor reasonably satisfactory to Beneficiary, and prepared by
the Chief Financial Officer of Integrated Packaging Assembly Corporation which
shall include, (as to the Secured Property only) with respect to the prior
fiscal year: (l) a statement of assets and liabilities of Trustor with respect
to the Secured Property only, (2) a statement of the source and application of
funds by Trustor with respect to the Secured Property, and (3) a detailed
profit and loss statement relating to the ownership and operation of the Secured
Property, including, without limitation, all rents and other income derived
therefrom and all expenses paid or incurred in connection therewith. The audit
shall also include annual sales figures for all tenants in the Secured Property
who are required by their respective lease to provide same to Trustor. In
addition to and simultaneously with the financial statements Trustor shall
deliver to Beneficiary a statement reflecting the complete rental status of the
Secured Property showing the name of each tenant, the area in square feet
occupied, the remaining term of the lease and the rental being paid.
B. Right to Inspect Books and Records. Beneficiary or its
----------------------------------
representative shall have the right to examine and make copies of such books and
records and all supporting vouchers and data relating to the Premises, at the
Premises or at Trustor's principal place of business at Trustor's expense.
1.7 Condemnation.
------------
A. Beneficiary's Right to Participate in Proceedings. If the
-------------------------------------------------
Secured Property, or any part thereof, shall be taken in condemnation
proceedings or by exercise of any right of eminent domain (collectively,
"Condemnation Proceedings"), Beneficiary shall have the right to participate in
any such Condemnation Proceedings and the award or payment that may be made in
any such Condemnation Proceedings is hereby assigned to Beneficiary and shall be
deposited with Beneficiary, so long as Beneficiary is Sun Life Assurance Company
of Canada or a financial institution of comparable credit or, alternatively to
an escrow account at a national bank of sound financial reputation, and
disbursed in the manner set forth in this Section 1.7. Trustor will give
-----------
Beneficiary immediate notice of the actual or threatened commencement of any
Condemnation Proceedings affecting all or any part of the Secured Property,
including severance and consequential damage and change in grade in streets, and
will deliver to Beneficiary copies of any and all papers served in connection
with any such proceedings. Notwithstanding the foregoing, Beneficiary is hereby
authorized, at its option, to commence, appear in and prosecute in its own or
Trustor's name any action or proceeding relating to any such condemnation and to
settle or compromise any claim in connection therewith; provided however that
Beneficiary shall give notice to and consult with Trustor prior to any action.
No settlement for the damages sustained thereby shall be made by Trustor without
Beneficiary's prior written approval thereof
15
<PAGE>
and, except during the existence of an Event of Default, Trustor's prior written
approval thereof. Trustor agrees to execute any and all further documents that
may be required in order to facilitate the collection of any award or awards and
the making of any such deposit.
B. Application of Condemnation Award. If at any time title or
---------------------------------
temporary title to the whole or any part of the Secured Property shall be taken
in Condemnation
16
<PAGE>
Proceedings or pursuant to any agreement between Trustor, Beneficiary and those
authorized to exercise the right to condemnation, Beneficiary, at its option in
its sole and absolute discretion and without regard to the adequacy of its
security hereunder, shall have the right to apply such award or proceeds which
it receives to payment of the Obligations in inverse order of maturity without a
prepayment charge or premium. In the event that all or substantially all of
the Secured Property is taken and the amount of the award or proceeds received
by Beneficiary shall not be sufficient to pay the then unpaid balance of the
Obligations, then the balance of the Obligations shall, at the option of
Beneficiary, become immediately due and payable and Trustor shall, within ten
(10) days after the application of the award or proceeds as aforesaid, pay such
deficiency to Beneficiary. "Substantially all of the Secured Property" shall be
deemed to have been taken if the remainder of the Secured Property (1) in the
sole opinion of Beneficiary's Architect, cannot be capable of being restored to
a self-contained and architecturally complete unit or units or (2) in the sole
opinion of Beneficiary, the balance of the Secured Property as restored will not
be economically viable and capable of supporting all carrying charges and
operation and maintenance expenses.
C. Reimbursement of Costs. In the case of any taking covered
----------------------
by the provisions of this Section 1.7, Beneficiary (to the extent that
-----------
Beneficiary has not been reimbursed therefor by Trustor) shall be entitled, as a
first priority, to the reimbursement out of any award or awards for all
reasonable costs, fees, reimbursements to Beneficiary and expenses incurred in
the determination and collection of any such awards.
D. Existing Obligations. Notwithstanding any taking by
--------------------
Condemnation Proceedings, Trustor shall continue to pay the monthly installments
due under the Note as well as all other sums secured by this Deed of Trust at
the rate provided therein until any such award or payment shall have been
actually received by Beneficiary and applied to the Obligations. Any reduction
in the Obligations resulting from Beneficiary's application of such award or
payment as hereinabove set forth shall be deemed to take effect only on the date
of receipt by Beneficiary. If prior to Beneficiary's receipt of such award or
payment the Secured Property shall have been sold on foreclosure of this Deed of
Trust, Beneficiary shall have the right to receive said award or payment to the
extent of any portion of the Obligations still unpaid after application of the
proceeds of the foreclosure sale, with interest thereon at the Increased Rate,
plus attorneys' fees and other costs and disbursements incurred by Beneficiary
in connection with the collection of such award or payment and in establishing
the deficiency. The application of condemnation proceeds to the obligations
secured by this Deed of Trust, whether or not then due or payable, shall not
postpone, abate or reduce any of the periodic installments of principal and/or
interest thereafter to become due under this Deed of Trust until the Obligations
are paid in full.
E. Application of Award. Notwithstanding the provisions of
--------------------
Section 1.7B above (except for a taking which occurs during the last six months
- ------------
of the loan term), upon full satisfaction of all of the following conditions,
Beneficiary shall, after deducting Beneficiary's costs in connection with the
disbursement of funds, apply the award or payment to the cost to restore, repair
or alter the remaining portion of the Secured Property, subject to the
provisions of subsection 1.3F (which shall apply in all respects except that any
---------------
reference therein to insurance proceeds shall be deemed to refer to the award or
payment in the taking), and Trustor will promptly restore, repair or alter the
remaining Secured Property. The provisions of this subsection 1.7E shall not
---------------
apply unless (1) the balance of the Improvements shall, in the opinion of
Beneficiary's Architect, be capable of being restored to a self-contained and
architecturally complete unit or units, (2) the balance of the Improvements
after restoration to a self-contained
17
<PAGE>
and architecturally complete unit or units shall, in the opinion of Beneficiary,
be economically viable and capable of supporting all carrying charges and
operating and maintenance expenses of the Secured Property, after reduction, if
any, of the Obligations in accordance with the following sentence, and (3)
Trustor shall furnish to Beneficiary evidence satisfactory to Beneficiary that
the Improvements so restored or reconstructed and their use would fully comply
with all zoning and building laws, ordinances and regulations, and with all
other applicable federal, state and municipal laws and requirements. The balance
of the condemnation award or payment so deposited with Beneficiary, after
disbursement in accordance with this subsection 1.7E, shall be applied to the
---------------
Obligations in inverse order of maturity, whether or not the same shall then be
due and payable without a prepayment charge or premium. All awards and payments
and other sums deposited with Beneficiary, until expended or applied as provided
in this subsection 1.7E, may be commingled with the general funds of
---------------
Beneficiary and shall constitute additional security for the Obligations and
shall not bear interest. In all cases where a taking occurs during the last six
months of the loan term, or in Beneficiary's sole judgment Trustor is not
proceeding with the repair or restoration in a manner that would entitle Trustor
to have the awards or payments disbursed to it or for any other reason
Beneficiary determines in its sole judgment that Trustor shall not be entitled
to such awards or payments pursuant to the terms of this Deed of Trust,
Beneficiary, at its option in its sole and absolute discretion and without
regard to the adequacy of its security hereunder, shall have the right to apply
such award or proceeds which it receives to payment of the Obligations in the
inverse order of maturity, whether or not the same shall then be due and
payable.
1.8 Leases.
------
A. Performance of Lessor's Covenants. Trustor, as lessor, may,
---------------------------------
in accordance with the Assignment of Lease enter into leases with space tenants,
as lessees, for parts or all of the Secured Property (all such leases for parts
or all of the Secured Property are hereinafter referred to individually as a
"Lease" and collectively as "Leases" and the lessees under such Leases are
hereinafter referred to individually as a "Lessee" and collectively as
"Lessees"). Trustor shall faithfully perform the lessor's covenants under any
subsisting and future Leases affecting the Secured Property or any part thereof,
and neither do, nor neglect to do, nor permit to be done (other than enforce the
terms of such Leases and exercise the lessor's remedies thereunder following a
default or event of default on the part of any Lessee in the performance of its
prescribed obligations), anything which may cause the modification or
termination of any of said Leases without the consent of Beneficiary, with
consent shall not be unreasonably withheld, or of the obligations of any Lessee
or any other person claiming through such Lessee, or which may diminish or
impair the value of any Lease or the rents provided for therein, or the interest
of the lessor or of Beneficiary therein or thereunder.
B. Notice of Default. Trustor will give Beneficiary immediate
-----------------
notice, by certified mail, of any notice of default, event of default or
cancellation given to or received from any Lessee.
C. Representations Regarding Leases. Except as described in
--------------------------------
writing to Beneficiary, trustor hereby represents and warrants that: (1) all
representations made by it in the Leases are true; (2) all Improvements and the
leased space demised and let pursuant to each Lease have been completed to the
satisfaction of Lessee; (3) each Lessee has accepted possession of its leased
space and has opened for business and commenced payment of rent under its Lease;
(4) each Lessee is in occupancy; (5) all rents and other charges due and payable
under the Leases
18
<PAGE>
have been paid; (6) no rent has been prepaid, except as expressly described
under such Lease; (7) there is no existing default or breach of any covenant or
condition on the part of any Lessee or Lessor under any Lease; (8) there are no
options to purchase all or any portion of the Secured Property contained in any
Lease; (9) there are no options to renew by any Lessee except as stated in the
Leases; (10) there are no amendments of or modifications to any Leases except as
disclosed in writing to Beneficiary; and (11) all Leases are subject and
subordinate to this Deed of Trust.
D. Covenants Regarding Leases. Except as otherwise required
--------------------------
under any such Lease, Trustor covenants it will not, without the prior written
consent of the Beneficiary, which shall not be unreasonably withheld obtained in
each instance:
(1) lease to any person, firm or corporation, except for
actual occupancy by such person, firm or corporation all or any part of the
space in any of the Improvements;
(2) cancel, terminate or accept a surrender or suffer or
permit any cancellation, termination or surrender of any Lease;
(3) modify any Lease so as to reduce the term thereof or
the rent payable thereunder, or to change any renewal provision contained
therein;
(4) commence any summary proceeding or other action to
recover possession of any space demised pursuant to any Lease, other than a
proceeding brought in good faith by reason of a default of any Lessee;
(5) receive or collect or permit the receipt or
collection of any rental payments of more than one monthly installment of rent
under any Lease in advance of the due dates of such rental payments;
(6) take any other action with respect to any Lease
which would tend to impair the security of the Beneficiary under this Deed of
Trust;
(7) extend any present Lease other than in the manner
presently provided for therein, or enter into any future Lease with any person,
firm or corporation, except on the best terms reasonably obtainable, under
Leases which shall in all respects be satisfactory to the Beneficiary as to the
form and substance thereof and the credit standing of the respective Lessee
thereunder;
(8) execute an Agreement or create or permit a lien
which may be or become superior to any existing Leases affecting the Secured
Property; or
(9) sell, assign, transfer, mortgage, pledge or
otherwise dispose of or encumber, whether by operation of law or otherwise, any
Lease or any rentals under any Lease or any rents, income, profits or cash
collateral issuing from the Secured Property, except in connection with a
transfer permitted by Section 1.11.
E. Application of Rents. Trustor shall use and apply all rents
--------------------
income and profits from the Secured Property first to the payment of the
Obligations in accordance with the terms of the Loan Documents, and then to the
payment of all Impositions and costs and expenses
19
<PAGE>
of management, operation, repair, maintenance, preservation, reconstruction and
restoration of the Secured Property in accordance with the requirements of this
Deed of Trust and the obligations of Trustor as the lessor under any Lease, and
shall not use such rents, income or profits for purposes unrelated to the
Secured Property unless and until all current payments on the Obligations,
Impositions, and such costs and expenses have been paid or provided for and
reasonably adequate cash reserves have been set aside to ensure the timely
payment of all future payments on such Obligations prior to the maturity
thereof, Impositions and such costs and expenses.
1.9 Assignment of Leases, Rents, Income, and Cash Collateral.
--------------------------------------------- ----------
A. Assignment; Discharge of Obligations. Trustor does hereby
------------------------------------
absolutely and presently bargain, sell, assign and set over unto Beneficiary,
all Leases, rents, income, profits cancellation fees, damages, or similar
payments in lieu of rents, and any and all cash collateral which, whether before
or after foreclosure or during the full period of redemption, shall be made upon
or accrue and be owing for the use or occupation of the Secured Property and of
the buildings and fixtures thereon, or any part thereof, subject to the license
granted to Trustor in the Assignment of Leases. For the aforesaid purpose,
Trustor does hereby constitute and appoint Beneficiary its attorney-in-fact,
irrevocably in its name, to receive, collect and receipt all sums due or owing
for such use and occupation, as the same accrue, and, out of the amount so
collected, Beneficiary, its successors and assigns, are hereby authorized (but
not obligated) to pay and discharge all obligations of Trustor hereunder,
including, but not being limited to, the obligation to pay the Obligations (and
including any accelerated Obligations) in such order as Beneficiary, its
successors or assigns, may determine and whether due or not, and to pay the
remainder, if any, to Trustor, but neither this assignment nor any such action
shall constitute Beneficiary as a "mortgagee in possession". The assignments of
Leases, rents, income, profits and any and all cash collateral of the Secured
Property in this Section 1.9 is intended to be an absolute and present
-----------
assignment from Trustor to Beneficiary and not merely the passing of a security
interest. Trustor shall, at any time or from time to time, upon request of
Beneficiary, execute and deliver any instrument as may be requested by
Beneficiary to further evidence the assignment and transfer to Beneficiary of
Trustor's interest in any Lease. Nothing herein shall in any way limit
Beneficiary's remedies or Trustor's obligations under the Assignment to
Beneficiary.
B. Entry Onto Secured Property; Lease of Secured Property.
------------------------------------------------------
Upon the occurrence and during the continuance of an Event of Default (as
hereinafter defined); Beneficiary at its sole option shall have the right to
enter and take possession of the Secured Property and manage and lease the same
as further provided in subsection 4.1C, including, without limitation, the right
---------------
to enter into Leases and new agreements extending said termination dates beyond
the maturity set forth in the Note and take any action which, in Beneficiary's
judgment, is necessary or proper to conserve the value of the Secured Property.
The expenses (including any receiver's fees, attorneys' fees, costs and agent's
compensation) incurred pursuant to the powers herein contained shall be secured
hereby. Beneficiary shall not be liable to account to Trustor for any action
taken pursuant hereto other than to account for any rents actually received by
Beneficiary. No right granted to Beneficiary, Trustee or any receiver pursuant
to the Loan Documents shall entitle any of them to seize, take possession of,
manage or operate any property of Trustor located within the Secured Property
nor to operate the business of Trustor conducted in the Secured Property.
20
<PAGE>
C. Right to Manage Secured Property. Notwithstanding anything
--------------------------------
to the contrary contained in subsection A of this Section 1.9, as long as
------------ -----------
Beneficiary has not taken possession of the Secured Property pursuant to Section
1.9(B), Trustor shall have the sole right to possession, to manage and operate
the Secured Property, including without limitation, the right to enter into
Leases, and collect, as they accrue, all such rents, income, profits and cash
collateral.
D. Delivery of Assignments. Trustor will, as requested from
-----------------------
time to time by Beneficiary, execute such additional documents to evidence the
assignment to Beneficiary or its nominee of any Leases now or hereafter made
upon said Secured Property, such assignment documents to be in form and content
reasonably acceptable to Beneficiary. For the aforesaid purposes, Trustor agrees
to deliver to Beneficiary within thirty (30) days after Beneficiary's request, a
duplicate original of every Lease which is at the time of such request
outstanding upon the said Secured Property and in addition thereto shall supply
Beneficiary at its request a complete list of each and every Lease certified by
(1) an officer of Trustor, if Trustor is a corporation, or (2) a general partner
of Trustor (or an officer of any such general partner which is a corporation) if
Trustor is a partnership or (3) a trustee of Trustor (or an officer of any such
trustee which is a corporation) if Trustor is a trust, or (4) Trustor if Trustor
is an individual or individuals, showing unit number, type, name of each Lessee,
monthly rental, date to which rents have been paid, term of Lease, date of
occupancy, date of expiration and any and every special provision, concession or
inducement granted to Lessee.
E. Indemnity. Notwithstanding anything to the contrary set
---------
forth in this Section 1.9, except to the extent caused by (i) the gross
-----------
negligence or willful misconduct of Beneficiary or its agents, contractors or
employees, or (ii) an occurrence on or about the Secured Property conclusively
determined by a court of last resort to have occurred following the sale or
transfer thereof as a result of foreclosure proceedings (or in lieu thereof),
Trustor agrees that in the exercise of the rights of Beneficiary contained in
this Section 1.9, no liability shall be asserted against Beneficiary, all such
-----------
liability being expressly waived and released by Trustor. Trustor hereby holds
Beneficiary harmless from and against any and all claims, liabilities and
expenses of any kind or nature against or incurred by Beneficiary arising out of
such management, operation or maintenance of the Secured Property or the
collection and disposition of rents, income, profits or cash collateral
therefrom, except for any claim, liability or expense arising out of
Beneficiary's fraud, bad faith, willful misconduct or gross negligence.
1.10 Further Assurances.
------------------
A. General; Appointment of Attorney-in-Fact. At any time, and
----------------------------------------
from time to time, upon request by Beneficiary, Trustor will make, execute, and
deliver or cause to be made, executed and delivered to Beneficiary, any and all
other instruments, certificates and other documents as may, in the opinion of
Beneficiary, be reasonably necessary or desirable in order to effectuate,
complete, perfect or continue and preserve the obligations of Trustor under the
Note and the Loan Documents. Upon any failure by Trustor to do so, Beneficiary
may make, execute and record any and all such instruments, certificates and
documents for and in the name of Trustor and Trustor hereby irrevocably appoints
Beneficiary the agent and attorney-in-fact of Trustor for such purposes. Trustor
will reimburse Beneficiary for any sums expended by Beneficiary in making,
executing and recording such instruments, certificates and documents and such
sums shall be secured by this Deed of Trust.
21
<PAGE>
B. Statement Regarding Obligations. Trustor from time to time,
-------------------------------
within ten (10) days after request by Beneficiary, shall furnish Beneficiary
with a written statement, duly acknowledged, setting forth the unpaid principal
of, and interest on, the Obligations secured hereby and whether or not any set-
offs or defenses exist against such principal and interest, and, if so, the
particulars thereof.
C. Additional Security Instruments. Trustor shall from time to
-------------------------------
time, within fifteen (15) days after request by Beneficiary, execute,
acknowledge and deliver to Beneficiary such chattel mortgages, security
agreements or other similar security instruments, in form and substance
satisfactory to Beneficiary, covering the Secured Property. Trustor shall
further from time to time within fifteen (15) days after request by Beneficiary,
execute, acknowledge and deliver any financing statement, renewal, affidavit,
certificate, continuation statement or other document as Beneficiary may request
in order to perfect, preserve, continue, extend or maintain the security
interest under, and the priority of, this Deed of Trust or such chattel Deed of
Trust or other security instrument as a first lien. Trustor further agrees to
pay to Beneficiary on demand all costs and expenses reasonably incurred by
Beneficiary in connection with the preparation, execution, recording, filing and
refiling of any such instrument or document, including the charges for examining
title and the attorneys' fee for rendering an opinion as to the priority of this
Deed of Trust and of such chattel Deed of Trust or other security instrument as
a valid first and subsisting lien. However, neither a request so made by
Beneficiary nor the failure of Beneficiary to make such a request shall be
construed as a release of such property, or any part thereof, from the lien of
this Deed of Trust, it being understood and agreed that this covenant and any
such chattel Deed of Trust, security agreement or other similar security
instrument, delivered to Beneficiary, are cumulative and given as additional
security. Trustor shall also pay all premiums and related costs in connection
with any title insurance policy or policies in full or partial replacement of
the title policy now insuring or which will insure the lien of this Deed of
Trust.
D. Security Agreement.
------------------
(1) THIS DEED OF TRUST CREATES A LIEN ON THE SECURED
PROPERTY, AND TO THE EXTENT THE PROPERTY IS PERSONAL PROPERTY UNDER APPLICABLE
LAW, THIS DEED OF TRUST CONSTITUTES A SECURITY AGREEMENT UNDER THE CALIFORNIA
UNIFORM COMMERCIAL CODE (THE "U.C.C.") AND ANY OTHER APPLICABLE LAW AND IS FILED
AS A FIXTURE FILING. UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, BENEFICIARY
MAY, AT ITS OPTION, PURSUE ANY AND ALL RIGHTS AND REMEDIES AVAILABLE TO A
SECURED PARTY WITH RESPECT TO ANY PORTION OF THE SECURED PROPERTY, AND/OR
BENEFICIARY MAY, AT ITS OPTION, PROCEED AS TO ALL OR ANY PART OF THE SECURED
PROPERTY IN ACCORDANCE WITH BENEFICIARY'S RIGHTS AND REMEDIES WITH RESPECT TO
THE LIEN CREATED BY THIS DEED OF TRUST.
(2) The grant of a security interest to Beneficiary in the
granting clauses of this Deed of Trust shall not be construed to derogate from
or impair the lien or provisions of or the rights of Beneficiary under this Deed
of Trust with respect to any property described therein which is real property
or which the parties have agreed to treat as real property. The hereby stated
intention of Trustor and Beneficiary is that all Secured Property is, and at all
times and for all purposes and in all proceedings, both legal and equitable,
shall be regarded as
22
<PAGE>
real property, irrespective of whether or not the same is physically attached to
the Land and/or Improvements.
(3) If reasonably required by Beneficiary, at any time
during the term of this Deed of Trust, Trustor will execute and deliver to
Beneficiary, in form satisfactory to Beneficiary, additional security
agreements, financing statements and/or other instruments covering all Personal
Property included in the Secured Property.
(4) Trustor hereby irrevocably constitutes and appoints
Beneficiary as its attorney-in-fact and such appointment is coupled with an
interest, to execute, deliver and file with the appropriate filing officer or
office such security agreements, financing statements and/or other instruments
as Beneficiary may request or require in order to impose and perfect the lien
and security interest created hereby more specifically on the Personal Property
or any fixtures.
(5) If Trustor enters into a separate security agreement
with Beneficiary relating to any of the Personal Property or fixtures, the terms
of such security agreement shall govern the rights and remedies of Beneficiary
after an Event of Default thereunder.
(6) It is understood and agreed that, in order to protect
Beneficiary from the effect of U.C.C. Section 9313, as amended from time to
time, in the event that Trustor intends to purchase any goods which will become
part of the Secured Property, or any part thereof, and such goods will be
subject to a purchase money security interest held by a seller or any other
party:
(a) Trustor shall, before executing any security
agreement or other document evidencing or perfecting such security interest,
obtain the prior written approval of Beneficiary, and all requests for such
written approval shall be in writing and contain the following information:
(i) a description of the Secured Property to
be replaced, added to, installed or substituted;
(ii) the address at which the Secured
Property will be replaced, added to, installed or substituted; and
(iii) the name and address of the proposed
holder and proposed amount of the security interest.
(b) Trustor's execution of any such security
agreement or other document evidencing or perfecting such security interest
without Beneficiary's prior written approval shall constitute an Event of
Default. No consent by Beneficiary pursuant to this subparagraph shall be deemed
to constitute an agreement to subordinate any right of Beneficiary in fixtures
or other property covered by this Deed of Trust.
(7) If at any time Trustor fails to make any payment on an
obligation secured by a purchase money security interest in the Personal
Property Beneficiary, at its option, may at any time pay the amount secured by
such security interest. Any money paid by Beneficiary under this Subparagraph,
including any expenses, costs, charges and attorney's fees reasonably incurred
by Beneficiary, shall be reimbursed to Beneficiary in accordance with
23
<PAGE>
Section 1.2E hereof. Beneficiary shall be subrogated to the rights of the holder
- ------------
of any such purchase money security interest in the Personal Property.
(8) Beneficiary shall have the right to acquire by
assignment from the holder of such security interest any and all contract
rights, accounts receivable, negotiable or non-negotiable instruments, or other
evidence of Trustor's indebtedness for such Personal Property and, upon
acquiring such interest by assignment, shall have the right to enforce the
security interest as assignee thereof, in accordance with the terms and
provisions of the U.C.C. and in accordance with any other provisions of law.
(9) Whether or not Beneficiary has paid the indebtedness
secured by, or taken an assignment of, such security interest, Trustor covenants
to pay all sums and perform all obligations secured thereby, and if Trustor at
any time shall be in default under such security agreement (after the giving of
any notice and the lapse of any grace period therefor), it shall constitute an
Event of Default.
(10) The provisions of this Section 1.10D shall not apply if
-------------
the goods which may become fixtures are of at least equivalent value and quality
as any property being replaced and if the rights of the party holding such
security interest have been expressly subordinated, at no cost to Beneficiary,
to the lien and security interest of this Deed of Trust in a manner satisfactory
to Beneficiary, including without limitation, at the option of Beneficiary,
providing to Beneficiary a satisfactory opinion of counsel to the effect that
this Deed of Trust constitutes a valid and subsisting first lien on such
fixtures which is not subordinate to the lien of such security interest under
any applicable law, including without limitation, the provisions of Section 9313
of the U.C.C.
(11) Trustor hereby warrants, represents and covenants as
follows:
(a) To the best of Trustor's knowledge, Trustor is
the sole owner of the Personal Property free from any lien, security interest,
encumbrance or adverse claim thereon of any kind whatsoever. Trustor will notify
Beneficiary of, and will protect, defend and indemnify Beneficiary against, all
claims and demands of all persons at any time claiming any rights or interest
therein.
(b) The Personal Property is not used or bought and
shall not be used or bought for personal, family, or household purposes, but
shall be bought and used solely for the purpose of the Secured Property.
(c) To the best of Trustor's knowledge, the Personal
Property is located on the Land and/or Improvements and will be kept on or at
the Land or the Improvements and Trustor will not remove the Personal Property
therefrom without the prior written consent of Beneficiary, except such portions
or items of Personal Property which are consumed or worn out in ordinary usage,
all of which shall be promptly replaced by Trustor with other Personal Property
of value equal to or greater than the value of the replaced Personal Property
when new, and except such portions or items of Personal Property temporarily
stored elsewhere to facilitate refurbishing or repair thereof or of the
Improvements.
(d) Trustor maintains a place of business in the
State and Trustor will immediately notify Beneficiary in writing of any change
in its principal place of business as set forth in the beginning of this Deed of
Trust.
24
<PAGE>
E. Preservation of Trustor's Existence. If Trustor is a
-----------------------------------
partnership or a corporation, subject to Section 1.11 it shall do all things
necessary to preserve and keep in full force and effect its existence,
franchise, rights and privileges under the laws of the state of its formation or
incorporation and the state in which the Secured Property is located, if
required by the laws of such state, and shall comply with all regulations,
rules, ordinances, statutes, orders and decrees of any governmental or quasi-
governmental authority or court applicable to it.
F. Further Indemnities. In addition to any other indemnities
-------------------
to Beneficiary specifically provided for in this Deed of Trust, except to the
extent caused by (i) the gross negligence or willful misconduct of Beneficiary
or its agents, contractors or employees, or (ii) an occurrence on or about the
Secured Property conclusively determined by a court of last resort to have
occurred following the sale or transfer thereof as a result of foreclosure
proceedings (or deed in lieu thereof), Trustor hereby indemnifies and saves
Beneficiary harmless from and against any and all losses, liabilities, suits,
obligations, fines, damages, penalties, claims, costs, charges, and expenses,
including, without limitation, reasonable architects', engineers' and attorneys'
fees and all disbursements which may be imposed upon, incurred or asserted
against Beneficiary by reason of: (l) the construction of the Improvements, (2)
any capital improvements, other work or things, done in, on or about the Secured
Property or any part thereof, (3) any use, non-use, misuse, possession,
occupation, alteration, repair, condition, operation, maintenance or management
of the Secured Property or any part thereof or any street, drive, sidewalk,
curb, passageway or space comprising a part thereof or adjacent thereto, (4) any
negligence or wilful act or omission on the part of Trustor, any Lessee under a
Lease or their agents, contractors, servants, employees, licensees or invitees,
(5) any accident, injury (including death) or damage to any person or property
occurring in, on or about the Secured Property or any part thereof or in, on or
about any street, drive, sidewalk, curb, passageway or space adjacent thereto,
(6) any default or Event of Default (as herein defined), (7) any lien or claim
which may be alleged to have arisen on or against the Secured Property or any
part thereof under the laws of the local or state government or any other
governmental or quasi-governmental authority or any liability asserted against
Beneficiary with respect thereto, (8) any tax attributable to the execution,
delivery, filing or recording of this Deed of Trust, the Note, any Lease, or any
other Loan Documents, or (9) any contest permitted pursuant to the provisions of
this Deed of Trust.
G. Absence of Insurance. The obligations of Trustor under this
--------------------
this Section 1.10 shall not in any way be affected by the absence in any case
------------
of covering insurance, by the amount of the insurance or by the failure or
refusal of any insurance carrier to perform any obligation on its part under
insurance policies affecting the Secured Property. If any claim, action or
proceeding is made or brought against Beneficiary by reason of any event as to
which Trustor is obligated to indemnify Beneficiary, then, upon demand by
Beneficiary, Trustor, at its sole cost and expense, shall resist or defend such
claim, action or proceeding in Beneficiary's name, if necessary, by the
attorneys for Trustor's insurance carrier, if such claim, action or proceeding
is covered by insurance, otherwise by such attorneys as Beneficiary shall
reasonably approve. Notwithstanding the foregoing, Beneficiary may engage its
own attorneys in its reasonable discretion to defend it or to assist in its
defense and Trustor shall pay the reasonable fees and disbursements of such
attorneys and such amounts shall bear interest at the Increased Rate and shall
be secured by this Deed of Trust.
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1.11 Further Sales or Encumbrances.
-----------------------------
A. Continuing Ownership and Management. Trustor acknowledges
-----------------------------------
that the continuous ownership of the Secured Property and the continuous
management and/or control of the operation of same by Trustor is of a material
nature to the transaction and the making of the loan evidenced by the Note and
secured by this Deed of Trust.
B. Transfer or Encumbrance of Secured Property. Trustor shall
-------------------------------------------
not, without the prior written consent of Beneficiary being first had and
obtained (which consent may be granted or denied in Beneficiary's sole
discretion), voluntarily or involuntarily, by operation of law or otherwise,
transfer or dispose of, or suffer any third party to transfer or dispose of, all
or any portion of the Secured Property or any interest therein or the management
and/or operation by Trustor of the Secured Property. For purposes of this
Section 1.11, a transfer or disposition of the Secured Property or
- ------------
any part thereof or interest therein shall include, without limitation, the sale
of the Secured Property or any portion thereof to a residential cooperative
corporation, conversion of all or any part of the Secured Property to a
condominium form of ownership, execution of a contract to sell or option to
purchase all or any portion of the Secured Property or any interest therein, any
transfer of or agreement to transfer air rights, any lease for space in any
Improvements on the Secured Property for purposes other than occupancy by the
tenant, any lease for space in Improvements containing an option to purchase, or
any direct or indirect sale, assignment, conveyance, transfer (excluding a
transfer as a result of or in lieu of condemnation), or other alienation of all
or any portion of the Secured Property or any interest therein, including, but
not limited to, the creation of a lien or other encumbrance on the Secured
Property or any part thereof or interest therein, and further including any
assignment, pledge, grant of security interest in, conditional sale, or the
execution of a title retention agreement with regard to any personalty included
in the Secured Property. Any such action described in this subsection 1.11B is
----------------
herein called a "Transfer." A Transfer shall also include, without limitation,
any of the following events, whether made directly or through an intermediary,
and whether made in one transaction or effected in more than one transaction:
(1) If Trustor is or becomes a corporation, a transfer or
disposition of more than 50% of the outstanding voting stock of such corporation
or 100% of any other corporation directly or indirectly owning or controlling
50% or more of the voting stock of Trustor;
(2) If Trustor is or becomes a partnership, a transfer or
disposition of any interest of any general partner in Trustor; or
(3) If Trustor is a trust or other entity, a transfer or
disposition of more than 50% of the beneficial interests in Trustor.
For purposes of the foregoing, a "transfer or disposition" of such stock or
interests shall include, without limitation, any direct or indirect sale
thereof, any execution of a contract or other agreement to sell or option to
purchase such stock or interests, or any assignment of such stock or interests,
including any assignment for security purposes.
In no event shall the following be deemed a Transfer or disposition of the
Secured Property in violation of this Section 1.11(B):
---------------
26
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(1) The transfer of the Secured Property to any corporation
which controls, is controlled by or is under common control with Trustor, so
long as Trustor continues to be liable for performance of the Obligations after
the transfer;
(2) The merger or consolidation of Trustor with any other
company, so long as the net worth of the combined company after consummation of
the transaction is not less than the net worth of Trustor immediately prior to
the merger or consolidation; or
(3) The issuance or trading of the stock or debt securities
of Trustor or any parent of Trustor through any public exchange, in one
transaction or a series of transactions.
C. Acceleration of Obligations. In the event of a Transfer
---------------------------
without the prior written consent of Beneficiary, Beneficiary may, without
limiting any other right or remedy available to Beneficiary at law, in equity or
by agreement with Trustor, and in Beneficiary's absolute discretion and without
regard to the adequacy of its security, accelerate the maturity of the Note and
require the payment of the then existing outstanding principal balance and all
other sums due under the Note and under this Deed of Trust, including, but not
limited to, the prepayment charge provided in Section 4.6 herein. The giving of
-----------
consent by Beneficiary to a Transfer in any one or more instances
shall not limit or waive the need for such consent in any other or subsequent
instances.
D. Wrap-Around Financing. Should the Secured Property at any
---------------------
time be or become subject to the lien of any agreement, deed of trust or
mortgage or similar instrument in connection with which payments on account of
the Obligations secured hereby are to be made directly or indirectly by or
through a mortgagee, grantee or beneficiary thereunder, regardless of whether or
not payment of the Obligations secured hereby is assumed by such mortgagee,
grantee or beneficiary, the whole of the principal sum and interest and other
sums hereby secured, at the option of Beneficiary, shall immediately become due
and payable.
1.12 Expenses. Trustor will pay or reimburse Beneficiary for all
--------
reasonable attorneys' fees, costs and expenses incurred by Beneficiary in any
proceedings affecting the Obligations or the Secured Property, (A) involving the
estate of a decedent or an insolvent, or (B) except to the extent caused by (i)
the gross negligence or willful misconduct of Beneficiary or its agents,
contractors or employees, or (ii) an occurrence on or about the Secured Property
following the sale or transfer thereof as a result of foreclosure proceedings
(or in lieu thereof), in any action, legal proceeding or dispute of any kind in
which Beneficiary is made a party, or appears as party plaintiff or defendant,
including, but not limited to, any exercise of the power of sale or judicial
foreclosure as set forth in this Deed of Trust, any condemnation action
involving the Secured Property or any action to protect the security hereof or
upon the reasonable concern of Beneficiary with the condition of the Secured
Property, and any such amounts paid by Beneficiary shall be added to the
Obligations and secured by this Deed of Trust. If the Obligations are referred
to attorneys for collection, foreclosure or for any cause set forth in Article
III hereof, Trustor shall pay all expenses incurred by Beneficiary, including
reasonable attorneys' fees, all costs of collection, litigation costs, and costs
(which may be estimated as to items to be expended after entry of the decree) of
procuring title insurance policies, whether or not obtained, Torrens
certificates, and similar assurances with respect to title and value as
Beneficiary may deem reasonably necessary together with all statutory costs,
with or without the institution of an action or proceeding. All such costs and
expenses with interest thereon at the Increased Rate shall be deemed to be
secured by this Deed of Trust.
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<PAGE>
ARTICLE II
WARRANTIES AND REPRESENTATIONS
------------------------------
Trustor makes the following warranties and representations:
2.1 Warranty of Title. Trustor (A) is lawfully seized and possessed
-----------------
of the Secured Property, in fee simple, subject to no mortgage, lien, charge or
encumbrance, except as specifically set forth in the title insurance policy
issued to Beneficiary upon recordation of this Deed of Trust, (B) has full power
and lawful authority to grant, bargain, sell, convey, assign, transfer and
mortgage the Secured Property in the manner and form hereby mortgaged and
conveyed, (C) is the fee owner of the Improvements, (D) is the owner of the
Personal Property, and (E) does warrant and will defend the title to the Secured
Property against all claims and demands whatsoever.
2.2 Ownership Of Improvements And Personal Property. All Improvements
-----------------------------------------------
and Personal Property now or hereafter affixed, placed or used by Trustor are
and will hereafter be owned by Trustor free from any prior liens or
encumbrances, provided, however, that if any of the foregoing Improvements or
Personal Property shall be subject to a conditional bill of sale, chattel
mortgage or other agreement creating a security interest, then all of the right,
title and interest of Trustor in and to such Improvements and Personal Property
together with the benefits of any deposits or payments now or hereafter made
thereon shall be covered by and subject to this Deed of Trust.
2.3 No Pending Material Litigation or Proceeding; No Hazardous
Materials.
A. Proceedings Affecting Trustor. Except as disclosed in
-----------------------------
writing to Beneficiary, to the best knowledge and belief of Trustor, there are
no actions, suits or proceedings pending, and, there are no actions, suits,
investigations or proceedings threatened, against or affecting Trustor, or the
business, operations, properties or assets of Trustor, or before or by any
governmental department, commission, board, regulatory authority, bureau, agency
or instrumentality, domestic, foreign, federal, state or municipal
(collectively, "Governmental Agency"), or any court, arbitrator or grand jury,
which may result in any material adverse change in the business, operations,
properties or assets or in the condition, financial or otherwise, of Trustor, or
in the ability of Trustor to perform its obligations under the Note or this Deed
of Trust. To the best knowledge and belief of Trustor, Trustor is not in
default, and there is no other default, with respect to any judgment, order,
writ, injunction, decree, demand, rule or regulation of any court, arbitrator,
grand jury or of any Governmental Agency, default under which might have
consequences which would materially and adversely affect the business,
operations, properties or assets or the condition, financial or otherwise, of
Trustor or the ability of Trustor to perform its obligations under the Note or
this Deed of Trust.
B. Proceedings Affecting Secured Property. To the best of
--------------------------------------
Trustor's knowledge, there are no proceedings of any kind pending, or,
threatened against or affecting Trustor, the Secured Property (including any
attempt or threat by any Governmental Agency to condemn or rezone all or any
portion of the Secured Property), any party constituting Trustor in any such
party, or involving the validity, enforceability or priority of this Deed of
Trust, the Note or any of the other Loan Documents or enjoining or preventing or
threatening to enjoin or prevent the use and occupancy of the Secured Property
or the performance by Beneficiary of its obligations hereunder, and there are no
rent controls covering use of the Land, governmental
28
<PAGE>
moratoria or environmental controls covering the use of the Land (other than
those generally imposed by local, federal or state law upon property in the
State of California) presently in existence, or to the best knowledge of
Trustor, threatened, affecting use of the Secured Property, except as identified
in writing to, and approved by, Beneficiary.
C. No Litigation Regarding Hazardous Materials. No litigation,
-------------------------------------------
administrative enforcement actions or proceedings have been brought, and to the
current and actual knowledge of Trustor threatened, nor have any settlements
been reached by or with any party or parties, public or private, in disputes in
which the presence, disposal, release or threatened release of any Hazardous
Material (as defined in the Indemnity) on, from, or under any of the Secured
Property had been alleged.
2.4 Valid Organization, Good Standing and Qualification of Trustor.
--------------------------------------------------------------
Trustor is a duly and validly organized and existing Corporation under the
laws of the State of California and is entitled to own its properties and
assets, and to carry on its business, all as, and in the places where, such
properties and assets are now owned or operated or such business is now
conducted or proposed to be conducted.
2.5 Authorization; No Legal Restrictions on Performance. The
---------------------------------------------------
execution and delivery by Trustor of this Deed of Trust and the other Loan
Documents and its compliance with the terms and conditions hereof and thereof
have been duly and validly authorized by all necessary partnership action,
including, without limitation, all necessary corporate action of all of
Trustor's corporate general partners, if any. The Loan Documents are valid and
enforceable obligations of Trustor in accordance with the terms hereof and
thereof. Neither the execution and delivery by Trustor of this Deed of Trust or
any of the other Loan Documents nor the consummation of the transactions
contemplated herein or therein, nor compliance with the terms and conditions
hereof and thereof will, to Trustor's current and actual knowledge, (A) conflict
with or result in a material breach of, or constitute a material default under,
any of the terms, obligations, covenants, conditions or provisions of (1)
Trustor's articles of incorporation, bylaws, or any indenture, mortgage, deed of
trust, pledge, bank loan or credit agreement, agreement creating, evidencing or
securing any indebtedness of Trustor or by which its properties may be bound or
affected, or any other agreement or instrument to which Trustor is now a party,
or (2) any judgment, order, writ, injunction, decree or demand of any court,
arbitrator, grand jury or Governmental Agency, or (B) result in the creation or
imposition of any lien, charge or encumbrance of any nature whatsoever upon any
property or asset of Trustor under the terms or provisions of any of the
foregoing. Trustor is not in default in the performance, observance or
fulfillment of any of the terms, obligations, covenants, conditions or
provisions contained in any indenture or other agreement creating, evidencing or
securing indebtedness of Trustor or pursuant to which Trustor is a party or by
which Trustor or its properties may be bound or affected, which may result in
any material adverse change in the business, operations, properties, or assets
or in the condition, financial or otherwise, of Trustor, or in the ability of
Trustor to perform its obligations under the Note or this Deed of Trust.
2.6 Compliance With Laws. Trustor has complied, and at all future
--------------------
times shall comply, with all applicable statutes, rules, regulations, orders and
restrictions of any domestic or foreign government or any instrumentality or
agency thereof, in respect of the conduct of its business and ownership of its
properties (including, without limitation, applicable statutes, rules,
regulations, orders and restrictions relating to equal employment opportunities
or environmental standards or controls) which would materially and adversely
effect the financial condition of
29
<PAGE>
Trustor or the ability of Trustor to perform under the Loan Documents. No
governmental orders, permissions, consents, approvals or authorizations are
required to be obtained and no registrations or declarations are required to be
filed in connection with the execution and delivery or performance of this Deed
of Trust or any of the other Loan Documents, except as anticipated by the Loan
Documents.
2.7 Tax Status. Trustor has filed all United States income tax
----------
returns and all state and municipal tax returns which are required to be filed,
and has paid, or made provision for the payment of, all taxes which have become
due pursuant to said returns or pursuant to any assessment received by Trustor,
except such filings and taxes, if any, as are being contested in good faith and
as to which adequate reserves have been provided.
2.8 Absence of Foreign or Enemy Status. Trustor is not a "national"
----------------------------------
of a "designated foreign country" (or a person defined as a "designated foreign
country") within the definitions in the Foreign or Cuban Assets Control
Regulations of the United States Treasury Department, 31 CFR, Subtitle B,
Chapter V, as amended, or any regulation or ruling issued thereunder.
2.9 Federal Reserve Board Regulations. Trustor does not own any
---------------------------------
"margin security" as such term is defined in Regulation G of the Board of
Governors of the Federal Reserve System (12 CFR Part 207), as amended, except
margin securities owned or which may be acquired by Trustor which do not and
would not in the aggregate constitute a substantial part of the assets of
Trustor within the meaning of Section 207.2(i) of the aforesaid Regulation G,
and Trustor will not use any part of the proceeds from the loans to be made
under this Agreement (A) directly or indirectly, to purchase or carry any such
security or to reduce or retire any indebtedness originally incurred to purchase
any such security within the meaning of such Regulation, (B) so as to involve
Trustor in a violation of Regulation T, U or X of such Board (12 CFR Parts 220,
221 and 224), or (C) for any other purpose not permitted by Section 7 of the
Securities Exchange Act of 1934, as amended, or any of the rules and regulations
respecting the extension of credit promulgated thereunder.
2.10 Investment Company Act and Public Utility Holding Company Act.
-------------------------------------------------------------
Trustor is not an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended, and Trustor is not a "holding company" or a "subsidiary company" of
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended.
2.11 Exempt Status of Transactions Under Securities Act and
------------------------------------------------------
Representations Relating Thereto. Trustor has not, either directly or through
- --------------------------------
any agent, offered all or any part of the loan made or to be made by Beneficiary
and secured by this Deed of Trust to, or solicited any offers to make all or any
part of such loan from, or otherwise approached or negotiated or communicated in
respect of all or any part of such loan with anyone other than Beneficiary so as
thereby to bring the obtaining of such loan by Trustor and the delivery of the
Note within the registration provisions of the Securities Act of 1933, as
amended. Neither Trustor nor any agent on its behalf will offer to obtain all or
any part of such loan from, or solicit any offers to make all or any part of
such loan from, or otherwise approach or negotiate or communicate in respect of
all or any part of such loan with, any person or persons so as thereby to bring
the obtaining of such loan by Trustor and the delivery of the Note within the
registration provisions of the Securities Act of 1933, as amended.
30
<PAGE>
2.12 Employee Benefit Plans.
----------------------
A. None of the employee benefit plans maintained at any
time by Trustor (herein called "Employee Benefit Plans") or the trusts created
thereunder has engaged in a prohibited transaction which could subject any such
Employee Benefit Plan or trust to a tax or penalty on prohibited transactions
imposed under Internal Revenue Code Section 4975 or the Employee Retirement
Income Security Act of 1974 and the regulations thereunder (herein called
"ERISA"), which would materially and adversely effect the financial condition of
Trustor or the ability of Trustor to perform under the Loan Documents.
B. None of the Employee Benefit Plans which are employee
pension benefit plans or the trusts created thereunder has been terminated; nor
has any such Employee Benefit Plan incurred any liability to the Pension Benefit
Guaranty Corporation established pursuant to ERISA which would be material to
Trustor, other than for required insurance premiums which have been paid when
due, or incurred any accumulated funding deficiency which would be material to
Trustor, whether or not waived; nor has there been any reportable event, or
other event or condition, which presents a risk of termination of any such
Employee Benefit Plan by such Pension Benefit Guaranty Corporation which
termination would be material to Trustor.
C. The present value of all benefits vested under the
Employee Benefit Plans which are employee pension benefit plans did not, as of
the most recent valuation date, exceed the then current value of the assets of
such Employee Benefit Plans allocable to such vested benefits by an amount that
would materially affect the financial condition of Trustor or the ability of
Trustor to perform under the Loan Documents.
D. The consummation of the loan from Beneficiary referred
to in this Deed of Trust, and the execution and delivery of the Note hereunder
and the performance by Trustor of its obligations under the Loan Documents, will
not involve any prohibited transaction.
E. As used in this Section 2.12, the terms "employee
------------
benefit plans," "employee pension benefit plans," "accumulated funding
deficiency," "reportable event," "accrued benefits," "separate account" and
"multiemployer plan" shall have the respective meanings assigned to them in
ERISA, and the term "prohibited transaction" shall have the meaning assigned to
it in Internal Revenue Code Section 4975 and ERISA.
ARTICLE III
DEFAULTS
--------
3.1 Events of Default. Any of the following events shall be deemed an
-----------------
Event of Default or a default hereunder:
A. if default shall be made in the payment of any
installment of the principal of, or interest on the Obligations or any other sum
which is payable hereunder as and when the same shall become due and payable as
in the Note or herein provided; or
B. if Trustor fails to perform or observe any material
term, provision, covenant or agreement in the Note, this Deed of Trust or in any
other Loan Documents; provided, however in the event of any default other than a
default which can be cured by the payment of money (a "non-monetary default"),
the Beneficiary shall be entitled to enforce the
31
<PAGE>
remedies therefor provided herein only after giving notice thereof to Trustor
and such default shall have continued uncorrected for thirty (30) days, unless
such non-monetary default is of such a character as to require more than thirty
(30) days to cure and the Trustor shall, prior to the expiration of said thirty
(30) days, promptly commence and diligently and continuously proceed with due
diligence to cure such default, in which event such period shall be extended for
a reasonable time necessary to cure such default, but in no event more than one
hundred eighty (180) days after such default; provided, however, that the
foregoing opportunity to cure shall not apply to (a) any default under any
letter of credit agreement made by the Beneficiary and the Trustor, if any, or
the Beneficiary's rights under the letter(s) of credit delivered to the
Beneficiary in connection therewith; (b) any sale, assignment, transfer,
encumbrance, or lien in violation of this Note or the Deed of Trust; or (c) the
Beneficiary's right to (i) charge interest at the Default Rate as provided
herein, (ii) impose a late charge as provided herein, or (iii) make payments and
cure defaults of the Trustor under the Note as provided therein, all of which
amounts shall be immediately due and payable without any obligation on the part
of the Beneficiary to notify any party and whether or not such default is cured;
or
C. if any warranty, representation, certification,
financial statement or other information made or furnished at any time pursuant
to the terms of this Deed of Trust or otherwise, by Trustor, or by any person or
entity liable for the Obligations in connection with the loan transaction, shall
prove to be materially false and to have been made or furnished with knowledge
of the false nature thereof; or
D. if Trustor shall:
(1) apply for, consent to or acquiesce in the
appointment of a receiver, trustee or liquidator of it or of all or a
substantial part of its assets, or the Secured Property or any interest in any
part thereof (the term "acquiesce" includes, but is not limited to, the failure
to file a petition or motion to vacate or discharge any order, judgment or
decree providing for such appointment within ten (10) days after the
appointment); or
(2) commence a voluntary case or other proceeding in
bankruptcy, or admit in writing its inability to pay its debts as they come due;
or
(3) make a general assignment for the benefit of
creditors; or
(4) file a petition or an answer seeking
reorganization, arrangement, composition, readjustment, liquidation,
dissolution, or similar relief for itself under the present or any future
federal bankruptcy act or any other statute or law relative to bankruptcy,
insolvency, or other relief for debtors; or
(5) file an answer admitting the material allegations
of, or consent to, or default in answering, a petition filed against it in any
bankruptcy, reorganization or insolvency case or proceeding; or
E. if an order for relief shall be entered against
Trustor by a court of competent jurisdiction under any present or future
bankruptcy law, which order shall continue unstayed and in effect for any period
of forty-five (45) consecutive days; or
F. if an order, judgment or decree shall be entered by
any court of competent jurisdiction, adjudicating Trustor insolvent, approving a
petition seeking reorganization or
32
<PAGE>
arrangement of Trustor or appointing a receiver, trustee or liquidator of it or
of all or a substantial part of its assets, and such order, judgment or decree
shall continue unstayed and in effect for any period of forty-five (45)
consecutive days; or
G. if Trustor has assigned or purports to assign the
whole or any part of the rents, income or profits arising from the Secured
Property, without the prior written consent of Beneficiary; or
H. if a Transfer not consented to by Beneficiary shall
have occurred in violation of Section 1.11; or
------------
I. if Trustor shall enter into a mortgage or other
security instrument with respect to the Secured Property which does not comply
with the requirements of Section 1.11; or
------------
J. if Trustor shall be in default beyond any applicable
grace period under any other mortgage or security instrument affecting all or
any part of the Secured Property; or
K. if any mechanic's, laborer's or materialman's lien,
federal tax lien, broker's lien or other lien not permitted hereunder and
affecting the Secured Property or any part thereof is not discharged, by
payment, bonding, order of a court of competent jurisdiction or otherwise,
within twenty (20) days after Trustor receives notice thereof from the lienor or
from Beneficiary.
ARTICLE IV
REMEDIES
--------
4.1 Remedies. Upon the occurrence of any one or more Events of
--------
Default, Trustee and/or Beneficiary may (but shall not be obligated), in
addition to any rights or remedies available to them hereunder or under the
other Loan Documents, take such action personally or by their agents or
attorneys, with or without entry, and without notice, demand, presentment or
protest (each and all of which are hereby waived to the extent permitted by law)
as they deem necessary or advisable to protect and enforce Beneficiary's rights
and remedies against Trustor and Secured Property, including the following
actions, each of which may be pursued concurrently or otherwise, at such time
and in such order as Trustee and/or Beneficiary may determine, in their sole
discretion, without impairing or otherwise affecting its or their other rights
or remedies:
(a) declare the entire balance of the Obligations
(including the entire principal balance thereof, all accrued and unpaid interest
and any premium thereon and all other such sums secured hereby) to be
immediately due and payable and upon any such declaration the entire unpaid
balance of the Obligations shall become and be immediately due and payable,
without presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by Trustor anything in the Loan Documents to the
contrary notwithstanding; or
(b) institute a proceeding or proceedings, judicial or
otherwise, for the complete foreclosure of this Deed of Trust under any
applicable provision of law; or
(c) institute a proceeding or proceedings for the
partial foreclosure of this Deed of Trust under any applicable provision of law
for the portion of the Obligations then
33
<PAGE>
due and payable, subject to the lien of this Deed of Trust continuing unimpaired
and without loss of priority so as to secure the balance of the Obligations not
then due and payable; or
(d) cause any or all of the Secured Property to be sold
under the power of sale granted by this Deed of Trust or any of the other Loan
Documents in any manner permitted by applicable law. For any sale under the
power of sale granted by this Deed of Trust, Trustee or Beneficiary must record
and give all notices required by law and then, upon the expiration of such time
as is required by law, may sell the Secured Property, and all estate, right,
title, interest, claim and demand of Trustor therein, and all rights of
redemption thereof, at one or more sales, as an entirety or in parcels, with
such elements of real and/or personal property (and, to the extent permitted by
applicable law, may elect to deem all of the Secured Property to be real
property for purposes thereof), and at such time or place and upon such terms as
Trustee and Beneficiary may determine and shall execute and deliver to the
purchaser or purchasers thereof a deed or deeds conveying the property sold, but
without any covenant or warranty, express or implied, and the recitals in the
deed or deeds of any facts affecting the regularity or validity of the sale will
be conclusive against all persons. In the event of a sale, by foreclosure or
otherwise, of less than all of the Secured Property, this Deed of Trust shall
continue as a lien and security interest on the remaining portion of the Secured
Property; or
(e) institute an action, suit or proceeding in equity for
the specific performance of any of the provisions contained in the Loan
Documents; or
(f) apply for the appointment of a receiver, custodian,
trustee, liquidator or conservator of the Secured Property, to be vested with
the fullest powers permitted under applicable law, as a matter of right and
without regard to or the necessity to disprove the adequacy of the security for
the Obligations or the solvency of Trustor or any other person liable for the
payment of the Obligations, and Trustor and each other person so liable waives
or shall be deemed to have waived such necessity and consents or shall be deemed
to have consented to such appointment; or
(g) subject to the provisions and restrictions of any
applicable law, enter upon the Premises, and exclude Trustor and its agents and
servants wholly therefrom, without liability for trespass, damages or otherwise,
and take possession of all books, records and accounts relating thereto and all
other Secured Property, and Trustor agrees to surrender possession of the
Secured Property and of such books, records and accounts to Trustor or
Beneficiary on demand after the happening of any Event of Default; and having
and holding the same may use, operate, manage, preserve, control and otherwise
deal therewith and either personally or by its superintendents, managers,
agents, servants, attorneys or receivers, without interference from Trustor; and
upon each such entry and from time to time thereafter may, at the expense of
Trustor and the Secured Property, without interference by Trustor and as
Beneficiary may deem advisable, (i) either by purchase, repair or construction,
maintain and restore the Premises, (ii) insure or reinsure the same, (iii) make
all necessary or proper repairs, renewals, replacements, alterations, additions,
betterments and improvements thereto and thereon, (iv) complete the construction
of the Improvements and, in the course of such completion, may make such changes
in the contemplated or completed Improvements as it may deem advisable, (v) in
every such case in connection with the foregoing have the right to exercise all
rights and powers of Trustee with respect to the Secured Property, either in
Trustor's name or otherwise, including the right to make, terminate, cancel,
enforce or modify Leases, obtain and evict Lessees and sublessees on such terms
as Beneficiary shall deem advisable and to take any actions described in
subsection (i) of this Section 4.1; or
- ------------- ----------
34
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(h) subject to the provisions and restrictions of any
applicable law, may, with or without the entrance upon the Premises, collect,
receive, sue for and recover in its own name all Rents and cash collateral
derived from the leasing of the Premises, and after deducting therefrom all
costs, expenses and liabilities of every character incurred by Trustee and/or
Beneficiary, in collecting the same and in using, operating, managing,
preserving and controlling the Premises, and otherwise in exercising Trustee's
and/or Beneficiary's rights under subsection (g) of this Section 4.1, including
-------------- -----------
all amounts necessary to pay Impositions, insurance premiums and other charges
in connection with the Premises, as well as compensation for the services of
Trustee and Beneficiary and their respective attorneys, agents and employees, to
apply the remainder as provided in Section 4.4; or
-----------
(i) release any portion of the Secured Property for such
consideration as Beneficiary may require without, as to the remainder of the
Secured Property, in any way impairing or affecting the lien or priority of this
Deed of Trust, or improving the position of any subordinate lienholder with
respect thereto, except to the extent that the Obligations shall have been
reduced by the actual monetary consideration, if any, received by Trustee and/or
Beneficiary for such release, and may accept by assignment, pledge or otherwise
any other property in place thereof as Trustee and/or Beneficiary may require
without being accountable for so doing to any other lienholder; or
(j) may take all actions permitted under the Uniform
Commercial Code of the State of California; or
(k) may take any other action, or pursue any other right or
remedy, as Trustee and/or Beneficiary may have under applicable law, and Trustor
does hereby grant the same to Trustee and Beneficiary.
In the event that Trustee and/or Beneficiary shall exercise any of the
rights or remedies set forth in subsections (g) and (h) of this Section 4.1,
----------------------- -----------
neither Trustee nor Beneficiary shall be deemed to have entered upon or taken
possession of the Secured Property except upon the exercise of its option to do
so, evidenced by its demand and overt act for such purpose, nor shall it be
deemed a beneficiary or mortgagee in possession by reason of such entry or
taking possession, unless applicable law requires that it be deemed to be a
beneficiary or mortgagee in possession. Neither Trustee nor Beneficiary shall
be liable to account for any action taken pursuant to any such exercise other
than for rents actually received by such party, nor liable for any loss
sustained by Trustor resulting from any failure to let the Premises, or from any
other act or omission of Trustee and/or Beneficiary, except to the extent caused
by (i) the gross negligence or willful misconduct of Beneficiary or its agents,
contractors or employees, or (ii) an occurrence on or about the Secured Property
following the sale or transfer thereof as a result of foreclosure proceedings
(or in lieu thereof), except to the extent such loss is caused by the willful
misconduct or bad faith of such party or such liability may not be waived under
applicable law. Trustor hereby consents to, ratifies and confirms the exercise
by Trustee and/or Beneficiary of said rights and remedies, except to the extent
caused by (i) the gross negligence or willful misconduct of Beneficiary or its
agents, contractors or employees, or (ii) an occurrence on or about the Secured
Property following the sale or transfer thereof as a result of foreclosure
proceedings (or in lieu thereof).
4.2 Expenses. If any action is commenced to foreclose this Deed of
--------
Trust, or to enforce any other remedy of Trustee and/or Beneficiary under any of
the Loan Documents,
35
<PAGE>
whether such action is judicial or pursuant to the power of sale contained
herein or otherwise, there shall be added to the Obligations secured by this
Deed of Trust all costs and expenses, including attorney's fees, plus interest
thereon at the Default Rate (as defined in the Note) until paid, in the
commencement and prosecution of such action, whether or not such action results
in a foreclosure sale, foreclosure or other judicial decree or judgment.
4.3 Rights Pertaining to Sales. Subject to the provisions or other
--------------------------
requirements of law, the following provisions shall apply to any sale or sales
of the Secured Property under or by virtue of this Article IV, whether made
under the power of sale herein granted or by virtue of judicial proceedings or
of a judgment or decree of foreclosure and sale:
(a) Trustee, at the request of Beneficiary, may conduct any
number of sales from time to time. The power of sale set forth in Section 4.1(d)
--------------
hereof shall not be exhausted by any one or more such sales as to any part of
the Secured Property which shall not have been sold, nor by any sale which is
not completed or is defective in Trustee's or Beneficiary's opinion, until the
Obligations shall have been paid in full.
(b) Any sale may be postponed or adjourned by public
announcement at the time and place appointed for such sale or for such postponed
or adjourned sale without further notice.
(c) After each sale, Trustee, or an officer of any court
empowered to do so, shall execute and deliver to the purchaser or purchasers at
such sale a good and sufficient instrument or instruments granting, conveying,
assigning and transferring all right, title and interest of Trustor in and to
the property and rights sold and shall receive the proceeds of said sale or
sales and apply the same as herein provided. Trustee is hereby appointed the
true and lawful attorney-in-fact of Trustor, which appointment is irrevocable
and shall be deemed to be coupled with an interest, in Trustor's name and stead,
to make all necessary conveyances, assignments, transfers and deliveries of the
property and rights so sold, and for that purpose Trustee may execute all
necessary instruments of conveyance, assignment, transfer and delivery, and may
substitute one or more persons with like power, Trustor hereby ratifying and
confirming all that said attorney or such substitute or substitutes shall
lawfully do by virtue thereof. Nevertheless, Trustor, if requested by Trustee or
Beneficiary, shall ratify and confirm any such sale or sales by executing and
delivering to Trustee or such purchaser or purchasers all such instruments as
may be advisable, in Trustee's or Beneficiary's judgment, for the purposes as
may be designated in such request.
(d) Any and all statements of fact or other recitals made in
any of the instruments referred to in subsection (c) of this Section 4.3 given
-------------- -----------
by Trustee and/or Beneficiary as to nonpayment of the Obligations, or as to the
occurrence of any Event of Default, or as to Beneficiary having declared all or
any of the Obligations to be due and payable, or as to the request to sell, or
as to notice of time, place and terms of sale and of the property or rights to
be sold having been duly given, or as to the refusal, failure or inability to
act of Trustee, or as to the appointment of any substitute or successor Trustee,
or as to any other act or thing having been duly done by Trustor, Beneficiary,
or by such Trustee, shall be taken as conclusive and binding against all persons
as to evidence of the truth of the facts so stated and recited. Trustee and/or
Beneficiary may appoint or delegate any one or more persons as agent to perform
any act or acts necessary or incident to any sale so held, including the posting
of notices and the conduct of sale, but in the name and behalf of Trustee or
Beneficiary, as applicable.
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<PAGE>
(e) The receipt of Trustee for the purchase money paid at
any such sale, or the receipt of any other person authorized to receive the
same, shall be sufficient discharge therefor to any purchaser of any property or
rights sold as aforesaid, and no such purchaser, or its representatives,
grantees or assigns, after paying such purchase price and receiving such
receipt, shall be bound to see to the application of such purchase price of any
part thereof upon or for any trust or purpose of this Deed of Trust or, in any
manner whatsoever, be answerable for any loss, misapplication or non-application
of any such purchase money, or part thereof, or be bound to inquire as to the
authorization, necessity, expediency or regularity of any such sale.
(f) Any such sale or sales shall operate to divest all of
the estate, right, title, interest, claim and demand whatsoever, whether at law
or in equity, of Trustor in and to the properties and rights so sold, and shall
be a perpetual bar both at law and in equity against Trustor and any and all
persons claiming or who may claim the same, or any part thereof or any interest
therein, by, through or under Trustor to the fullest extent permitted by
applicable law.
(g) Upon any such sale or sales, Beneficiary may bid for and
acquire the Secured Property and, in lieu of paying cash therefor, may make
settlement for the purchase price by crediting against the Obligations the
amount of the bid made therefor, after deducting therefrom the expenses of the
sale, the cost of any enforcement proceeding hereunder and any other sums which
Trustee or Beneficiary is authorized to deduct under the terms hereof, to the
extent necessary to satisfy such bid.
(h) In the event that Trustor, or any person claiming by,
through or under Trustor, shall transfer or refuse or fail to surrender
possession of the Secured Property after any sale thereof, then Trustor, or such
person shall be deemed a tenant at sufferance of the purchaser at such sale,
subject to eviction by means of forcible entry and detainer proceedings in
accordance with applicable law, or subject to any other right or remedy
available hereunder or under applicable law.
(i) Upon any such sale, it shall not be necessary for
Trustee, Beneficiary or any public officer acting under execution or order of
court to have present or constructively in its possession any of the Secured
Property.
(j) In the event a foreclosure hereunder shall be commenced
by Trustee at the request of Beneficiary, Trustee or Beneficiary may at any time
before the sale of the Secured Property abandon the sale, and may institute suit
for the collection of the Obligations and for the foreclosure of this Deed of
Trust, or in the event that Trustee or Beneficiary should institute a suit for
collection of the Obligations, and for the foreclosure of this Deed of Trust,
Beneficiary may at any time before the entry of final judgment in said suit
dismiss the same and sell or require Trustee to sell the Secured Property in
accordance with the provisions of this Deed of Trust.
4.4 Application of Proceeds. The purchase money, proceeds or
-----------------------
avails of any sale referred to in Section 4.3, together with any other sums
-----------
which may be held by Trustee or Beneficiary hereunder, whether under the
provisions of this Article IV or otherwise, shall, except as herein expressly
provided to the contrary, be applied as follows:
First: To the payment of the costs and expenses of any
-----
such sale, including compensation to Trustee and/or Beneficiary, their
agents and counsel, and of
37
<PAGE>
any judicial proceeding wherein the same may be made, and of all expenses,
liabilities and advances made or incurred by Trustee and/or Beneficiary
hereunder, together with interest thereon as provided herein, and all
taxes, assessments and other charges, except any taxes, assessments or
other charges subject to which the Secured Property shall have been sold.
Second: To the payment in full of the Obligations (including
------
principal, interest, premium and fees) in such order as Beneficiary may
elect.
Third: To the payment of any other sums secured hereunder or
-----
required to be paid by Trustor pursuant to any provision of the Loan
Documents.
Fourth: To the payment of the surplus, if any, to whomsoever may
------
be lawfully entitled to receive the same.
4.5 Prepayment Charge. Trustor hereby agrees to pay the charge provided
-----------------
in the Note for prepayment of the Obligations, if for any reason any of said
Obligations shall be paid prior to the stated maturity date thereof, even if and
notwithstanding that an Event of Default shall have occurred and Beneficiary, by
reason thereof, shall have declared said Obligations due and payable, and
whether or not said payment is made prior to or at any sale held under or by
virtue of this Article IV. Trustor acknowledges that Beneficiary, in making the
loan evidenced by the Note and entering into this Deed of Trust, is relying on
Trustor's credit worthiness and its agreement to repay the Obligations in strict
accordance with the terms set forth in the Note. Trustor acknowledges that
Beneficiary would not make the loan without full and complete assurance by
Trustor of its agreement to make regular payments of principal and interest
under the Note and its further agreement not to prepay all or any part of the
principal of the Note prior to the final maturity date thereof, except on the
terms expressly set forth herein and in the Note. Therefore, any prepayment of
the Note, whether occurring as a voluntary prepayment by Trustor or occurring
upon an acceleration of the principal balance of the Note by Beneficiary on
account of any default by Trustor (including, but not limited to, the making or
suffering by Trustor, of any transfer or disposition of all or any portion of
the Secured Property or any interest therein as prohibited by Section 1.11 of
------------
this Deed of Trust) will prejudice Beneficiary's ability to meet its obligations
and to earn the return on the funds advanced to Trustor, which Beneficiary
intended and expected to earn when it agreed to make the subject loan and will
also result in other loss and additional expenses to Beneficiary. Accordingly,
in recognition of the foregoing and in consideration of Beneficiary making the
loan secured by this Deed of Trust at the interest rate and for the term set
forth in the Note, Trustor hereby expressly (A) waives any and all rights it may
have under applicable law to prepay without charge or premium all or any part of
the Note, either voluntarily or upon an acceleration of the maturity date of the
Note on account of any default of Trustor (including, but not limited to, the
making or suffering by Trustor of any transfer or disposition prohibited by
Section 1.11 of this Deed of Trust) and (B) agrees that if, for any reason,
- ------------
whether due to the voluntary acceptance by Beneficiary of a prepayment tendered
by Trustor or the acceleration by Beneficiary of the maturity date of the Note,
as aforesaid, on account of any such default by Trustor, a prepayment of all or
any part of the principal of the Note is made by or on behalf of Trustor, or is
otherwise made or occurs in connection with any reinstatement of the Loan
Documents under any foreclosure proceedings, or any right of redemption
exercised by Trustor or any other party having the right to redeem or to prevent
any foreclosure of this Deed of Trust, or upon the consummation of any
foreclosure sale, then Trustor or any other party making any such prepayment
shall be obligated to pay, concurrently therewith,
38
<PAGE>
the prepayment charge set forth in the Note, and the payment of such premium
shall be a condition to the making of such prepayment and shall be secured by
this Deed of Trust. Such prepayment charge shall be paid without prejudice to
the right of Beneficiary to collect any other amounts provided to be paid or to
declare a default hereunder. Nothing herein shall be construed as permitting any
partial prepayment except with Beneficiary's prior written consent thereto
obtained in each instance.
4.6 Environmental Defaults and Remedies. In the event that any
-----------------------------------
portion of the Secured Property is determined to be "environmentally impaired"
(as "environmentally impaired" is defined in California Code of Civil Procedure
Section 726.5(e)(3)) or to be an "affected parcel" (as "affected parcel" is
defined California Code of Civil Procedure Section 726.5(e)(1)), then, without
otherwise limiting or in any way affecting Beneficiary's or Trustee's rights and
remedies under this Deed of Trust, Beneficiary may elect to exercise its right
under California Code of Civil Procedure Section 726.5(a) to (1) waive its lien
on such environmentally impaired or affected parcel portion of the Secured
Property and (2) exercise (i) the rights and remedies of an unsecured creditor,
including reduction of its claim against Trustor to judgment, and (ii) any other
rights and remedies permitted by law. For purposes of determining Beneficiary's
right to proceed as an unsecured creditor under California Code of Civil
Procedure Section 726.5(a), Trustor shall be deemed to have willfully permitted
or acquiesced in a release or threatened release of hazardous materials, within
the meaning of California Code of Civil Procedure Section 726.5(d)(1), if the
release or threatened release of hazardous materials was knowingly or
negligently caused or contributed to by any lessee, occupant or user of any
portion of the Secured Property and Trustor knew or should have known of the
activity by such lessee, occupant or user which caused or contributed to the
release or threatened release. All costs and expenses, including, but not
limited to, reasonable attorneys' fees, incurred by Beneficiary in connection
with any action commenced under this Section 4.6, including any action required
-----------
by California Code of Civil Procedure Section 726.5(b) to determine the degree
to which the Secured Property is environmentally impaired, plus interest thereon
at the Default Rate (as defined in the Note) until paid, shall be added to the
Obligations secured by this Deed of Trust and shall be due and payable to
Beneficiary upon its demand made at any time following the conclusion of such
action.
ARTICLE V
MISCELLANEOUS
-------------
5.1 Non-Waiver. The failure of Beneficiary to insist upon strict
----------
performance of any term of this Deed of Trust shall not be deemed to be a waiver
of any term of this Deed of Trust. Trustor shall not be relieved of its
obligation to pay the Obligations at any time and in the manner provided for its
payment in the Note and this Deed of Trust by reason of (A) a failure by
Beneficiary to comply with any request of Trustor to take any action to
foreclose this Deed of Trust or otherwise enforce any of the provisions of this
Deed of Trust or of the Note or any other Loan Document, (B) the release,
regardless of consideration, of the whole or any part of the Secured Property or
any other security for the Obligations, or (C) any agreement or stipulation
between Beneficiary and any subsequent owner or owners of the Secured Property
or other person extending the time of payment or otherwise modifying or
supplementing the terms of the Note, this Deed of Trust or any Loan Document
securing or guaranteeing the Obligations or any portion thereof, without first
having obtained the consent of Trustor and, in the latter event, Trustor shall
continue to be obligated to pay the Obligations at the time and in the manner
provided in the Note and this Deed of Trust, as so extended, modified and
supplemented, unless
39
<PAGE>
expressly released and discharged by Beneficiary. Regardless of consideration,
and without the necessity for any notice to or consent by the holder of any
subordinate lien, encumbrance, right, title or interest in or to the Secured
Property, Beneficiary may release any person at any time liable for the payment
of the Obligations or any portion thereof or any part of the security held for
the Obligations and may extend the time of payment or otherwise modify the terms
of any Loan Documents, including, without limitation, a modification of the
interest rate payable on the principal balance of the Note, without in any
manner impairing or affecting any of the Loan Documents or the lien thereof or
the priority of this Deed of Trust, as so extended and modified, as security for
the Obligations over any such subordinate lien, encumbrance, right, title or
interest. Beneficiary may resort for the payment of the Obligations to any other
security held by Beneficiary in such order and manner as Beneficiary, in its
discretion, may elect. Beneficiary may take action to recover the Obligations,
or any portion thereof, or to enforce any covenant of this Deed of Trust without
prejudice to the right of Beneficiary thereafter to foreclose this Deed of
Trust. Beneficiary shall not be limited exclusively to the rights and remedies
stated in this Deed of Trust but shall be entitled to every additional right and
remedy now or hereafter afforded by law. The rights of Beneficiary under this
Deed of Trust shall be separate, distinct and cumulative and none shall be given
effect to the exclusion of the others. No act of Beneficiary shall be construed
as an election to proceed under any one provision of this Deed of Trust to the
exclusion of any other provision.
5.2 Sole Discretion of Beneficiary. Wherever, pursuant to this Deed
------------------------------
of Trust, Beneficiary's consent or approval is required, the decision as to
whether or not to consent or approve shall be in the sole discretion of
Beneficiary and Beneficiary's decision shall be final and conclusive, except
where this Deed of Trust expressly provides to the contrary. If Trustor shall
seek the approval by or consent of Beneficiary under this Deed of Trust and
Beneficiary shall fail or refuse to give such consent or approval, Trustor shall
not be entitled to any damages for any withholding of such approval or consent
by Beneficiary, it being intended that Trustor's sole remedy shall be an action
for injunctive or declaratory relief, which remedy shall be available only in
those cases where Beneficiary has expressly agreed not to unreasonably withhold
its consent or approval.
5.3 Recovery of Sums Required To Be Paid. Beneficiary shall have the
------------------------------------
right from time to time to take action to recover any sum or sums which
constitute a part of the Obligations as such sums shall become due, without
regard to whether or not the balance of the Obligations shall be due, and
without prejudice to the right of Beneficiary thereafter to bring an action of
foreclosure or any other action for a default or defaults by Trustor existing at
the time such earlier action was commenced.
5.4 Legal Tender. All payments of principal, interest and any and
------------
all other payments required or provided herein shall be paid in lawful money of
the United States of America which shall be legal tender in payment of all debts
and dues, public and private, at the time of payment, at the office of
Beneficiary or at such other place either within or without the State of
California as Beneficiary may from time to time designate.
5.5 No Merger. If both the lessor's and lessee's estates under any
---------
lease or any portion thereof which constitutes a part of the Secured Property
shall at any time become vested in one owner, this Deed of Trust and the lien
created hereby shall not be destroyed or terminated by the application of the
doctrine of merger and in such event, Beneficiary shall continue to have and
enjoy all of the rights and privileges of Beneficiary as to the separate
estates. In addition, upon
40
<PAGE>
the foreclosure of the lien created by this Deed of Trust on the Secured
Property pursuant to the provisions hereof, any leases or subleases then
existing and created by Trustor shall not be destroyed or terminated by
application of the law of merger or as a matter of law or as a result of such
foreclosure unless Beneficiary or any purchaser at any such foreclosure sale
shall so elect. No act by or on behalf of Beneficiary or any such purchaser
shall constitute a termination of any lease or sublease unless Beneficiary or
such purchaser shall give written notice thereof to such lessee or sublessee.
5.6 Discontinuance of Actions. In case Beneficiary shall have
-------------------------
proceeded to enforce any right under this Deed of Trust by foreclosure, sale or
entry or otherwise, and such proceedings shall have been discontinued or
abandoned for any reason or shall have been determined adversely, then, in every
such case, Trustor and Beneficiary shall be restored to their former positions
and rights hereunder with respect to the Secured Property which shall remain
subject to the lien of this Deed of Trust.
5.7 Headings. The headings of the sections, paragraphs and
--------
subdivisions of this Deed of Trust are for the convenience of reference only,
are not to be considered a part hereof and shall not limit or otherwise affect
any of the terms hereof.
5.8 Notice to Parties. All notices and demands hereunder shall be in
-----------------
writing and shall be deemed to have been sufficiently given or served for all
purposes when presented personally or sent by certified or registered mail with
return receipt requested or generally recognized overnight delivery service,
addressed to the parties at the addresses stated below, or at such other address
as either party may hereafter notify the other in writing as aforesaid:
Trustor: IPAC Properties
2221 Old Oakland Road
San Jose, California
Attn: Mr. Tony Lin
with a copy to: Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Attn: Debra Summers, Esq.
Beneficiary: SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA 02181
Attn: Property Investments
with a copy to: Graham & James LLP
One Maritime Plaza, Suite 300
San Francisco, CA 94111-3492
Attn: Bruce W. Hyman, Esq.
Trustee: Chicago Title Company
110 West Taylor Street
San Jose, CA 95110
41
<PAGE>
Service of any such notice or demand so made shall be deemed effective on the
day of actual delivery as shown by the addressee's return receipt or the
expiration of forty-eight (48) hours after the date sent by generally recognized
overnight delivery service or mailed, whichever is the earlier in time, except
that service of any notice of default or notice of sale provided or required by
law shall, if mailed, be deemed effective on the date of mailing.
5.9 Non-Recourse. If an Event of Default has occurred, Beneficiary
------------
shall have all rights reserved in the Note, this Deed of Trust and every other
Loan Document prior to "Lease Termination" as defined below and shall have full
recourse against Trustor. For purposes of this paragraph "Lease Termination"
shall occur upon the earlier of the effective date of a lease with Integrated
Packaging Assembly Corporation for all of the space in the Secured Property
(estimated to be August 15, 1999) or the date the Secured Property is fully
occupied by Integrated Packaging Assembly Corporation or its successors by
merger, consolidation, or sale of substantially all of its assets. In the event
of default after Lease Termination, Holder shall have full recourse to the
Secured Property and to the other collateral given by Trustor to secure the
Note, provided, however, that any judgment obtained by Beneficiary in any
proceeding to enforce such rights shall be enforced only against the Secured
Property and such other collateral. Notwithstanding the foregoing, Beneficiary
shall not in any way be prohibited from naming Trustor or any of its successors
or assigns or any person holding under or through them as parties to any
actions, suits or other proceedings initiated by Beneficiary to enforce such
rights or to foreclose its mortgage lien or otherwise realize upon any other
lien or security interest created in any other collateral given to secure the
payment of the Obligations. The foregoing restriction after Lease Termination
shall not apply to, and Trustor shall be personally liable for, any losses,
damages, costs and expenses incurred by Beneficiary as a result of (A) any
material misstatement of fact (1) made by Trustor or any person or entity
constituting Trustor to induce Beneficiary to advance the principal amount
evidenced hereby or (2) contained in any Loan Document, (B) fraud committed by
Trustor or any person or entity constituting Trustor, (C) misapplication of
rents, income, insurance proceeds, condemnation awards or trust funds, (D) any
loss, damage, expense or liability on the part of Beneficiary (including,
without limitation, attorneys fees and disbursements) for which Trustor is
liable and which is not reimbursable to Beneficiary pursuant to the Indemnity
executed on even date herewith including, but not limited to the diminution in
value of the Secured Property due to the existence of Hazardous Substances (as
defined in the Indemnity), or if required in the reasonable judgment of
Beneficiary, the preparation of an environmental audit on the Secured Property,
whether conducted or authorized by Trustor, Beneficiary or a third party or the
implementation of any environmental audit's recommendations, (E) all losses,
damages or liability suffered by Beneficiary arising from any acts of commission
or omission by Trustor that result in waste upon the Secured Property, (F)
failure to pay real property taxes when due, (G) taking of any rents prepaid for
more than one month in advance, (H) cost of any property repair as a result of a
casualty not reimbursed by insurance to the extent insurance is required
pursuant to this Deed of Trust, or (I) failure to fully comply with the
provisions of the Americans With Disabilities Act.
5.10 Successors and Assigns Included In Parties. Subject to the
------------------------------------------
provisions of Section 1.11, whenever in this Deed of Trust one of the parties
------------
hereto is named or referred to, the heirs, legal representatives, successors and
assigns of such party shall be included and all covenants and agreements
contained in this Deed of Trust by or on behalf of Trustor or by or on behalf of
Beneficiary shall bind and inure to the benefit of their respective heirs, legal
representatives, successors and assigns, whether so expressed or not.
42
<PAGE>
5.11 Number and Gender. Whenever the singular or plural number,
-----------------
masculine or feminine or neuter gender is used herein, it shall equally include
the other.
5.12 Changes and Modifications. This Deed of Trust cannot be changed
-------------------------
except by an agreement in writing, signed by the party against whom enforcement
of any change or modification is sought.
5.13 Applicable Law. This Deed of Trust shall be construed and
--------------
enforced according to the laws of the State of California.
5.14 Invalid Provisions to Affect No Others. The unenforceability or
--------------------------------------
invalidity of any provision or provisions of this Deed of Trust as to any
persons or circumstances shall not render that provision or those provisions
unenforceable or invalid as to any other persons or circumstances, and all
provisions hereof, in all other respects, shall remain valid and enforceable.
5.15 Usury Savings Clause. It is the intention of Trustor and
--------------------
Beneficiary to conform strictly to the usury laws now or hereafter in
force in the State of California and any interest payable under the
Note, this Deed of Trust, or any of the other Loan Documents executed
by Trustor, to the extent that any sums secured hereby or the
advancing of such sums by Beneficiary shall not be exempt from such
laws, shall be subject to reduction to the amount equal to the maximum
non-usurious amount allowed under the usury laws of California as now
or hereafter construed by the courts having jurisdiction over such
matters. In the event the maturity of the Note is accelerated by
reason of any provision of this Deed of Trust including, without
limitation, an election by Beneficiary resulting from an Event of
Default (or an event permitting acceleration) under this Deed of Trust
or any other Loan Documents, voluntary prepayment of the Note, or
otherwise, then earned interest may never include more than the
maximum amount permitted by law, computed from the dates of each
advance of the Obligations until payment, and any interest in excess
of the maximum amount permitted by law shall be canceled automatically
and, if theretofore paid, shall at the option of Beneficiary either be
rebated to Trustor or credited on the principal amount of the Note or
if all principal has been repaid, then the excess shall be rebated to
Trustor. The aggregate of all interest (whether designated as
interest, service charges, points or otherwise) contracted for,
chargeable, or receivable under the Note, this Deed of Trust, or any
other Loan Document shall under no circumstances exceed the maximum
legal rates upon the unpaid principal balance of the Note remaining
unpaid from time to time. In the event such interest does exceed the
maximum legal rate, it shall be deemed a mistake and such excess shall
be canceled automatically and if theretofore paid, rebated to Trustor
or credited on the principal amount of the Note, or if the Note has
been repaid, then such excess shall be rebated to Trustor.
43
<PAGE>
5.16 No Statute of Limitations. The pleadings of any statute of
-------------------------
limitations as a defense to any and all obligations secured by this Deed of
Trust are hereby waived to the full extent permissible by law .
5.17 Late Charges. In the event that any installment of principal,
------------
interest or escrow deposit shall become overdue, a "late charge" of four cents
($.04) for each dollar ($1.00), or part thereof so overdue, may be charged to
Trustor by Beneficiary for the purpose of defraying Beneficiary's expenses
incident to handling such delinquent payment. This charge shall be in addition
to, and not in lieu of, any other remedy Beneficiary may have and is in addition
to any reasonable fees and charges of any agents or attorneys which Beneficiary
is entitled to employ on any default hereunder whether authorized herein or by
law. Such "late charges", if not previously paid, shall, at the option of
Beneficiary, be added to and become part of the succeeding monthly payment to be
made under the Note and secured by this Deed of Trust.
5.18 Continuing Effectiveness. This Deed of Trust shall cover any
------------------------
and all advances made pursuant to the Loan Documents, rearrangements and
renewals of the Obligations and all extensions in the time of payment thereof,
whether such advances, extensions or renewals are evidenced by new promissory
notes or other instruments hereafter executed and irrespective of whether filed
or recorded. Likewise, the execution of this Deed of Trust shall not impair or
affect any other security which may be given to secure the payment of the
Obligations, and all such additional security shall be considered as cumulative.
The taking of additional security, execution of partial releases of the
security, or any extension of time of payment of the Obligations shall not
diminish the force, effect or lien of this Deed of Trust and shall not affect or
impair the liability of any maker, surety or endorser for the payment of the
Obligations.
IN WITNESS WHEREOF, Trustor has executed this Deed of Trust as of the
date and year first above written.
Trustor
IPAC PROPERTIES, a California corporation
By: /s/ Tony Lin
____________________________________
Its: Chief Financial Officer
______________________________
[ALL SIGNATURES MUST BE ACKNOWLEDGED]
44
<PAGE>
SCHEDULE A
Description of Land
The land situated in the County of Santa Clara, State of California, and is
described as follows:
[to be attached]
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
GRANTING CLAUSE ONE........................................................ 1
GRANTING CLAUSE TWO........................................................ 1
GRANTING CLAUSE THREE...................................................... 2
GRANTING CLAUSE FOUR....................................................... 2
GRANTING CLAUSE FIVE....................................................... 2
GRANTING CLAUSE SIX........................................................ 2
GRANTING CLAUSE SEVEN...................................................... 3
GRANTING CLAUSE EIGHT...................................................... 3
GRANTING CLAUSE NINE....................................................... 3
GRANTING CLAUSE TEN........................................................ 3
GRANTING CLAUSE ELEVEN..................................................... 3
GRANTING CLAUSE TWELVE..................................................... 3
ARTICLE I COVENANTS AND AGREEMENTS......................................... 4
1.1 Performance by Trustor..................................... 4
1.2 Payment of Taxes, Assessments, Etc......................... 4
A. Impositions......................................... 4
B. Installments........................................ 4
C. Receipts............................................ 4
D. Evidence of Payment................................. 5
E. Payment by Beneficiary.............................. 5
F. Change in Law....................................... 5
G. Permitted Contest................................... 5
H. No Lease Default.................................... 6
I. Joint Assessment.................................... 6
1.3 Insurance.................................................. 6
A. Extended Coverage................................... 6
B. Additional Coverage................................. 6
C. Separate Insurance.................................. 7
D. Insurers; Policies.................................. 7
E. Beneficiary's Right to Provide Coverage............. 8
F. Damage or Destruction............................... 8
G. Trustor's Use of Proceeds........................... 9
H. Transfer of Interest in Policies.................... 11
1.4 Escrow Deposits............................................ 11
1.5 Care and Use of Premises................................... 12
A. Maintenance and Repairs............................. 12
B. Standard of Repairs................................. 12
C. Notice to Trustor................................... 12
D. Removal of Equipment................................ 12
E. Compliance With Laws and Insurance.................. 13
F. Permitted Contests.................................. 13
G. Compliance With Instruments of Record............... 13
H. Alteration of Secured Property...................... 14
I. Parking............................................. 14
J. Entry on Secured Property........................... 14
K. No Consent to Alterations or Repairs................ 14
i
<PAGE>
L. Mechanics Liens..................................... 14
M. Use of Secured Property by Trustor.................. 14
N. Use of Secured Property by Public................... 15
1.6 Financial Information...................................... 15
A. Audit............................................... 15
B. Right to Inspect Books and Records.................. 15
1.7 Condemnation............................................... 15
A. Beneficiary's Right to Participate in Proceedings... 15
B. Application of Condemnation Award................... 16
C. Reimbursement of Costs.............................. 17
D. Existing Obligations................................ 17
E. Application of Award................................ 17
1.8 Leases..................................................... 18
A. Performance of Lessor's Covenants................... 18
B. Notice of Default................................... 18
C. Representations Regarding Leases.................... 18
D. Covenants Regarding Leases.......................... 19
E. Application of Rents................................ 19
1.9 Assignment of Leases, Rents, Income, and Cash Collateral... 20
A. Assignment; Discharge of Obligations................ 20
B. Entry Onto Secured Property; Lease of Secured
Property........................................... 20
C. Right to Manage Secured Property.................... 21
D. Delivery of Assignments............................. 21
E. Indemnity........................................... 21
1.10 Further Assurances......................................... 21
A. General; Appointment of Attorney-in-Fact............ 21
B. Statement Regarding Obligations..................... 22
C. Additional Security Instruments..................... 22
D. Security Agreement.................................. 22
E. Preservation of Trustor's Existence................. 25
F. Further Indemnities................................. 25
G. Absence of Insurance................................ 25
1.11 Further Sales or Encumbrances.............................. 26
A. Continuing Ownership and Management................. 26
B. Transfer or Encumbrance of Secured Property......... 26
C. Acceleration of Obligations......................... 27
D. Wrap-Around Financing............................... 27
1.12 Expenses................................................... 27
ARTICLE II WARRANTIES AND REPRESENTATIONS.................................. 28
2.1 Warranty of Title.......................................... 28
2.2 Ownership Of Improvements And Personal Property............ 28
2.3 No Pending Material Litigation or Proceeding;
No Hazardous Materials................................... 28
A. Proceedings Affecting Trustor...................... 28
B. Proceedings Affecting Secured Property............. 28
ii
<PAGE>
C. No Litigation Regarding Hazardous Materials........ 29
2.4 Valid Organization, Good Standing and Qualification
of Trustor............................................... 29
2.5 Authorization; No Legal Restrictions on Performance........ 29
2.6 Compliance With Laws....................................... 29
2.7 Tax Status................................................. 30
2.8 Absence of Foreign or Enemy Status......................... 30
2.9 Federal Reserve Board Regulations.......................... 30
2.10 Investment Company Act and Public Utility Holding
Company Act.............................................. 30
2.11 Exempt Status of Transactions Under Securities
Act and Representations Relating Thereto................. 30
2.12 Employee Benefit Plans..................................... 31
ARTICLE III DEFAULTS....................................................... 31
3.1 Events of Default.......................................... 31
ARTICLE IV REMEDIES........................................................ 33
4.1 Remedies................................................... 33
4.2 Expenses................................................... 35
4.3 Rights Pertaining to Sales................................. 36
4.4 Application of Proceeds.................................... 37
4.5 Prepayment Charge.......................................... 38
4.6 Environmental Defaults and Remedies........................ 39
ARTICLE V MISCELLANEOUS.................................................... 39
5.1 Non-Waiver................................................. 39
5.2 Sole Discretion of Beneficiary............................. 40
5.3 Recovery of Sums Required To Be Paid....................... 40
5.4 Legal Tender............................................... 40
5.5 No Merger.................................................. 40
5.6 Discontinuance of Actions.................................. 41
5.7 Headings................................................... 41
5.8 Notice to Parties.......................................... 41
5.9 Non-Recourse............................................... 42
5.10 Successors and Assigns Included In Parties................. 42
5.11 Number and Gender.......................................... 43
5.12 Changes and Modifications.................................. 43
5.13 Applicable Law............................................. 43
5.14 Invalid Provisions to Affect No Others..................... 43
5.15 Usury Savings Clause....................................... 43
5.16 No Statute of Limitations.................................. 43
5.17 Late Charges............................................... 44
5.18 Continuing Effectiveness................................... 44
iii
<PAGE>
EXHIBIT 10.19
PROMISSORY NOTE
---------------
$6,700,000.00 San Jose, California
March 24 , 1997
FOR VALUE RECEIVED, IPAC PROPERTIES, a California corporation ("Maker"),
having an office at 2221 Old Oakland Road, San Jose, California 95131 promises
to pay to SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware corporation
("Holder") having its principal office address, at One Sun Life Executive Park,
Wellesley Hills, MA 02181, or order, at its principal office in Wellesley
Hills, MA or at such other place as may be designated in writing by Holder, the
principal sum of SIX MILLION SEVEN HUNDRED THOUSAND and NO/100 Dollars
($6,700,000.00) (the "Principal Indebtedness"), in lawful money of the United
States, together with interest thereon at the rate of eight and one half percent
(8.50%) per annum, payable in monthly installments of principal and interest in
the sum of Fifty Eight Thousand One Hundred Forty Four and 16/100 Dollars
($58,144.16) commencing May 1, 1997 and payable on the first day (1st) of each
month for fifty nine (59) months with the last installment being due and payable
on March 31, 2002 (the "Maturity Date"), at which time the entire unpaid balance
together with accrued interest shall be due and payable. Interest accrued from
the date Holder initially disburses funds to the first (1st) day of the month
following the month during which Holder initially disburses funds, shall be due
and payable at the time of closing.
This Note is secured by, among other things, (i) a Deed of Trust, Financing
Statement, Security Agreement and Fixture Filing (with Assignment of Rents and
Leases) (the "Deed of Trust") dated as of the date hereof made by Maker for the
benefit of Holder and encumbering certain premises situate in the City of San
Jose, County of Santa Clara and the improvements thereon, along with other
property more particularly described in the Deed of Trust (collectively, the
"Secured Property"), and (ii) an Absolute Assignment of Leases, Rents, Income
and Cash Collateral dated as of the date hereof from Maker to Holder. Each of
the documents mentioned in this paragraph and all other documents either
evidencing or further securing the Principal Indebtedness are collectively
referred to herein as the "Loan Documents".
Upon the occurrence of an Event of Default (as such term is defined in the
Deed of Trust) (including, without limitation, the failure of Maker to pay any
sum herein specified when due regardless of whether or not there has been an
acceleration), all delinquent payments and all accrued and unpaid interest
thereon, and all other delinquent sums evidenced and/or secured by the Loan
Documents shall bear interest from the date of delinquency at a rate per annum
(the "Default Rate") equal to the lesser of: (i) the highest rate of interest
permitted to be contracted for under the laws of the State of California, if
any, or (ii) twelve and one half percent (12.5%) per annum. The Default Rate
shall be in lieu of any other interest rate otherwise applicable and shall
commence, without notice, immediately upon and from the occurrence of such Event
of Default and shall continue until all defaults are cured and all sums then due
and payable under the Loan Documents are paid in full.
No privilege is reserved to prepay the Principal Indebtedness either in
whole or in part prior to April 1, 1999 (the "Closed Period"). Thereafter,
beginning on April 1, 1999 and except as provided hereinafter, the privilege is
reserved by Maker to prepay the entire principal balance hereunder together with
accrued interest thereon to the date of payment on such date or any subsequent
monthly installment date, upon not less than ninety (90) days' prior written
notice to Holder of Maker's intention to make such prepayment, provided there is
paid, in addition to interest accrued to the date of such prepayment, a
prepayment fee which shall be equal to the
<PAGE>
greater of (a) one percent (1%) of the then outstanding balance of the
Principal Indebtedness, or (b) a Discounted Yield Maintenance Prepayment Fee
computed as follows: the proceeds of the prepayment will be assumed to be
immediately reinvested in a United States Treasury Security having a coupon
interest rate and maturity most closely equivalent to that of this Note. If the
yield (the "Treasury Yield") on that certain United States Treasury Security, as
published in the "Wall Street Journal" on the fifth business day prior to the
date of prepayment, is:
1. less than the interest rate of this Note, Maker will pay to Holder a
fee equal to the positive difference between the two interest rates,
divided by 12 and multiplied by the then outstanding balance of the
Principal Indebtedness to arrive at the monthly payment differential.
Holder shall then determine the present value of the series of monthly
payment differentials for the number of whole and partial months from
the prepayment date to the maturity date using the Treasury Yield as
the discount rate compounding monthly. The resulting sum of the
discounted monthly payment differentials will be the Discounted Yield
Maintenance Prepayment Fee, or,
2. greater than or equal to the interest rate on this Note, then the
prepayment fee shall be 1% of the then outstanding balance of the
Principal Indebtedness.
In the event the outstanding balance of the Principal Indebtedness shall
become due and payable as a result of (a) an Event of Default (as such term is
defined in the Deed of Trust) causing acceleration under this Note, then, in
such event, Maker shall pay the prepayment charge which would otherwise be
applicable hereunder; or if at that time there is no such privilege of
prepayment (e.g., during the Closed Period), then, to the extent permitted by
law, and except as provided hereinafter, such prepayment fee shall be equal to
the greater of (a) three percent (3%) of the then outstanding balance of the
Principal Indebtedness, or (b) a Discounted Acceleration Premium amount
calculated as follows: the proceeds of the prepayment will be assumed to be
immediately reinvested in a United States Treasury Security having a coupon
interest rate and maturity most closely equivalent to that of this Note. If the
yield on that certain United States Treasury Security, as published in the Wall
Street Journal on the fifth business day prior to the date of prepayment, is:
1. less than the interest of this Note, Maker will pay to Holder a fee
equal to the positive difference between the two interest rates,
divided by 12 and multiplied by the then outstanding balance of the
Principal Indebtedness to arrive at the monthly payment differential.
Holder shall then determine the present value of the series of monthly
payment differentials for the number of whole and partial months from
the prepayment date to the maturity date using the Treasury Yield as
the discount rate compounding monthly. The resulting sum of the
discounted monthly payment differential will be the Discounted
Acceleration Premium, or,
2. greater than or equal to the interest rate on this Note, then the
prepayment fee shall be 3% of the then outstanding balance of the
Principal Indebtedness.
MAKER HEREBY EXPRESSLY (A) WAIVES ANY RIGHTS IT MAY HAVE UNDER CALIFORNIA
CIVIL CODE SECTION 2954.10 TO PREPAY THIS NOTE, IN WHOLE OR IN PART, WITHOUT
PENALTY, UPON ACCELERATION OF THE MATURITY DATE OF THE NOTE, AND (B) AGREES THAT
IF, FOR ANY REASON, A PREPAYMENT OF ANY OR ALL OF THIS NOTE IS MADE, WHETHER
VOLUNTARY OR INVOLUNTARY, OR UPON OR FOLLOWING ANY ACCELERATION OF THE MATURITY
DATE OF THE NOTE BY HOLDER ON ACCOUNT OF ANY DEFAULT BY
2
<PAGE>
MAKER UNDER ANY LOAN DOCUMENT, INCLUDING BUT NOT LIMITED TO ANY TRANSFER OR
DISPOSITION AS PROHIBITED OR RESTRICTED BY SECTION 1.11 OF THE DEED OF TRUST,
THEN MAKER SHALL BE OBLIGATED TO PAY, CONCURRENTLY THEREWITH, AS A PREPAYMENT
FEE, THE APPLICABLE SUM SPECIFIED IN THE PRECEDING PARAGRAPH. BY SIGNING THIS
PROVISION IN THE SPACE PROVIDED BELOW, MAKER AGREES THAT HOLDER'S AGREEMENT TO
MAKE THE LOAN EVIDENCED BY THIS NOTE AT THE INTEREST RATE AND FOR THE TERM SET
FORTH IN THE NOTE CONSTITUTES ADEQUATE CONSIDERATION, GIVEN INDIVIDUAL WEIGHT BY
MAKER FOR THIS WAIVER AND AGREEMENT.
IPAC PROPERTIES, a California corporation
By: /s/ Tony Lin
_____________________________________
Its: CFO
_______________________________
Notwithstanding the foregoing, no prepayment fee shall be payable in
connection with any voluntary or involuntary prepayment made on or after January
1, 2002.
Upon the occurrence of any other Event of Default, then and in any such
events, Holder may, at its option, declare this Note and the entire Principal
Indebtedness to be immediately due and payable and collectible then or
thereafter as Holder may elect, regardless of the stated Maturity Date.
Should the Principal Indebtedness or any part thereof be collected at law
or in equity, or in bankruptcy, receivership, or any other court proceeding
(whether at the trial or appellate level), or should this Note be placed in the
hands of attorneys for collection upon default, Maker agrees to pay, in addition
to the principal, prepayment charge, interest and any other outstanding amounts
due and payable hereon, all costs of collecting or attempting to collect this
Note and enforcing Holder's remedies under the Loan Documents, including
reasonable attorneys' fees and expenses, and the same shall constitute
additional indebtedness secured by the Deed of Trust.
Maker recognizes that any default in the payment of any installment of
principal and/or interest due hereunder on the date the same is due will result
in loss and additional expense to Holder in servicing the Principal
Indebtedness, handling such delinquent payments and meeting its other financial
obligations, and that the extent of such loss and additional expenses is
extremely difficult and impractical to ascertain. Maker therefore agrees that
in the event any installment of principal and/or interest due hereunder is not
paid on the date the same is due and payable, without regard to any grace
periods, a late charge of four percent (4%) of the overdue installment of
principal and/or interest shall be paid by Maker and that such amount is a
reasonable estimate of such loss and expense and may be charged by Holder, at
its option, for the purpose of defraying such loss and expenses, unless
applicable law requires a lesser such charge, in which event the maximum rate
permitted by such law may be charged by Holder for said purposes.
The failure of Holder to exercise the option for acceleration of maturity,
foreclosure or any other remedies provided in the Loan Documents following any
default as aforesaid or to exercise any other option granted to it hereunder,
under the Deed of Trust or under any of the other Loan Documents, in any one or
more instances, or the acceptance by Holder of partial payments or partial
performance, shall not constitute a waiver of any such default, but such option
shall remain continuously in force. Acceleration of maturity, once claimed
hereunder by Holder, may at its option be rescinded by written acknowledgment to
such effect, but the tender
3
<PAGE>
and acceptance of partial payment or partial performance alone shall not in any
way affect or rescind such acceleration of maturity.
Maker hereby covenants and agrees that, together with and in addition to
the monthly payments of principal and/or interest payable under the terms of
this Note, Maker will deposit with Holder of this Note or its agent, as directed
by Holder, until this Note is fully paid, installments of insurance premiums and
Impositions (as defined and required in the Deed of Trust). Amounts held
hereunder shall not be deemed to be trust funds, but may be commingled with the
general funds of Holder.
It is the intention of Maker and Holder to conform strictly to the usury
laws now or hereafter in force in the State of California, and any interest
payable under this Note, the Deed of Trust, the other Loan Documents, and/or any
of the other documents or instruments executed by Maker in connection with the
loan made or to be made hereunder shall be subject to reduction to the amount
not in excess of the maximum non-usurious amount allowed under the usury laws of
the State of California as now or hereafter construed by the courts having
jurisdiction over such matters. If the aggregate of all interest (whether
designated as interest, service charges, points or otherwise) contracted for,
chargeable or receivable under this Note, the Deed of Trust and any other Loan
Document should exceed the maximum legal rate, it shall be deemed a mistake and
such excess shall be canceled automatically and, if theretofore paid, shall at
the option of Holder either be rebated to Maker or credited on the principal
amount of this Note, or, if the Note has been repaid, such excess shall be
rebated to Maker. In the event the Maturity Date is accelerated by reason of
any provision of this Note or by reason of an election by Holder resulting from
an Event of Default under the Loan Documents, voluntary prepayment by Maker, or
otherwise, then earned interest may never include more than the maximum amount
permitted by law, computed from the dates of each advance of loan proceeds
hereunder until payment, and any interest in excess of the maximum amount
permitted by law shall be canceled automatically and, if theretofore paid, shall
at the option of Holder either be rebated to Maker or credited on the principal
amount of this Note or, if the Note has been repaid, the excess shall be rebated
to the Maker. This provision shall control every other provision of all
agreements between Maker and Holder.
Maker hereby waives presentment, protest, notice of protest, notice of
dishonor and diligence in collection, and any and all other notices and matters
of a like nature, except for those expressly required by the Deed of Trust, this
Note or any other Loan Documents. Maker consents to any extension of time
(whether one or more) of payment hereof, release of all or any part of the
security for the payment of this obligation or release of any person or entity
liable for payment of this Note. Any such extension or release may be made
without notice to any such party and without discharging said party's liability
hereunder.
This Note may not be changed orally, but only by an agreement in writing,
signed by the party against whom enforcement of any waiver, change, modification
or discharge is sought.
No failure or delay on the part of Holder in exercising any right, power or
privilege under this Note and no course of dealing between Maker and Holder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies which Holder would otherwise have at law or equity. No
notice to or demand on Maker in any case shall entitle Maker to any other or
further notice or demand in similar or other circumstances or constitute a
waiver of the right of Holder to any other or further action in any
circumstances without notice or demand.
4
<PAGE>
Maker acknowledges that the ownership (and the continuation thereof) of the
Secured Property by Maker is of a material nature to the loan and the making of
the loan evidenced by this Note. Therefore, Maker agrees that in the event of
any transfer that is prohibited by the terms of Section 1.11 of the Deed of
------------
Trust or other Loan Document, howsoever evidenced or occasioned, then, at the
option of Holder, the entire Principal Indebtedness along with all accrued
interest thereon shall immediately become due and payable.
Whenever in this Note one of the parties hereto is named or referred to,
the heirs, legal representatives, successors and assigns of such party shall be
included and all covenants and agreements contained in this Note by or on behalf
of Maker or by or on behalf of Holder shall bind and inure to the benefit of
such party's heirs, legal representatives, successors and assigns, whether so
expressed or not.
The obligations of each person and entity comprising Maker (if more than
one) shall be joint and several.
The unenforceability or invalidity of any provision or provisions of this
Note as to any persons or entities or circumstances shall not render that
provision or those provisions unenforceable or invalid as to any other persons
or entities or circumstances, and all provisions hereof, in all other respects,
shall remain valid and enforceable.
In the event of any default by Maker under this Note, the Deed of Trust or
any other Loan Document prior to "Lease Termination" as defined below, Holder
shall have all rights reserved in this Note, the Deed of Trust and every other
Loan Document and shall have full recourse against Borrower. For purposes of
this paragraph "Lease Termination" shall occur upon the earlier of the effective
date of a lease with Integrated Packaging Assembly Corporation for all of the
space in the Secured Property (estimated to be August 15, 1999) or the date the
Secured Property is fully occupied by Integrated Packaging Assembly Corporation
or its successors by merger, consolidation, or sale of substantially all of its
assets. In the event of any default after Lease Termination, Holder shall have
full recourse to the Secured Property and to the other collateral given by Maker
to secure this Note, provided, however, that any judgment obtained by Holder in
any proceeding to enforce such rights shall be enforced only against the Secured
Property and such other collateral. Notwithstanding the foregoing, Holder shall
not in any way be prohibited from naming Maker or any of its successors or
assigns or any person holding under or through them as parties to any actions,
suits or other proceedings initiated by Holder to enforce such rights or to
foreclose its mortgage lien or otherwise realize upon any other lien or security
interest created in any other collateral given to secure the payment of this
Note. The foregoing restriction after Lease Termination shall not apply to, and
Maker shall be personally liable for, any losses, damages, costs and expenses
incurred by Holder as a result of (i) any material misstatement of fact (A) by
Maker or any person or entity constituting Maker to induce Holder to advance the
principal amount evidenced hereby or (B) contained in any Loan Document, (ii)
fraud committed by Maker or any person or entity constituting Maker, (iii)
misapplication of rents, security deposits, income, insurance proceeds,
condemnation awards or trust funds, (iv) any loss, damage, expense or liability
on the part of Holder (including, without limitation, attorneys' fees and
disbursements) for which Maker is liable and which is not reimbursable to Holder
pursuant to the Environmental Agreement and Indemnity (the "Indemnity") executed
on even date herewith including, but not limited to the diminution in value of
the Secured Property due to the existence of Hazardous Substances (as defined in
the Indemnity), or if required in the reasonable judgment of Holder, the
preparation of an environmental audit on the Secured Property, whether conducted
or authorized by Maker, Holder or a third party or the implementation of any
environmental audit's recommendations, (v) all losses, damages or liability
suffered by Holder arising from any acts of commission or omission by Maker that
result
5
<PAGE>
in waste upon the Secured Property, (vi) failure to pay real property
taxes when due, (vii) taking of any rents prepaid for more than one (1) month in
advance, (viii) cost of any property repair as a result of a casualty not
reimbursed by insurance to the extent insurance is required pursuant to the Deed
of Trust, or (ix) failure to fully comply with the provisions of the Americans
With Disabilities Act.
6
<PAGE>
Whenever used, the words "Maker" and "Holder" shall be deemed to include
the respective heirs, successors, assigns and legal representatives of Maker and
Holder.
This Note is to be construed and enforced according to and governed by the
laws of the State of California.
IN WITNESS WHEREOF, Maker has executed this Note as of the date first above
written.
MAKER
IPAC PROPERTIES, a California corporation
By: /s/ Tony Lin
______________________________________
Its: Chief Financial Officer
_________________________________
7
<PAGE>
EXHIBIT 10.20
AGREEMENT OF GUARANTY
---------------------
THIS AGREEMENT OF GUARANTY ("Guaranty") is made this 24th day of March,
1997, by INTEGRATED PACKAGING ASSEMBLY CORPORATION, a California corporation
(the "Guarantor"), to SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.), a Delaware
corporation ("Lender"), with reference to the following facts:
RECITALS
--------
A. Concurrently herewith, Lender is making a loan in the original
maximum principal amount of Six Million Seven Hundred Thousand and NO/100
Dollars ($6,700,000.00) (the "Loan") to IPAC PROPERTIES, a California
corporation ("Borrower").
B. The Loan is evidenced by that certain Promissory Note of even date
herewith in the original principal sum of $6,700,000.00 (the "Note") and is
secured by (i) that certain Deed of Trust, Financing Statement, Security
Agreement, and Fixture Filing (with Assignment of Rents and Leases) of even date
herewith and recorded in the Official Records of Santa Clara County, California
(the "Deed of Trust"), encumbering certain real property located in said County
and more particularly described in the Deed of Trust (the "Property"); (ii) that
certain UCC-1 Financing Statement of even date herewith to be filed in the
Office of the Secretary of State of the State of California; (iii) the
Environmental Agreement and Indemnity and (iv) various other security documents
and instruments executed by Borrower in favor of Lender. All of the foregoing
documents and instruments are sometimes collectively referred to herein as the
"Loan Documents".
C. The person or entity named herein as Guarantor (or, if more than one
person or entity is named herein as Guarantor, each of the persons or entities
comprising Guarantor) wholly-owns all interest in Borrower, and will therefore
receive a direct and substantive benefit from the Loan.
D. Guarantor has reviewed, understood and approved all of the terms and
conditions of the Note, the Deed of Trust and all of the other Loan Documents
and all other documents executed in connection with the Loan, including, but not
limited to, this Guaranty; Guarantor has been afforded the full and fair
opportunity to consult with independent legal counsel of Guarantor own choice
with respect to each and all of such matters and documents and has done so to
the extent deemed appropriate by Guarantor.
E. The execution and delivery of this Guaranty to Lender by Guarantor
is a condition precedent to Lender's making the Loan, is a material inducement
to Lender in making the Loan and Lender would be unwilling to make the Loan
without this further assurance of payment and performance.
AGREEMENT
---------
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Guarantor hereby agrees as
follows:
<PAGE>
1. Each of the foregoing Recitals is true and correct and is
incorporated herein by this reference.
2. Subject to the provisions of the Note limiting liability after the
Lease Termination as defined in the Note and also as limited by the non-recourse
language before and after Lease Termination (as defined in the Note) on page 6
of the Note of even date herewith executed by Borrower, Guarantor hereby
unconditionally and irrevocably guaranties and promises, without demand by
Lender therefor, to pay all sums owing by Borrower to Lender under any of the
Loan Documents and to perform any and all of the terms, covenants, conditions
and agreements contained in any of the Loan Documents when and as required to be
paid and performed by Borrower thereunder, including, but not limited to, the
obligation to make payments of principal and interest due under the Note, the
obligation to repay the entire principal balance of the Note, whether at
maturity, through acceleration or otherwise, the obligation to pay all other
sums evidenced or secured by, or advanced to Borrower under, the Note, the Deed
of Trust, or any other of the Loan Documents and the obligation to perform all
of the covenants and agreements of Borrower to be performed under the Deed of
Trust or any of the other Loan Documents. The liability of Guarantor hereunder
shall be IN THE FULL AMOUNT AND FOR ALL OBLIGATIONS owed to Lender and any
trustee under any of the Loan Documents, including any interest, late charges,
default interest, costs and fees (including, without limitation, reasonable
attorneys' fees) that would have accrued under the Loan Documents and all other
obligations that would have been performable by Borrower under the Loan
Documents but for the commencement of a case under the Bankruptcy Code or any
other law governing insolvency, bankruptcy, reorganization, liquidation or like
proceeding, plus interest thereon as provided in the Note, plus the attorneys'
fees, costs and other expenses incurred by Lender in the enforcement of this
Guaranty.
3. If so provided in the Loan Documents, Guarantor agrees that
bankruptcy, insolvency and other actions by, against or on behalf of Guarantor,
or any Guarantor, as set forth therein may be declared by Lender to be events of
default under the Loan Documents.
4. The obligations of Guarantor hereunder are joint and several, and are
independent of the obligations of Borrower. Guarantor expressly and specifically
agrees that a separate action or actions may be brought and prosecuted against
Guarantor whether or not action is brought against Borrower and whether or not
Borrower is joined in any action against Guarantor.
5. Guarantor hereby authorizes Lender, without notice or demand and
without affecting Guarantor liability hereunder, from time to time to: (a)
change or extend the time, or manner, of payment of the Note; (b) make further
advances under the Note or increase or decrease the principal amount evidenced
thereby; (c) change any of the terms, covenants, conditions or provisions of the
Deed of Trust or any other of the Loan Documents; (d) transfer, assign or
negotiate the Note and transfer and assign the Deed of Trust and other Loan
Documents; (e) take and hold additional security for the payment of the Note or
the performance of the Deed of Trust, and exchange, enforce, waive and release
any such security; (f) release all or part of the Property from the Deed of
Trust whether in accordance with any partial release provision now contained in
the Deed of Trust or otherwise as Lender may determine in its discretion; (g)
apply the Property secured by the Deed of Trust to the payment of the Loan and
direct the order or manner of sale thereof as Lender may determine in its
discretion; (h) proceed against Borrower or Guarantor on the Note without first
foreclosing under the Deed of Trust; (i) accept a conveyance of all or part of
the Property secured by the Deed of Trust in partial satisfaction of the
indebtedness due under the Note and proceed against Borrower or Guarantor
<PAGE>
for the balance then due thereunder; (j) accept one or more substitute
properties to replace any portion of the Property released from the Deed of
Trust; (k) discharge or release any parties liable under the Loan Documents; (l)
accept or make compositions or other arrangements or file or refrain from filing
a claim in any bankruptcy proceeding of or affecting Borrower or any other
guarantor or pledgor or the property of any of them; or (m) credit payments in
such manner and order of priority to principal, interest or other obligations as
Lender may determine in its discretion.
6. In addition to all the other waivers agreed to and made by Guarantor
as set forth in this Guaranty, by executing this Guaranty Guarantor freely,
irrevocably and unconditionally waives all rights and defenses that the
Guarantor may have because the Borrower's debt is secured by real property. This
means, among other things:
a. Lender may collect from the Guarantor without first foreclosing on
any real or personal property collateral pledged by the Borrower.
b. If Lender forecloses on any real property collateral pledged by the
Borrower:
(i) The amount of the debt may be reduced only by the price for which
that collateral is sold at the foreclosure sale, even if the
collateral is worth more than the sale price.
(ii) The Lender may collect from the Guarantor even if the Lender, by
foreclosing on the real property collateral, has destroyed any right
the Guarantor may have to collect from the Borrower. This is an
unconditional and irrevocable waiver of any rights and defenses the
Guarantor may have because the Borrower's debt is secured by real
property. These rights and defenses include, but are not limited to,
any rights or defenses based upon Section 580a, 580b, 580d, or 726 of
the Code of Civil Procedure.
c. Guarantor waives all rights and defenses arising out of an election
of remedies by Lender, even though that election of remedies, such as
a nonjudicial foreclosure with respect to security for a guaranteed
obligation, has destroyed the Guarantor's rights of subrogation and
reimbursement against the principal by the operation of Section 580d
of the Code of Civil Procedure or otherwise.
d. Guarantor waives the benefit of or right to assert any statute of
limitations affecting the liability of Guarantor hereunder or the
enforcement thereof to the extent permitted by law; any part payment
by Borrower or other circumstance which operates to toll any statute
of limitations as to Borrower shall also operate to toll the statute
of limitations as to Guarantor;
e. Until the obligations guaranteed hereby have been fully paid and
performed, Guarantor waives the Guarantor's or other surety's rights
of subrogation, reimbursement, indemnification and contribution and
other rights, benefits and defenses, if any, otherwise available to
Guarantor pursuant to California law, including, without limitation,
the rights, benefits or defenses set forth in California Civil Code
Sections 2787 to 2855, inclusive, 2899 or 3433 and any rights,
benefits or defenses resulting from alteration, impairment or
suspension in any respect or by any means of any of Borrower's
obligations under the Loan
<PAGE>
Documents or any of Lender's rights or remedies under the Loan
Documents without Guarantor's prior consent;
f. Guarantor acknowledges and agrees that Lender is relying on the above
waivers in making the Loan, and that these waivers are a material
part of the consideration which Lender is receiving for making the
Loan;
g. Guarantor waives presentment, demand, protest, notice of protest,
notice of dishonor and notice of non-payment and notice of acceptance
of this Guaranty;
h. Guarantor waives the right, if any, to the benefit of, or to direct
the application of, any security held by Lender, including, without
limitation, the Property described in the Deed of Trust; and, until
all the indebtedness and obligations, payment and performance of
which are hereby guarantied, have been paid and performed in full,
any right to enforce any remedy which Lender now has or hereafter may
have against Borrower, and any right to participate in any security
now or hereafter held by Lender; and
i. Guarantor waives the right to require Lender to proceed against
Borrower, to proceed against the Property, or to proceed against any
other security now or hereafter held by Lender or to pursue any other
remedy in Lender's power.
If this Guaranty is secured by real property owned by Guarantor, Lender and
Guarantor agree that Guarantor's waivers pursuant to this Paragraph 6 are meant
to apply to the security and collateral provided by Borrower or any other
guarantor or pledgor and not to the real property of Guarantor securing this
Guaranty; provided, however, that this sentence shall not be applicable with
regard to the Property or any portion thereof or any interest therein now owned
or hereafter acquired by Guarantor whether with or without the consent of
Lender.
7. Any indebtedness of Borrower now or hereafter held by Guarantor is
hereby subordinated to the indebtedness of Borrower to Lender; and any such
indebtedness of Borrower to Guarantor, if Lender so requests, shall be
collected, enforced, received and held by Guarantor as trustee for Lender on
account of the indebtedness of Borrower to Lender and without affecting the
liability of Guarantor under this Guaranty.
8. It is not necessary for Lender to inquire into the powers of Borrower
or of the officers, partners, joint venturers or agents, if any, acting or
purporting to act on Borrower's behalf, and any indebtedness or other obligation
made or created in reliance upon the professed exercise of such powers shall be
guarantied hereunder.
9. Guarantor agrees to pay all reasonable attorneys' fees and other
costs and expenses which may be incurred by Lender in the enforcement of this
Guaranty, including, without limitation, those incurred in connection with any
case, action, proceeding, claim or otherwise under Chapters 7, 11 or 13 of the
Bankruptcy Code or any successor statute or statutes thereto whether the same be
commenced or filed by Borrower, Guarantor or any other person or entity.
10. This Guaranty shall bind the heirs, devisees, successors and assigns
of Guarantor and shall inure to the benefit of the successors and assigns of
Lender. As used herein, the term "Guarantor" shall also include any estate
created by the commencement of a case under Title 11
<PAGE>
of the United States Code or under any successor statute thereto ("Bankruptcy
Code") or under any other insolvency, bankruptcy reorganization or liquidation
proceeding, or whether acting by any trustee under the Bankruptcy Code,
liquidator, sequestrator or receiver of any person or entity comprising
Guarantor or of the property of any such person or entity or acting by similar
person or entity duly appointed pursuant to any law generally governing any
insolvency, bankruptcy, reorganization, liquidation, receivership or like
proceeding.
11. This Guaranty shall bind the heirs, devisees, successors and assigns
of Guarantor and shall inure to the benefit of the successors and assigns of
Lender.
12. This Guaranty shall follow the Note and the Deed of Trust and, in the
event that the Note and the Deed of Trust are sold, transferred, assigned or
conveyed by Lender, this Guaranty may be likewise sold, transferred, assigned or
conveyed by Lender to the successor holder of the Note and the Deed of Trust,
and, in such event, the successor holder of this Guaranty may enforce this
Guaranty just as if said holder had been originally named as Lender
hereunder.
13. If all or any portion of the obligations guarantied hereunder are paid
or performed, the obligations of Guarantor hereunder shall continue and shall
remain in full force and effect in the event that all or any part of such
payment or performance is avoided or recovered directly or indirectly from
Lender as a preference, fraudulent transfer or otherwise under the Bankruptcy
Code or any other Federal or state laws, irrespective of (a) any notice of
revocation given by Guarantor prior to such avoidance or recovery, and (b) full
payment and performance of all of the indebtedness and obligations evidenced and
secured by the Loan Documents.
14. No term or provision of this Guaranty may be changed, waived, revoked
or amended without Lender's prior written consent. Should any term or provision
of this Guaranty be determined by a court of competent jurisdiction to be
unenforceable, all other terms and provisions hereof shall remain effective.
15. This Guaranty shall apply to each of the individuals or entities
comprising Guarantor as if each had executed a separate guaranty, and the
liability of each Guarantor shall be joint and several. If for any reason this
Guaranty is held to be unenforceable against any of the individuals or entities
comprising Guarantor, such unenforceability shall not affect the obligations of
the remaining individuals or entities comprising Guarantor hereunder, and each
Guarantor agrees that suit may be brought against each Guarantor individually to
enforce the terms and conditions of this Guaranty.
16. Any notice, demand, consent, approval, directive, agreement or other
communication required or permitted hereunder or under the other Loan Documents
shall be in writing and shall be validly given and effectively served if mailed
by U.S. mail, first class or certified mail, return receipt requested, postage
prepaid, addressed as follows to the person entitled to receive the same:
<PAGE>
If to Lender: Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley, Massachusetts 02181
Attn: Legal Department
with a copy to: Graham & James LLP
One Maritime Plaza, Suite 300
San Francisco, California 94111
Attn: Bruce W. Hyman, Esq.
To Guarantor: Integrated Packaging Assembly Corporation
2221 Old Oakland Road
San Jose, California 95131
with a copy to: Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attn: Debra Summers, Esq.
17. This Guaranty shall be governed by and construed in accordance with
the laws of the State of California. In the event any action is brought against
Guarantor hereunder, Guarantor agree to submit to the jurisdiction of the State
of California.
18. This Guaranty embodies the entire agreement of Guarantor and Lender
with respect to the matters set forth herein, and supersedes all prior and
contemporaneous agreements (whether oral or written) between Guarantor and
Lender with respect to the matters set forth herein. No course of prior dealing
between Guarantor and Lender, no usage of trade, and no parol or extrinsic
evidence of any nature shall be used to supplement, modify or vary any of the
terms hereof. There are no conditions to the full effectiveness of this
Guaranty.
19. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original and all of which together shall comprise
but a single instrument.
20. Notwithstanding anything to the contrary in this Guaranty, except with
respect to "recourse obligations" described in Section 5.9 of the Deed of Trust,
this Guaranty and all rights and privileges of Lender and all obligations and
liabilities of Guarantor hereunder shall automatically terminate upon the
occurrence of "Lease Termination" (as defined in Section 5.9 of the Deed of
Trust)."
IN WITNESS WHEREOF, Guarantor has executed this Agreement of Guaranty as of
the date first above written.
INTEGRATED PACKAGING ASSEMBLY
CORPORATION, a California corporation
<PAGE>
By: /s/ Tony Lin
_______________________
Its: CFO
_________________
<PAGE>
EXHIBIT 10.21
ENVIRONMENTAL AGREEMENT AND INDEMNITY
-------------------------------------
THIS ENVIRONMENTAL AGREEMENT AND INDEMNITY (this "Agreement") is made
and entered into as of March 24, 1997 by IPAC Properties, a California
corporation ("Indemnitor"), to and for the benefit of SUN LIFE ASSURANCE COMPANY
OF CANADA (U.S.), a Delaware corporation ("Lender").
R E C I T A L S
---------------
A. Lender has made a loan (the "Loan") to Indemnitor in the principal
amount of $6,700,000.00, which Loan is evidenced by a Promissory Note ("Note")
of even date herewith executed by Indemnitor in favor of Lender and is secured
by, among other things, that certain Deed of Trust, Financing Statement,
Security Agreement and Fixture Filing (With Assignment of Rents and Leases) (the
"Deed of Trust") of even date herewith executed by Indemnitor, as trustor, in
favor of Lender, as beneficiary, encumbering certain property located in the
City of San Jose, County of Santa Clara, State of California, as described in
Exhibit A attached hereto and made a part hereof (the "Property").
- ---------
B. As a result of Lender's making the Loan to Indemnitor, Lender could
incur or suffer certain liabilities, costs and/or expenses in connection with
the Property relating to Hazardous Substances (as hereinafter defined)
including, but not limited to, as the owner of the Property subsequent to a
foreclosure sale or deed taken in lieu thereof. Lender has therefore required
the execution and delivery of this Agreement as a condition precedent to
Lender's making of the Loan to Indemnitor in order to protect Lender from any
such liabilities, costs and/or expenses, and Lender would not be willing to make
the Loan to Indemnitor in the absence of the execution and delivery by
Indemnitor of this Agreement.
NOW, THEREFORE, Indemnitor, in consideration of the foregoing and as an
inducement to Lender to make the Loan, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
hereby covenants and agrees to and for the benefit of Lender as follows:
A G R E E M E N T
-----------------
1. Recitals. The recitals set forth above are true and correct and are by
--------
this reference incorporated herein.
2. Definitions. As used in this Agreement, the following terms shall have
-----------
the following meanings:
(a) Hazardous Substance. The term "Hazardous Substance" means (i) any
-------------------
chemical, compound, material, mixture or substance that is now or hereafter
defined or listed in, or otherwise classified pursuant to, any
Environmental Laws (as hereinafter defined) as a "hazardous substance",
"hazardous material", "hazardous waste", "extremely hazardous waste",
"infectious waste", "toxic substance", "toxic pollutant" or any other
formulation intended to define, list, or classify substances by reason of
deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, toxicity, reproductive toxicity, or "EP toxicity", (ii)
any petroleum, natural gas, natural gas liquid, liquified natural gas,
synthetic gas usable for fuel (or mixtures of natural gas and such
synthetic gas), ash produced by a resource recovery facility utilizing a
municipal solid
<PAGE>
waste stream, and drilling fluids, produced waters, and other wastes
associated with the exploration, development or production of crude oil,
natural gas, or geothermal resources, and (iii) any underground storage
tanks.
(b) Hazardous Substance Activity. The term "Hazardous Substance
----------------------------
Activity" means any actual, proposed or threatened storage, holding,
existence or suspected existence, release or suspected release, emission,
discharge, generation, processing, abatement, removal, disposition,
handling or transportation of any Hazardous Substance from, under, into, on
or across the Property or surrounding property or any other use of or
operation on the Property or the surrounding property that creates a risk
of Hazardous Substance contamination of the Property. "Hazardous Substance
Activity" includes, without limitation, any use of the Property involving
any of the following activities: leather tanning; metal plating; salvage
operations of any type (including, but not limited to, automobiles,
electrical equipment or transformers, surplus military equipment or lead
batteries); fertilizer or pesticide manufacture, packaging or bulk storage;
wood or pole treatment facilities; paint manufacturing; drum or tank
recycling or salvage; oil reclamation; petroleum blending, packaging or
bulk storage; chemical manufacturing, processing, blending, bulk storage,
packaging or distribution; manufacturing of electronic components or
analytical laboratory equipment; ceramics manufacturing or painting; dry
cleaning; printing; biological or chemical research; precious metal
recovery; gas station operations; automobile painting; or automotive
service center.
(c) Environmental Laws. The term "Environmental Laws" means any and
------------------
all present and future federal, state and local laws (whether under common
law, statute, ordinance, rule, regulation or otherwise), court or
administrative orders or decrees, requirements of permits issued with
respect thereto, and other requirements of governmental authorities
relating to the environment or to any Hazardous Substance or Hazardous
Substance Activity (including, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C.
(S)(S)9601, et seq.), as heretofore or hereafter amended from time to time
------
("CERCLA"), and the applicable provisions of the California Health and
Safety Code and the California Water Code).
(d) Hazardous Substance Claims. The term "Hazardous Substance Claims"
--------------------------
means any and all enforcement, clean-up, removal, remedial or other
governmental or regulatory actions, agreements or orders threatened,
instituted or completed pursuant to any Environmental Laws and any and all
other actions, proceedings, claims, demands or causes of action, whether
meritorious or not (including, without limitation, third party claims for
contribution, indemnity, personal injury or real or personal property
damage), which directly or indirectly relate to, arise from or are based in
whole or in part on: (i) the occurrence or alleged occurrence of any
Hazardous Substance Activity; (ii) any violation or alleged violation of
any applicable Environmental Laws relating to the Property or to the
ownership, use, occupation or operation thereof; or (iii) any
investigation, inquiry, order, hearing, action or other proceeding by or
before any governmental agency in connection with any Hazardous Substance
Activity.
(e) Remedial Work. The term "Remedial Work" shall mean all
-------------
investigation, monitoring, restoration, abatement, detoxification,
containment, handling, treatment, removal, storage, decontamination, clean-
up, transport, disposal or other ameliorative work or response action
required by (i) any Environmental Law, (ii) any order or request
2
<PAGE>
of any federal, state or local governmental agency, or (iii) any judgment,
consent decree, settlement or compromise with respect to any Hazardous
Substance Claims.
(f) Losses. The term "Losses" means any and all losses (including
------
diminution in value of the Property), liabilities, damages, punitive
damages, demands, claims, actions, judgments, causes of action,
assessments, penalties, costs and expenses (including sums paid in
settlement of claims), liens, interest, fines or penalties, including,
without limitation, the reasonable fees and disbursements of outside legal
counsel, paralegals and accountants and the reasonable charges of in-house
legal counsel, paralegals and accountants, consultant fees, expert fees,
all foreseeable and unforeseeable consequential damages, and all other
costs and expenses of any kind or nature. "Losses" include, but are not
limited to, (a) capital, operating and maintenance costs incurred in
connection with any Remedial Work required or performed by or on behalf of
any federal, state or local governmental agency or political subdivision or
performed by or on behalf of any nongovernmental entity or person because
of the presence, suspected presence, release or suspected release of any
Hazardous Substance in or into the air, soil, groundwater or surface water
at, on, about, under or within the Property (or any portion thereof), and
any claims of third parties for loss or damage due to such Hazardous
Substance; and (b) all Losses sustained by Lender due to any Hazardous
Substance (i) that is present or suspected to be present in the air, soil,
groundwater or surface water at, on, about, under or within the Property
(or any portion thereof) on or before the date of this Agreement, or (ii)
that migrates, flows, percolates, diffuses or in any way moves onto, into
or under the air, soil, groundwater or surface water at, on, about, under
or within the Property (or any portion thereof) after the date of this
Agreement, irrespective of whether such Hazardous Substance shall be
present or suspected to be present in the air, soil, groundwater or surface
water at, on, about, under or within the Property (or any portion thereof)
as a result of any release, discharge, disposal, dumping, spilling, or
leaking (accidental or otherwise) onto the Property (or any portion
thereof) occurring before, on or after the date of this Agreement or caused
by any person or entity.
(g) Environmental Losses. The term "Environmental Losses" means Losses
--------------------
suffered or incurred by Lender with respect to the Property arising out of
or as a result of: (i) the occurrence of any Hazardous Substance Activity;
(ii) any violation of any applicable Environmental Laws relating to the
Property or to the ownership, use, occupancy or operation thereof; (iii)
any investigation, inquiry, order, hearing, action, or other proceeding by
or before any governmental agency in connection with any Hazardous
Substance Activity; (iv) any Hazardous Substance Claims brought, asserted,
or alleged against Lender or any of its directors, officers, shareholders,
employees or agents; (v) any actions taken by Lender to enter and inspect
the Property pursuant to California Civil Code Section 2929.5; (vi) any
actions taken by Lender to appoint a receiver pursuant to California Code
of Civil Procedure Section 564; and (vii) any actions taken by Lender
pursuant to California Code of Civil Procedure Section 726.5.
3. Representations and Warranties. Indemnitor hereby represents and
------------------------------
warrants that, except as disclosed by the Level I Site Assessment dated December
18, 1996 and prepared by AllWest Environmental, Inc. and provided to Lender: (a)
to the best of Indemnitor's knowledge, no Hazardous Substances currently are or
have been present, used, generated, manufactured, stored, released, discharged
on or transported to, from or across the Property and no other Hazardous
Substance Activity currently is or has been conducted on the Property, except
strictly in accordance with all applicable Environmental Laws, and, as to
tenants or others in possession as of the date hereof, with prudent business
practices as determined by Indemnitor in its capacity
3
<PAGE>
as a prudent landlord and owner; (b) Indemnitor has not received any written
notice that the Property is in violation of any Environmental Laws; and (c)
Indemnitor has not received any written notice of any Hazardous Substance
Claims.
4. Covenants. Indemnitor shall: (a) comply and cause all tenants and other
---------
persons on or occupying the Property, to comply with all Environmental Laws; (b)
without limiting the generality of clause (a) above, not engage in, permit nor
acquiesce to any Hazardous Substance Activity on, under or about the Property,
except in strict accordance with all Environmental Laws, and with then prudent
business practices as determined by Indemnitor in its capacity as a prudent
landlord and owner; (c) immediately advise Lender in writing of (i) the receipt
by Indemnitor of written notice of any and all Hazardous Substance Claims, and,
as soon thereafter as possible, advise Lender of the correctness of such
Hazardous Substance Claims, (ii) any knowledge by Indemnitor that the Property
does not comply with any Environmental Laws, (iii) any remedial action taken by
Indemnitor in response to any Hazardous Substances or Hazardous Substance
Activity on, under or about the Property, or to any Hazardous Substance Claims,
and (iv) Indemnitor's discovery of the presence of any Hazardous Substances or
Hazardous Substances Activity on, under or about the Property or any real
property immediately adjacent to the Property whether or not the same requires
notice to be given to any governmental entity or agency under Environmental
Laws; (d) submit to Lender, promptly upon receipt or preparation, copies of any
and all reports, studies, analyses, correspondence, governmental comments or
approvals, proposed removal or other Remedial Work contracts and similar
information prepared or received by Indemnitor in connection with any Remedial
Work or Hazardous Substances relating to the Property; (e) maintain property
management services at the Property which shall provide for periodic inspections
of the Property (subject to access restrictions under leases and at law) and for
periodic meetings with representatives of Indemnitor and, upon request, Lender
to review the results of such inspections; and (f) use reasonable efforts to
negotiate leases which provide (i) that periodic entry and inspection by
Indemnitor, Indemnitor's representatives, property manager and/or upon request,
Lender, is authorized and (ii) that Indemnitor is authorized under the lease to
perform Remedial Work after a failure by a tenant to respond to Indemnitor's
request for Remedial Work by such tenant.
5. Remedial Work. As soon as possible, but no later than sixty (60) days
-------------
after receipt by Indemnitor of any Hazardous Substance Claim, Indemnitor shall
perform or cause others qualified to do so to perform any and all necessary
Remedial Work in response to any Hazardous Substance Claim. Subject to the terms
of any leases and applicable laws, in response to Indemnitor's knowledge of the
presence of any Hazardous Substance on or under the Property or real property
immediately adjacent to the Property, Indemnitor shall immediately perform or
cause tenants to immediately perform all Remedial Work. All costs and expenses
of any Remedial Work shall be paid by Indemnitor, it being understood that
Lender shall be at no cost or expense in connection with any Remedial Work.
Lender shall have the right, but no obligation, to join and participate in, as a
party if it so elects at Lender's cost, any legal proceedings or actions
initiated in connection with any Hazardous Substance Claims, provided, however,
Indemnitor shall reimburse to Lender its attorneys' fees and costs incurred if
such participation is deemed reasonably necessary by Lender to protect its
security interest in the Property.
6. Remedies. In addition to any other rights or remedies Lender may have
--------
under this Agreement, at law or in equity, in the event that Indemnitor shall
fail to timely comply with the provisions hereof or in the event that any
representation or warranty made herein proves to be intentionally or materially
false or misleading, then, in such event and after (a) delivering written notice
to Indemnitor, which notice specifically states that Indemnitor has failed to
comply with
4
<PAGE>
the provisions of this Agreement; and (b) the expiration of the cure
period, if any, permitted under the applicable laws, rules, regulations or
orders with which Indemnitor shall have failed to comply; Lender may (i) declare
that an Event of Default (as defined in the Deed of Trust) has occurred under
the Deed of Trust and exercise any and all remedies provided for therein, (ii)
institute an action against Indemnitor for specific performance of the action
which Indemnitor has failed to perform, (iii) do or cause to be done whatever is
necessary to cause the Property to comply with all Environmental Laws and other
applicable laws, rules, regulations or orders and the costs thereof shall become
immediately due and payable from Indemnitor to Lender as Environmental Losses,
(iv) enter into and inspect the Property pursuant to California Civil Code
Section 2929.5, and/or (v) appoint a receiver pursuant to California Code of
Civil Procedure Section 564.
7. Indemnification. Indemnitor agrees to indemnify, protect, defend (with
---------------
counsel reasonably approved by Lender) and hold Lender, and the directors,
officers, shareholders, policyholders, employees and agents of Lender, and each
of them, harmless from and against any and all Environmental Losses, to the
fullest extent permitted by applicable law. The indemnification provided for in
this paragraph shall specifically apply to and include any Environmental Losses
incurred by Lender in connection with the exercise of Lender's rights (i) to
enter and inspect the Property pursuant to California Civil Code Section 2929.5,
including, without limitation, the cost of repair of any physical damage to the
Property caused by the entry and inspection; (ii) to appoint a receiver pursuant
to California Code of Civil Procedure Section 564; and (iii) pursuant to
California Code of Civil Procedure Section 726.5, including, without limitation,
costs incurred to determine the value of the Property and to establish the
degree to which the Property is environmentally impaired, as required by
California Code of Civil Procedure Section 726.5(b). The indemnification
provided for in this paragraph shall also specifically apply to and include
claims or actions brought by or on behalf of employees of the Indemnitor, and
Indemnitor hereby expressly waives any immunity to which Indemnitor may
otherwise be entitled under any industrial or workers' compensation laws. In the
event Lender shall suffer or incur any such Environmental Losses, Indemnitor
shall pay to Lender the total of all such Environmental Losses suffered or
incurred by Lender upon demand therefor by Lender. Notwithstanding anything to
the contrary in this Agreement or in any other Loan Document (as defined in the
Note), Indemnitor shall have no obligation to indemnify any person, pay any sum,
perform any act or bear any other responsibility whatsoever for, any Hazardous
Substance Claim, Loss Environmental Loss, or Remedial Work, to the extent that a
court of competent jurisdiction conclusively determines that the foregoing
arises out of (a) any Hazardous Substance Activity which occurs on or after the
Foreclosure Date or (b) any Hazardous Substance which first comes to be present
on the Property, or the soil, groundwater, ambient air, or building materials
thereof on or after the Foreclosure Date. As used in this Section, the term
"Foreclosure Date" means the date of a final foreclosure sale, or the date of
reconveyance of the Deed of Trust by deed in lieu of foreclosure or
otherwise.
8. Subrogation of Indemnity Rights. If Indemnitor fails to perform its
-------------------------------
obligations under this Agreement, Lender shall be subrogated to any rights
Indemnitor may have under any indemnifications from any present, future or
former owners, tenants or other occupants or users of the Property (or any
portion thereof), relating to the matters covered by this Agreement.
9. Joint and Several Liability; Contribution. If this Agreement is executed
-----------------------------------------
and entered into by more than one person or entity as "Indemnitor", then:
(a) Each of such persons or entities shall be jointly and severally
liable for each and all of the obligations of Indemnitor hereunder;
5
<PAGE>
(b) Each Indemnitor agrees that it shall have no right of contribution
(including, without limitation, any rights of contribution under CERCLA) or
subrogation against any other Indemnitor hereunder unless and until all
obligations of such Indemnitor have been satisfied; and
(c) Each Indemnitor further agrees that, to the extent that the waiver
of its rights of subrogation and contribution as set forth herein is found
by a court of competent jurisdiction to be void or voidable for any reason,
any rights of subrogation or contribution such Indemnitor may have shall be
junior and subordinate to the rights of Lender against any Indemnitor
hereunder.
10. Inspection. Indemnitor shall permit Lender to enter the Indemnitor's
----------
office and the Property during all reasonable business hours (after giving
reasonable notice to Indemnitor) to conduct environmental testing and, in the
event of Indemnitor's failure to undertake Remedial Work, to perform Remedial
Work, and Indemnitor hereby grants to Lender (and its employees and agents) an
irrevocable and non-exclusive license for the purpose of conducting such testing
and/or Remedial Work. Lender's right to enter and inspect the Indemnitor's
office and the Property shall include all rights conferred upon Lender by
California Civil Code Section 2929.5.
11. Assignment by Lender. No assignment or reassignment of the rights of
--------------------
Lender hereunder to one or more purchasers of the Loan or the Property shall be
permitted without the consent of the Indemnitor.
12. Interest. Any costs and other payments required to be paid by
--------
Indemnitor to Lender under this Agreement which are not paid on demand therefor
shall thereupon be considered "Delinquent". In addition to all other rights and
remedies of Lender against Indemnitor as provided herein, or under applicable
law, Indemnitor shall pay to Lender, immediately upon demand therefor, Interest
(as defined below) on any such payments which are or have become Delinquent.
Interest shall be paid by Indemnitor from the date such payment becomes
Delinquent through and including the date of payment of such Delinquent sums. As
used herein, "Interest" shall be equal to interest at the Default Rate (as the
term "Default Rate" is defined in the Note) on the Delinquent sums, but not in
any event greater than the maximum rate of interest, if any, permitted by law to
be contracted for between Indemnitor and Lender.
13. Recourse Obligations. The obligations of Indemnitor under this
--------------------
Agreement shall be exceptions to any limitations on Lender's recourse against
Indemnitor or any so called "non-recourse" or "exculpatory" provisions set forth
in the Deed of Trust, in the Note or in any other document referred to therein
and evidencing or securing the repayment of the Loan, such that Indemnitor shall
be fully and personally liable on a full recourse basis for all of Indemnitor's
obligations hereunder, and such liability shall not be limited to the original
principal amount of the Loan.
14. Secured Obligations; Survival. Indemnitor's obligations hereunder shall
-----------------------------
be secured by the Deed of Trust for so long as the Deed of Trust shall remain a
lien upon the Property, provided, however, that any termination of the lien of
the Deed of Trust shall not terminate or otherwise affect Indemnitor's
obligations hereunder and Indemnitor's obligations hereunder shall survive (i)
any foreclosure, deed in lieu of foreclosure or reconveyance of the Deed of
Trust and (ii) any sale or other transfer of the Property by either Indemnitor
or Lender. The rights of Lender under this Agreement shall be in addition to any
other rights and remedies of Lender against Indemnitor under any other document
or instrument now or hereafter executed by Indemnitor, or at law or in equity
(including, without limitation, any right of reimbursement
6
<PAGE>
or contribution pursuant to CERCLA), and shall not in any way be deemed a waiver
of any of such rights. The obligations of Indemnitor under this Agreement shall
be personal to each Indemnitor and their respective representatives,
administrators, executors, successors and assigns, and shall not run, and shall
not be deemed to run, with the land.
15. Miscellaneous. If any term or condition of this Agreement or any
-------------
application thereof shall be invalid, illegal or unenforceable, the remainder of
this Agreement and any other application of such term or condition shall not be
affected thereby. No delay or omission in exercising any right hereunder shall
operate as a waiver of such right or any other right. This Agreement shall be
binding upon, inure to the benefit of and be enforceable by Indemnitor and
Lender, and their respective representatives, administrators, executors,
successors and assigns, including, without limitation, any assignee or purchaser
of all or any portion of the Lender's interest in the Loan or the Property. No
failure or delay on the part of Lender to exercise any power, right or privilege
under this Agreement shall impair any such power, right or privilege, or be
construed to be a waiver of any default or an acquiescence therein, nor shall
any single or partial exercise of such power, right or privilege preclude other
or further exercise thereof or of any other right, power or privilege. No
provision of this Agreement may be changed, waived, discharged or terminated
except by an instrument in writing signed by the party against whom enforcement
of the change, waiver, discharge or termination is sought. This Agreement shall
be governed and construed in accordance with the laws of the State of
California.
16. Attorneys' Fees. Indemnitor hereby agrees to pay all attorneys' and
---------------
paralegals' fees and other costs and expenses which may be incurred by the
Lender in the enforcement of this Agreement including, without limitation, those
incurred in any case, action, proceeding, claim or otherwise under Chapters 7,
11 or 13 of the Federal Bankruptcy Code or any successor statute or statutes
thereto.
[Signatures begin on next page.]
7
<PAGE>
IN WITNESS WHEREOF, Indemnitor has caused this Agreement to be duly and
properly executed as of the day and year first above written.
Dated: March 24, 1997
--
Indemnitor:
IPAC PROPERTIES, a California corporation
By: /s/ Tony Lin
________________________________
Its: Chief Financial Officer
___________________________
8
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION
[to be attached]
<PAGE>
EXHIBIT 11.1
Integrated Packaging Assembly Corporation
Computation of Earnings Per Share
(In thousands, except per share data)
Year Ended
1996 1995 1994
---------- -------- ---------
Weighted average common
shares outstanding................... 11,967 2,111 2,051
Common equivalent shares from
"options, warrants and convertible
preferred stock (1)................... -- 2,347 2,347
Weighted average common equivalent
shares from convertible preferred stock
calculated using if-converted method..... 1,310 6,123 5,092
Weighted average common stock equivalents
calculated by the treasury stock method
applied to options and warrants.......... 880 675 --
_______ _______ _______
Weighted average common shares and
equivalents............................. 14,157 11,256 9,490
======= ======= =======
Net income............................... $ 2,317 $ 1,550 (2,086)
======= ======= =======
Net income per share..................... $0.16 $0.14 ($0.22)
======= ======= =======
(1) Pursuant to Securities and Exchange Commission Staff Accounting
Bulletins, common and common equivalent shares and options issued by the
Company during the 12 month period prior to the initial public offering
of the Company common stock have been included as ifthey were
outstanding for all periods presented.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement of Integrated Packaging Assembly Corporation on Form SB-2 Number 333-
326LA (filed on January 17, 1996) of our report dated January 13, 1997 (except
Note 5, for which the date is March 25, 1997) appearing on page 21 of this Form
10-K.
Price Waterhouse LLP
San Jose, California
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED STATEMENT OF OPERATIONS, THE CONDENSED BALANCE SHEET AND THE
ACCOMPANYING NOTES TO THE CONDENSED FINANCIAL STATEMENTS, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<CASH> 15,817
<SECURITIES> 3,025
<RECEIVABLES> 6,286
<ALLOWANCES> 145
<INVENTORY> 1,977
<CURRENT-ASSETS> 27,566
<PP&E> 46,757
<DEPRECIATION> (4,981)
<TOTAL-ASSETS> 69,639
<CURRENT-LIABILITIES> 11,952
<BONDS> 0
0
0
<COMMON> 39,811
<OTHER-SE> 950
<TOTAL-LIABILITY-AND-EQUITY> 69,639
<SALES> 36,402
<TOTAL-REVENUES> 36,402
<CGS> 28,840
<TOTAL-COSTS> 28,840
<OTHER-EXPENSES> 4,541
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,384
<INCOME-PRETAX> 2,847
<INCOME-TAX> 530
<INCOME-CONTINUING> 2,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,317
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
