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UNITED STATES
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, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of The Securities
Exchange Act of 1934.
For the transition period from to
Commission File Number: 0-25560
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ACT Manufacturing, Inc.
(Exact name of registrant as specified in its charter)
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<CAPTION>
Massachusetts 04-2777507
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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2 Cabot Road 01749
<S> <C>
Hudson, Massachusetts (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (978) 567-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 24, 2000 (based on the closing sale price as quoted by
the Nasdaq National Market as of such date) was $494,950,268.
As of March 24, 2000, 16,331,355 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of registrant's definitive proxy statement for the annual meeting
of stockholders to be held on or about May 15, 2000 to be filed pursuant to
Regulation 14A are incorporated by reference into Part III of this Form 10-K.
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PART I
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K are forward-looking statements
that involve risks and uncertainties. ACT Manufacturing, Inc. makes such
forward-looking statements under the provision of the "Safe Harbor" section of
the Private Securities Litigation Reform Act of 1995. Any forward-looking
statements should be considered in light of the factors described below in
Item 7 under "Year 2000 Readiness Disclosure Statement" and "Cautionary
Statements." Actual results may vary materially from those projected,
anticipated or indicated in any forward-looking statements. In this Annual
Report on Form 10-K, the words "anticipates," "believes," "expects,"
"intends," "future," "could," "may," and similar words or expressions (as well
as other words or expressions referencing future events, conditions or
circumstances) identify forward-looking statements.
ITEM 1. BUSINESS
ACT Manufacturing, Inc. (ACT or We) is a leading provider of value-added
electronics manufacturing services to original equipment manufacturers (OEMs)
in the networking and telecommunications, computer and industrial and medical
equipment markets. We provide OEMs with:
. complex printed circuit board assembly, primarily utilizing advanced
surface mount technology;
. electro-mechanical sub-assembly;
. total system assembly and integration; and
. mechanical and molded cable and harness assembly.
We target and have developed a particular expertise in serving emerging and
established OEMs who require moderate volume production runs of complex,
leading-edge commercial market applications. The multiple configurations and
high printed circuit board densities that characterize these applications
generally require technologically-advanced and flexible manufacturing as well
as a high degree of other value-added services. As an integral part of our
offerings to customers, we provide the following value-added services in all
of our service offerings:
. new product introduction services;
. advanced manufacturing and test engineering;
. flexible materials management;
. comprehensive test services;
. product diagnostics and repair;
. product configuration;
. packaging;
. order fulfillment; and
. distribution services.
Since 1997, we have completed four acquisitions that have enabled us to
strengthen our advanced engineering capabilities, expand our operations and
geographic presence and diversify our customer base. Prior to 1997, we
operated primarily in the northeastern United States. Through our
acquisitions, we have added facilities in California, Georgia, Mississippi,
Ireland and Mexico. Our July 1999 merger with CMC Industries, Inc. enabled us
to significantly increase our scale of operations, expand our customer base
and geographic presence, and strengthen our management and engineering
resources. In addition, the acquisition of certain inventory and fixed assets
of GSS/Array Technology, Inc. in October 1999 strengthened and expanded our
California operations and considerably enhanced our advanced engineering
capabilities, in particular those related to high-end radio frequency
applications. We expect to continue to pursue select strategic acquisitions to
enhance our growth, operations, geographic presence, engineering capabilities
and service offerings.
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We have developed strong customer relationships with a wide range of
companies in the networking and telecommunications and computer industries.
Our customer base of over 100 customers includes large, established OEMs such
as EMC Corporation, Motorola and Nortel Networks, and emerging providers of
next-generation technology products such as Convergent Networks, Efficient
Networks and Unisphere Solutions (formerly Redstone Communications). OEMs in
the networking and telecommunications segment of the electronics industry
represented approximately 66% of our net sales for fiscal 1999 while OEMs in
the computer segment accounted for approximately 25% for the same period.
These customers require our advanced engineering capabilities and other value-
added services to manufacture technologically complex products, such as
wireless and ADSL modems, Internet access switches, routers and mass storage
systems . We establish close, long-term relationships with our customers by
offering them a complete and flexible electronics manufacturing solution in
order to accelerate their time-to-market and time-to-volume production.
Recent and Pending Business and Asset Acquisitions
On March 15, 2000, we entered into a Pre-Tender Agreement for the
acquisition of GSS Array Technology Public Company Limited (GSS Thailand), a
Thailand company publicly traded on the Stock Exchange of Thailand. Under the
terms of the agreement, GSS Thailand would be delisted from the Stock Exchange
of Thailand and we would then make a cash tender offer for all issued shares
and outstanding options of GSS Thailand for approximately $93.0 million at the
exchange rate in effect between the Thai Baht and the U.S. Dollar on March 15,
2000. We also have the option to make the cash tender offer prior to the
delisting of GSS Thailand from the Stock Exchange of Thailand. Holders of
approximately 23% of GSS Thailand's outstanding shares have agreed to tender
their issued shares and outstanding options to ACT. We expect to close the
acquisition in the third quarter of fiscal 2000, however, the acquisition is
subject to various regulatory approvals and other closing conditions. We
cannot assure you that these closing conditions will be satisfied and we
therefore may not consummate this acquisition of GSS Thailand on a timely
basis or at all.
On October 12, 1999, we acquired certain inventory and fixed assets of
GSS/Array Technology, Inc., located in San Jose, California, for approximately
$12.9 million in cash and the assumption of $0.6 million in liabilities, which
we financed primarily through our bank credit facility. The purchase of these
assets did not constitute the acquisition of a business. GSS/Array Technology,
Inc. was a subsidiary of GSS Thailand. We assumed on-going relationships with
select GSS/Array domestic customers and hired select employees.
On July 29, 1999, we completed our merger with CMC Industries, Inc. (CMC), a
provider of electronics manufacturing services to OEMs in the
telecommunications, computer and electronics industries. CMC operated
manufacturing facilities in Santa Clara, California, Corinth, Mississippi and
Hermosillo, Mexico. As a result of the merger, CMC became our wholly owned
subsidiary. Under the terms of the merger agreement, each share of CMC common
stock was exchanged for 0.5 of a share of our common stock and all CMC stock
options were assumed by us. We issued approximately 3.9 million shares of
common stock and reserved approximately 0.9 million shares of common stock for
future issuance under CMC's 1990 Equity Incentive Plan, pursuant to the
merger. The merger has been accounted for as a pooling of interests.
The merger with CMC has provided us many benefits which enable us to compete
more effectively in the electronics manufacturing services industry,
including:
. We gained the critical mass necessary to compete for the business of
larger OEMs in the electronics industry.
. We enhanced our customer diversity, reduced our reliance on specific
major customers and enhanced our opportunity to sell additional value-
added services to a larger customer base as a result of the lack of
overlap between the ACT and CMC customer bases.
. We expanded our geographic presence and broadened our range of cost and
volume production capabilities through the addition of high volume, low
cost manufacturing production facilities in Corinth, Mississippi and
Hermosillo, Mexico and a moderate volume facility in Santa Clara,
California.
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. We acquired significant managerial, sales and engineering resources which
has facilitated the expansion of our manufacturing capacity and has
strengthened our advanced engineering capabilities.
. We acquired a procurement office in Taiwan as well as experienced
purchasing personnel which has strengthened our component supply chains.
Services
We utilize a business unit or cell approach to provide value-added services
to more effectively satisfy the needs of our customers. Within this
environment, we assign dedicated equipment, personnel and systems to specific
customers. Throughout the manufacturing organization, we use state-of-the-art
production performance, statistical process control and quality reporting
systems to provide accurate, timely and relevant management and customer
information.
Manufacturing of Electronic Assemblies
We offer manufacturing capabilities for printed circuit board assembly,
electro-mechanical sub-assembly, total system assembly and integration, and
cable and harness assembly.
Printed Circuit Board Assembly. Printed circuit boards are platforms on
which integrated circuits and other electronic components are mounted.
Semiconductor designs are complex and often require printed circuit boards
with many layers of narrow, densely-spaced wiring. Rapid technological
advances have occurred in the electronics industry in recent years that have
increased the speed and performance of components, while reducing their size.
These technological advances have caused printed circuit boards to become
smaller with components more densely attached to the board. These
technological advances have required increasingly advanced surface mount
manufacturing technologies, in addition to traditional surface mount and pin-
through-hole technology.
In pin-through-hole production, components are attached by pins, also called
leads, inserted through and soldered to plated holes in the printed circuit
board. In traditional surface mount technology production, the leads on
integrated circuits and other electronic components are soldered to the
surface of the printed circuit board rather than inserted into holes. Surface
mount technologies can accommodate a substantially higher number of leads in a
given area than pin-through-hole production. As a result, surface mount
technologies allow the printed circuit board to interconnect a greater density
of integrated circuits. This density permits tighter component spacing and a
reduction in the printed circuit board dimensions. Additionally, surface mount
technologies allow components to be placed on both sides of the printed
circuit board, thereby permitting even greater density. The substantially
finer lead-to-lead spacing in surface mount technologies requires a
manufacturing process far more exacting than the pin-through-hole interconnect
products. An advanced surface mount technology called micro ball grid array
(BGA) allows for even greater densities than traditional surface mount
technology. The BGA assembly process uses small balls of solder, instead of
leads that could bend and break, located directly underneath the part, to
interconnect the component and circuit board. Because of their high number of
leads, most complex or very large scale integrated circuits are configured for
surface mount technologies production.
We employ advanced surface mount technologies, primarily micro ball grid
array, in our printed circuit board assembly operations in addition to
traditional surface mount technologies. We also continue to support pin-
through-hole technology and related semi-automated and manual placement
processes for existing and new applications that require these technologies.
We focus on low to moderate volume manufacturing of highly complex and
sophisticated printed circuit board assemblies. We manufacture these complex
assemblies on a batch basis and have developed expertise in quickly changing
equipment set-up and manufacturing capabilities in order to respond to our
customers' changing needs. We believe this capability provides our customers
with optimal flexibility in product design, while allowing for rapid
turnaround of new or highly complex but lower volume products. We also offer
our customers high volume manufacturing alternatives. In our Hermosillo,
Mexico and Corinth, Mississippi facilities,
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we currently manufacture larger volume, less complex printed circuit boards
using a variety of surface mount technologies.
As part of our comprehensive manufacturing process, we provide in-circuit,
functional and stress environmental testing services for substantially all
completed printed circuit board assemblies. In-circuit tests verify that:
. the components have been attached properly;
. the components meet functional standards; and
. the electrical circuits have been completed properly.
We perform these tests on industry standard testing equipment using
proprietary software developed either by the customer or our test engineers.
We also use specialized testing equipment designed and provided by the
customer or developed by our engineers to perform customized functional tests
designed to ensure that the printed circuit board assembly will perform its
intended functions. In addition, since defective components normally fail
after a relatively short period of use, we subject more complex printed
circuit board assemblies to controlled environmental stresses, typically
thermal or electrical stresses, based on customer requests.
Electro-Mechanical Sub-Assembly and Total System Assembly and
Integration. We integrate components, including our printed circuit board and
cable and harness assemblies, into higher level sub-assemblies and total
system assemblies. We maintain significant systems assembly capacity to meet
the increasing demands of our customers for total system assemblies. In
addition to product assemblies, we also provide the following services to
customers seeking to integrate manufacturing and distribution services:
. custom configuration;
. documentation;
. packaging; and
. order fulfillment.
Cable and Harness Assembly. We offer a wide range of cable and harness
assembly services for molded and mechanical applications including:
. custom manufactured ribbon assemblies;
. multiconductor, co-axial and fiber optic cable assemblies; and
. discrete wire harness assemblies.
We use advanced and diverse manufacturing processes, in-line inspection and
test and dedicated work cells to minimize work-in-process time and focus on
process efficiencies and quality. We use both automated and semi-automated
preparation and insertion equipment, as well as manual assembly techniques to
accomplish the cable and harness assembly process. We test substantially all
of our cable and harness assemblies using automated test equipment.
Value-Added Services
Outsourcing allows OEMs to take advantage of the manufacturing expertise,
advanced technology, capital investments and overall cost benefits obtained by
electronics manufacturing services providers. In addition, OEMs outsource
their manufacturing strategies to accelerate their time-to-market and time-to-
volume production, improve inventory management and purchasing power, and
improve the overall quality of their products. In order for OEMs to fully
achieve the benefits of outsourcing, they seek a comprehensive manufacturing
solution. To meet the requirements of our OEM customers, we provide the
following value-added services across the full range of our electronics
manufacturing services:
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New Product Introduction Services. We work with potential and existing
customers as early as possible in the new product development process to
optimize their products' design for manufacturing. Our new product
introduction services include design and layout, concurrent engineering, test
development and prototype engineering. Our new product introduction services
are designed to shorten customers' product development cycles by offering full
design and development services that compliment the customers' in-house
capabilities.
We believe that our new product introduction capabilities result in close
interaction with our customers and new business prospects which:
. enhance responsiveness to customers;
. enable us to stay at the forefront of technological innovations; and
. strengthen our relationships with our existing and new customers.
Advanced Manufacturing and Test Engineering. Our advanced manufacturing
engineers work closely with a customer's product designers at the early design
stage of a product. Our engineers:
. evaluate the initial product design to identify potential manufacturing
and testability issues;
. review the layout of a board to determine if it has the optimal tool set-
up and efficient component spacing and densities; and
. participate in parts selection and materials utilization decisions.
This early interaction with the customer optimizes product
manufacturability, testability, and reliability. This participation also
mitigates component availability issues which might arise during the
manufacturing cycle. Our engineers also evaluate the ongoing manufacturing
process and recommend improvements to reduce manufacturing costs or lead
times, or to increase the quality of finished assemblies. Our engineering
services help customers:
. bring their products rapidly to the market;
. meet the market's expectation for quality; and
. take advantage of advances in manufacturing and testing technology and
processes.
Materials Management. We provide our customers optimal flexibility regarding
their production delivery and product mix requirements. We directly purchase
all or a substantial portion of the components necessary for our product
assemblies. We procure components from vendors which meet our standards for
timely delivery, high quality, cost-effectiveness, flexibility and compliance
with customer specifications. To help control inventory investment, we
generally order components only when we have a customer forecast, purchase
order or commitment to purchase the completed assemblies. We use a materials
requirements planning system to plan and procure materials. We use electronic
data interchange systems to efficiently communicate with many of our vendors.
We have recently begun using an Internet-based procurement tool and expect to
realize cost savings and efficiencies by sourcing components via the Internet.
Additionally, we use just-in-time inventory management techniques and manage
our materials pipelines and vendor base to provide our customers flexibility
to change their volume requirements within established frameworks.
Product Diagnostics and Repair. As OEMs increasingly outsource their
manufacturing needs and divest their internal manufacturing capabilities, they
need electronics manufacturing services providers that offer product
diagnostic and repair services. If a product purchased by an OEM's customer
fails or breaks, an OEM that has outsourced its manufacturing is not likely to
have the equipment, facilities or trained personnel available to identify and
fix the problem. We use our engineering and test capabilities to provide
product diagnostic and repair for assemblies we manufacture and, in some
instances, for other products of our customers. We also offer our OEM
customers revision control, lot tracking and materials management services for
their product revisions, upgrades and repairs.
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Order Fulfillment and Distribution. To more rapidly respond to the market
demands of our customers, we offer delivery programs and capabilities designed
with the flexibility to ship products directly to an OEM's customers. Under
these programs, we package products to the customer's specification with
appropriate product documentation and manage the logistics of delivery. We
work closely with our customers to identify and offer additional services in
anticipation of future customer needs.
Suppliers
Our OEM customers need us to:
. assure the short and long term supply of materials and components to
manufacture their products;
. negotiate low prices for these materials;
. secure the highest quality and most reliable materials;
. assure the on-time delivery of these materials; and
. provide them with the flexibility to change their production requirements
on short notice.
To compete effectively in this business environment, we have developed a
materials procurement strategy whereby we maintain strong, long-term
relationships with a limited number of suppliers who conform to our high
standards. We seek to work only with suppliers that consistently deliver the
best technology and quality materials at the lowest total cost on the shortest
and most flexible lead times. We consistently evaluate all of our suppliers'
performances and provide them with suggestions for improving our
relationships. When we do business with a supplier at our customer's
direction, we closely monitor the supplier's performance and work with both
the supplier and the customer to improve the supplier's performance when
necessary. We believe this strategy enables us to provide optimal flexibility
to our OEM customers and enables us to better satisfy their electronics
manufacturing services needs.
Our team of materials acquisition professionals is responsible for all
materials procurement and planning. We have a strategic purchasing group that
develops our worldwide materials and commodity procurement strategy. We have
adopted a more direct supplier model that targets select high quality
suppliers from a more distributor-oriented procurement model. This strategic
group is responsible for understanding the needs of our customers and the
commodity supply market, evaluating the overall quality of suppliers and
negotiating and executing low cost commodity supply contracts with preferred
suppliers. We also have a group that focuses on the day-to-day tactical
execution of our materials procurement process to insure that material or
component costs or shortages do not prevent us from providing optimal services
to our customers. This group is responsible for proactively managing inventory
programs, evaluating day-to-day supplier performance and co-ordinating
customer plan production changes.
We typically procure components when a purchase order or forecast is
received from a customer. Due to our utilization of just-in-time inventory
techniques, the timely availability of many components depends on our ability
to both develop accurate forecasts of customer requirements and manage our
materials supply chain. Given our direct component procurement strategy with
quality suppliers, we rely on a single or limited number of suppliers for many
proprietary and other components used in our assembly process. Although we
have strong relationships with high quality suppliers, we do not have any long
term supply agreements. Shortages of materials and components have occurred
from time to time and will likely occur in the future despite our development
of select long-term supplier relationships. In particular, we are currently
experiencing a shortage in components such as tantalum and ceramic capacitors,
flash memory and dynamic and static ram. We believe our direct procurement
strategy and the division of responsibility within our materials procurement
team enable us to better manage our supply chain in order to reduce the
occurrence and minimize the effect on our customers of materials or component
shortages.
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Customers and Markets
We serve a wide range of customers from emerging growth companies to
established multinational corporations in a variety of markets, including
networking and telecommunications, computer and industrial and medical
equipment. We currently provide services to over 100 customers worldwide.
Customers in the networking and telecommunications segment of the
electronics industry represented approximately 66% of our net sales for fiscal
1999 while OEMs in the computer segment accounted for approximately 25% for
the same period.
For fiscal 1999, our five largest customers accounted for approximately 52%
of our net sales. For fiscal 1999, each of Nortel Networks (formerly Bay
Networks and Aptis Communications) and S-3 Incorporated (formerly Diamond
Multimedia) accounted for 10% or more of our net sales (15% and 13%,
respectively).
Customers representing 10% or more of our net sales in fiscal 1998 were
Nortel Networks and Micron Electronics, each with approximately 12%, as
compared to Nortel Networks with 17% of our net sales in fiscal 1997.
The timing and level of orders from our customers varies substantially from
period to period. The historic level of net sales we have received from a
specific customer in one particular period is not necessarily indicative of
net sales we may receive from that customer in any future period. While we
focus on maintaining long term relationships with our customers, for various
reasons, including consolidation in our customers' industries, we have in the
past and will continue in the future to terminate or lose relationships with
customers. Customers may also significantly reduce the level of business they
do with us or delay the volume of manufacturing services they order from us.
Significant or numerous terminations, reductions or delays in our customers'
orders could negatively impact our operating results in future quarters. We
continue to focus on expanding and diversifying our customer base to reduce
dependence on any individual customer or market.
In many cases, our customers utilize more than one electronics manufacturing
services provider across their product lines. Our goal is to be the primary
electronics manufacturing services provider for our customers. We seek to
manufacture the high-value, leading-edge products of our customers and target
OEMs that require moderate volume production. Our high volume, low cost
facilities enable us to offer our customers a broad range of volume production
and cost alternatives. We believe that we are advantageously positioned to be
selected to provide manufacturing and value-added services for our customers'
new product offerings due to our:
. close interaction with the design engineering personnel of our customers
at the product development stage;
. prototype production experience;
. advanced manufacturing and engineering capabilities, such as radio
frequency capabilities; and
. established and dependable materials pipeline.
We generally warrant that our products will be free from defects in
workmanship for twelve months. We also pass on to our customers any warranties
provided by component manufacturers and material suppliers to the extent
permitted under our arrangements with these parties. Our warranty provides
that during the warranty period we will take action to repair or replace
failed products. We test substantially all of our assemblies prior to
shipment. In addition, our customers generally test or have tested final
products on a sample basis prior to deployment in the field. Our warranty
costs have not been material to date.
Sales and Marketing
We develop close, long term relationships with our customers by working with
them throughout the development, manufacturing and distribution processes.
Electronics manufacturing services providers generally face a long sales cycle
and must perform satisfactorily on a trial basis prior to capturing
significant orders from
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an OEM. As a result, we seek to develop these close relationships with
customers during the initial product design and development stage. We then
support our existing customer relationships through a comprehensive staff of
program managers dedicated to individual customer accounts. We assign each
customer a program manager who acts as the primary contact for the customer.
Program managers are responsible for the development of the manufacturing
relationship between our company and the customer and the assignment of our
resources to meet the customer's requirements.
We market our services primarily through a direct sales force, and to a
lesser extent, through independent manufacturer's representatives in the
United States, Canada and Europe. As we have grown, we have increasingly
relied on and developed our direct selling organization as opposed to
utilizing independent manufacturer representatives. We divide our direct sales
organization into two operations groups. The strategic sales group focuses its
selling efforts on major multinational accounts. The core sales group focuses
on existing and new accounts within set geographic regions. We expect to
continue to expand our direct sales organization and marketing efforts in
response to increased customer opportunities in new geographic markets, our
increased critical mass and our expanded customer base.
Competition
The electronics manufacturing services industry is highly competitive. We
compete against numerous U.S. and foreign electronics manufacturing services
providers with global operations, including Benchmark Electronics, Celestica,
Flextronics, Jabil Circuit, Plexus, Sanmina, SCI and Solectron. We also face
competition from a number of electronics manufacturing services providers that
operate on a local or regional basis. In addition, current and prospective
customers continually evaluate the merits of manufacturing products
internally. Consolidation in the electronics manufacturing services industry
results in a continually changing competitive landscape. The consolidation
trend in the industry also results in larger and more geographically diverse
competitors who have significant combined resources with which to compete
against us.
We believe that the principal competitive factors in the segments of the
electronics manufacturing services industry in which we operate are:
. geographic location and coverage;
. flexibility in adapting to customers' needs;
. manufacturing capability;
. price;
. service;
. technology;
. quality;
. reliability; and
. timeliness in delivering finished products.
We believe that we have developed a particular strength relative to some of
our major competitors in the manufacturing of complex, moderate volume,
leading-edge products. Competition from existing or potential competitors
could result in reduced prices, margins and market share which would
significantly and negatively impact our operating results.
Governmental Regulation
Our operations are subject to certain federal, state and local regulatory
requirements relating to environmental compliance and site cleanups, waste
management and health and safety matters. In particular, we are subject to
regulations promulgated by:
. the Occupational Safety and Health Administration pertaining to health
and safety in the workplace;
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. the Environmental Protection Agency pertaining to the use, storage,
discharge and disposal of hazardous chemicals used in the manufacturing
processes; and
. corresponding state agencies.
To date the costs of compliance and environmental remediation have not been
material to us. Nevertheless, additional or modified requirements may be
imposed in the future. If such additional or modified requirements are imposed
on us, or if conditions requiring remediation were found to exist, we may be
required to incur substantial additional expenditures.
Employees
At December 31, 1999, we had 2,816 permanent employees. To provide
manufacturing flexibility for our customers, we utilize the services of
temporary employees to meet short-term manufacturing capacity fluctuations.
The only employees represented by a labor union are those employees in our
Mexico operations. We have never experienced a labor stoppage or strike. We
consider our relations with our employees to be good.
ITEM 2. PROPERTIES
Our principal manufacturing facilities are located in ten facilities
containing an aggregate of approximately 1.0 million square feet. Our
significant facilities are as follows:
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Approximate Lease
Location Square Feet Leased/Owned Expiration Description
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Hudson, MA.............. 147,000 Leased 2007 High-End Tech. Mfg.
Hudson, MA.............. 32,000 Leased 2003 Cable Prototyping & Mfg.
Hudson, MA.............. 28,000 Leased 2003 Cable Prototyping & Mfg.
Mansfield, MA........... 44,000 Leased 2001 Low-Moderate Volume Mfg.
Marlborough, MA......... 126,000 Leased 2003 High-End Tech. Mfg.
Santa Clara, CA......... 75,000 Leased 2000 Low-Moderate Volume Mfg./High-
End Tech. Mfg.
Lawrenceville, GA....... 62,000 Leased 2005 Low-Moderate Volume Mfg.
Corinth, MS............. 350,000 Leased 2060 Moderate-High Volume Mfg.
Hermosillo, Mexico...... 110,000 Owned -- Moderate-High Volume Mfg.
Dublin, Ireland......... 45,000 Leased 2002 Low-Moderate Volume Mfg.
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Total................. 1,019,000
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We lease two of the Hudson facilities from Re-Act Realty Trust, a
Massachusetts nominee trust, which is controlled by John A. Pino, our Chairman
of the Board, President and Chief Executive Officer, and the beneficial
interest of which is principally owned by Mr. Pino.
Our manufacturing facility in Corinth, Mississippi is located on 64 acres of
land. The facility and land are leased from the Industrial Development Board
of Alcorn County, Mississippi under a lease which has options to renew until
2060. We also lease 20,000 square feet of warehouse space in Corinth,
Mississippi, an international purchasing office in Taiwan and a sales and
procurement office in Huntsville, Alabama.
We have consolidated the equipment and assets we purchased from GSS/Array
into our Santa Clara operations. Our Santa Clara facility's lease term expires
in November 2000. We have signed a lease for a new 202,000 square foot
facility in San Jose, California that is under construction. We plan to move
our existing Santa Clara operations and the equipment and assets we purchased
from GSS/Array to this new facility and expect to begin operations in this new
facility in the fourth quarter of fiscal 2000.
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All of our manufacturing facilities have been certified to the ISO 9002
international quality standard except the Corinth, Mississippi facility which
is certified to the ISO 9001 international quality standard and our newly
leased facility in Marlborough, Massachusetts, which we occupied in January
2000. We expect that this facility will be certified in the near future.
Our Massachusetts facilities contain 14 surface mount technology lines. We
operate 16 surface mount technology lines at our Corinth, Mississippi
facility; ten at Hermosillo, Mexico; nine at Santa Clara, California; three at
Lawrenceville, Georgia; and two in the Dublin, Ireland facility.
ITEM 3. LEGAL PROCEEDINGS
On February 27, 1998, our company and several of our officers and directors
were named as defendants in a purported securities class action lawsuit filed
in the United States District Court for the District of Massachusetts. The
plaintiffs amended the complaint on October 16, 1998. The plaintiffs purport
to represent a class of all persons who purchased or otherwise acquired our
common stock in the period from April 17, 1997 through March 31, 1998. The
amended complaint alleges, among other things, that the defendants knowingly
made misstatements to the investing public about the value of our inventory
and the nature of our accounting practices. On December 15, 1998, we filed a
motion to dismiss the case in its entirety based on the pleadings. Our motion
to dismiss was granted without prejudice on May 27, 1999 and the case was
closed by the court on June 1, 1999. On June 28, 1999, the plaintiffs filed a
motion with the court seeking permission to file a second amended complaint.
We opposed that motion. On July 13, 1999, the court denied the plaintiffs'
motion to amend, noting "final judgment having entered in the case." On July
26, 1999, the plaintiffs filed a motion with the court asking the court to
extend the 30-day period for filing an appeal of its ruling dismissing the
case. We opposed that motion as well, and the court denied the motion on
August 10, 1999. The plaintiffs have filed an appeal with the United States
Court of Appeals for the First Circuit requesting that the Court of Appeals
reverse each of the orders described above. The parties are currently briefing
the issues before the Court of Appeals. We believe the claims asserted in this
action, and the plaintiffs' pending appeal, are without merit and intend to
continue to defend ourselves vigorously in this action. We further believe
that this litigation will not have a material adverse effect on our business
and results of operations, although we cannot assure you as to the ultimate
outcome of these matters.
In December 1993, CMC Industries retained the services of a consultant to
assist in quantifying the potential exposure to CMC in connection with clean-
up and related costs of a former manufacturing site. This site is commonly
known as the ITT Telecommunications site in Milan, Tennessee. The consultant
initially estimated that the cost to remove and dispose of the contaminated
soil would be approximately $200,000. CMC subsequently entered into a
voluntary agreement to investigate the site with the Tennessee Department of
Environment and Conservation. In addition, CMC agreed to reimburse a tenant of
the site $115,000 for expenditures previously incurred to investigate
environmental conditions at the site. CMC recorded a total provision of
$320,000 based on these estimates. In fiscal 1995, an environmental consultant
estimated that the cost of a full study combined with short and long term
remediation of the site may cost between $3.0 and $4.0 million. Subsequent
environmental studies done in fiscal 1999 have estimated such costs as between
$750,000 and $3.5 million. During CMC's fiscal 1996, the State of Tennessee's
Department of Environment and Conservation named certain potentially
responsible parties in relation to the former facility. CMC was not named as a
potentially responsible party. However, Alcatel, Inc., a potentially
responsible party named by the State of Tennessee's Department of Environment
and Conversation and a former owner of CMC, sought indemnification from CMC
under the purchase agreement by which CMC acquired the stock of one of the
operators of the facility. To date, Alcatel has not filed any legal
proceedings to enforce its indemnification claim. However, Alcatel could
initiate such proceedings and other third parties could assert claims against
us relating to remediation of the site. We have entered into an agreement with
Alcatel pursuant to which the statute of limitations on its indemnification
claim is tolled for a period of time. In the event any proceedings are
initiated
10
<PAGE>
or any claim is made, we would defend ourselves vigorously but defense or
resolution of this matter could negatively impact our financial position and
results of operations.
In connection with a fiscal 1996 staff reduction by CMC, a number of
terminated employees subsequently claimed that CMC had engaged in age
discrimination in their dismissal and sought damages of varying amounts. CMC
defended the actual and threatened claims vigorously during fiscal 1998
incurring approximately $275,000 in legal costs over the course of the year.
On August 6, 1998, a judgment was rendered in favor of one plaintiff, in the
amount of $127,000 which CMC subsequently settled for $112,000. A second
plaintiff's claim for $53,000 was filed and subsequently settled for $48,500.
The EEOC negotiated with CMC to reach a monetary settlement for other
potential claimants. Without admitting any liability, CMC entered into a
Conciliation Agreement with the EEOC and agreed to pay approximately $500,000
to settle all such claims and limit future litigation costs. As a result of
these events and the significant ongoing costs to defend these claims, in
October 1998, CMC concluded that its interest would be best served to settle
all such matters. CMC reserved $975,000 to resolve all such claims, which
represented its best estimate of funds to ultimately be paid to such
claimants. This charge was recorded in CMC's fiscal year ended July 31, 1998.
On June 15, 1999, we received written notice from legal counsel for the
Lemelson Medical, Education & Research Foundation, Limited Partnership
alleging that we were infringing certain patents held by the Lemelson
Foundation Partnership and offering to license such patents to us. We entered
into a perpetual patent license agreement with the Lemelson Foundation
Partnership in February 2000.
From time to time, we are also subject to claims or litigation incidental to
our business. We do not believe that any incidental claims or litigation will
have a material adverse effect on our results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year ended
December 31, 1999 to a vote of security holders of ACT, through the
solicitation of proxies or otherwise.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq National Market under the symbol
"ACTM." The following table sets forth the high and low bid information for
the common stock as reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1999
First quarter................................................. $ 19.13 $ 12.88
Second quarter................................................ 17.25 11.88
Third quarter................................................. 28.19 13.50
Fourth quarter................................................ 39.31 19.69
1998
First quarter................................................. 18.06 9.50
Second quarter................................................ 13.13 6.13
Third quarter................................................. 12.81 5.91
Fourth quarter................................................ 14.75 5.06
</TABLE>
On March 24, 2000, the closing price of our common stock on The Nasdaq
National Market was $48.75 per share. As of March 24, 2000, there were
approximately 132 holders of record of our common stock, which does not
include stockholders for whom shares were held in a nominee or street name.
11
<PAGE>
We did not pay any cash dividends on our common stock during the periods
shown above. We presently do not anticipate paying any cash dividends in the
foreseeable future. We presently intend to retain future earnings, if any, to
finance the expansion and growth of our business. Our bank credit facility
prohibits the payment of cash dividends on our capital stock. See note 5 of
notes to our consolidated financial statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The data set forth below has been restated to give retroactive effect to the
merger of ACT Manufacturing, Inc. and CMC Industries, Inc. on July 29, 1999
which has been accounted for as a pooling of interests as described in note 1
to our consolidated financial statements. The selected consolidated financial
data set forth below for the fiscal years ended December 31, 1999, 1998 and
1997 and the consolidated balance sheet data as of December 31, 1999 and 1998
are derived from our audited consolidated financial statements, which are
included elsewhere in this Annual Report on Form 10-K. The selected
consolidated financial data for the fiscal years ended December 31, 1996 and
1995 and the consolidated balance sheet data as of December 31, 1997, 1996 and
1995 are derived from the combination of our respective audited consolidated
financial statements that are not included in this Annual Report on Form 10-K.
You should read the data set forth below in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the related notes
appearing elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31, (1) (2)
---------------------------------------------
1999 1998 1997 1996 1995 (3)
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net sales...................... $696,282 $592,484 $479,139 $390,611 $259,961
Cost of goods sold............. 641,856 556,339 454,203 351,485 238,140
-------- -------- -------- -------- --------
Gross profit................... 54,426 36,145 24,936 39,126 21,821
Selling, general and
administrative expenses....... 29,536 27,383 24,516 18,268 13,744
Restructuring costs............ -- -- -- 792 --
Merger costs (4)............... 5,601 -- -- -- --
-------- -------- -------- -------- --------
Operating income............... 19,289 8,762 420 20,066 8,077
Interest and other expense,
net........................... 5,262 3,625 4,056 2,936 1,623
-------- -------- -------- -------- --------
Income (loss) before provision
for income taxes.............. 14,027 5,137 (3,636) 17,130 6,454
Provision (benefit) for income
taxes......................... 7,793 2,044 (1,235) 6,868 1,948
-------- -------- -------- -------- --------
Net income (loss).............. $ 6,234 $ 3,093 $ (2,401) $ 10,262 $ 4,506
======== ======== ======== ======== ========
Net income (loss) per common
share:
Basic.......................... $ 0.47 $ 0.24 $ (0.19) $ 0.86 $ 0.41
Diluted........................ $ 0.45 $ 0.24 $ (0.19) $ 0.84 $ 0.39
Weighted-average shares
outstanding:
Basic.......................... 13,265 12,665 12,330 11,880 11,101
Diluted........................ 13,916 12,976 12,330 12,237 11,461
<CAPTION>
As of December 31, (1) (2)
---------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working capital................ $170,420 $ 86,059 $ 55,894 $ 92,005 $ 56,809
Total assets................... 402,326 238,294 208,573 175,029 127,058
Long-term debt, less current
portion (5)................... 49,332 42,014 4,817 34,966 8,591
Total debt (5)................. 53,361 62,604 59,938 43,496 20,501
Total stockholders' equity..... 178,129 91,460 84,103 78,234 64,026
</TABLE>
12
<PAGE>
- --------
(1) ACT prepares its consolidated financial statements on the basis of a
fiscal year ending December 31 and CMC prepared its consolidated financial
statements on the basis of a fiscal year ending July 31. The consolidated
statements of operations data for each of the four years in the period
ended December 31, 1998 (referred to as "fiscal" 1998, 1997 1996, and
1995) reflect such information for ACT for the years then ended combined
with such information for CMC for the years ended July 31, 1998, 1997,
1996 and 1995. The consolidated balance sheet data as of December 31,
1998, 1997, 1996 and 1995 reflects such information of ACT as of those
dates combined with such information of CMC as of July 31, 1998, 1997,
1996 and 1995. The consolidated statements of operations data and the
consolidated balance sheet data as of December 31, 1999 reflect such
information of ACT and CMC for the year then ended. The consolidated
financial statements have been adjusted to reflect the conforming of CMC's
accounting policy with that of ACT's by expensing previously capitalized
preoperating and start-up costs associated with CMC's Mexican
manufacturing facility. The adjustment also gives effect to the tax
deductibility of these expenses.
(2) As a result of ACT and CMC having different fiscal years, a summary of
CMC's condensed consolidated results of operations for the five-month
period from August 1, 1998 through December 31, 1998 are reported
separately, as follows:
<TABLE>
<S> <C>
Condensed Consolidated Statement of Operations Data (in
thousands):
Net sales..................................................... $122,423
Cost of sales................................................. 119,733
--------
Gross profit.................................................. 2,690
Selling, general and administrative expenses.................. 5,409
--------
Loss from operations.......................................... (2,719)
Interest expense.............................................. 691
--------
Loss before taxes............................................. (3,410)
Income tax benefit............................................ (1,279)
--------
Net loss...................................................... $ (2,131)
========
</TABLE>
This condensed consolidated statement of operations data of CMC for the
period August 1, 1998 through December 31, 1998 does not reflect any
adjustment to conform CMC's accounting policy with that of ACT's with
respect to capitalized preoperating and start-up costs associated with
CMC's Mexican manufacturing facility. The effect of this adjustment would
be to reduce cost of sales by $100,000 and reduce net loss by $60,000.
(3) ACT operated as an S corporation for income tax purposes from November 1,
1987 to March 28, 1995. Accordingly, during that period, ACT had not been
subject to federal income taxes and had been subject to certain state
income taxes at a reduced rate. Therefore, net income for the year ended
December 31, 1995 is presented on a pro forma basis as if ACT had been a C
corporation for the period presented. ACT's pro forma net income per
common share for 1995 reflects the assumed issuance of 650,000 shares that
ACT would have needed to issue at the initial public offering price of
ACT's common stock to fund the distribution of all previously taxed but
undistributed S corporation earnings to ACT's stockholders through March
28, 1995, which was approximately $7.8 million.
(4) Merger costs relating to the acquisition of CMC are comprised primarily of
investment banking, legal, accounting, printing, integration and other
fees and expenses directly related to the merger.
(5) Includes capital lease obligations.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis together with our
consolidated financial statements and related notes included elsewhere in this
Annual Report on Form 10-K. This Annual Report on Form 10-K, including the
following discussion, contains trend analysis and other forward-looking
statements within the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Any statements in this Annual Report on Form
10-K that are not statements of historical facts are forward-looking
statements. These forward-looking statements are based on a number of
assumptions and involve risks and uncertainties. Our actual results may differ
materially from those indicated in such forward-looking statements as a result
of the factors set forth elsewhere in this Annual Report on Form 10-K,
including under "Year 2000 Readiness Disclosure Statement" and "Cautionary
Statements."
Overview
We are a leading provider of value-added electronics manufacturing services
to original equipment manufacturers (OEMs) in the networking and
telecommunications, computer and industrial and medical equipment markets. We
provide OEMs with complex printed circuit board assembly, primarily utilizing
advanced surface mount technology, electro-mechanical sub-assembly, total
system assembly and integration, and mechanical and molded cable and harness
assembly. We target and have developed a particular expertise in serving
emerging and established OEMs who require moderate volume production runs of
complex, leading-edge commercial market applications. These applications are
generally characterized by multiple configurations and high printed circuit
board densities. As a result, they generally require technologically-advanced
and flexible manufacturing as well as a high degree of other value-added
services. As an integral part of our offerings to customers, we provide the
following value-added services: new product introduction services, advanced
manufacturing and test engineering, flexible materials management,
comprehensive test services, product diagnostics and repair, packaging, order
fulfillment and distribution services.
We currently manufacture at ten facilities having an aggregate of
approximately 1.0 million square feet. Of our leased manufacturing facilities,
five of the facilities are located in Massachusetts and one facility is
located in each of Santa Clara, California; Lawrenceville, Georgia; Corinth,
Mississippi; and Dublin, Ireland. We also own a 4.4-acre tract of land and a
110,000 square foot manufacturing facility on that property in Hermosillo,
Mexico. All of our manufacturing facilities have been certified to the ISO
9002 international quality standard, except our Corinth, Mississippi facility
which has been certified to the ISO 9001 international quality standard. We
commenced operations in a 126,000 square foot, newly leased facility in
Massachusetts in the first quarter of 2000. This new facility has not been
certified to the ISO 9001 or 9002 international quality standards, although we
expect that it will be certified in the near future. We have signed a lease
for a new 202,000 square foot facility in San Jose, California that is under
construction. We plan to move our existing Santa Clara operations and the
equipment and assets we purchased from GSS/Array to this new facility and
expect to begin operations in this new facility in the fourth quarter of
fiscal 2000. Our facilities contain 54 surface mount technology lines.
We recognize revenue upon shipment to customers or otherwise, under certain
contracts, when title to and reward of ownership pass to the customer. We
generally do not obtain long-term purchase orders or commitments from our
customers. Instead, we work closely with our customers to anticipate delivery
dates and future volume of orders based on customer forecasts. The level and
timing of orders placed by our customers vary due to:
. customer attempts to manage inventory;
. changes in the customer's manufacturing strategy; and
. variation in demand for customer products due to, among other things,
introduction of new products, product life cycles, competitive conditions
or industry or general economic conditions.
14
<PAGE>
We may purchase components for product assemblies based on customer
forecasts. Our policy is that customers are generally responsible for
materials and associated acquisition costs in the event of a significant
reduction, delay or cancellation of orders from the forecasted amounts.
Recent and Pending Business and Asset Acquisitions
On March 15, 2000, we entered into a Pre-Tender Agreement for the
acquisition of GSS Array Technology Public Company Limited (GSS Thailand), a
Thailand company publicly traded on the Stock Exchange of Thailand. Under the
terms of the agreement, GSS Thailand would be delisted from the Stock Exchange
of Thailand and we would then make a cash tender offer for all issued shares
and outstanding options of GSS Thailand for approximately $93.0 million at the
exchange rate in effect between the Thai Baht and the U.S. Dollar on March 15,
2000. We also have the option to make the cash tender offer prior to the
delisting of GSS Thailand from the Stock Exchange of Thailand. Holders of
approximately 23% of GSS Thailand's outstanding shares have agreed to tender
their issued shares and outstanding options to ACT. We expect to close the
acquisition in the third quarter of fiscal 2000, however, the acquisition is
subject to various regulatory approvals and other closing conditions. We
cannot assure you that these closing conditions will be satisfied, and we
therefore may not consummate this acquisition of GSS Thailand on a timely
basis or at all.
On October 12, 1999, we acquired certain inventory and fixed assets of
GSS/Array Technology, Inc., located in San Jose, California, for approximately
$12.9 million in cash and the assumption of $0.6 million in liabilities, which
we financed primarily from our bank credit facility. The purchase of these
assets did not constitute the acquisition of a business. GSS/Array Technology,
Inc. was a subsidiary of GSS Thailand. We have assumed on-going relationships
with select GSS/Array domestic customers and hired select employees. See note
2 of notes to our consolidated financial statements.
On July 29, 1999, we completed our merger with CMC Industries, Inc., a
provider of electronics manufacturing services to OEMs in the
telecommunications, computer and electronics industries. CMC operated
manufacturing facilities in Santa Clara, California, Corinth, Mississippi and
Hermosillo, Mexico. As a result of the merger, CMC became our wholly owned
subsidiary. Under the terms of the merger agreement, each share of CMC common
stock was exchanged for 0.5 of a share of our common stock and all CMC stock
options were assumed by us. We issued approximately 3.9 million shares of
common stock, and reserved approximately 0.9 million shares of common stock
for future issuance under CMC's 1990 Equity Incentive Plan, pursuant to the
merger. The merger has been accounted for as a pooling of interests.
Accordingly, our consolidated financial statements for prior periods have been
restated to include the operating results and financial position of CMC at the
beginning of the earliest period presented.
ACT prepares its consolidated financial statements on the basis of a fiscal
year ending December 31 and CMC prepared its consolidated financial statements
on the basis of a fiscal year ending July 31. The consolidated statements of
operations, comprehensive income (loss) and cash flows for the years ended
December 31, 1997 and 1998 (referred to as "fiscal" 1997 and 1998) reflect the
results of operations, comprehensive income (loss) and cash flows for ACT for
the years then ended combined with the results of operations and cash flows
for CMC for the years ended July 31, 1997 and 1998. The consolidated balance
sheet as of December 31, 1998 reflects the financial position of ACT as of
that date combined with the financial position of CMC as of July 31, 1998. The
consolidated statements of operations data, comprehensive income (loss) and
the consolidated balance sheet data as of December 31, 1999 reflect the
results of operations and financial position of ACT and CMC for the year then
ended. As a result of ACT and CMC having different fiscal years, CMC's
condensed consolidated results of operations and cash flows for the five-month
period from August 1, 1998 through December 31, 1998 are reported separately
in this Annual Report on Form 10-K. The consolidated financial statements have
been adjusted to reflect the conforming of CMC's accounting policy with that
of ACT's by expensing previously capitalized preoperating and start-up costs
associated with CMC's Mexican manufacturing facility. The adjustment also
gives effect to the tax deductibility of these expenses. See note 1 of notes
to our consolidated financial statements.
In June 1997, we acquired substantially all of the assets and liabilities of
Electronic Systems International, located in Georgia, a provider of
electronics manufacturing services to OEMs based primarily in the southeastern
15
<PAGE>
United States. We issued 186,100 shares of our common stock, valued at that
time at approximately $5.1 million, to purchase the ESI business. In 1997, we
also acquired Advanced Component Technologies Limited (formerly SignMax
Limited), located in Dublin, Ireland, a provider of electronics manufacturing
services primarily consisting of cable and harness assembly. We acquired this
business for approximately $2.0 million in cash and assumed liabilities. We
have since expanded our manufacturing facility in Ireland to include a printed
circuit board operation utilizing primarily surface mount technology. The
operating results of these acquired businesses are included from the dates of
purchase in our consolidated statement of operations for the year ended
December 31, 1997. See note 2 of notes to our consolidated financial
statements.
Results of Operations
The following table sets forth certain consolidated statement of operations
data as a percentage of net sales for each period indicated. The table and the
discussion below should be read in conjunction with our consolidated financial
statements and the related notes appearing elsewhere in this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
Fiscal Year Ended December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0 %
Cost of goods sold....................... 92.2 93.9 94.8
---------- ---------- ----------
Gross profit............................. 7.8 6.1 5.2
Selling, general and administrative
expenses................................ 4.2 4.6 5.1
Merger costs............................. 0.8 -- --
---------- ---------- ----------
Operating income......................... 2.8 1.5 0.1
Interest and other expense, net.......... 0.8 0.6 0.9
---------- ---------- ----------
Income (loss) before provision for income
taxes................................... 2.0 0.9 (0.8)
Provision (benefit) for income taxes..... 1.1 0.4 (0.3)
---------- ---------- ----------
Net income (loss)........................ 0.9% 0.5% (0.5)%
========== ========== ==========
</TABLE>
We provide electronics manufacturing services to customers in the networking
and telecommunications, computer and industrial and medical equipment markets.
The percentage of net sales by market for fiscal 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
Percentage of
Net Sales
----------------
Market 1999 1998 1997
- ------ ---- ---- ----
<S> <C> <C> <C>
Networking and Telecommunications............................. 66% 58% 66%
Computer...................................................... 25 32 23
Industrial and Medical........................................ 9 10 11
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Our net sales increased $103.8 million or 17.5% to $696.3 million in fiscal
1999 from $592.5 million for fiscal 1998. The increase was attributable to an
expansion of business in our printed circuit board assembly service offering
of $102.4 million, of which approximately $7.7 million resulted from the
GSS/Array acquisition. Approximately $71.5 million of the net increase was
from new customers and the remainder was due to increased business from
existing customers.
Net sales in the printed circuit board assembly service offering, including
value-added services such as systems integration, test, repair and order
fulfillment, as a percentage of net sales was approximately 95% and
16
<PAGE>
94% in fiscal 1999 and 1998, respectively. Net sales in our cable and harness
assembly service offering accounted for approximately 5% and 6% in fiscal 1999
and 1998, respectively.
Gross profit increased $18.3 million or 50.6% to $54.4 million in fiscal
1999 compared to $36.1 million for fiscal 1998. Gross profit as a percentage
of net sales, or gross margin, increased to 7.8% in fiscal 1999 from 6.1% in
fiscal 1998. The increase was primarily attributable to growth in sales
volume, an increase in sales with higher margins and an increase in absorption
of overhead in our Mexican facility.
Selling, general and administrative expenses increased $2.2 million or 7.9%
to $29.5 million compared with $27.4 million for fiscal 1998. SG&A expenses as
a percentage of net sales decreased to 4.2% from 4.6% in fiscal 1998. SG&A
expenses increased primarily to support the larger revenue base and
anticipated revenue growth.
Merger costs of $5.6 million related to the July 29, 1999 merger with CMC
Industries were recorded in fiscal 1999. These merger costs consisted
primarily of investment banking, legal, accounting, printing, integration and
other fees and expenses directly related to the merger.
Operating income increased $10.5 million to $19.3 million, or 2.8% of net
sales, compared with operating income of $8.8 million, or 1.5% of net sales,
for fiscal 1998 as a result of the above factors.
Interest and other expense, net increased $1.6 million to $5.3 million
compared to $3.7 million for fiscal 1998. The increase was due to higher
average working capital requirements resulting in higher average loan balances
in fiscal 1999, higher interest rates during fiscal 1999 and interest on
capital leases entered into in fiscal 1999.
We recorded a provision for income taxes of $7.8 million and $2.0 million in
fiscal 1999 and 1998, respectively. The effective income tax rate was 55.6% in
fiscal 1999 and 39.8% in fiscal 1998. The increase in the fiscal 1999
effective income tax rate was primarily attributable to the effects of non-
deductible merger costs.
Fiscal 1998 Compared to Fiscal 1997
Our net sales increased $113.4 million or 23.7% to $592.5 million in fiscal
1998 from $479.1 million in fiscal 1997. The increase was attributed
principally to an expansion of printed circuit board assembly business from
existing and new customers. Customers representing 10% or more of our net
sales in fiscal 1998 were Nortel Networks (12%) and Micron Electronics (12%)
as compared to Nortel Networks (17%) in fiscal 1997.
Net sales in the printed circuit board assembly product line, including
system integration, test, repair and order fulfillment, as a percentage of net
sales was approximately 94% in each of fiscal 1998 and fiscal 1997. Net sales
in the cable and harness assembly product line accounted for approximately 6%
of net sales in each of fiscal 1998 and fiscal 1997.
Gross profit increased $11.2 million or 45.0% to $36.1 million in fiscal
1998 compared to $24.9 million in fiscal 1997. Gross margin increased to 6.1%
in fiscal 1998 from 5.2% in fiscal 1997. Within fiscal 1998, gross margin was
5.0%, 5.7%, 6.9% and 7.0% in the first, second, third and fourth quarters.
This sequential improvement was due primarily to the positive impact of our
cost management programs and a favorable product mix offset in part by an
increase in costs of materials as a percentage of cost of goods sold in our
Mississippi operation. In addition, fiscal 1997 gross profit was impacted by a
charge relating to an inventory shortfall identified at the end of fiscal 1997
of approximately $13.1 million which was included in cost of goods sold, and
by the effect of a $989,000 write-off of certain inventory balances to cost of
goods sold.
Selling, general and administrative expenses increased $2.9 million or 11.7%
to $27.4 million in fiscal 1998 from $24.5 million in fiscal 1997. SG&A
expenses as a percentage of net sales decreased to 4.6% in fiscal 1998 from
5.1% in fiscal 1997. SG&A expenses in fiscal 1998 included a $1.3 million
charge for defense and settlement of certain claims of age discrimination
resulting from a September 1995 workforce reduction at CMC.
17
<PAGE>
Without admitting any liability, CMC agreed to enter into a Conciliation
Agreement with the EEOC to settle claims related to this matter and limit
future litigation costs. SG&A expenses in fiscal 1997 included a bad debt
reserve of $1.7 million for terminated customers and $600,000 for costs of
investigating the inventory shortfall. Although SG&A expenses decreased as a
percentage of net sales, these expenses increased in absolute dollars in
fiscal 1998 primarily due to our increase in net sales.
Operating income increased $8.3 million to $8.8 million, or 1.5% of net
sales, in fiscal 1998, compared with operating income of $420,000 in fiscal
1997 as a result of the previously discussed factors.
Interest and other expense, net decreased $431,000 to $3.6 million for
fiscal 1998 from $4.1 million for fiscal 1997. The decrease resulted
principally from reduced average borrowings on our credit facilities and lower
average interest rates in fiscal 1998 compared to fiscal 1997.
We recorded a provision for income taxes of $2.0 million in fiscal 1998
compared to a benefit for income taxes of $1.2 million in fiscal 1997. The
effective income tax rate was 39.8% in fiscal 1998 and 34.0% in fiscal 1997.
The 1997 tax benefit was provided at 34% primarily due to the effects of non-
deductible expenses and the differences in pre-tax income earned in various
jurisdictions in which we do business.
CMC Results of Operations for the Five Months Ended December 31, 1998
For the five months ended December 31, 1998, CMC generated gross profit of
$2.7 million on total net sales of $122.4 million. The gross margin of 2.2%
was lower than CMC's historical gross margin primarily because of the loss of
two customers, Micron Electronics and Global Village Communications, offset by
net sales to new customers and expanded business with existing customers at
lower margins. Gross profit was also adversely affected by increases in
manufacturing overhead costs incurred in anticipation of higher sales volumes
and inefficiencies associated with the initiation of new manufacturing
projects. The net loss for the five months ended December 31, 1998 of $2.1
million did not include any one time, non-recurring charges.
Liquidity and Capital Resources
We had working capital of $170.4 million at December 31, 1999 compared with
$86.1 million at December 31, 1998. Operating activities used $48.9 million of
cash in fiscal 1999 compared with cash provided by operations of $11.7 million
in fiscal 1998. The primary use of cash by operating activities for fiscal
1999 was an increase in both inventory and accounts receivable, partially
offset by an increase in accounts payable. Inventory increased $89.2 million
to $171.8 million and accounts receivable increased $44.1 million to $153.4
million, while accounts payable increased $56.2 million to $153.8 million, as
of December 31, 1999. These increases in inventory and accounts payable are
the result of continued sequential quarterly revenue growth, purchasing
strategies to prevent shortages of key components and reflect inventory
requirements to support first quarter 2000 customer demand. The increase in
accounts receivable is primarily due to sales revenue generated later in the
fourth quarter of 1999 than in the fourth quarter of fiscal 1998.
On July 29, 1999, we announced that we had executed an Amended and Restated
Credit Agreement for a new $107.0 million Senior Secured Credit Facility with
a group of banks led by The Chase Manhattan Bank as agent to replace our
previous credit facilities with the banks. This new credit facility provides
for a $7.0 million, five-year term loan and a $100.0 million five-year line of
credit, both of which are secured by substantially all of our assets. At
December 31, 1999, $41.3 million of the credit facility was utilized and an
additional $58.7 million was available for use based upon the applicable
borrowing base and the full term loan was utilized. At December 31, 1999, the
interest rate on the $7.0 million term loan was 7.89%, the rate on $17.0
million of the line of credit was 6.76% and the rate on the remainder of the
line of credit was 8.75%. The term loan amortizes at a rate of $1.0 million
per year for the first year and $1.5 million per year for years two through
five. We made $0.3 million in principal payments on the $7.0 million term loan
in fiscal 1999. The credit facility also provides for borrowings up to an
aggregate amount of $100.0 million, limited to a percentage of qualified
accounts receivable
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and qualified inventory. Interest is payable monthly. For the term loan, we
may choose an interest rate of either 2.5% above the prevailing London
Interbank Offering Rate (LIBOR), or 0.5% above the prime rate as announced by
the agent. For the revolving credit facility, we may choose an interest rate
of either 2.25% above the prevailing LIBOR rate, or 0.25% above the prime rate
as announced by the agent. In addition to certain other prohibited actions,
the credit facility limits our capital expenditures and prohibits the payment
of cash dividends on our common stock. The credit facility also requires us to
maintain certain minimum fixed charge coverage ratios and maximum leverage
ratios.
We received net proceeds of $79.9 million from the sale of our common stock
in fiscal 1999. On November 22, 1999, we sold 3,022,500 shares of our common
stock in a public offering. Net proceeds of $73.3 million from this sale were
principally used to reduce our indebtedness under our bank credit facility and
for general corporate purposes. The remaining $6.6 million of net proceeds
from the sale of our common stock were primarily the result of the exercise of
employee stock options.
We are a party to a $17.0 million interest rate swap in order to fix the
interest rate on a portion of our outstanding borrowings under the bank credit
facility. The swap agreement provides for payments by us at a fixed rate of
interest of 6.76% and matures on October 19, 2001. The fair value of the
interest rate swap at December 31, 1999 was approximately $(56,000) since the
fixed rate of 6.76% was higher than the floating rate. The swap agreement was
terminated on March 24, 2000.
Capital expenditures of $6.7 million for fiscal 1999 were primarily for the
acquisition of equipment related to operations.
We lease a manufacturing facility and certain equipment and computer
software used in our manufacturing operations under capital lease agreements
that expire through 2003. During the first quarter of 1999, we refinanced
approximately $2.6 million of our then existing operating leases and
classified these leases as capital leases in the accompanying consolidated
balance sheet for fiscal 1999. The effect of this refinancing on our results
of operations will not differ materially from the previous lease financing
arrangements.
At December 31, 1999, we had equipment lease lines of approximately $13.0
million available for purchases of manufacturing equipment, computer hardware
and software and furniture.
We sold 575,000 shares of common stock of eOn Communications (formerly
Cortelco), a related party, for net proceeds of approximately $6.4 million in
the first quarter of 2000. The accounting for the gain on the sale of the eOn
investment will be recorded in the fiscal 2000 financial statements.
Our need for, cost of and access to funds are dependent in the long-term on
our future operating results as well as conditions external to us. We may
require additional capital to finance further acquisitions or other
enhancements to or expansions of our manufacturing capacity. Although no
assurance can be given that any additional financing will be available on
terms satisfactory to us, we may seek additional funds from time to time
through public or private debt or equity offerings, or through further bank
borrowings or through equipment lease financing. We believe that our current
sources of liquidity are adequate to support our anticipated liquidity needs
for the next twelve months.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," amended in June 1999 and effective for fiscal years
beginning after June 15, 2000. The new standard requires that all companies
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Our management is currently
assessing the impact of SFAS No. 133 on our consolidated financial statements.
We will adopt this accounting standard on January 1, 2001, as required.
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Year 2000 Readiness Disclosure Statement
We have not experienced any material disruption in our operations as a
result of the Year 2000 issue, although it is possible that we could still
experience such a disruption. We incurred approximately $500,000 in costs in
assessing and correcting our internal hardware, software, equipment and
embedded technology. We used our working capital and available lease lines to
fund our Year 2000 project costs.
Cautionary Statements
The Private Securities Litigation Reform Act of 1995 (the Act) contains
certain safe harbors regarding forward-looking statements. From time to time,
information we provide or statements made by our employees may contain
forward-looking information. Any statements in this Annual Report on Form 10-K
that are not statements of historical fact are forward-looking statements. In
some cases you can identify these statements by forward-looking words such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"should," "will," and "would" or other similar words. You should read
statements that contain these words carefully because they discuss our future,
expectations, contain projections of our future results of operations or of
our financial position or state other forward-looking information. The
following cautionary statements should be considered carefully in evaluating
our business. The factors discussed in these cautionary statements, among
other factors, provide examples of risks, uncertainties and events that could
cause our actual results to differ materially from those contained in the
forward-looking statements made in this Annual Report on Form 10-K and
presented elsewhere by management from time to time. These cautionary
statements are being made pursuant to the provisions of the Act and with the
intention of obtaining the benefits of the safe harbor provisions of the Act.
Risks Related to Acquisitions
We may not close the acquisition of GSS Thailand.
The closing of the acquisition of GSS Thailand is subject to various closing
conditions including, among other things:
. the occurrence of all necessary government approvals, filings and
registrations;
. the shareholders of GSS Thailand voting in favor of the delisting of the
ordinary shares from the Stock Exchange of Thailand and the
transferability of the outstanding options to ACT, based on ACT's
obligation to make the tender offer;
. GSS Thailand obtaining a waiver from the Board of Investment relating to
its factory premises at Ayudhaya;
. no material breach of the Pre-Tender Offer Agreement before the launching
of the tender offer;
. no material adverse change in the business, condition (financial or
otherwise) or results of operation of GSS Thailand and/or reduction in
the value and/or assets of GSS Thailand (excluding changes occasioned by
(i) events affecting the contract electronic manufacturing industry as a
whole and (ii) fluctuations in the Baht/U.S. dollar exchange rate), prior
to the launch of the tender offer by ACT; and
. no proposal or offer for a tender offer for the shares of GSS Thailand
which is publicly announced and, in the judgment of the board of
directors of GSS Thailand, would result in a transaction more favorable
to the shareholders than the ACT offer, which causes GSS Thailand's board
to withdraw or adversely modify its recommendations to the shareholders
and optionholders for the delisting of the shares and the acceptance of
the tender offer.
If the Stock Exchange of Thailand accepts the delisting application of GSS
Thailand, we will be required to commence our tender offer for all issued
shares and outstanding options of GSS Thailand at the price per share set
forth in the Pre-Tender Agreement, and may not terminate our offer or lower
the purchase price based on adverse developments in the business, condition or
results of operations of GSS Thailand or otherwise. As part
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of the Pre-Tender Agreement, holders of approximately 23% of GSS Thailand's
outstanding shares agreed to tender their shares and options in ACT's tender
offer. However, we cannot assure you that these closing conditions will be
satisfied or that we will consummate the acquisition of GSS Thailand on a
timely basis or at all. Even if we consummate the GSS Thailand acquisition, we
may not realize any of the anticipated benefits of the acquisition.
Additional benefits from the merger with CMC Industries may not occur.
We completed the merger with CMC Industries with the expectation that the
merger would result in certain benefits, including:
. the opportunity to generate revenue from new customers that require an
electronics manufacturing services provider to have a minimum size and
geographic coverage;
. opportunities to increase revenues from our current customers by
providing a lower cost alternative and a broader geographic presence;
. operating efficiencies such as combined managerial, sales, marketing and
technological expertise and personnel; and
. other synergies due to the strategic fit and compatibility of the two
companies, including their common equipment platforms and information
systems.
We may not realize all of the anticipated benefits of the merger.
Integrating CMC's operations and personnel with our business has been and
continues to be a complex and difficult process. Achieving the benefits of the
merger will depend upon the successful integration of CMC's business in an
efficient and timely manner. The integration of CMC with our operations could
require additional costs and expenses as well as demands on management
personnel. The diversion of the attention of our management and any
difficulties encountered in the process of combining our companies could cause
the disruption of, or a loss of momentum in, our activities.
We may fail to make additional acquisitions and may not successfully integrate
acquisitions we do make, which could impair our ability to compete and our
operating results.
In light of the consolidation trend in our industry, we intend to pursue
selective acquisitions of additional electronics manufacturing services
providers, facilities, assets or businesses. We may compete for acquisition
opportunities with entities having significantly greater resources than us. As
a result, we may not succeed in acquiring some or all of the companies,
facilities, assets or businesses that we seek to acquire. Failure to
consummate additional acquisitions may prevent us from accumulating sufficient
critical mass required by customers in this consolidating industry. This
failure could significantly impact our ability to effectively compete in our
targeted markets and could negatively affect our results of operations.
Moreover, acquisitions that we do complete may result in:
. the potentially dilutive issuance of common stock or other equity
instruments;
. the incurrence of debt and amortization expenses related to goodwill and
other intangible assets; or
. the incurrence of significant costs and expenses.
Acquisition transactions, including our pending acquisition of GSS Thailand,
also involve numerous business risks, including:
. difficulties in assimilating the acquired operations, technologies,
personnel and products;
. difficulties in managing geographically dispersed and international
operations;
. the diversion of management's attention from other business concerns;
. the potential disruption of our business; and
. the potential loss of key employees.
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Risks Related to Our Operations
Our business may suffer if the networking and telecommunications segments of
the electronics industry fail to grow and evolve.
Our customer base has historically been concentrated in a limited number of
segments within the electronics industry. Net sales to customers within the
networking and telecommunications segments accounted for approximately 66% of
our net sales in fiscal 1999, 58% in fiscal 1998, and 66% in fiscal 1997.
Developments adverse to these industry segments could materially and
negatively impact us. These industry segments, and the electronics industry as
a whole, experience:
. intense competition;
. rapid technological changes resulting in short product life-cycles and
consequent product obsolescence;
. significant fluctuations in product demand;
. economic cycles, including recessionary periods; and
. consolidation.
A recessionary period or other event leading to excess capacity affecting
one or more segments of the electronics industry we serve would likely result
in intensified price competition, reduced margins and a decrease in our net
sales.
The loss of major customers could adversely affect us.
We depend on a small number of customers for a significant portion of our
business. Our five largest customers accounted for approximately 52% of our
net sales in fiscal 1999. For fiscal 1999, each of Nortel Networks (formerly
Bay Networks and Aptis Communications) and S-3 Incorporated (formerly Diamond
Multimedia) accounted for 10% or more of our net sales (15% and 13%,
respectively).
Customers representing 10% or more of our net sales in fiscal 1998 were
Nortel Networks and Micron Electronics, each with approximately 12%, as
compared to Nortel Networks with 17% of our net sales in fiscal 1997. The
timing and level of orders from our customers varies substantially from period
to period. The historic level of net sales we have received from a specific
customer in one particular period is not necessarily indicative of net sales
we may receive from that customer in any future period.
Our results may depend on our ability to diversify our customer base and
reduce our reliance on particular customers. Our major customers may not
continue to purchase products and services from us at current levels or at
all. In particular, we terminated our business with Ascend, which was acquired
by Lucent Technologies, in the fourth quarter of fiscal 1999 and we
experienced a significant decrease in sales to Micron in the third quarter of
fiscal 1998. For various reasons, including consolidation in our customers'
industries, we have in the past and will continue in the future to terminate
or lose relationships with customers. We may not be able to expand our
customer base to make up any sales shortfalls from our major customers so as
to increase overall net sales. Because certain customers represent such a
large part of our business, any of the following could negatively impact our
business:
. the loss of one or more major customers;
. a significant reduction or delay in purchases from any major customer;
. discontinuance by any major customer of the sale of products we
manufacture;
. a reduction in demand for the products of major customers that we
manufacture; or
. the inability or unwillingness of a major customer to pay for products
and services on a timely basis or at all.
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Our customers do not enter into long-term purchase orders or commitments, and
cancellations, reductions or delays in customer orders would adversely affect
our profitability.
The level and timing of orders placed by our customers vary due to:
. customer attempts to manage inventory;
. changes in the customers' manufacturing strategy, such as a decision by a
customer to either diversify or consolidate the number of electronics
manufacturing services providers used or to manufacture their products
internally; and
. variation in demand for customer products.
We generally do not obtain long-term purchase orders or commitments from our
customers. Instead, we work closely with our customers to anticipate delivery
dates and future volume of orders based on customer forecasts. We rely on our
estimates of anticipated future volumes when making commitments regarding:
. the levels of business that we will seek and accept;
. the timing of production schedules;
. the purchase of materials;
. the purchase or leasing of facilities and equipment; and
. the levels and utilization of personnel and other resources.
Customers may cancel, reduce or delay orders that were either previously
made or anticipated for a variety of reasons. Significant or numerous
terminations, reductions or delays in our customers' orders could negatively
impact our operating results. We often purchase components for product
assemblies based on customer forecasts, at times without a written customer
commitment to pay for them. Our policy is that customers are generally
responsible for materials and associated acquisition costs in the event of a
significant reduction, delay or cancellation of orders from the forecasted
amounts. A customer's unwillingness or inability to reimburse us for materials
costs in the case of a significant variance from forecast could adversely
affect our operating results.
Increased competition may result in decreased demand or prices for our
services.
The electronics manufacturing services industry is highly competitive. We
compete against numerous U.S. and foreign electronics manufacturing services
providers with global operations, as well as those who operate on a local or
regional basis. In addition, current and prospective customers continually
evaluate the merits of manufacturing products internally. Consolidation in the
electronics manufacturing services industry results in a continually changing
competitive landscape. The consolidation trend in the industry also results in
larger and more geographically diverse competitors who have significant
combined resources with which to compete against us. Some of our competitors
have substantially greater managerial, manufacturing, engineering, technical,
financial, systems, sales and marketing resources than we do. These
competitors may:
. respond more quickly to new or emerging technologies;
. have greater name recognition, critical mass and geographic and market
presence;
. be better able to take advantage of acquisition opportunities;
. adapt more quickly to changes in customer requirements; and
. devote greater resources to the development, promotion and sale of their
services.
We may be operating at a cost disadvantage compared to manufacturers who
have greater direct buying power from component suppliers, distributors and
raw material suppliers or who have lower cost structures. Our manufacturing
processes are generally not subject to significant proprietary protection, and
companies with greater resources or a greater geographic and market presence
may enter our market or increase their competition with us. Increased
competition from existing or potential competitors could result in price
reductions, reduced margins or loss of market share.
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We may not be able to obtain raw materials or components for our assemblies on
a timely basis or at all.
We rely on a single or limited number of third-party suppliers for many
proprietary and other components used in the assembly process. We do not have
any long-term supply agreements. Shortages of materials and components have
occurred from time to time and will likely occur in the future. In particular,
we are currently experiencing a shortage in components such as tantalum and
ceramic capacitors, flash memory, and dynamic and static ram. Raw materials or
component shortages could result in shipping delays or increased prices which
could adversely affect our ability to manufacture products for our customers
on a timely basis or at acceptable cost. Moreover, the consolidation trend in
our suppliers' industry results in changes in supply relationships and in the
price, availability and quality of components and raw materials. Due to our
utilization of just-in-time inventory techniques, the timely availability of
many components is dependent on our ability to both develop accurate forecasts
of customer requirements and manage the materials supply chain. If we fail to
do either, our operating results may suffer.
Operating in foreign countries exposes us to increased risks.
We acquired in fiscal 1997, and then subsequently expanded in fiscal 1998,
operations in Dublin, Ireland. As a result of our merger with CMC, we acquired
operations in Hermosillo, Mexico and a procurement office in Taiwan. We may in
the future expand into other international regions. We have limited experience
in managing geographically dispersed operations and in operating in Europe,
Mexico or Asia. We also purchase a significant number of components
manufactured in foreign countries. Because of the scope of our international
operations, we are subject to the following risks which could materially
impact our results of operations:
. economic or political instability;
. transportation delays and interruptions;
. foreign exchange rate fluctuations;
. increased employee turnover and labor unrest;
. longer payment cycles;
. greater difficulty in collecting accounts receivable;
. utilization of different systems and equipment;
. difficulties in staffing and managing foreign personnel and diverse
cultures; and
. less developed infrastructures.
In addition, changes in policies by the U.S. or foreign governments could
negatively affect our operating results due to:
. increased duties;
. increased regulatory requirements;
. higher taxation;
. currency conversion limitations;
. restrictions on the transfer of funds;
. the imposition of or increase in tariffs; or
. limitations on imports or exports.
Also, we could be adversely affected if our host countries revise their
current policies encouraging foreign investment or foreign trade.
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Our business could suffer if we lose the services of, or fail to attract, key
personnel.
Our future success largely depends upon the skills and efforts of John A.
Pino, Chairman of the Board, President and Chief Executive Officer, our other
key executives and our managerial, manufacturing, sales and technical
employees. With the exception of Jack O'Rear, Vice President of Operations,
and a small number of sales people, we have not entered into employment
contracts or noncompetition agreements with any of our senior management or
other key employees. We do not maintain or plan to acquire any key-man life
insurance on any of our key personnel. The loss of services of any of our
executives or other key personnel could negatively affect our business. Our
continued growth will also require us to attract, motivate, train and retain
additional skilled and experienced managerial, manufacturing, sales and
technical personnel. We face intense competition for such personnel. We may
not be able to attract, motivate and retain personnel with the skills and
experience needed to successfully manage our business and operations.
We may not be able to maintain our technological and manufacturing process
expertise.
The markets for our manufacturing services are characterized by rapidly
changing technology and evolving process development. The continued success of
our business will depend upon our ability to:
. maintain and enhance our technological capabilities;
. develop and market manufacturing services which meet changing customer
needs; and
. successfully anticipate or respond to technological changes in
manufacturing processes on a cost-effective and timely basis.
Although we believe that our operations utilize the assembly and testing
technologies, equipment and processes currently required by our customers, we
cannot be certain that we will develop capabilities required by our customers
in the future. Also, the emergence of new technologies, industry standards or
customer requirements may render our equipment, inventory or processes
obsolete or noncompetitive. In addition, we may have to acquire new assembly
and testing technologies and equipment to remain competitive. The acquisition
and implementation of new technologies and equipment may require significant
expense or capital investment. Our failure to anticipate and adapt to our
customers' changing technological needs and requirements would have an adverse
effect on our business.
We may incur significant liabilities if we fail to comply with environmental
regulations.
We are subject to environmental regulations relating to the use, storage,
discharge, site cleanup, and disposal of hazardous chemicals used in our
manufacturing processes. If we fail to comply with present and future
regulations, or are required to perform site remediation, we could be subject
to future liabilities or the suspension of production. Present and future
regulations may also:
. restrict our ability to expand our facilities;
. require us to acquire costly equipment; or
. require us to incur other significant costs and expenses.
Products we manufacture may contain design or manufacturing defects which
could result in reduced demand for our services and liability claims against
us.
We manufacture products to our customers' specifications which are highly
complex and may at times contain design or manufacturing errors or failures.
Defects have been discovered in products we manufacture in the past and,
despite our quality control and quality assurance efforts, defects may occur
in the future. Defects in the products we manufacture, whether caused by a
design, manufacturing or component failure or error, may result in delayed
shipments to customers or reduced or cancelled customer orders. If these
defects occur in large quantities or too frequently, our business reputation
may also be impaired. In addition, these defects may result in liability
claims against us.
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Risks Related to our Expansion
Our operating results will depend on our ability to manage our growth.
We have grown rapidly in recent years and we expect to continue to expand
our operations. This growth has placed, and will continue to place,
significant strain on our management, operations, technical, financial,
systems, sales, marketing and other resources. For example, we identified a
significant inventory shortfall occurring in the fourth quarter of fiscal 1997
that substantially adversely affected our operating results for that period.
As a result of this shortfall, we reviewed and continue to review our security
procedures and operating and financial controls. Based upon such review, we
implemented enhanced security systems and inventory work-in-process tracking
systems. These systems may not be adequate or have the intended results. We
also implemented various cost management programs to enhance our
profitability. These programs may not result in the anticipated cost savings,
however. We will have to continue to invest in both our manufacturing
infrastructure to expand capacity and our operational, financial, and
management information systems. If we fail to manage our expected growth
effectively, the quality of our services and products and our operating
results could suffer significantly.
Expansion of our operations may negatively impact our business.
We may expand our operations by establishing or acquiring new manufacturing
facilities or by expanding capacity in our current facilities. We may expand
both in geographical areas in which we currently operate and in new
geographical areas within the United States and internationally. We have
recently begun operations in a new facility in Massachusetts and have signed a
lease for a new facility in California which is currently under construction
and which will enable us to consolidate and expand our operations. We expect
to begin operations in this new California facility in the fourth quarter of
fiscal 2000. We may not be able to find additional suitable facilities on a
timely basis or on terms satisfactory to us. Expansion of operations involves
numerous business risks, including:
. the inability to successfully integrate additional facilities or capacity
and to realize anticipated synergies, economies of scale or other value;
. difficulties in the timing of expansions, including delays in the
implementation of construction and manufacturing plans;
. the diversion of management's attention from other business areas during
the planning and implementation of expansions;
. the strain placed on our operational, financial, management, technical
and information systems and resources;
. disruption in manufacturing operations;
. the incurrence of significant costs and expenses; and
. the inability to locate enough customers or employees to support the
expansion.
Our results of operations could be adversely affected if the revenues
associated with new or expanded facilities are not sufficient to offset the
increased expenditures associated with the expansions.
We may fail to secure necessary additional financing.
We have made and will continue to make substantial capital expenditures to
expand our operations and remain competitive in the rapidly changing
electronics manufacturing services industry. Our future success may depend on
our ability to obtain additional financing and capital to support our
continued growth and operations. We may seek to raise capital by:
. issuing additional common stock or other equity instruments;
. issuing debt securities;
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. obtaining additional lease financings;
. increasing our lines of credit; or
. obtaining off-balance sheet financing.
We may not be able to obtain additional capital when we want or need it, and
capital may not be available on satisfactory terms. If we issue additional
equity securities or convertible debt to raise capital, it may be dilutive to
your ownership interest. Furthermore, any additional capital may have terms
and conditions that adversely affect our business, such as financial or
operating covenants.
Risks Related to our Common Stock
We anticipate that our net sales and operating results will fluctuate which
could affect the trading price of our common stock.
Our net sales and operating results have fluctuated and may continue to
fluctuate significantly from quarter to quarter. A substantial portion of our
net sales in a given quarter may depend on obtaining and fulfilling orders for
assemblies to be manufactured and shipped in the same quarter in which those
orders are received. Further, a significant portion of our net sales in a
given quarter may depend on assemblies configured, completed, packaged and
shipped in the final weeks of such quarter. In addition to the variability
resulting from the short-term nature of our customers' commitments, the
following factors may contribute to such fluctuations:
. fluctuations in demand for our services or the products we manufacture;
. shipment delays;
. interruptions in manufacturing caused by earthquakes or other natural
disasters;
. effectiveness in controlling manufacturing costs;
. changes in cost and availability of labor and components;
. inefficiencies in managing inventory and accounts receivable, including
inventory obsolescence and write-offs; and
. the levels at which we utilize our manufacturing capacity.
Our operating expenses are based on anticipated revenue levels and a high
percentage of our operating expenses are relatively fixed in the short term.
As a result, any unanticipated shortfall in revenue in a quarter would likely
adversely affect our operating results for that quarter. Also, changes in our
product assembly mix may cause our margins to fluctuate which could negatively
impact our results of operations for that period. Results of operations in any
period should not be considered indicative of the results to be expected for
any future period. It is likely that in one or more future periods our results
of operations will fail to meet the expectations of securities analysts or
investors, and the price of our common stock could decline significantly.
We may incur costs and liability related to potential or pending litigation.
On February 27, 1998, our company and several of our officers and directors
were named as defendants in a purported securities class action lawsuit filed
in the United States District Court for the District of Massachusetts. The
plaintiffs amended the complaint on October 16, 1998. The plaintiffs purport
to represent a class of all persons who purchased or otherwise acquired our
common stock in the period from April 17, 1997 through March 31, 1998. The
amended complaint alleges, among other things, that the defendants knowingly
made misstatements to the investing public about the value of our inventory
and the nature of our accounting practices. On December 15, 1998, we filed a
motion to dismiss the case in its entirety based on the pleadings. Our motion
to dismiss was granted without prejudice on May 27, 1999, and the case was
closed by the court on June 1, 1999. On June 28, 1999, the plaintiffs filed a
motion with the court seeking permission to file a second amended complaint.
We opposed that motion. On July 13, 1999, the court denied the plaintiffs'
motion to amend,
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noting "final judgment having entered in the case." On July 26, 1999, the
plaintiffs filed a motion with the court asking the court to extend the 30-day
period for filing an appeal of its ruling dismissing the case. We opposed that
motion as well, and the court denied the motion on August 10, 1999. The
plaintiffs have filed an appeal with the United States Court of Appeals for
the First Circuit requesting that the Court of Appeals reverse each of the
orders described above. The parties are currently briefing the issues before
the Court of Appeals. We believe the claims asserted in this action and the
plaintiffs' pending appeal are without merit and intend to continue to defend
ourselves vigorously in this action. However, a material adverse judgment in
such matter could cause our financial condition or operating results to
suffer.
In December 1993, CMC Industries retained the services of a consultant to
assist in quantifying the potential exposure to CMC in connection with clean-
up and related costs of a former manufacturing site. This site is commonly
known as the ITT Telecommunications site in Milan, Tennessee. The consultant
initially estimated that the cost to remove and dispose of the contaminated
soil would be approximately $200,000. CMC subsequently entered into a
voluntary agreement to investigate the site with the Tennessee Department of
Environment and Conservation. In addition, CMC agreed to reimburse a tenant of
the site $115,000 for expenditures previously incurred to investigate
environmental conditions at the site. CMC recorded a total provision of
$320,000 based on these estimates. In fiscal 1995, an environmental consultant
estimated that the cost of a full study combined with short- and long-term
remediation of the site may cost between $3.0 and $4.0 million. Subsequent
environmental studies done in fiscal 1999 have estimated such costs as between
$750,000 and $3.5 million. During CMC's fiscal 1996, the State of Tennessee's
Department of Environment and Conservation named certain potentially
responsible parties in relation to the former facility. CMC was not named as a
potentially responsible party. However, Alcatel, Inc., a potentially
responsible party named by the State of Tennessee's Department of Environment
and Conservation and a former owner of CMC, sought indemnification from CMC
under the purchase agreement by which CMC acquired the stock of one of the
operators of the facility. To date, Alcatel has not filed any legal
proceedings to enforce its indemnification claim. However, Alcatel could
initiate such proceedings and other third parties could assert claims against
us relating to remediation of the site. We have entered into an agreement with
Alcatel pursuant to which the statute of limitations on its indemnification
claim is tolled for a period of time. In the event any proceedings are
initiated or any claim is made, we would defend ourselves vigorously but
defense or resolution of this matter could negatively impact our financial
position and results of operations.
John A. Pino has significant influence over our company.
John A. Pino, Chairman of the Board, President and Chief Executive Officer,
and a number of trusts for his and his family's benefit, collectively
beneficially owns approximately 31% of our common stock. As a result, Mr. Pino
is able to exert significant influence over us through his ability to
influence the election of directors and all other matters that require action
by our stockholders. The voting power of Mr. Pino and these trusts could have
the effect of preventing or delaying a change in control of our company, which
Mr. Pino opposes even if our other stockholders believe it is in their best
interests.
The price of our common stock has been and may continue to be volatile.
The trading price of our common stock has been and may continue to be
volatile. From October 1, 1998 through March 24, 2000, our stock price has
fluctuated between a low of $5.06 per share and a high of $49.31 per share. On
March 24, 2000, the closing price for our common stock was $48.75. The price
of our common stock may fluctuate significantly in response to a number of
events and factors relating to our company, our competitors and the market for
our services, many of which are beyond our control, such as:
. quarterly variations in our operating results;
. announcements of new technological innovations, equipment or service
offerings by us or our competitors;
. announcements of new products or enhancement by our customers;
28
<PAGE>
. changes in financial estimates and recommendations by securities
analysts; and
. news relating to trends in our markets.
In addition, the stock market in general, and the market prices for
technology companies in particular, have experienced extreme volatility that
often has been unrelated to the operating performance of these companies.
These broad market and industry fluctuations may adversely affect the market
price of our common stock, regardless of our operating performance.
Recently, when the market price of a stock has been volatile, holders of
that stock have often instituted securities class action litigation against
the company that issued the stock. We have been the subject of such a lawsuit.
If any of our stockholders brought another securities class action lawsuit
against us, we could incur substantial additional costs defending that
lawsuit. The lawsuit could also divert the time and attention of our
management and an adverse judgment could cause our financial condition or
operating results to suffer.
It may be difficult for a third party to acquire our company, and this could
depress the trading price of our common stock.
Massachusetts corporate law and our articles of organization and by-laws
contain provisions that could have the effect of delaying, deferring or
preventing a change in control of our company or our management. These
provisions could discourage proxy contests and make it more difficult for you
and other stockholders to elect directors and take other corporate actions.
These provisions could also limit the price that investors might be willing to
pay in the future for shares of our common stock. These provisions:
. authorize the issuance of "blank check" preferred stock, which is
preferred stock that can be created and issued by our board of directors
without prior stockholder approval, with rights senior to those of common
stock;
. provide for a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
. require unanimity for stockholder action by written consent; and
. establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to changes in interest rates and foreign currency exchange
primarily in our cash, debt and foreign currency transactions. We do not hold
derivative financial instruments for trading or speculative purposes.
We have a $107.0 million Senior Secured Credit Facility which bears interest
at variable interest rates. We have a $17.0 million interest rate swap
agreement which matures in October 2001 in order to reduce the impact of
fluctuating interest rates on our credit facility. This swap agreement is
classified as held for purposes other than trading. Under this swap agreement,
we have agreed with the counterpart to pay fixed rate payments on a monthly
basis, based upon an annual interest rate of 6.76%, in exchange for receiving
variable rate payments on a monthly basis, calculated on an agreed-upon
notional amount. Net interest payments or receipts from interest rate swaps
are recorded as adjustments to interest expense in our condensed consolidated
statements of operations. The swap agreement was terminated on March 24, 2000.
Our exposure related to adverse movements in interest rates is primarily
derived from the variable rate on the remainder of our credit facility. As of
December 31, 1999, $17.0 million of the outstanding balance of $41.3 million
under the credit facility was at a rate of 6.76% and the remainder of the
credit facility was at an 8.75% interest rate. Based on the portion of this
balance in excess of $17.0 million, an adverse change of one percent in the
interest rate would cause a change in interest expense of approximately
$243,000 on an annual basis.
29
<PAGE>
The foreign currencies to which we have exchange rate exposure are the Irish
punt and the Mexican peso. International operations do not currently
constitute a significant portion of our net sales or net assets. Therefore
this exposure is not considered material to us.
Based on a hypothetical ten percent adverse movement in interest rates and
foreign currency exchange rates, the potential losses in future earnings, fair
value of the risk-sensitive financial instruments and cash flows are
immaterial. However, the actual effects of interest rates and foreign currency
exchange rates may differ materially from the hypothetical analysis.
30
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
The Company's Consolidated Financial Statements and the Independent Auditors'
Reports thereon are presented in the following pages. The Consolidated
Financial Statements filed in Item 8 are as follows:
Independent Auditors' Report
Report of Independent Accountants
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Comprehensive Income (Loss) for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
31
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
ACT Manufacturing, Inc.:
We have audited the consolidated balance sheets of ACT Manufacturing, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the consolidated financial
statement schedule listed in the index at Item 14 (a)(2). These consolidated
financial statements and consolidated financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and consolidated
financial statement schedule based on our audits. The consolidated financial
statements give retroactive effect to the merger of ACT Manufacturing, Inc.
and CMC Industries, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. We
did not audit the balance sheet of CMC Industries, Inc. as of July 31, 1998,
or the related statements of income, stockholders' equity, and cash flows of
CMC Industries, Inc. for each of the two years in the period ended July 31,
1998, which statements reflect total assets of $93,405,000 as of July 31,
1998, and total revenues of $301,955,000 and $214,485,000 for the years ended
July 31, 1998 and 1997, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for CMC Industries, Inc. for 1998 and 1997, is
based solely on the report of such other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of ACT Manufacturing, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principals generally
accepted in the United States of America. Also, in our opinion, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
Boston, Massachusetts
February 16, 2000, except as
to Note 14 which is dated
March 15, 2000
32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CMC Industries, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of income, of changes in stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of CMC
Industries, Inc. and its subsidiaries (not presented separately herein) at
July 31, 1998, and the results of their operations and their cash flows for
each of the two years in the period ended July 31, 1998, 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.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------------
PricewaterhouseCoopers LLP
Memphis, Tennessee
August 21, 1998, except as to
Note 14, which is as of
October 9, 1998
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CMC Industries, Inc.
In our opinion, the accompanying consolidated statements of operations, of
changes in stockholders' equity and of cash flows of CMC Industries, Inc. and
its subsidiaries (not presented separately herein) present fairly, in all
material respects, their operations and their cash flows for the five months
in the period ended December 31, 1998, 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 audit. We conducted our audit 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 audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1, CMC Industries, Inc. merged with Act Manufacturing,
Inc. on July 29, 1999. The merger was accounted for as a pooling of interests.
/s/ PricewaterhouseCoopers LLP ______
PricewaterhouseCoopers LLP
Memphis, Tennessee
June 21, 1999, except as to
Note 13, which is as of
July 29, 1999
34
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands,
except share
data)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 4,558 $ 10,670
Accounts receivable--trade (less allowance for doubtful
accounts of $2,939 in 1999 and $1,233 in 1998).......... 153,422 101,828
Accounts and notes receivable from related party......... 7,408 5,678
Inventory................................................ 171,762 65,612
Prepaid expenses and other assets........................ 2,925 4,204
Deferred tax asset....................................... 1,252 880
-------- --------
Total current assets................................... 341,327 188,872
Property and equipment--net................................ 38,047 32,279
Notes receivable--related party............................ 550 1,400
Goodwill--net.............................................. 10,334 6,224
Investment in related party................................ 5,884 5,884
Other assets--net.......................................... 6,184 3,635
-------- --------
Total.................................................. $402,326 $238,294
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable bank........................................ $ -- $ 18,111
Current portion of long-term debt........................ 1,125 1,300
Current portion of other long-term liabilities........... 2,972 1,236
Accounts payable......................................... 153,764 71,956
Accrued compensation and related taxes................... 3,769 3,404
Income tax payable....................................... 3,074 505
Deferred taxes........................................... 253 --
Accrued expenses and other............................... 5,950 6,301
-------- --------
Total current liabilities.............................. 170,907 102,813
Long-term debt-less current portion........................ 46,933 41,756
Deferred taxes............................................. 2,735 1,173
Other long-term liabilities................................ 3,622 1,092
Commitments and contingencies (Notes 12 and 13)............
Stockholders' Equity:
Preferred stock--$.01 par value; authorized, 5,000,000
shares; issued and outstanding, none.................... -- --
Common stock--$.01 par value; authorized, 50,000,000
shares; issued and outstanding, 16,465,771 shares in
1999 and 12,835,908 shares in 1998...................... 165 128
Additional paid-in capital............................... 157,887 74,960
Accumulated other comprehensive (loss)................... (637) (180)
Retained earnings........................................ 20,714 16,552
-------- --------
Total stockholders' equity............................. 178,129 91,460
-------- --------
Total................................................ $402,326 $238,294
======== ========
</TABLE>
See notes to consolidated financial statements.
35
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands, except per
share data)
<S> <C> <C> <C>
Net sales:
Unrelated parties............................. $671,061 $566,048 $447,827
Related parties............................... 25,221 26,436 31,312
-------- -------- --------
Total net sales............................. 696,282 592,484 479,139
-------- -------- --------
Cost of goods sold:
Unrelated parties............................. 618,653 532,018 425,396
Related parties............................... 23,203 24,321 28,807
-------- -------- --------
Total cost of goods sold.................... 641,856 556,339 454,203
-------- -------- --------
Gross profit.................................... 54,426 36,145 24,936
Selling, general and administrative expenses.... 29,536 27,383 24,516
Merger costs.................................... 5,601 -- --
-------- -------- --------
Operating income................................ 19,289 8,762 420
-------- -------- --------
Other income (expense):
Interest expense, net......................... (5,256) (3,718) (4,009)
Other, net.................................... (6) 93 (47)
-------- -------- --------
Total....................................... (5,262) (3,625) (4,056)
-------- -------- --------
Income (loss) before provision for income
taxes.......................................... 14,027 5,137 (3,636)
Provision (benefit) for income taxes............ 7,793 2,044 (1,235)
-------- -------- --------
Net income (loss)............................... $ 6,234 $ 3,093 $ (2,401)
======== ======== ========
Basic net income (loss) per common share........ $ 0.47 $ 0.24 $ (0.19)
-------- -------- --------
Diluted net income (loss) per common share...... $ 0.45 $ 0.24 $ (0.19)
-------- -------- --------
Weighted-average shares outstanding--basic...... 13,265 12,665 12,330
-------- -------- --------
Weighted-average shares outstanding--diluted.... 13,916 12,976 12,330
======== ======== ========
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net income (loss)............................... $ 6,234 $ 3,093 $ (2,401)
Other comprehensive income (loss):
Foreign currency translation adjustment....... (457) (184) 4
Minimum pension liability..................... -- -- 996
-------- -------- --------
Comprehensive income (loss)..................... $ 5,777 $ 2,909 $ (1,401)
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
$.01
Par Accumulated
Value Additional Other Total
Common Paid-in Comprehensive Retained Stockholders'
Stock Capital Income (Loss) Earnings Equity
------ ---------- ------------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1997................... $121 $ 63,249 $ (996) $15,860 $ 78,234
Net loss.............. -- -- -- (2,401) (2,401)
Minimum pension
liability............ -- -- 996 -- 996
Exercise of warrants.. -- 1,267 -- -- 1,267
Net proceeds from sale
of stock............. 2 376 -- -- 378
Issuance of stock for
acquisition.......... 2 5,248 -- -- 5,250
Cumulative foreign
currency translation
adjustments.......... -- -- 4 -- 4
Income tax benefit
from employees'
exercise of stock
options.............. -- 375 -- -- 375
---- -------- ------ ------- --------
Balance, December 31,
1997................... 125 70,515 4 13,459 84,103
Net income............ -- -- -- 3,093 3,093
Net proceeds from sale
of stock............. 3 4,567 -- -- 4,570
Cumulative foreign
currency translation
adjustments.......... -- -- (184) -- (184)
Cancellation of common
stock from
acquisition escrow... -- (122) -- -- (122)
---- -------- ------ ------- --------
Balance, December 31,
1998................... 128 74,960 (180) 16,552 91,460
CMC Industries, Inc.
and subsidiaries for
the five months ended
December 31, 1998:
Net loss............ -- -- -- (2,072) (2,072)
Minimum pension
liability
adjustment......... -- -- (1,511) -- (1,511)
Net proceeds from
the sale of stock.. 1 328 -- -- 329
Net income............ -- -- -- 6,234 6,234
Minimum pension
liability
adjustment........... -- -- 1,511 -- 1,511
Cumulative foreign
currency translation
adjustments.......... -- -- (457) -- (457)
Net proceeds from sale
of stock............. 36 79,912 -- -- 79,948
Income tax benefit
from employees'
exercise of stock
options.............. -- 2,687 -- -- 2,687
---- -------- ------ ------- --------
Balance, December 31,
1999................... $165 $157,887 $ (637) $20,714 $178,129
==== ======== ====== ======= ========
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $ 6,234 $ 3,093 $ (2,401)
Adjustments to reconcile net income (loss) to
net cash (used for) provided by operating
activities:
Depreciation and amortization.................. 7,541 4,884 3,587
Deferred income taxes.......................... 2,119 (764) 1,387
Provision for doubtful accounts................ 3,957 1,945 1,805
Loss on disposal of fixed assets............... -- 132 --
Increase (decrease) in cash from:
Accounts receivable--trade.................... (44,086) (26,771) (16,932)
Inventory..................................... (89,158) 4,239 7,684
Prepaid expenses and other assets............. 636 (2,632) (2,415)
Accounts payable.............................. 56,213 17,463 10,743
Accrued compensation and related taxes........ 879 (194) 130
Income tax refundable (payable)............... 5,256 8,922 (9,977)
Accrued expenses and other.................... 1,540 1,372 980
-------- -------- --------
Net cash (used for) provided by operating
activities.................................. (48,869) 11,689 (5,409)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment........... (6,729) (17,450) (4,820)
Increase in other noncurrent assets............. (3,727) (632) (153)
Proceeds from the sale of property and
equipment...................................... -- 111 --
Acquisitions, net of cash acquired.............. (12,875) -- (2,388)
-------- -------- --------
Net cash used for investing activities....... (23,439) (17,971) (7,361)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Repayments) borrowings under line-of-credit
agreements, net................................ (13,363) 4,612 15,712
Proceeds under term loan........................ 7,000 -- --
Payments under term loan........................ (250) -- --
Principal payments on long-term debt............ (3,017) (1,300) (1,300)
Repayments of other long-term liabilities....... (867) (692) (2,337)
Receipt of deferred revenue..................... 540 483 --
Net proceeds from sale of stock................. 79,948 4,570 2,085
-------- -------- --------
Net cash provided by financing activities.... 69,991 7,673 14,160
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS..................................... (469) (184) 42
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (1,848) 1,207 1,432
NET DECREASE IN CASH, CMC INDUSTRIES, INC. AND
SUBSIDIARIES FOR THE FIVE MONTHS ENDED
DECEMBER 31, 1998............................... (4,264) -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR..... 10,670 9,463 8,031
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR........... $ 4,558 $ 10,670 $ 9,463
======== ======== ========
</TABLE>
38
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business--ACT Manufacturing, Inc. and Subsidiaries (the "Company"
or "ACT") provide value-added electronics manufacturing services for original
equipment manufacturers in the networking and telecommunications, computer and
industrial and medical equipment markets. The Company provides original
equipment manufacturers with complex printed circuit board assembly primarily
utilizing advanced surface mount technology, electro-mechanical subassembly,
total system assembly and integration, and mechanical and molded cable and
harness assembly.
Principles of Consolidation and Basis of Presentation--The consolidated
financial statements include the accounts of ACT Manufacturing, Inc. and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. On July 29, 1999 the Company completed a
merger with CMC Industries, Inc. ("CMC") in which CMC became a wholly owned
subsidiary of ACT Manufacturing, Inc. The merger has been accounted for as a
pooling of interests, and accordingly, the Company's consolidated financial
statements for prior periods have been restated to include the operating
results, financial position and cash flows of CMC at the beginning of the
earliest period presented. In connection with the pooling, ACT issued 0.5 of a
share of ACT common stock for each outstanding share of CMC common stock. A
total of 3.9 million shares of ACT common stock were issued in connection with
the merger, and approximately 0.9 million shares of ACT common stock were
reserved for the conversion of CMC's outstanding stock options. Approximately
$5,601,000 in merger-related costs were charged to operations in the quarter
ended September 30, 1999.
ACT prepares its consolidated financial statements on the basis of a fiscal
year ending December 31, and CMC prepared its consolidated financial
statements on the basis of a fiscal year ending July 31. The consolidated
statements of operations, comprehensive income (loss) and cash flows for the
years ended December 31, 1998 and 1997 (herein referred to as "fiscal" 1998
and 1997) reflect the results of operations, comprehensive income (loss) and
cash flows for ACT for the years then ended combined with CMC for the years
ended July 31, 1998 and 1997, respectively. The consolidated balance sheet as
of December 31, 1998 reflects the financial position of ACT as of that date
combined with the financial position of CMC as of July 31, 1998.
As a result of ACT and CMC having different fiscal years, CMC's condensed
consolidated results of operations for the five-month period from August 1,
1998 through December 31, 1998 are reported separately. However, this
condensed consolidated statement of operations data of CMC, presented below,
for the period August 1, 1998 through December 31, 1998 does not reflect any
adjustment to conform CMC's accounting policy with that of ACT's of expensing
previously capitalized preoperating and start-up costs associated with CMC's
Mexican manufacturing facility. The effect of such adjustment would be to
reduce cost of goods sold by $100,000 and reduce net loss by $60,000. This
adjustment also gives effect to the tax deductibility of these expenses.
39
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
Condensed Consolidated Statement of Operations Data (in
thousands):
Net sales....................................................... $122,423
Cost of sales................................................... 119,733
--------
Gross profit.................................................... 2,690
Selling, general and administrative expenses.................... 5,409
--------
Loss from operations............................................ (2,719)
Interest expense................................................ 691
--------
Loss before taxes............................................... (3,410)
Income tax benefit.............................................. (1,279)
--------
Net loss........................................................ $ (2,131)
========
</TABLE>
Translation of Foreign Currency--The Company translates financial statements
denominated in foreign currency by translating balance sheet accounts at the
end of period exchange rate and statement of operations accounts at the
average exchange rate for the period. Where the local currency is the
functional currency, translation gains and losses are recorded as a separate
component of stockholders' equity in accumulated other comprehensive income
(loss) and transaction gains and losses are reflected in other income (loss)
in determining net income. Where the U. S. dollar is the functional currency,
all foreign currency gains and losses are included in determining net income.
Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates. Estimates include such
items as reserves for accounts receivable and inventory, useful lives of other
assets, goodwill, property and equipment, investment in related party and
accrued liabilities. Actual results could differ from those estimates.
Fair Value of Financial Instruments--Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments," requires disclosure of the fair value of certain financial
instruments. The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value
because of their short-term nature. The Company's bank debt, because it
carries a variable interest rate, is stated at its approximate fair market
value.
Derivatives--The Company has entered into an interest rate swap that
qualifies as a matched swap that is linked by designation with a balance sheet
liability and has opposite interest rate characteristics of such balance sheet
item. Matched interest rate swaps qualify for settlement accounting. Under
settlement accounting, periodic net cash settlements under the swap agreement
are recognized in income on an accrual basis. These settlements are offset
against interest expense in the consolidated statements of operations.
Revenue Recognition--Revenue is recognized upon shipment of the product or
otherwise, under certain contracts, when title to and risks and reward of
ownership pass to the customer.
Cash and Cash Equivalents--The Company considers all highly liquid debt
instruments purchased with original maturities of three months or less to be
cash equivalents.
Inventory--Inventory is stated at the lower of cost or market. Cost has been
determined using the first-in, first-out ("FIFO") method for approximately 72%
and 69% of the inventories at the end of fiscal 1999 and 1998, respectively,
with the remaining balance determined using the last-in, first-out ("LIFO")
method.
40
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment--Purchased property and equipment is recorded at
cost. Capital lease property and equipment is recorded at the lesser of cost
or the present value of the minimum lease payments required. Depreciation and
amortization is provided using the straight-line method over the estimated
useful lives of the related assets (three to thirty years) and over the terms
of the related leases (five years).
Goodwill--Goodwill is being amortized on a straight-line basis over a period
of ten to twenty years.
Investment in Related Party--The carrying amount of the investment in
preferred stock of a related party is based upon the present value of expected
cash flows. See Note 11.
Other Assets--Other assets include cash surrender value of officer's life
insurance, prepaid pension expense and noncompete agreements. The noncompete
agreements are being amortized over three to ten years.
Warranty--The Company generally warrants that its hardware assemblies will
be free from defects in workmanship for 12 months and passes on to the
customer any warranties provided by component manufacturers and material
suppliers to the extent permitted. Warranty costs have not been material to
date.
Income Taxes--The Company accounts for income taxes under SFAS No. 109,
"Accounting for Income Taxes." This Statement requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the Company's consolidated financial statements or
tax returns. Deferred tax liabilities and assets are determined based on the
difference between the financial statement carrying amounts and tax bases of
existing assets and liabilities, using enacted tax rates in effect in the
years in which the differences are expected to reverse.
Stock-Based Compensation--As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company accounts for stock option grants using
the intrinsic value method in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Net Income (Loss) Per Common Share--Basic net income (loss) per common share
is computed by dividing net income (loss) available to common stockholders by
the weighted average number of common shares outstanding for the period.
Diluted net income (loss) per common share reflects the potential dilution if
common equivalent shares outstanding (common stock options and warrants) were
exercised or converted into common stock unless the effects of such equivalent
shares were antidilutive.
41
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A reconciliation of net income (loss) per common share and the weighted
average shares used in the earnings per share ("EPS") calculations for fiscal
years 1999, 1998 and 1997 is as follows (in thousands except per share
amounts):
<TABLE>
<CAPTION>
Net Income Per
(Loss) Shares Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
1999
Basic........................................ $ 6,234 13,265 $ 0.47
=======
Effect of stock options...................... 651 $(0.02)
------ ------
Diluted...................................... $ 6,234 13,916 $ 0.45
======= ====== ======
1998
Basic........................................ $ 3,093 12,665 $ 0.24
=======
Effect of stock options...................... 311 --
------ ------
Diluted...................................... $ 3,093 12,976 $ 0.24
======= ====== ======
1997
Basic........................................ $(2,401) 12,330 $(0.19)
=======
Effect of stock options and warrants......... -- --
------ ------
Diluted...................................... $(2,401) 12,330 $(0.19)
======= ====== ======
</TABLE>
Options and warrants to purchase 228,501, 757,296 and 1,328,774 shares of
common stock were outstanding during fiscal 1999, 1998 and 1997, respectively,
but were not included in the computation of diluted EPS because of either the
net loss in fiscal 1997 or because the options' exercise prices were greater
than the average market prices of the common stock, and therefore, their
effect would be antidilutive.
Supplemental Cash Flow Information--Selected cash payments and noncash
activities for fiscal 1999, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Cash paid for interest................................... $5,176 $3,887 $3,795
Cash paid for (refunded from) income taxes............... 1,537 (7,686) 7,729
Noncash investing and financing activities:
Assets acquired in exchange for common stock........... -- -- 5,250
Reduction of goodwill upon cancellation of common stock
from acquisition escrow............................... -- 122 --
Receipt of stock as payment on account................. -- -- 441
</TABLE>
Impairment of Long-Lived Assets--At each balance sheet date, the Company
assesses whether there has been an impairment in the value of long-lived
assets by determining whether projected undiscounted cash flows generated by
the applicable asset exceeds its net book value as of the assessment date. At
the end of fiscal 1999 and 1998, subject to changes in circumstances, there
were no impairments of the Company's assets.
Comprehensive Income (Loss)--The Company adopted SFAS No. 130, "Reporting
Comprehensive Income" in fiscal 1998. SFAS No. 130 requires the reporting of
comprehensive income (loss), which in the case of the Company, is the
combination of reported net income, and the change in the cumulative
translation adjustment and the change in the minimum pension liability, which
is a component of stockholders' equity.
42
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Recently Issued Financial Accounting Standard--In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," amended in June 1999 and
effective for fiscal years beginning after June 15, 2000. The new standard
requires that all companies record derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether it qualifies for hedge accounting. Management is
currently assessing the impact of SFAS No. 133 on the consolidated financial
statements of the Company. The Company will adopt this accounting standard on
January 1, 2001, as required.
2. Acquisitions of Businesses and Assets
Business Acquisitions
Effective June 9, 1997, the Company acquired substantially all of the assets
and liabilities of Electronics Systems International ("ESI") located in
Georgia. ESI is an electronics manufacturing services provider to customers
throughout the southeastern United States. Under the terms of the purchase
agreement, the Company acquired assets and liabilities of ESI in exchange for
190,546 shares of the Company's common stock plus acquisition costs. In 1998
the Company cancelled 4,446 shares previously issued and held in escrow. The
per share market value of the Company's common stock on the date of the
purchase was $27.50.
Effective June 10, 1997, the Company acquired substantially all of the
outstanding stock of Advanced Component Technologies Limited (formerly SignMax
Limited), a cable and harness manufacturing company based in Dublin, Ireland.
Under the terms of the purchase agreement, approximately 82% of the
outstanding common shares of Advanced Component Technologies Limited (formerly
SignMax Limited) were acquired for cash of $1,000,000 plus acquisition costs.
Effective June 27, 1997, the Company acquired all of the outstanding stock
of SignMax America, LLC, which owned the remaining 18% of Advanced Component
Technologies Limited (formerly SignMax Limited). Under the terms of the
purchase agreement, 100% of the outstanding common shares were acquired for
cash of $460,000 and the assumption of $575,000 in notes payable.
The ESI and SignMax transactions were accounted for as purchases in
accordance with APB Opinion No. 16, "Business Combinations," as follows (in
thousands):
<TABLE>
<S> <C>
Details of Acquisitions:
Cash paid, net of cash acquired...................................... $ 1,455
Acquisition expenses................................................. 939
-------
Total cash paid.................................................... 2,394
Common stock issued.................................................. 5,250
-------
Total cash paid and common stock issued............................ 7,644
Liabilities assumed.................................................. 4,334
-------
Total purchase price of acquisitions............................... 11,978
Fair value of assets acquired........................................ 5,609
-------
Excess of purchase price over net assets........................... $ 6,369
=======
</TABLE>
The operating results of the ESI and SignMax acquired businesses from the
dates of purchase are included in the Company's Consolidated Statement of
Operations for fiscal 1997. The Consolidated Statement of Operations for
fiscal 1998 includes a full year of operations of these acquired businesses.
Pro forma information
43
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
has not been provided, as the operations of the acquired businesses were not
material to the consolidated results of operations or financial position of
the Company in fiscal 1997.
The Company attributes the goodwill to the expected ability to expand sales
in these new geographic markets, utilizing the acquired existing business
infrastructure and geographic market presence as a basis for expansion.
Accumulated amortization on these acquisitions amounted to approximately
$1,082,000 and $640,000 at the end of fiscal 1999 and 1998, respectively.
Asset Acquisition
Effective October 12, 1999, the Company acquired certain inventory and fixed
assets of GSS/Array Technology, Inc. located in San Jose, California, a
subsidiary of GSS Array Technology Public Company Limited, a Thailand company.
Under the terms of the purchase agreement, the Company assumed on going
relationships with select GSS/Array domestic customers.
The Company paid approximately $12,875,000 in cash and assumed $618,000 in
liabilities in connection with this asset purchase. The fair value of the
assets purchased was approximately $8,879,000. The Company recorded $4,614,000
as the excess of the asset purchase price over the fair value of assets
purchased. The operating results following the Company's purchase of the
selected GSS/Array assets from the date of purchase are included in the
Company's Consolidated Statement of Operations for fiscal 1999.
The Company attributes the goodwill to the expected future economic benefits
the acquisition of these assets is expected to provide. Accumulated
amortization on the acquisition of these assets amounted to approximately
$96,000 in fiscal 1999.
3. Inventory
Inventory consisted of the following at fiscal year end 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Raw materials.................................................. $125,869 $50,354
Work in process................................................ 42,039 12,511
Finished goods................................................. 3,854 2,747
-------- -------
Total........................................................ $171,762 $65,612
======== =======
</TABLE>
The carrying value of inventory approximates replacement cost.
44
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Property and Equipment
Property and equipment consisted of the following at fiscal year end 1999
and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Land.......................................................... $ 798 $ 798
Building...................................................... 4,922 4,622
Leasehold improvements........................................ 11,234 7,618
Manufacturing equipment....................................... 35,696 24,618
Office furniture and equipment................................ 9,311 7,856
Vehicles...................................................... 418 144
Construction-in-progress...................................... 1,026 2,838
------- -------
Total property and equipment................................ 63,405 48,494
Less accumulated depreciation and amortization................ (25,358) (16,215)
------- -------
Property and equipment--net................................. $38,047 $32,279
======= =======
</TABLE>
Included in property and equipment is a manufacturing facility and certain
equipment held under capital leases with a net carrying value of $5,745,000
and $1,615,950 at the end of fiscal 1999 and 1998, respectively.
The Company has capitalized interest in the amount of $40,000 and $171,000
at the end of fiscal 1999 and 1998, respectively, related to the construction-
in-progress.
5. Indebtedness
On July 29, 1999, the Company executed an Amended and Restated Credit
Agreement for a new $107.0 million Senior Secured Credit Facility ("Credit
Facility") with a group of banks led by The Chase Manhattan Bank as agent
("Agent") to replace the Company's previous credit facilities with the banks.
This new Credit Facility provides for a $7.0 million, five-year Term Loan
("Term Loan") and a $100.0 million, five-year Line of Credit ("Revolving
Credit Facility"), both of which are secured by substantially all of the
assets of the Company. The Term Loan shall amortize at a rate of $1.0 million
per year for the first year and $1.5 million per year for years two through
five. The Revolving Credit Facility provides for borrowings up to an aggregate
amount of $100.0 million, limited to a certain percentage of qualified
accounts receivable and qualified inventory. Interest is payable monthly. For
the Term Loan, the Company may choose an interest rate of either (i) 2.5%
above the prevailing London Interbank Offering Rate ("LIBOR"), or (ii) 0.5%
above the prime rate as announced by the Agent. For the Revolving Credit
Facility, the Company may choose an interest rate of either (i) 2.25% above
the prevailing LIBOR rate, or (ii) 0.25% above the prime rate as announced by
the Agent. In addition to certain other prohibited actions, the Credit
Facility limits capital expenditures by the Company and prohibits the payment
of cash dividends on the Company's common stock. The Credit Facility requires
the Company to maintain certain minimum fixed charge coverage ratios and
maximum leverage ratios. Outstanding borrowings under the Credit Facility are
secured primarily by the Company's accounts receivable, inventories, machinery
and equipment. The interest rates on the Term Loan and the Credit Facility
were 7.89% and 8.75%, respectively, at December 31, 1999. The balances
outstanding under the Term Loan and the Credit Facility at December 31, 1999
were $6.8 million and $41.3 million, respectively, and $58.7 million was
available for borrowing under the Credit Facility.
Previously, the Company had a total credit facility at the end of fiscal
1998 of $90.0 million including a $55.0 million Senior Secured Credit Facility
("Senior Credit Facility") with a financial institution and a $35.0 million
Loan and Security Agreement with another financial institution. The Company
executed the $55.0 million Senior Credit Facility in fiscal 1998 to replace
the $50.0 million Loan and Security Agreement then outstanding.
45
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company entered into a $17.0 million interest rate swap agreement in
fiscal 1998 simultaneous with the execution of the Senior Credit Facility. The
swap agreement provides for payments by the Company at a fixed rate of
interest of 6.76% and matures on October 19, 2001. The fair value of the
interest rate swap at December 31, 1999 was approximately $(56,000) since the
fixed rate of interest of 6.76% was higher than the floating rate.
The aggregate annual maturities of long-term debt at the end of fiscal 1999
are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................... $ 1,125
2001.................................................................... 1,500
2002.................................................................... 1,500
2003.................................................................... 1,500
2004.................................................................... 42,433
</TABLE>
6. Other Long-Term Liabilities
Other long-term liabilities consisted of the following at fiscal year end
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Noncompete covenant.............................................. $ 245 $ 303
Deferred revenue................................................. 1,023 483
Capital leases................................................... 5,303 1,437
Other noncurrent liabilities..................................... 23 105
------ ------
Total.......................................................... 6,594 2,328
Less current portion............................................. 2,972 1,236
------ ------
Other long-term liabilities.................................... $3,622 $1,092
====== ======
</TABLE>
Noncompete Covenant--In 1993, the Company entered into an agreement with its
former sole stockholder, which provides for monthly payments over a ten-year
period, in return for a promise not to compete. The liability is recorded at
the present value of the required future payments at an interest rate of 8%.
Deferred Revenue--The Company received grants of $540,000 and $483,000 in
fiscal 1999 and 1998, respectively, under an agreement with the Ireland
Industrial Development Agency. These payments have been recorded as deferred
revenue at the end of fiscal 1999 and 1998 since the Company will be required
to return the grants if certain conditions, including employment levels, are
not met by December 31, 2002.
Facility and Equipment Leases--The Company leases a manufacturing facility
and certain equipment and computer software used in its manufacturing
operations under capital lease agreements that expire through 2003.
46
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other long-term liabilities at the end of fiscal 1999 are due as follows (in
thousands):
<TABLE>
<CAPTION>
Noncompete Capital Deferred
Covenant Leases Revenue Other Total
---------- ------- -------- ----- ------
<S> <C> <C> <C> <C> <C>
2000.................................. $ 86 $3,207 $ -- $-- $3,293
2001.................................. 92 1,975 -- 23 2,090
2002.................................. 100 356 1,023 -- 1,479
2003.................................. -- 222 -- -- 222
2004.................................. -- -- -- -- --
---- ------ ------ ---- ------
Total............................... 278 5,760 1,023 23 7,084
Less amount representing interest..... 33 457 -- -- 490
---- ------ ------ ---- ------
Present value of minimum payments..... 245 5,303 1,023 23 6,594
Less current portion.................. 68 2,904 -- -- 2,972
---- ------ ------ ---- ------
Other long-term liabilities......... $177 $2,399 $1,023 $ 23 $3,622
==== ====== ====== ==== ======
</TABLE>
7. Income Taxes
The provisions (benefit) for income taxes for fiscal years 1999, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Current taxes:
Federal............................................ $5,538 $2,221 $(2,619)
State.............................................. 926 586 (3)
------ ------ -------
6,464 2,807 (2,622)
Deferred taxes....................................... 1,329 (763) 1,387
------ ------ -------
Total............................................ $7,793 $2,044 $(1,235)
====== ====== =======
</TABLE>
Deferred income tax assets (liabilities) are attributable to the following
for fiscal years 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Accounts receivable........................................ $ 918 $ 460
Inventory.................................................. (980) (2,239)
Depreciation............................................... (2,287) (2,231)
Accrued liabilities........................................ 868 1,568
Pension.................................................... (576) --
State operating loss and credits........................... -- 367
Minimum tax credit......................................... -- 594
Other...................................................... 321 1,188
------- ------
Net deferred tax liability............................... $(1,736) $ (293)
======= ======
</TABLE>
The net deferred tax liability is classified as follows at the end of the
fiscal years 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current asset, net........................................ $ 999 $ 880
Noncurrent liability...................................... (2,735) (1,173)
------- -------
Net deferred tax liability.............................. $(1,736) $ (293)
======= =======
</TABLE>
47
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
No valuation allowance is required as the deferred tax assets are expected
to be fully realized.
A reconciliation of the expected tax rate at the U.S. statutory rate to the
effective tax rate for the fiscal years indicated is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate....................................... 35% 34% (34)%
State income taxes, net of federal benefit................... 9 6 (6)
Nondeductible merger costs................................... 14 -- --
Adjustments to prior year tax liability...................... -- 1 --
Other........................................................ (2) (1) 6
--- --- ----
Effective rate............................................. 56% 40% (34)%
=== === ====
</TABLE>
For state income tax purposes, the Company has utilized all net operating
loss carryforwards as of fiscal year end 1999.
8. Capital Stock
Stock Option Plans
The Company has the 1995 Stock Plan, which provides for the grant of
incentive and nonqualified stock options to purchase up to an aggregate of
2,250,000 shares. The Company has a 1995 Non-Employee Director Stock Option
Plan that provides for the grant of options to purchase a maximum of 100,000
shares to nonemployee directors of the Company. The Company also has the 1993
Incentive Stock Option Plan under which options for up to 690,664 shares of
common stock may be granted at an exercise price not less than fair market
value at the date of grant. CMC's 1990 Equity Incentive Plan provides for the
granting of options to purchase a maximum of 950,052 shares. Options granted
under CMC's 1990 Equity Incentive Plan were converted to ACT options in
conjunction with the pooling. Such activity is incorporated in the activity
below. Stock option activity for the fiscal years indicated was as follows:
<TABLE>
<CAPTION>
Weighted- Weighted-
Number of Average Average
Options Exercise Price Fair Value
--------- -------------- ----------
<S> <C> <C> <C>
Outstanding at Beginning of Fiscal
1997................................. 810,008 $ 8.18
Granted............................. 772,750 22.97 $13.42
Exercised........................... (85,435) 9.57
Forfeited........................... (168,551) 20.31
--------- ------
Outstanding at End of Fiscal 1997..... 1,328,772 15.06
Granted............................. 1,246,750 12.92 6.95
Exercised........................... (42,290) 8.08
Forfeited........................... (571,578) 23.67
--------- ------
Outstanding at End of Fiscal 1998..... 1,961,654 11.38
Net CMC activity August 1 to
December 31, 1998.................. 47,630 11.33
Granted............................. 498,000 16.91 12.95
Exercised........................... (491,455) 11.84
Forfeited........................... (255,839) 13.52
--------- ------
Outstanding at End of Fiscal 1999..... 1,759,990 $12.11
========= ======
</TABLE>
48
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ---------------------------------
Weighted Average
Number of Range of Remaining Life Weighted-Average Number Currently
Options Exercise Price (In Years) Exercise Price Exercisable
--------- -------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
50,267 $ 0.48-$0.84 2 $ 0.60 50,267
49,266 3.70-3.96 4 3.88 49,266
448,069 5.45-8.00 7 7.07 246,589
302,060 8.75-12.25 7 11.08 127,552
711,828 13.64-20.25 8 16.35 162,179
198,500 20.74-27.13 9 22.23 11,085
--------- -------
1,759,990 646,938
========= =======
</TABLE>
The options generally vest over three- to five-year periods.
The Company has reserved shares for future grants of common stock for
issuance pursuant to the 1993 Incentive Stock Option Plan, 1995 Non-Employee
Director Stock Option Plan, the 1995 Stock Plan and the 1990 Equity Incentive
Plan for 450,800, 66,000, 1,012,600 and 209,400 shares, respectively.
In January 1998 the Board of Directors approved a vote to reprice 516,500
employee stock options. The options were originally issued between March 1997
and October 1997 and had original grant prices ranging between $14.44 and
$39.25. The grant price for these options was lowered to $13.94, which
reflects the market value of the stock as of the reprice date. The repriced
options continue to vest according to the original grant date. No compensation
expense was required to be recorded in the Consolidated Statements of
Operations.
As described in Note 1, the Company uses the intrinsic value method to
measure compensation expense associated with grants of stock options to
employees. Had the Company used the fair value method to measure compensation
for grants made after fiscal 1995, (including the repricing described above)
pro forma net income (loss) and net income (loss) per share for fiscal years
indicated would have been as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -------
<S> <C> <C> <C>
Net income (loss)................................... $4,167 $ (966) $(5,432)
====== ====== =======
Diluted earnings (loss) per common share............ $ 0.30 $(0.07) $ (0.43)
====== ====== =======
</TABLE>
The fair value of options on their grant date was measured using the
Black/Scholes option-pricing model. Key assumptions used to apply this pricing
model for the fiscal years indicated are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate.................... 5.9% 5.5% 6.0%
Expected life of option grants............. 3-5 years 3-5 years 3-5 years
Expected volatility of underlying stock.... 98% 102% 82%
</TABLE>
It should be noted that the option-pricing model used was designed to value
readily tradable stock options with relatively short lives. The options
granted to employees are not tradable and have contractual lives of up to ten
years. However, management believes that the assumptions used to value the
options and the model applied yield a reasonable estimate of the fair value of
the grants made under the circumstances.
49
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Private Placement
In 1998, CMC issued 250,000 shares of stock to two members of the board of
directors in a private placement. Proceeds from the issuance totaled
$3,620,000. The purchase price equaled the fair market value of the stock
issued.
Capitalization
On May 16, 1996, CMC issued 218,018 shares of common stock with detachable
warrants that entitle the holders to purchase 84,481 shares of common stock at
a price of $15.00 per share. The total proceeds for the shares and warrants
issued were $2,464,000 and $44,000, respectively. Due to the Company meeting
specified levels of financial performance, the warrants were called during
fiscal 1997. Total proceeds from the exercise of the warrants were $1,267,000.
Stock Purchase Plan
On November 15, 1996, CMC's stockholders approved the Employee Stock
Purchase Plan ("ESPP"). The ESPP allowed eligible employees the right to
purchase common stock on a semi-annual basis at the lower of 85% of the market
price at the beginning or end of each offering period. This plan was
terminated as a result of the merger of ACT and CMC on July 29, 1999.
Common Stock and Stock Option Plan Amendments
On July 29, 1999, the Company's shareholders approved an amendment to the
Restated Articles of Organization of ACT Manufacturing, Inc. to increase the
number of authorized shares of the Company's common stock, $0.01 par value,
from 30,000,000 to 50,000,000.
Also on July 29, 1999, the Company's shareholders approved an amendment to
the 1995 Stock Plan increasing the aggregate number of shares which may be
issued from 1,250,000 to 2,250,000 shares.
9. Employee Benefit Plans
Retirement Benefits
In 1999, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pension and Other Postretirement Benefits." The provisions of SFAS No. 132
provide new disclosure requirements for pensions and other postretirement
benefit plans, but do not change the measurement or recognition of these
plans. SFAS 132 standardizes the disclosure requirements for pensions and
other postretirment benefits to the extent practicable and requires additional
information on the changes in benefit obligations and fair values of plan
assets.
CMC maintains a defined benefit pension plan (the "Pension Plan") which
covers certain hourly employees at one plant. Retirement benefits under the
Pension Plan are based on an employee's length of service and a benefit
formula based on year of hire. The benefit formula does not include a
provision for increases in further compensation levels. Contributions to the
Pension Plan are primarily based on the projected unit actuarial cost method.
The Pension Plan's assets consist principally of short-term U.S. government
instruments and pooled fixed income, debt and equity investment funds with
several financial institutions. Effective June 1, 1994, the Company terminated
the future service payments for employees; accordingly, salary increase
assumptions are not applicable.
50
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The components of net periodic pension cost and related assumptions for
fiscal years 1999, 1998 and 1997 were as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Service cost............................................... $ -- $ -- $ --
Interest cost.............................................. 642 612 582
Return on plan assets...................................... (688) (671) (785)
Net amortization and deferral.............................. 157 157 270
----- ----- -----
Net periodic pension expense............................... $ 111 $ 98 $ 67
===== ===== =====
Discount rate.............................................. 8.00% 8.25% 8.25%
Long-term rate of return................................... 9.00% 8.00% 8.25%
</TABLE>
The following table sets forth changes in the projected benefit obligation
and changes in the value of Plan assets at fiscal year end (in thousands):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Changes in projected benefit obligation:
Benefit obligation at beginning of year......................... $7,712 $7,238
CMC net activity August 1 to December 31, 1998.................. 1,731 --
Service cost.................................................... -- --
Interest cost................................................... 642 612
Benefits paid................................................... (754) (678)
Loss due to census changes...................................... -- 540
Revaluation gain................................................ (972) --
------ ------
Benefit obligation at end of year............................. $8,359 $7,712
====== ======
Changes in plan assets:
Fair value of plan assets at beginning of year.................. $7,881 $7,375
CMC net activity August 1 to December 31, 1998.................. (36) --
Actual return on plan assets.................................... 949 671
Employer contributions.......................................... 394 513
Benefits paid................................................... (754) (678)
------ ------
Fair value of plan assets at end of year...................... $8,434 $7,881
====== ======
Funded status................................................... $ 75 $ 169
Unrecognized loss............................................... 1,368 1,261
------ ------
Prepaid pension cost.......................................... $1,443 $1,430
====== ======
</TABLE>
Under SFAS No. 87, the portion of deferred gains and losses in excess of 10%
of the projected benefit obligation is amortized as a component of net
periodic pension cost. If amortization is required, the period used is the
average remaining service period of active employees, which was approximately
12.39 years as of December 31, 1999.
Savings Plans
During fiscal 1994, the Company adopted a savings plan for its employees
pursuant to Section 401(k) of the Internal Revenue Code. Substantially all
employees are eligible to participate, and the plan allows a deferral ranging
from a minimum of 1% to the maximum percentage of compensation permitted by
law. Company
51
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
contributions to the plan are at the discretion of the Board of Directors.
Contributions to the Plan were $0, $0 and $50,000, in fiscal 1999, 1998 and
1997, respectively.
CMC had a profit sharing savings plan (the "Savings Plan") for employees of
CMC. Under the terms of the Savings Plan, employees may contribute from 2% to
16% of compensation and an additional elective amount. Effective June 30,
1994, the Company terminated matching employee contributions. The Company may
also elect to make an additional discretionary profit sharing contribution.
Effective January 1, 1996, the Savings Plan eligibility requirements were
amended to include all full-time employees with one hour of service. The
Company recorded no contributions in fiscal 1999, 1998 and 1997.
Medical Care and Disability Benefit Plans
The Company is self-insured with respect to certain medical care and
disability benefit plans for a percentage of its employees. The costs for such
plans are charged against earnings in the period incurred. The liability for
healthcare claims was $605,000 and $661,000 at fiscal year end 1999 and 1998
respectively, and the related expense incurred was $4,774,000, $4,265,000 and
$4,897,000 for fiscal 1999, 1998 and 1997, respectively. The Company does not
provide benefits under these plans to retired employees.
10. Major Customers and Operating Data
Sales to Nortel Networks (formerly Bay Networks and Aptis Communication) and
S-3 Corporation (formerly Diamond Multimedia) were 15% and 13%, respectively,
of the Company's fiscal 1999 net sales. In fiscal 1998, sales to Nortel
Networks and Micron Electronics were each approximately 12% of the Company's
net sales. In fiscal 1997 Nortel Networks accounted for approximately 17% of
the Company's net sales. All such sales relate to the printed circuit board
assembly service offering of the Company's business.
The Company operates as a single segment within the electronics
manufacturing services industry. A summary of the net sales for the Company's
principal service offerings for fiscal 1999, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Printed Circuit Boards.............................. $658,749 $556,348 $450,467
Cable and Harness................................... 37,533 36,136 28,672
-------- -------- --------
$696,282 $592,484 $479,139
======== ======== ========
</TABLE>
11. Transactions With Related Parties
The Company leases certain facilities and equipment from a realty trust
controlled by its principal stockholder under leases that expire in fiscal
2003. These commitments are included in Note 12. The Company pays all
operating costs of the building. Total payments to the realty trust were
approximately $388,000, $388,000 and $364,000 in fiscal 1999, 1998 and 1997,
respectively.
In fiscal 1993, the Company entered into a ten-year agreement with one of
its directors for future consulting services. Payments under the agreement
were approximately $302,000, $280,000 and $259,000 in fiscal 1999, 1998 and
1997, respectively. Future commitments under this agreement are approximately
$326,000 in fiscal 2000, $352,000 in fiscal 2001, $380,000 in fiscal 2002 and
$233,000 in fiscal 2003. The agreement expires in fiscal 2003. A noncompete
agreement was also entered into with the same individual (see Notes 1 and 6).
Payments under this agreement were $79,000, $73,000 and $68,000 in fiscal
1999, 1998 and 1997, respectively, with future payments totaling $279,000. All
of these payments were charged to the statement of operations in the year they
were incurred.
52
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In August 1993, CMC transferred certain assets and related liabilities
associated with its telephone business to Cortelco Systems Holding Corporation
("Cortelco"). Under a manufacturing services agreement which expired in fiscal
1998, CMC provided manufacturing services to Cortelco on a turnkey basis with
prices based on cost plus 8% for telephone products and cost plus 10% for
telecommunications systems products. Included in net sales for fiscal 1999,
1998 and 1997 were sales to Cortelco totaling $25,221,000, $26,436,000 and
$31,312,000, respectively. Total cost of sales for the same periods relating
to these sales to Cortelco were $23,203,000, $24,321,000 and $28,807,000,
respectively. CMC continues to provide services to Cortelco with prices
negotiated on a per contract basis.
In July of 1998, CMC converted certain accounts receivable from Cortelco
totaling $2,000,000 into a note receivable. Under the terms of the note,
Cortelco agrees to pay the balance over a three-year term with monthly
payments of $50,000 plus interest. Interest accrues on the note at a rate of
9.0% per annum. CMC continues to provide credit for manufacturing services
sold to Cortelco in the form of trade receivables.
In connection with the August 1993 transfer of assets and related
liabilities to Cortelco, CMC received preferred stock in Cortelco. The
Cortelco preferred stock was non-voting, had a liquidation preference of
$12.50 per share and entitled the Company to dividends which were non-
cumulative until August 1995 and thereafter cumulative at $0.75 per share for
each year in which Cortelco earned net income of $2.0 million or more. The
Company could, subject to certain restrictions, require Cortelco to redeem the
preferred stock, on a pro rata basis, over a five-year period beginning August
1999. The Company recorded the preferred stock at fair value, $5,884,000 in
1995, based on the discounted cash flow of the redemption requirements. The
excess cost basis of the net assets over the fair value of the preferred
shares received was recorded as a distribution of capital to CMC's
stockholders.
In March 1999, the Company consented to a restructuring of certain assets of
Cortelco. In connection with this restructuring, Cortelco distributed common
stock of Cortelco Systems, Inc. to its stockholders on a pro rata basis.
Pursuant to this distribution, CMC received its pro rata share which was equal
to 6,125,302 shares of common stock of Cortelco Systems.
During the fourth quarter of 1999, Cortelco Systems effected a 1-for-10
reverse stock split. The Company's investment in Cortelco was 612,530 shares
as a result of this stock split. Also in the fourth quarter of 1999, Cortelco
Systems changed its corporate name to eOn Communications Corporation ("eOn")
and filed a Form S-1 for the initial public offering of common stock.
On February 4, 2000, eOn completed an initial public offering of its common
stock and the Company sold 575,000 shares of common stock in eOn for
approximately $6.4 million. The accounting for the gain on the sale of the eOn
investment will be recorded in the fiscal 2000 financial statements.
53
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Operating Lease Commitments
The Company leases various plant and office equipment under noncancelable
operating leases expiring through 2007. Rent expense in fiscal 1999, 1998 and
1997 was approximately $17,628,000, $14,276,000 and $9,361,000, respectively.
The future minimum rental payments under these leases over the next five years
are approximately as follows (in thousands):
<TABLE>
<CAPTION>
Related-
Party Other
Commitments Commitments Total
----------- ----------- -------
<S> <C> <C> <C>
2000............................................ $ 364 $19,109 $19,473
2001............................................ 364 14,605 14,969
2002............................................ 364 10,795 11,159
2003............................................ 196 8,045 8,241
2004............................................ -- 3,420 3,420
------ ------- -------
Total......................................... $1,288 $55,974 $57,262
====== ======= =======
</TABLE>
The Company has equipment lease lines of approximately $13.0 million
available for purchases of manufacturing equipment, computer hardware and
software and furniture.
13. Contingencies
On June 15, 1999, we received written notice from legal counsel for the
Lemelson Medical, Education & Research Foundation, Limited Partnership
alleging that we were infringing certain patents held by the Lemelson
Foundation Partnership and offering to license such patents to us. We entered
into a perpetual patent license agreement with the Lemelson Foundation
Partnership in February 2000.
On February 27, 1998, the Company and several of the Company's officers and
directors were named as defendants in a purported securities class action
lawsuit filed in the United States District Court for the District of
Massachusetts. The plaintiffs amended the complaint on October 16, 1998. The
plaintiffs purport to represent a class of all persons who purchased or
otherwise acquired our common stock in the period from April 17, 1997 through
March 31, 1998. The amended complaint alleges, among other things, that the
defendants knowingly made misstatements to the investing public about the
value of the Company's inventory and the nature of its accounting practices.
On December 15, 1998, the Company filed a motion to dismiss the case in its
entirety based on the pleadings. The Company's motion to dismiss the purported
securities class action lawsuit was granted without prejudice on May 27, 1999
and the case was closed by the court on June 1, 1999. On June 29, 1999, the
plaintiffs filed a motion with the court seeking permission to file a second
amended complaint. The Company opposed that motion. On July 13, 1999, the
court denied the plaintiffs' motion to amend, noting "final judgment having
entered in the case." On July 26, 1999, the plaintiffs filed a motion with the
court asking the court to extend the 30-day period for filing an appeal of its
ruling dismissing the case. The Company opposed that motion as well, and the
court denied the motion on August 10, 1999. The plaintiffs have filed an
appeal with the United States Court of Appeals for the First Circuit
requesting that the Court of Appeals reverse each of the orders described
above. The parties are currently briefing the issues before the Court of
Appeals. The Company believes the claims asserted in this action, and the
plaintiffs' pending appeal, are without merit and intends to continue to
defend itself vigorously in this action. The Company further believes that
this litigation will not have a material adverse effect on the Company's
business and results of operations, although the Company cannot assure you as
to the ultimate outcome of these matters.
In December 1993, CMC Industries retained the services of a consultant to
assist in quantifying the potential exposure to CMC in connection with clean-
up and related costs of a former manufacturing site. This site is
54
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
commonly known as the ITT Telecommunications site in Milan, Tennessee. The
consultant initially estimated that the cost to remove and dispose of the
contaminated soil would be approximately $200,000. CMC subsequently entered
into a voluntary agreement to investigate the site with the Tennessee
Department of Environment and Conservation. In addition, CMC agreed to
reimburse a tenant of the site $115,000 for expenditures previously incurred
to investigate environmental conditions at the site. CMC recorded a total
provision of $320,000 based on these estimates. In fiscal 1995, an
environmental consultant estimated that the cost of a full study combined with
short- and long-term remediation of the site may cost between $3.0 and $4.0
million. Subsequent environmental studies done in 1999 have estimated such
costs as between $750,000 and $3.5 million. During CMC's fiscal 1996, the
State of Tennessee's Department of Environment and Conservation named certain
potentially responsible parties in relation to the former facility. CMC was
not named as a potentially responsible party. However, Alcatel, Inc., a
potentially responsible party named by the State of Tennessee's Department of
Environment and Conversation and a former owner of CMC, sought indemnification
from CMC under the purchase agreement by which CMC acquired the stock of one
of the operators of the facility. To date, Alcatel has not filed any legal
proceedings to enforce its indemnification claim. However, Alcatel could
initiate such proceedings and other third parties could assert claims against
us relating to remediation of the site. We have entered into an agreement with
Alcatel pursuant to which the statute of limitations on its indemnification
claim is tolled for a period of time. In the event any proceedings are
initiated or any claims made, the Company would defend itself vigorously but
defense or resolution of this matter could negatively impact the Company's
financial position and results of operations.
In connection with a fiscal 1996 staff reduction by CMC, a number of
terminated employees subsequently claimed that CMC had engaged in age
discrimination in their dismissal and sought damages of varying amounts. CMC
defended the actual and threatened claims vigorously during fiscal 1998
incurring approximately $275,000 in legal costs over the course of the year.
On August 6, 1998, a judgment was rendered in favor of one plaintiff, in the
amount of $127,000 which CMC subsequently settled for $112,000. A second
plaintiff's claim for $53,000 was filed and subsequently settled for $48,500.
The Equal Employment Opportunity Commission ("EEOC") negotiated with CMC to
reach a monetary settlement for other potential claimants. Without admitting
any liability, CMC entered into a Conciliation Agreement with the EEOC and
agreed to pay approximately $500,000 to settle all such claims and limit
future litigation costs. As a result of these events and the significant
ongoing costs to defend these claims, in October 1998, CMC concluded that its
interest would be best served to settle all such matters. CMC reserved
$975,000 to resolve all such claims, which represented its best estimate of
funds to ultimately be paid to such claimants. This charge was recorded in
CMC's fiscal year ended July 31, 1998.
From time to time, the Company is also subject to claims or litigation
incidental to its business. The Company does not believe that any incidental
claims or litigation will have a material adverse effect on its results of
operations.
14. Subsequent Event
On March 15, 2000, the Company signed a pre-tender agreement (the
"Agreement") to acquire GSS Array Technology Public Company Limited ("GSS
Thailand"). As part of the Agreement, certain of GSS Thailand's principal
shareholders have agreed to tender all their issued shares and outstanding
options to the Company. GSS Thailand is a Thai-based contract electronics
manufacturing company and is listed on the Stock Exchange of Thailand. The
acquisition is subject to various closing conditions and is expected to close
in the third quarter of fiscal 2000.
Under the terms of the Agreement, GSS Thailand would be delisted from the
Stock Exchange of Thailand and ACT would make a cash tender offer for all
issued shares and outstanding options of GSS Thailand for
55
<PAGE>
ACT MANUFACTURING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately $93.0 million in cash. Upon the closing of the acquisition, ACT
would assume on-going relationships with GSS Thailand customers and will
retain certain GSS Thailand management to support this additional operation.
15. Selected Quarterly Financial Data (unaudited):
Summarized quarterly financial data are as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1999 Quarters
------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................. $145,947 $157,519 $180,105 $212,711
Gross profit.............................. 10,436 11,060 14,822 18,108
Net income (loss)......................... 1,850 1,028 (1,748) 5,104
Earnings (loss) per share:
Basic................................... 0.14 0.08 (0.13) 0.35
Diluted................................. 0.14 0.08 (0.13) 0.33
<CAPTION>
1998 Quarters
------------------------------------
First Second Third Fourth
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales................................. $151,569 $162,604 $137,452 $140,859
Gross profit.............................. 7,530 9,182 9,529 9,904
Net income................................ 164 1,130 1,219 580
Earnings per share:
Basic................................... 0.01 0.09 0.10 0.05
Diluted................................. 0.01 0.09 0.09 0.04
</TABLE>
The Company's third quarter fiscal 1999 net loss includes $5,601,000 of non-
tax deductible merger costs incurred in connection with the Company's merger
with CMC.
* * * * *
56
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Anything herein to the contrary notwithstanding, in no event are the
sections entitled "Stock Performance Graph" and "Compensation Committee and
Stock Option Committee Report on Executive Compensation" to be incorporated by
reference herein from the Company's definitive proxy statement for the
Company's 2000 Annual Meeting of Stockholders which will be filed with the
Commission within 120 days after the close of the fiscal year (the "Definitive
Proxy Statement").
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Certain information concerning the directors of the Company is incorporated
by reference herein from the information contained under the heading "Election
of Directors" in the Company's Definitive Proxy Statement.
Certain information concerning directors and executive officers of the
Company is incorporated by reference herein from the information contained
under the heading "Occupations of Directors and Executive Officers" in the
Company's Definitive Proxy Statement.
The information concerning compliance with Section 16(a) of the Exchange Act
required under this item is incorporated herein by reference from the
information contained under the heading "Section 16 Reporting" in the
Company's Definitive Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Certain information concerning executive compensation is incorporated by
reference herein from the information contained under the heading
"Compensation and Other Information Concerning Directors and Executive
Officers" in the Company's Definitive Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Certain information concerning security ownership of certain beneficial
owners and management is incorporated by reference herein from the information
contained under the heading "Securities Ownership of Certain Beneficial Owners
and Management" in the Company's Definitive Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain information concerning certain relationships and related
transactions is incorporated by reference herein from the information
contained under the heading "Certain Relationships and Related Transactions"
in the Company's Definitive Proxy Statement.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Index To Consolidated Financial Statements
The following Consolidated Financial Statements of the Registrant are filed
as part of this report:
Independent Auditors' Report
Report of Independent Accountants
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997. Consolidated Statements of Comprehensive Income
(Loss) for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements
(a)(2) Index to Consolidated Financial Statement Schedules
The following Consolidated Financial Statement Schedule of the Registrant is
filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II -- Valuation and Qualifying Accounts and Reserves S-1
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
accompanying consolidated financial statements or Notes thereto.
(a)(3) Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1(1) --Second Restated Articles of Organization of the Company.
3.2(2) --Amended and Restated By-Laws of the Company.
3.3(7) --Articles of Amendment to the Second Restated Articles of
Organization of the Company.
4.1(2) --Specimen certificate representing the Common Stock.
4.2 --Second Restated Articles of Organization of the Company (see
Exhibit 3.1).
4.3 --Amended and Restated By-Laws of the Company (see Exhibit 3.2).
4.4 --Articles of Amendment to the Second Restated Articles of
Organization of the Company (see Exhibit 3.3).
10.1(2) --1995 Non-Employee Director Stock Option Plan.
10.2(2) --Stock Option Plan dated April 15, 1993.
10.3(2) --Stock Option Plan of Automated Component Technologies, Inc.
dated April 15, 1993.
10.4(2) --Registration Rights Agreement dated February 8, 1995 by and
among the Company, John A. Pino and certain other stockholders
named therein.
10.5(2) --Lease dated April 1, 1985 between Re-Act Realty Trust and the
Company, as amended by the First Amendment thereto dated
October 25, 1988, the Second Amendment thereto dated August 4,
1993 and the Third Amendment thereto dated February 7, 1995
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.6(2) --Lease dated October 1, 1988 between Re-Act Realty Trust, as
amended by the First Amendment thereto dated August 4, 1993 and
the Second Amendment thereto dated February 7, 1995.
10.7(2) --Stock Purchase Agreement dated as of January 1, 1993 between
Donald G. Polich, John A. Pino, the Company and Automated
Component Technologies, Inc., as amended by the First Amendment
dated February 8, 1995.
10.8(2) --Consulting Agreement dated as of August 4, 1993 between the
Company and Re-Act Consulting as amended by the First Amendment
thereto dated February 8, 1995.
10.9(2) --Consulting Agreement dated as of August 4, 1993 between
Automated Component Technologies, Inc. and Re-Act Consulting as
amended by the First Amendment thereto dated February 8, 1995.
10.10(2) --Noncompetition Agreement dated as of January 1, 1993 between
the Company, John A. Pino and Donald G. Polich.
10.11(2) --Noncompetition Agreement dated as of January 1, 1993 between
Automated Component Technologies, Inc., John A. Pino and Donald
G. Polich as amended by the First Amendment thereto dated
February 8, 1995.
10.12(2) --Letter Agreement dated as of January 1, 1993 from the Company
and Automated Component Technologies, Inc. to Donald G. Polich,
as amended by the First Amendment thereto dated February 8,
1995.
10.13(3) --Lease dated January 31, 1996 between Mansfield/Forbes Ltd.
Partnership and the Company.
10.14(4) --Split-Dollar Life Insurance Agreement Dated September 5, 1996
by and between the John A. Pino and Janet M. Pino Family
Maintenance Trust and the Company.
10.15(5) --Lease Agreement dated May 26, 1998 between Highwoods/Forsyth
Limited Partnership and ACT Manufacturing, Inc.
10.16(6) --Share Pledge Agreement dated October 14, 1998 between the
Company and The Chase Manhattan Bank, as agent.
10.17(6) --ISDA Master Agreement dated October 14, 1998 between the
Company and The Chase Manhattan Bank.
10.18(6) --Stock Purchase Agreement dated October 13, 1998 between the
Company and Advanced Component Technologies Limited.
10.19(6) --Subordinated Loan Agreement dated October 13, 1998 between the
Company and Advanced Component Technologies Limited.
10.20(6) --Restated Second Amendment to Agreement of Lease dated November
6, 1998 between the Company and John A. Pino, Trustee of Re-Act
Realty Trust.
10.21(6) --Restated Lease Amendment and Third Amendment to Agreement of
Lease dated November 6, 1998 between the Company and John A.
Pino, Trustee of Re-Act Realty Trust.
10.22(6) --Letter Agreement dated October 14, 1998 between the Company
and BancBoston Leasing.
10.23(6) --Letter Agreement dated October 14, 1998 between the Company
and Citizens Leasing.
10.24(8) --Development Agreement dated August 18, 1997 between Citiwest
Limited, SignMax Limited and ACT Manufacturing, Inc.
10.25(8) --Option Agreement dated August 18, 1997 between Citiwest
Limited, SignMax Limited and ACT Manufacturing, Inc.
10.26(8) --Lease Agreement dated August 18, 1997 between Irish Life
Assurance PLC, SignMax Limited and ACT Manufacturing, Inc.
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.27(8) --Agreement dated May 25, 1998 between Industrial Development
Agency (Ireland) and Advanced Component Technologies Limited.
10.28(8) --Master Lease Agreement dated February 22, 1999 between Heller
Financial Leasing, Inc. and the Company.
10.29(8) --Lease Agreement dated February 26, 1999 between Amplicon, Inc.
and the Company.
10.30(9) --Global Master Rental Agreement dated May 1, 1998 between the
Company and Comdisco, Inc.
10.31(7) --Amended and Restated 1995 Stock Plan.
10.32(7) --Amended and Restated 1990 Equity Incentive Plan (assumed from
CMC Industries, Inc.)
10.33(10) --Amended and Restated Credit Agreement dated July 29, 1999
between the Company, CMC Industries, Inc., ACT Manufacturing
Securities Corporation and The Chase Manhattan Bank, as agent.
10.34(10) --Revolving Credit Note from the Company and CMC Industries,
Inc. in favor of National Bank of Canada.
10.35(10) --Revolving Credit Note from the Company and CMC Industries,
Inc. in favor of The Chase Manhattan Bank.
10.36(10) --Revolving Credit Note from the Company and CMC Industries,
Inc. in favor of Firstar Bank, N.A.
10.37(10) --Revolving Credit Note from the Company and CMC Industries,
Inc. in favor of IBJ Whitehall Business Credit Corporation.
10.38(10) --Revolving Credit Note from the Company and CMC Industries,
Inc. in favor of The Provident Bank.
10.39(10) --Revolving Credit Note from the Company and CMC Industries,
Inc. in favor of Sovereign Bank.
10.40(10) --Term Note from the Company and CMC Industries, Inc. in favor
of National Bank of Canada.
10.41(10) --Term Note from the Company and CMC Industries, Inc. in favor
of The Chase Manhattan Bank.
10.42(10) --Term Note from the Company and CMC Industries, Inc. in favor
of Firstar Bank, N.A.
10.43(10) --Term Note from the Company and CMC Industries, Inc. in favor
of IBJ Whitehall Business Credit Corporation.
10.44(10) --Term Note from the Company and CMC Industries, Inc. in favor
of The Provident Bank.
10.45(10) --Term Note from the Company and CMC Industries, Inc. in favor
of Sovereign Bank.
10.46(10) --Amended and Restated Security Agreement dated July 29, 1999
between the Company, CMC Industries, Inc., ACT Manufacturing
Securities Corporation and The Chase Manhattan Bank, as agent.
10.47(10) --Amended and Restated Pledge Agreement dated July 29, 1999
between the Company, CMC Industries, Inc. and The Chase
Manhattan Bank, as agent.
10.48(10) --Mexican Stock Pledge Agreement dated July 29, 1999 between the
Company, CMC Industries, Inc., and The Chase Manhattan Bank, as
agent.
10.49(11) --Employment Agreement dated as of July 29, 1999 between the
Company and Jack O'Rear.
10.50* --Lease Agreement dated February 22, 1999 between the Company
and American Technologies Credit, Inc.
10.51* --Master Lease Agreement dated April 30, 1999 between the
Company and General Electric Capital Corporation.
10.52* --Second Assignment of Sublease dated December 17, 1999 between
the Company and Mack Technologies, Inc.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.53* --Sublease Agreement dated October 16, 1992 between Loral
Infrared & Imaging Systems, Inc. and Stratus Computer, Inc.
10.54* --Lease dated March 15, 2000 between the Company and Mission
West Properties, L.P.
11.1* --Statement re: computation of earnings per share.
21.1(11) --Subsidiaries of Registrant.
23.1* --Consent of Deloitte & Touche LLP.
24.1 --Power of Attorney (see Page 62 of this Form 10-K).
27.1* --Financial Data Schedule--Fiscal Year 1999.
</TABLE>
- --------
(1) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
(2) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 33-89532), as amended.
(3) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1996.
(4) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996.
(5) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(6) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1998.
(7) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No. 333-84231).
(8) Incorporated herein by reference to the exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
(9) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1999.
(10) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1999.
(11) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1999.
* Filed herewith.
(b) REPORTS ON FORM 8-K
Not applicable.
(c) EXHIBITS
The Company hereby files as part of this Annual Report on Form 10-K the
exhibits listed in Item 14(a)(3) above. Exhibits which are incorporated herein
by reference can be inspected and copied at the public reference facilities
maintained by the Commission, 450 Fifth Street, NW, Room 1024, Washington,
D.C. and at the Commission's regional offices at 219 South Dearborn Street,
Room 1204, Chicago, Illinois; 26 Federal Plaza, Room 1102, New York, New York
and 5757 Wilshire Boulevard, Suite 1710, Los Angeles, California. Copies of
such material can also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates.
(d) FINANCIAL STATEMENT SCHEDULES
The Company hereby files as part of this Annual Report on Form 10-K the
consolidated financial statement schedules listed in Item 14(a)(2) above.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ACT Manufacturing, Inc.
Date: March 28, 2000 /s/ John A. Pino
By: _________________________________
John A. Pino
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John A. Pino and Jeffrey B. Lavin, jointly and
severally, his attorney-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this Annual Report on
Form 10-K and to file same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ John A. Pino President, Chief Executive March 28, 2000
_____________________________________ Officer and Director
John A. Pino (Principal Executive
Officer)
/s/ Jeffrey B. Lavin Vice President of Finance March 28, 2000
_____________________________________ and Chief Financial
Jeffrey B. Lavin Officer (Principal
Financial and Accounting
Officer)
/s/ Edward T. Cuddy Director March 28, 2000
_____________________________________
Edward T. Cuddy
/s/ Bruce R. Gardner Director March 28, 2000
_____________________________________
Bruce R. Gardner
/s/ Frederick Gibbs Director March 28, 2000
_____________________________________
Frederick Gibbs
/s/ David S. Lee Director March 28, 2000
_____________________________________
David S. Lee
/s/ Donald G. Polich Director March 28, 2000
_____________________________________
Donald G. Polich
</TABLE>
62
<PAGE>
SCHEDULE II
ACT MANUFACTURING, INC.
Valuation and Qualifying Accounts and Reserves
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Additions
Balance Charged to Balance
at Beginning Costs and Deductions and at End
of Period Expenses Adjustments of Period
------------ ---------- -------------- ---------
(in thousands)
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
For the year ended December
31, 1997.................... $ 751 $1,805 $ 451 $ 2,105
For the year ended December
31, 1998.................... 2,105 1,945 2,817 1,233
For the year ended December
31, 1999.................... 1,233 3,957 2,251 2,939
INVENTORY RESERVE:
For the year ended December
31, 1997.................... 5,859 1,181 4,296 2,744
For the year ended December
31, 1998.................... 2,744 845 946 2,643
For the year ended December
31, 1999.................... 2,643 204 675 2,172
</TABLE>
S-1
<PAGE>
Exhibit 10.50
ORDER NO. ____________
LESSOR: LESSEE:
AMERICAN TECHNOLOGIES CREDIT, INC. ACT MANUFACTURING, INC.
18101 Van Karman - Suite 140-255 2 Cabot Road
Irvine, CA 92612 Hudson, MA (Middlesex) 01749
Telephone 714-436-6500//Facsimile 714-436-6599 Doug Greenlaw
Vice President of
Strategic Development
TERMS AND CONDITIONS OF LEASE
1. LEASED PROPERTY: Subject to the following terms and conditions,
American Technologies Credit, Inc. ("Lessor") hereby agrees to lease to Lessee
the Hardware, Software and other Equipment ("Property") described on the Lease
Schedule(s) referencing this Lease Agreement ("Agreement"), and Lessee agrees to
lease the Property from Lessor. Each Schedule that the parties may from time to
time enter into with respect to this Agreement incorporates the terms of the
Agreement and constitutes a separate lease agreement and is referred to herein
as the "Lease".
2. TERM: This Lease, with respect to any Schedule, shall become effective
upon acceptance by Lessor and the term for any Schedule(s) shall commence on the
day Lessee certifies that the Property has been delivered to and is usable by
Lessee ("Commencement Date"). Lessee agrees that its remedies, should it find
fault with any of the Property, shall be and are solely against the
manufacturer/vendor/licensor ("Supplier") and not against Lessor. This Lease
shall give Lessee the right to use the Property at the location(s) delineated on
the Schedule(s). The initial base term of the Lease shall be as indicate don
the respective Schedule(s) and shall be calculated from the first day of the
calendar quarter following the Commencement Date ("Base Lease Term"). A
calendar quarter means a three-month period commencing on January 1, April 1,
July 1, and October 1 of any calendar year. The Base Lease Term shall be
extended for an additional one-year period (the "extended Base Lease Term") at
the rate delineated on the respective Schedule(s) unless Lessee provides to
Lessor written notice of Lessee's election not to extend the Base Lease Term at
least one hundred eighty (180) days prior to the expiration of the initial Base
Lease Term. Notwithstanding the provision of Section 19 below, such written
notice may be delivered to Lessor by hand or by certified mail and shall not be
effective unless it is actually received by Lessor at least one hundred eighty
(1980) days prior to the expiration of the initial Base Lease Term. At the
expiration of the initial Base Lease Term (or, if extended, at the expiration of
the extended Base Lease Term), Lessee shall do one of t he following: (A)
purchase all, but not less than all, of the Property for its then Fair Market
Value ("FMV"), plus applicable sales tax; (B) promptly return all, but not less
than all, of the Property and lease replacement property from Lessor which has a
cost equal to or greater than the original cost of the Property; or (C) extend
the Schedule for a period of one additional year at the rental rate delineated
on the respective Schedule. With respect to Option (A), FMV is the price a
willing buyer (who is neither a used property dealer or reseller) would pay for
the Property in an arm's length transaction to a willing seller under no
compulsion to sell. Such FMV shall be determined on the basis that: (i) the
Property is assumed to be in the condition in which it is to be maintained under
the Lease and is in complete compliance with all other terms of the Lease; (ii)
the Property is assumed to be installed and/or in full service and is valued on
an installed basis; and (iii) the cost of removal of the Property from its
present location is not deducted from the valuation. If Lessee elects to
purchase the Property and the parties are not able to agree on FMV at least 60
days prior to the expiration of the applicable term, Lessor shall appoint an
independent appraiser (reasonably acceptable to Lessee) who shall determine FMV,
and the parties acknowledge and agree that such determination shall be final,
binding and conclusive with respect to the parties' agree upon purchase price.
Lessee shall be responsible for the cost of the appraisal. With respect to
Option (B), Lessee and Lessor shall each have absolute discretion regarding
their agreement or lack of agreement to the terms of a lease for replacement
property. If Lessee has not elected Option (A) or (B) by the end of the initial
Base Lease Term or, if extended, the extended Base Lease Term, then Option (C)
shall prevail. Thereafter, this Lease will continue subject to termination by
either Lessee or Lessor at the end of any month, provided at least ninety days'
prior written notice is delivered to the other party. Each Schedule shall be
deemed to incorporate therein those specific terms and conditions and shall have
an independent initial Base Lease Term and extension period(s).
<PAGE>
-2-
3. RENTALS: The quarterly rent payable with respect to any Schedule(s)
shall be the amount shown with respect to such Schedule(s). Lessee shall pay to
Lessor the quarterly rent for each Schedule, in advance, for each quarter or any
part thereof that this Lease, with respect to said Schedule(s) is in effect.
The first such payment shall be made on the first day of the calendar quarter
following the Commencement Date. A pro rata portion of the quarterly rental
charges based on a daily rental of one-ninetieth (1/90th) of the quarterly
rental calculated from the Commencement Date to the end of the calendar quarter,
shall be due and payable at the Commencement Date. If rent or any other amount
is not paid within ten days of its due date, Lessee agrees to pay a late charge
equal to five percent (5%) of the unpaid amount. Each month thereafter, past
due amounts remaining unpaid hereunder shall bear interest at the lesser of one
and one-half percent (1 1/2%) per month, compounded monthly or the maximum rate
allowed by law. All rent shall be paid at the place of business of Lessor shown
above or such other place as Lessor may designate by written notice to Lessee.
Except as otherwise provided in this Lease, Lessee's obligation to pay rent
shall be absolute and unconditional under all circumstances, notwithstanding:
(i) any setoff, counterclaim, recoupment, defense or other right which Lessee
may have against Lessor for any reason whatsoever; or (ii) any defect in the
title, right to use, condition, operation, fitness for use, damage or
destruction of or to the Property or any interruptions or cessations in use or
possession thereof for any reason whatsoever. Lessee hereby waives, to the
extent permitted by law, the following rights and remedies which may be
conferred upon Lessee by law: (a) right to cancel or terminate this Lease
except in accordance with the express terms hereof, (b) right to revoke
acceptance of the Property, (c) right to recover damages from Lessor for any
breach of warrant and (d) right to recover any consequential damages whatsoever.
4. ADDITIONS AND MODIFICATIONS: All additions and modifications to the
Property become an integral part of the Property and are owned by Lessor,.
Software, as described on any Schedule(s) includes all updates, revisions,
upgrades, new versions, enhancements, modifications, derivative works,
maintenance fixes, translations, adaptations, and copies of the foregoing or of
the original version of the Software whether obtained from the Supplier, or from
any source whatsoever, and references in this Lease to Software will be
incorporated as references to any and all of the foregoing. All additions and
modifications to the Property must be free and clear of any liens or rights of
other parties.
5. NO WARRANTIES: Lessor not being the Supplier, manufacturer, developer,
publisher, distributor, or licensor of the Property, MAKES NO WARRANTIES, OR
REPRESENTATIONS, EXPRESS OR IMPLIED, NOR SHALL IT BE DEEMED TO HAVE MADE ANY
SUCH WARRANTIES OR REPRESENTATIONS AS TO THE MERCHANTABILITY, COMPATIBILITY,
FITNESS, DESIGN, CONDITIONS, QUALITY OR CAPACITY OF THE LEASED PROPERTY, OR ANY
OTHER REPRESENTATION OR WARRANTY WHATSOEVER WITH RESPECT TO THE PROPERTY, LESSEE
REPRESENTS THAT ALL OF THE PROPERTY ARE OF A SIZE, DESIGN, AND CAPACITY SELECTED
BY IT, AND THAT IT IS SATISFIED THAT THE SAME IS SUITABLE FOR LESSEE'S PURPOSES.
Lessor assigns to Lessee during the term of the Lease any warranty rights it may
have received from the Supplier as a result of Lessor's purchase of the
Property. If Lessee has any claims, regarding the Property or any other matter
arising from Lessee's relationship with the Supplier, Lessee must make them
against the Supplier. This provision survives termination of the Lease.
6. USE, OPERATION AND MAINTENANCE: Lessee at its own expense, will
provide a suitable place for the operation of the Property, and keep in force
for the term of the Lease the best standard Supplier's maintenance agreement(s)
which will cause the Supplier(s) to make all the necessary repairs, adjustments,
and replacements in accordance with such maintenance agreement(s) and entitle
Lessee (through Lessor, if necessary) to obtain available enhancements, upgrades
and changes.
7. RISK OF LOSS: During the period the Property is in transit, is in the
possession of the Lessee, and until the Property is returned to Lessor, Lessee
shall assume all responsibility for loss or damage and shall hold Lessor
harmless against the same, in the event that, during the term of the Lease or
until the Property shall have been returned, if any of the Property shall be
confiscated, taken, requisitioned, lost, stolen, destroyed or irreparably
damaged for any cause whatsoever (such occurrences being hereinafter called
"Casualty Occurrences"), Lessee shall immediately and fully inform Lessor, in
the case of Software, the erasure, inoperability or other incapacity of the
Software triggered by a preprogrammed termination or limiting design or routine
embedded in the Software shall also be deemed a "Casualty Occurrence".
Following a Casualty Occurrence, on the next succeeding rent payment date,
Lessee shall pay to Lessor, in addition to all past due rentals, and other
amounts then late and outstanding, an
<PAGE>
-3-
amount equal to the Casualty Value as determined by the attached Casualty
Schedule as of the date of the Casualty Occurrence. Upon the making of such
payment by Lessee, the rental for such Schedule(s) shall cease to accrue as of
the date of such payment and the term of the Lease as to such Schedule(s) shall
terminate. Insurance proceeds received by Lessor as the result of a Casualty
Occurrence with respect to any Schedule(s) shall be applied in reduction of
Lessee's obligation to pay the Casualty Value. The Casualty Value as of any rent
payment date (or as of any other date on which Casualty Value is payable) shall
be an amount equal to that percentage of the Purchase Price or License Fee as is
set forth in the Casualty Schedule attached hereto, opposite the number of such
rent payment date or such other date. The Purchase Price or License Fee of any
Property shall be the total cost paid by Lessor with respect to the Property.
8. INDEMNITY AND INSURANCE: Lessee assumes liability for, and agrees at
its own expense to indemnify and defend Lessor, its employees, officers,
directors and assigns, from and against any and all claims, liabilities, losses,
damages, and expenses (including legal expenses) of every kind or nature
(including, without limitation, claims based upon strict liability) arising out
of the use, condition (including latent and other defects, whether known or
unknown.
THIS LEASE AGREEMENT AND THE APPLICABLE SCHEDULE(S) CONTAIN THE ENTIRE
AGREEMENT BETWEEN LESSOR ANd LESSEE WITH RESPECT TO THE SUBJECT MATTER HEREOF.
THE LEASE CAN ONLY BE MODIFIED IN WRITING, WITH SUCH MODIFICATIONS SIGNED BY A
PERSON AUTHORIZED TO SIGN AGREEMENTS ON BEHALF O LESSEE AND BY AN AUTHORIZED
SIGNER OF LESSOR. NO ORAL OR OTHER WRITTEN AGREEMENTS, REPRESENTATIONS OR
PROMISES SHALL BE RELIED UPON BY, OR BE BINDING ON, THE PARTIES UNLESS MADE A
PART OF THIS LEASE BY A WRITTEN MODIFICATION SIGNED BY AN AUTHORIZED SIGNER OF
LESSEE AND LESSOR.
LESSEE: /s/ Jeffrey B. Lavin LESSOR: /s/ Irene Tanilhara
--------------------------- ---------------------------
Authorized Signature Authorized Signature
OFFER AND ACCEPTANCE:
This Lease is subject to approval and acceptance by the American Technologies
Credit, Inc. Finance Committee. By signing below, the signer certifies that he
has read the Agreement, INCLUDE THE REVERSE SIDE, and that he is authorized to
sign this Lease on behalf of Lessee. Until this Lease has been signed by an
authorized signor of Lessor, it shall constitute a firm offer by Lessee.
OFFER:
LESSEE: ACT MANUFACTURING, INC.
By: /s/ Jeffrey B. Lavin
--------------------
Name/Title: Jeffrey B. Lavin, V.P. Finance
------------------------------
Date: 1/15/99
-------
ACCEPTANCE:
LESSOR: AMERICAN TECHNOLOGIES CREDIT, INC.
By: /s/ Irene Tanihara
------------------
Name/Title: Irene Tanihara, Assiatant V.P.
------------------------------
Date: 1/15/99
-------
<PAGE>
Exhibit 10.51
MASTER LEASE AGREEMENT
dated as of April 30, 1999 ("Agreement")
THIS AGREEMENT, is between General Electric Capital Corporation (together
with its successors and assigns, if any, "Lessor") and ACT Manufacturing, Inc.
("Lessee"). Lessor has an office at 44 Old Ridgebury Road, Danbury, CT 06810-
5105. Lessee is a corporation organized and existing under the laws of the
State of Massachusetts. Lessee's mailing address and chief place of business is
108 Forest Avenue, Hudson, MA 01749. This Agreement contains the general terms
that apply to the leasing of Equipment from Lessor to Lessee. Additional terms
that apply to the Equipment (term, rent, options, etc.) shall be contained on a
schedule ("Schedule").
1. LEASING:
(a) Lessor agrees to lease to Lessee, and Lessee agrees to lease from
Lessor, the equipment ("Equipment") described in any Schedule signed by both
parties.
(b) Lessor shall purchase Equipment from the manufacturer or supplier
("Supplier") and lease it to Lessee if on or before the Last Delivery Date
Lessor receives (i) a Schedule for the Equipment, (ii) evidence of insurance
which complies with the requirements of Section 9, and (iii) such other
documents as Lessor may reasonably request. Each of the documents required
above must be in form and substance satisfactory to Lessor. Lessor hereby
appoints Lessee its agent for inspection and acceptance of the Equipment from
the Supplier. Once the Schedule is signed, the Lessee may not cancel the
Schedule.
2. TERM, RENT AND PAYMENT:
(a) The rent payable for the Equipment and Lessee's right to use the
Equipment shall begin on the earlier of (i) the date when the Lessee signs the
Schedule and accepts the Equipment or (ii) when Lessee has accepted the
Equipment under a Certificate of Acceptance ("Lease Commencement Date"). The
term of this Agreement shall be the period specified in the applicable Schedule.
The word "term" shall include all basic and any renewal terms.
(b) Lessee shall pay rent to Lessor at its address stated above,
except as otherwise directed by Lessor. Rent payments shall be in the amount
set forth in, and due as stated in the applicable Schedule. If any Advance Rent
(as stated in the Schedule) is payable, it shall be due when the Lessee signs
the Schedule. Advance Rent shall be applied to the first rent payment and the
balance, if any, to the final rent payment(s) under such Schedule. In no event
shall any Advance Rent or any other rent payments be refunded to Lessee. If
rent is not paid within ten (10) days of its due date, Lessee agrees to pay a
late charge of five cents ($.05) per dollar on, and in addition to, the amount
of such rent but not exceeding the lawful maximum, if any.
<PAGE>
-2-
3. RENT ADJUSTMENT:
(a) The periodic rent payments in each Schedule have been calculated
on the assumption (which, as between Lessor and Lessee, is mutual) that the
maximum effective corporate income tax rate (exclusive of any minimum tax rate)
for calendar-year taxpayers ("Effective Rate") will be thirty-five percent (35%)
in 1995 and each year thereafter.
(b) If, solely as a result of Congressional enactment of any law
(including, without limitation, any modification of, or amendment or addition
to, the Internal Revenue Code of 1986 ("Code")), the Effective Rate for 1995 or
any subsequent year during the lease term is (i) increased above 35%, (ii)
further increased, or (iii) increased after any decrease, then Lessor shall have
the right to increase such rent payments by requiring payment of a single
additional sum equal to the product of (i) the Effective Rate (expressed as a
decimal) for such year less .35 (or, in the event that any adjustment has been
made hereunder for any previous year, the Effective Rate(expressed as a
decimal), used in calculating the next previous adjustment) times (ii) the
adjusted Termination Value divided by the difference between the new Effective
Tax Rate (expressed as a decimal) and one (1). The adjusted Termination Value
shall be the Termination Value( calculated as of the first rental due in the
year for which such adjustment is being made) less the product of the Tax
Benefits that would be allowable under Section 168 of the Code (as of the first
day of the year for which such adjustment is being made and all subsequent years
of the lease term) times the Effective Rate (expressed as a decimal) (in the
year for which such adjustment is being made). Lessee shall pay to Lessor the
full amount of the additional rent payment on the later of (i) receipt of notice
or (ii) the first day of the year for which such adjustment is being made.
(c) If, solely as a result of Congressional enactment of any law
(including, without limitation, any modification of, or amendment or addition
to, the Internal Revenue Code of 1986 ("Code)), the Effective Rate for 1995 or
any subsequent year during the lease term is (i) decrease below 35%, (ii)
further decreased, or (iii) decreased after any increase, then Lessee shall have
the right to request, upon written notice, Lessor to pay Lessee, as a rental
rebate, a single additional sum equal to the product of (i) .35 (or, in the
event that any adjustment has been made under Section II for any previous year,
the Effective Rate (expressed as a decimal) used in calculating the next
previous adjustment) less the Effective Rate (expressed as a decimal) for such
year times (ii) the adjusted Termination Value divided by the difference between
the new Effective Tax Rate (expressed as a decimal) and one (1) (as defined
hereinabove). Lessor shall pay to Lessee the full amount of any such rental
rebate on the later of (i) receipt of Lessee's notice or (ii) the first day of
the year for which such adjustment is being made.
(d) Lessee's obligation under this Section III shall survive any
expiration or termination of this Agreement.
4. TAXES: If permitted by law, Lessee shall report and pay promptly all
taxes, fees and assessments due, imposed or levied against any Equipment (or
purchase, ownership delivery, leasing, possession, use or operation thereof),
this Agreement (or any rents or receipts hereunder), any Schedule, Lessor or
Lessee by any governmental entity or taxing authority during or related to the
term of this Agreement, including, without limitation, all license and
registration fees, and all sales, use personal, property, excise, gross
receipts, franchise, stamp or
<PAGE>
-3-
other taxes, imposts, duties and charges, together with any penalties, fines or
interest thereon (collectively "Taxes"). Lessee shall have no liability for
Taxes imposed by the United States of America or any state or political
subdivision thereof which are on or measured by the net income of Lessor except
as provided in Section 3 and 14(c). Lessee shall promptly reimburse Lessor (on
or after tax basis) for any Taxes charged to or assessed against Lessor. Lessee
shall show Lessor as the owner of the Equipment on all tax reports or returns,
and send Lessor a copy of each report or return and evidence of Lessee's payment
of Taxes upon request.
5. REPORTS:
(a) If any tax or other lien, which results from the acts of Lessee
shall attach to any Equipment, Lessee will notify Lessor in writing, within ten
(10) days after Lessee becomes aware of the tax or lien. The notice shall
include the full particulars of the tax or lien and the location of such
Equipment on the date of the notice.
(b) Lessee will deliver to Lessor, Lessee's complete financial
statements, certified by a recognized firm of certified public accountants
within ninety (90) days of the close of each fiscal year of Lessee. Lessee will
deliver to Lessor copies of Lessee's quarterly financial report certified by the
chief financial officer of Lessee, within ninety (90) days of the close of each
fiscal quarter of Lessee. Lessee will deliver to Lessor all Forms 10-K and 10-
Q, if any, filed with the Securities and Exchange Commission within thirty (30)
days after the date on which they are filed.
(c) Lessor may inspect any Equipment during normal business hours
after giving Lessee reasonable prior notice.
(d) Lessee will keep the Equipment at the Equipment Location
(specified in the applicable Schedule) and will give Lessor prior written notice
of any relocation of Equipment. If Lessor asks, Lessee will promptly notify
Lessor in writing of the location of any Equipment.
(e) If any Equipment is lost or damaged (where the estimated repair
costs would exceed the greater of ten percent (10%) of the original Equipment
cost or ten thousand and 00/100 dollars ($10,000)), or is otherwise involved in
an accident causing personal injury or property damage, Lessee will promptly and
fully report the event to Lessor in writing.
(f) Lessee will furnish a certificate of an authorized officer of
Lessor stating that he has reviewed the activities of Lessee and that, to the
best of his knowledge, there exists no default or event which with notice or
lapse of time (or both) would become such a default within thirty (30) days
after any request by Lessor.
6. DELIVERY, USE AND OPERATION:
(a) All Equipment shall be shipped directly from the Supplier to
Lessee.
(b) Lessee agrees that the Equipment will be used by Lessee solely in
the conduct of its business and in a manner complying with all applicable laws,
regulations and insurance policies and Lessee shall not discontinue use of the
Equipment.
<PAGE>
-4-
(c) Lessee will not move any equipment from the location specified on
the Schedule, without the prior written consent of Lessor.
(d) Lessee will keep the Equipment free and clear of all liens and
encumbrances other than those which result from acts of Lessor.
(e) Lessor shall not disturb Lessee's quiet enjoyment of the Equipment
during the term of the Agreement unless a default has occurred and is continuing
under this Agreement.
7. MAINTENANCE:
(a) Lessee will, at its sole expense, maintain each unit of Equipment
in good operating order and repair, normal wear and tear excepted. The Lessee
shall also maintain the Equipment in accordance with manufacturer's
recommendations. Lessee shall make all alterations or modifications required to
comply with any applicable law, rule or regulation during the term of this
Agreement. If Lessor requests, Lessee shall affix plates, tags or other
identifying labels showing ownership thereof by Lessor. The tags or labels
shall be placed in a prominent position on each unit of Equipment.
(b) Lessee will not attach or install anything on any Equipment that
will impair the originally intended function or use of such Equipment without
the prior written consent of Lessor. All additions, parts, supplies,
accessories, and equipment ("Additions") furnished or attached to any Equipment
that are not readily removable shall become the property of Lessor. All
Additions shall be made only in compliance with applicable law. Lessee will not
attach or install any Equipment to or in any other personal or real property
without the prior written consent of Lessor.
8. STIPULATED LOSS VALUE: If for any reason any unit of Equipment becomes
worn out, lost, stolen, destroyed, irreparably damaged or unusable ("Casualty
Occurrences") Lessee shall promptly and fully notify Lessor in writing. Lessee
shall pay Lessor the sum of (i) the Stipulated Loss value (see Schedule) or the
affected unit determined as of the rent payment date prior to the Casualty
Occurrence; and (ii) all rent and other amounts which are then due under this
Agreement on the Payment Date (defined below) for the affected unit. The Payment
Date shall be the next rent payment date after the Casualty Occurrence. Upon
Payment of all sums due hereunder, the term of this Lease as to such unit shall
terminate.
9. INSURANCE:
(a) Lessee shall bear the entire risk of any loss, theft, damage to,
or destruction of, any unit of Equipment from any cause whatsoever from the time
the Equipment is shipped to Lessee.
(b) Lessee agrees, at its own expense, to keep all Equipment insured
for such amounts and against such hazards as Lessor may reasonably require. All
such policies shall be with companies, and on terms, reasonably satisfactory to
Lessor. The insurance shall include coverage for damage to or loss of the
Equipment, liability for personal injuries, death or property damage. Lessor
shall be named as additional insured with a loss payable clause in favor of
Lessor, as its interest may appear, irrespective of any breach of warranty or
other act or omission
<PAGE>
-5-
of Lessee. The insurance shall provide for liability coverage in an amount equal
to at least ONE MILLION U.S. DOLLARS ($1,000,000.00) total liability per
occurrence, unless otherwise stated in any Schedule. The casualty/property
damage coverage shall be in an amount equal to the higher of the Stipulated Loss
Value or the full replacement cost of the Equipment. No insurance shall be
subject to any co-insurance clause. The insurance policies shall provide that
the insurance may not be altered or canceled by the insurer until after thirty
(30) days written notice to Lessor. Lessee agrees to deliver to Lessor evidence
of insurance reasonably satisfactory to Lessor.
(c) Lessee hereby appoints Lessor as Lessee's attorney-in-fact to make
proof of loss and claim for insurance, and to make adjustments with insurers and
to receive payment of an execute or endorse all documents, checks or drafts in
connection with insurance payments. Lessor shall not act as Lessee'' attorney-
in-fact unless Lessee is in default. Lessee shall pay any reasonable expenses
of Lessor in adjusting or collecting insurance. Lessee will not make
adjustments with insurers except with respect to claims for damage to any unit
of Equipment where the repair costs are less than the lesser of ten percent
(10%) of the original Equipment cost or ten thousand and 00/100 dollars
($10,000). Lessor may, at its option, apply proceeds of insurance, in whole or
in part, to (i) repair or replace Equipment or any portion thereof, or (ii)
satisfy any obligation of Lessee to Lessor under this Agreement.
10. RETURN OF EQUIPMENT:
(a) At the expiration or termination of this Agreement or any
Schedule, Lessee shall perform any testing and repairs required to place the
units of Equipment in the same condition and appearance as when received by
lessee (reasonable wear and tear excepted) and in good working order for the
original intended purpose of the Equipment. If required the units of Equipment
shall be deinstalled, disassembled and crated by an authorized manufacturer's
representative or such other service person as is reasonably satisfactory to
Lessor. Lessee shall remove installed markings that are not necessary for the
operation, maintenance or repair of the Equipment. All Equipment will be
cleaned, cosmetically acceptable, and in such condition as to be immediately
installed into use in a similar environment for which the Equipment was
originally intended to be used. All waste material and fluid must be removed
from the Equipment and disposed of in accordance with then current waste
disposal laws. Lessee shall return the units of Equipment to a location within
the continental United States as Lessor shall direct. Lessee shall obtain and
pay for a policy of transmit insurance for the redelivery period in an amount
equal to the replacement value of the Equipment. The transit insurance must
name Lessor as the loss payee. The Lessee shall pay for all costs to comply
with this section (a).
(b) Until Lessee has fully complied with the requirements of Section
10(a) above, Lessee's rent payment obligation and all other obligations under
this Agreement shall continue from month to month notwithstanding any expiration
or termination of the lease term. Lessor may terminate the Lessee's right to
use the Equipment upon ten (10) days notice to Lessee.
(c) Lessee shall provide to Lessor a detailed inventory of all
components of the Equipment including model and serial numbers. Lessee shall
also provide an up-to-date copy of all other documentation pertaining to the
Equipment. All service manuals, blueprints, process
<PAGE>
-6-
of flow diagrams, operating manuals, inventory and maintenance records shall be
given to Lessor at least ninety (90) days and not more than one hundred twenty
(120) days prior to lease termination.
(d) Lessee shall make the Equipment available for on-site operational
inspections by potential purchasers at least one hundred twenty (120) days prior
to and continuing up to lease termination. Lessor shall provide Lessee with
reasonable notice prior to any inspection. Lessee shall provide personnel,
power and other requirements necessary to demonstrate electrical, hydraulic and
mechanical systems for each item of Equipment.
11. DEFAULT AND REMEDIES:
(a) Lessor may in writing declare this Agreement in default if:
(i)Lessee breaches its obligation to pay rent or other sum when due and fails to
cure the breach within ten (10) days; (ii) Lessee breaches any of its insurance
obligations under Section 9; (iii) Lessee breaches any of its other obligations
and fails to cure that breach within thirty (30) days after written notice from
Lessor; (iv) any representation or warranty made by Lessee in connection with
this Agreement shall be false or misleading in any material respect when made;
(v) Lessee or any guarantor or other obligor for the Lessee's obligations
hereunder ("Guarantor") becomes insolvent or ceases to do business as a going
concern; (vi) any Equipment is illegally used; (vii) if Lessee or any Guarantor
is a natural person, any death or incompetency of Lessee or such Guarantor; or
(viii) a petition is filed by or against Lessee or any Guarantor under any
bankruptcy or insolvency laws and in the event of an involuntary petition, the
petition is not dismissed within forty-five (45) days of the filing date. The
default declaration shall apply to all Schedules unless specifically excepted by
Lessor.
(b) After a default has occurred and is continuing: at the request of
Lessor, Lessee shall comply with the provisions of Section 10(a). Lessee hereby
authorizes Lessor to peacefully enter any premises where any Equipment may be
and take possession of the Equipment. Lessee shall immediately pay to Lessor
without further demand as liquidated damages for loss of a bargain and not as a
penalty, the Stipulated Loss Value of the Equipment (calculated as of the rent
payment date prior to the declaration of default), and all rents and other sums
then due under this Agreement and all Schedules. Lessor may terminate this
Agreement as to any or all of the Equipment. A termination shall occur only
upon written notice by Lessor to Lessee and only as to the units of Equipment
specified in any such notice. Lessor may, but shall not be required to, sell
Equipment at private or public sale, in bulk or in parcels, with or without
notice, and without having the Equipment present at the place of sale. Lessor
may also, but shall not be required to, lease, otherwise dispose of or keep idle
all or part of the Equipment. Lessor may use Lessee's premises for a reasonable
period of time for any or all of the purposes stated above without liability for
rent, costs, damages or otherwise. The proceeds of sale, lease or other
disposition, if any, shall be applied in the following order or priorities: (i)
to pay all of Lessor's costs, charges and expenses incurred in taking, removing,
holding, repairing and selling, leasing or otherwise disposing of Equipment;
then, (ii) to the extent not previously paid by Lessee, to pay Lessor all sums
due from Lessee under this Agreement; then, (iii) to reimburse to Lessee any
sums previously paid by Lessee as liquidated damages; and (iv) any surplus shall
be retained by Lessor. Lessee shall immediately pay any deficiency in (i) and
(ii) above.
<PAGE>
-7-
(c) The foregoing remedies are cumulative, and any or all thereof may
be exercised instead of or in addition to each other or any remedies at law, in
equity, or under statute. Lessee waives notice of sale or other disposition
(and the time and place thereof), and the manner and place of any advertising.
Lessee shall pay Lessor's actual attorney's fees incurred in connection with the
enforcement, assertion, defense or preservation of Lessor's rights and remedies
under this Agreement, if prohibited by law, such lesser sum as may be permitted.
Waiver of any default shall not be a waiver of any other or subsequent default.
(d) Any default under the terms of this or any other agreement between
Lessor and Lessee may be declared by lessor a default under this and any such
other agreement.
12. ASSIGNMENT: LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, ENCUMBER OR
SUBLET ANY EQUIPMENT OR THE INTEREST OF LESSEE IN THE EQUIPMENT WITHOUT THE
PRIOR WRITTEN CONSENT OF LESSOR. Lessor may, without the consent of Lessee,
assign this Agreement, any Schedule or the right to enter into a Schedule.
Lessee agrees that if Lessee receives written notice of an assignment from
Lessor, Lessee will pay all rent and all other amounts payable under any
assigned Schedule to such assignee or, as instructed by Lessor. Lessee also
agrees to confirm in writing receipt of the notice of assignment as may be
reasonably requested by assignee. Lessee hereby waives and agrees not to asset
against any such assignee any defense, set-off, recoupment claim or counterclaim
which Lessee has or may at any time have against Lessor for any reason
whatsoever.
13. NET LEASE: Lessee is unconditionally obligated to pay all rent and
other amounts due for the entire lease term no matter what happens, even if the
Equipment is damaged or destroyed, if it is defective or if Lessee no longer can
use it. Lessee is not entitled to reduce or set-off against rent or other
amounts due to Lessor or to anyone to whom Lessor assigns this Agreement or any
Schedule whether Lessee's claim arises out of this Agreement, any Schedule, any
statement by Lessor, Lessor's liability or any manufacturer's liability, strict
liability, negligence or otherwise.
14. INDEMNIFICATION:
(a) Lessee hereby agrees to indemnify Lessor, its agents, employees,
successors and assigns (on or after tax basis) from and against any and all
losses, damages, penalties, injuries, claims, actions, and suits, including
legal expenses, of whatsoever kind and nature arising out of or relating to the
Equipment or this Agreement, except to the extent the losses, damages,
penalties, injuries, claims, actions, suits or expenses result from Lessor's
gross negligence or willful misconduct ("Claims"). This indemnity shall
include, but is not limited to, Lessor's strict liability in tort and Claims,
arising out of (i) the selection, manufacture, purchase, acceptance or rejection
of Equipment, the ownership of Equipment during the term of this Agreement, and
the delivery, lease, possession, maintenance, uses, condition, return or
operation of Equipment (including, without limitation, latent and other defects,
whether or not discoverable by Lessor Lessee and any claim for patent, trademark
or copyright infringement or environmental damage) or (ii) the condition of
Equipment sold or disposed of after use by Lessee, any sublessee or employees of
Lessee. Lessee shall, upon request, defend any actions based on, or arising out
of, any of the foregoing.
<PAGE>
-8-
(b) Lessee hereby represents, warrants and covenants that (i) on the
Lease Commencement Date for any unit of Equipment, such unit will qualify for
all of the items of deduction and credit specified in Section C of the
applicable Schedule ("Tax Benefits") in the hands of Lessor, and (ii) at no time
during the term of this Agreement will Lessee take or omit to take, nor will it
permit any sublessee or assignee to take or omit to take, any action (whether or
not such act or omission is otherwise permitted by Lessor or by this Agreement,)
which will result in the disqualification of any Equipment for, or recapture of,
all or any portion of such Tax Benefits.
(c) If as a result of a breach of any representation, warranty or
covenant of the Lessee contained in this Agreement or any Schedule (i) tax
counsel of Lessor shall determine that Lessor is not entitled to claim on its
Federal income tax return all or any portion of the Tax Benefits with respect to
any Equipment, or (ii) any Tax Benefit claimed on the Federal income tax return
of Lessor is disallowed or adjusted by the Internal Revenue Service, or (iii)
any Tax Benefit is recalculated or recaptured (any determination, disallowance,
adjustment, recalculation or recapture being a "Loss"), then Lessee shall pay to
Lessor, as an indemnity and as additional rent, an amount that shall, in the
reasonable opinion of Lessor, cause Lessor's after-tax economic yields and cash
flows to equal the Net Economic Return that would have been realized by Lessor
if such Loss had not occurred. Such amount shall be payable upon demand
accompanied by a statement describing in reasonable detail such Loss and the
computation of such amount. The economic yields and cash flows shall be
computed on the same assumptions, including tax rates as were used by Lessor in
originally evaluating the transaction ("Net Economic Return"). If an adjustment
has been made under Section 3 then the Effective Rate used in the next preceding
adjustment shall be substituted.
(d) All references to Lessor in this Section 14 include Lessor and the
consolidated taxpayer group of which Lessor is a member. All of Lessor's
rights, privileges and indemnities contained in this Section 14 shall survive
the expiration or other termination of this Agreement. The rights, privileges
and indemnities contained herein are expressly made for the benefit of, and
shall be enforceable by Lessor, its successors and assigns.
15. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT
WITHOUT ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT
MAKE, HAS NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THIS
EQUIPMENT LEASED UNDER THIS AGREEMENT OR ANY COMPONENT, THEREOF, INCLUDING,
WITHOUT LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS,
QUALITY OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE,
USE OR OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE.
All such risks as between Lessor and Lessee, are to be borne by Lessee. Without
limiting the foregoing, Lessor shall have no responsibility or liability to
Lessee or any other person with respect to any of the following: (i) any
liability, loss or damage caused or alleged to be caused directly or indirectly
by any Equipment, any inadequacy thereof, any deficiency or defect (latent or
otherwise) of the Equipment, or any other circumstance in connection with the
Equipment; (ii) the use, operation or performance of any Equipment or any risks
relating to it; (iii) any interruption of service, loss
<PAGE>
-9-
of business or anticipated profits or consequential damages; or (iv) the
delivery, operation, servicing, maintenance, repair, improvement or replacement
of any Equipment. If, and so long as, no default exists under this Agreement,
Lessee shall be, and hereby is, authorized during the term of this Agreement to
assert and enforce whatever claims and rights Lessor may have against any
Supplier of the Equipment at Lessee's sole cost and expense, in the name of and
for the account of Lessor and/or Lessee, as their interests may appear.
16. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee makes each of the
following representations and warranties to Lessor on the date hereof and on the
date of execution of each Schedule.
(a) Lessee has adequate power and capacity to enter into, and perform
under, this Agreement and all related documents (together, the "Documents").
Lessee is duly qualified to do business wherever necessary to carry on its
present business and operations, including the jurisdiction(s) where the
Equipment is or is to be located.
(b) The Documents have been duly authorized, executed and delivered by
lessee and constitute valid, legal and binding agreements, enforceable in
accordance with their terms, except to the extent that the enforcement of
remedies may be limited under applicable bankruptcy and insolvency laws or
general equity principals.
(c) No approval, consent or withholding of objections is required from
any governmental authority or entity with respect to the entry into or
performance by Lessee of the Documents except such as have already been
obtained.
(d) The entry into and performance by Lessee of the Documents will
not: (i) violate any judgment, order, law or regulation applicable to Lessee or
any provision of Lessee's Certificate of Incorporation or bylaws; or (ii) result
in any breach of, constitute a default under or result in the creation of any
lien, charge, security interest or other encumbrance upon any Equipment pursuant
to any indenture, mortgage, deed of trust, bank loan or credit agreement or
other instrument (other than this Agreement) to which Lessee is a party.
(e) There are no suits or proceeding pending or threatened in court or
before any commission, board or other administrative agency against or affecting
Lessee, which if decided against Lessee, will have a material adverse effect on
the ability of Lessee to fulfill its obligations under this Agreement.
(f) The Equipment accepted under any Certificate of Acceptance is and
will remain tangible personal property.
(g) Each financial statement delivered to Lessor has been prepared in
accordance with generally accepted accounting principles consistently applied.
since the date of the most recent financial statement, there has been no
material adverse change.
(h) Lessee is and will be at all times validly existing and in good
standing under the laws of the State of its incorporation (specified in the
first sentence of this Agreement).
<PAGE>
-10-
(i) The Equipment will at all times be used for commercial or business
purposes.
17. EARLY TERMINATION
(a) On or after the First Termination Date (specified in the
applicable Schedule), Lessee may, so long as no default exists hereunder,
terminate this Agreement as to all (but not less than all) of the Equipment on
such Schedule as of a rent payment date ("Termination Date"). Lessee must give
Lessor at least ninety (90) days prior written notice of the termination.
(b) Lessee shall, and Lessor may, solicit cash bids for the Equipment
on an AS IS, WHERE IS BASIS without recourse to or warranty from Lessor, express
or implied ("AS IS BASIS"). Prior to the Termination Date, Lessee shall (i)
certify to Lessor any bids received by Lessee and (ii) pay to Lessor (A) the
Termination Value (calculated as of the rent due on the Termination Date) for
the Equipment, and (B) all rent and other sums due and unpaid as of the
Termination Date.
(c) If all amounts due hereunder have been paid on the Termination
Date, Lessor shall (i) sell the Equipment on an AS IS BASIS for cash to the
highest bidder and (ii) refund the proceeds of such sale (net of any related
expenses) to Lessee up to the amount of the Termination Value. If such sale is
not consummated, no termination shall occur and Lessor shall refund the
Termination Value (less any expenses incurred by Lessor) to Lessee.
(d) Notwithstanding the foregoing, Lessor may elect by written notice,
at any time prior to the Termination Date, not to sell the Equipment. In that
event, on the Termination Date Lessee shall (i) return the Equipment (in
accordance with Section 10) and (ii) pay to Lessor all amounts required under
Section 17(b) less the amount of the highest bid certified by Lessee to Lessor.
18. PURCHASE OPTION:
(a) Lessee may at lease expiration purchase all (but not less than
all) of the Equipment in any Schedule on an AS IS BASIS for cash equal to its
then Fair Market Value (plus all applicable sales taxes). Lessee must notify
Lessor of its intent to purchase the Equipment in writing at least one hundred
eighty (180) days in advance. If Lessee is in default or if the Lease has
already been terminated Lessee may not purchase the Equipment.
(b) "Fair Market Value" shall mean the price that a willing buyer (who
is neither a lessee in possession nor a used equipment dealer) would pay for the
Equipment in an arm's length transaction to a willing seller under no compulsion
to sell. In determining the Fair Market Value the Equipment shall be assumed to
be in the condition in which it is required to be maintained and returned under
this Agreement. If the Equipment is installed it shall be valued on an
installed basis. The costs of removal from current location shall not be a
deduction from the value of the Equipment. If Lessor and Lessee are unable to
agree on the Fair Market Value at least one hundred thirty-five (135) days
before lease expiration, Lessor shall appoint an independent appraiser
(reasonably acceptable to Lessee) to determine Fair Market Value. The
<PAGE>
-11-
independent appraiser's determination shall be final, binding and conclusive.
Lessee shall bear all costs associated with any such appraisal.
(c) Lessee shall be deemed to have waived this option unless it
provides Lessor with written notice of its irrevocable election to exercise the
same within fifteen (15) days after Fair Market Value is sold to Lessee.
19. MISCELLANEOUS:
(a) LESSEE AND LESSOR UNCONDITIONALLY WAIVE THEIR RIGHTS TO A JURY
TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS
AGREEMENT, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS,
AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR.
THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT. THIS WAIVER IS IRREVOCABLE. THIS
WAIVER MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING. THE WAIVER ALSO SHALL
APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO
THIS AGREEMENT, ANY REALTED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THIS TRANSACTION OR ANY RELATED TRANSACTION. THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
(b) The Equipment shall remain Lessor's property unless Lessee
purchases the Equipment from Lessor and until such time Lessee shall only have
the right to use the Equipment as a lessee. Any cancellation or termination by
Lessor of this Agreement, any Schedule, supplement or amendment hereto, or the
lease of any Equipment hereunder shall not release Lessee from any then
outstanding obligations to Lessor hereunder. all Equipment shall at all times
remain personal property of Lessor even though it may be attached to real
property. The Equipment shall not become part of any other property by reason
of any installation, in or attachment to, other real or personal property.
(c) Time is of the essence of this Agreement. Lessor's failure at any
time to require strict performance by Lessee of any of the provisions hereof
shall not waive or diminish Lessor's right at any other time to demand strict
compliance with this Agreement. Lessee agrees, upon Lessor's request, to
execute any instrument necessary or expedient, for filing, recording or
perfecting the interest of Lessor. All notices required to be given hereunder
shall be deemed adequately given if sent by registered or certified mail to the
addressee at its address stated herein, or at such other place as such addressee
may have specified in writing. This Agreement and any Schedule and Annexes
thereto constitute the entire agreement of the parties with respect to the
subject matter hereof. NO VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY
WAIVER OF ANY OF ITS PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING
AND SIGNED BY AN AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO.
<PAGE>
-12-
(d) If Lessee does not comply with any provision of this Agreement,
Lessor shall have the right, but shall not be obligated, to effect such
compliance, in whole or in part. All reasonable amounts spent and obligations
incurred or assumed by Lessor in effecting such compliance shall constitute
additional rent due to Lessor. Lessee shall pay the additional rent within five
days after the date Lessor sends notice to Lessee requesting payment. Lessor's
effecting such compliance shall not be a waiver of Lessee's default.
(e) Any rent or other amount not paid to Lessor when due shall bear
interest, from the due date until paid, at the lesser of eighteen percent (18%)
per annum or the maximum rate allowed by law. Any provisions in this Agreement
and any Schedule that are in conflict with any statute, law or applicable rule
shall be deemed omitted, modified or altered to conform thereto.
(f) Lessee hereby irrevocably authorizes Lessor to adjust the
Capitalized Lessor's Cost up or down by no more than ten percent (10%) within
each Schedule to account for equipment change orders, equipment returns,
invoicing errors, and similar matters. Lessee acknowledges and agrees that the
rent shall be adjusted as a result of the change in the Capitalized Lessor's
Cost. Lessor shall send Lessee a written notice stating the final Capitalized
Lessor's Cost, if it has changed.
(g) THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH,
THE INTERNAL LAWS OF THE STATE OF CONNECTICUT (WITHOUT REGARD TO THE CONFLICT OF
LAWS PRINCIPLES OF SUCH STATE), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY
AND PERFORMANCE, REGARDLESS OF THE LOCATION OF THE EQUIPMENT.
(h) Any cancellation or termination by Lessor, pursuant to the
provisions of this Agreement, any Schedule, supplement or amendment hereto, of
the lease of any Equipment hereunder, shall not release Lessee from any then
outstanding obligations to Lessor hereunder.
(i) To the extent that any Schedule would constitute chattel paper, as
such term is defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction, no security interest therein may be created through the
transfer or possession of this Agreement in and of itself without the transfer
or possession of the original of a Schedule executed pursuant to this Agreement
and incorporating this Agreement by reference; and no security interest in this
Agreement and a Schedule may be created by the transfer or possession of any
counterpart of the Schedule other than the original thereof, which shall be
identified as the document marked "Original" and all other counterparts shall be
marked "Duplicate".
<PAGE>
-13-
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
General Electric Capital Corporation ACT Manufacturing, Inc.
By: /s/ James R. Costello By: /s/ Jeffrey B. Lavin
------------------------------------ ----------------------------
Name: James R. Costello Name: Jeffrey B. Lavin
---------------------------------- --------------------------
Title: Risk Analyst Title: Chief Financial Officer
--------------------------------- -------------------------
<PAGE>
-14-
CORPORATE LESSEE'S
BOARD OF DIRECTORS RESOLUTION
The undersigned hereby certified: (i) that she/he is the Secretary of ACT
Manufacturing, Inc.; (ii) that the following is a true and correct copy of
resolutions duly adopted at a meeting of the Board of Directors of said
Corporation duly held on the 26th day of April, 1999; and (iii) that said
resolutions have not been amended, rescinded, modified or revoked, and are in
full force and effect:
"RESOLVED, that each of the officers of this Corporation, whose name
appears below:
/s/ John A. Pino /s/ Jeffrey B. Lavin
- ------------------------------ ---------------------------------
President Treasurer
/s/ Douglass Greenlaw /s/ Jeffrey B. Lavin
- ------------------------------ ---------------------------------
Vice President Secretary
or the duly elected or appointed successor in office of any or all of them, be,
and hereby is, authorized and empowered in the name and on behalf of this
Corporation to enter into, execute and deliver a master lease agreement with
General Electric Capital Corporation (together with its successors and assigns,
if any, "Lessor") as Lessor, providing for the leasing to (or sale and leaseback
by) this Corporation, from time to time, of certain equipment, and further
providing for this Corporation to indemnify said Lessor against certain
occurrences and against the loss of contemplated tax treatment; and
FURTHER RESOLVED, that each officer of this Corporation be, and is,
authorized and empowered in the name and on behalf of this Corporation to enter
into, execute and deliver any documents and to do and perform all other acts and
deeds which may be necessary or appropriate to effectuate the lease (or sale and
leaseback) of equipment from Lessor; and
FURTHER RESOLVED, that the Lessor may rely upon the aforesaid resolutions
until receipt by it of written notice of any change.
IN WITNESS WHEREOF, I have set my hand and affixed the seal of said
Corporation this 26th day of April, 1999.
(CORPORATE SEAL)
/s/ Jeffrey B. Lavin
- ----------------------
Secretary
<PAGE>
Exhibit 10.52
SECOND ASSIGNMENT OF SUBLEASE
THIS SECOND ASSIGNMENT OF SUBLEASE (this "Second Assignment") is entered into as
of the 17th day of December, 1999, by and between Mack Technologies, Inc., of 27
Carlisle Road, Westford, MA 01886, a Delaware corporation (hereinafter referred
to as "Mack"), and ACT Manufacturing Corporation, of 2 Cabot Road, Hudson,
Massachusetts 01749, a Massachusetts corporation (hereinafter referred to as
"ACT").
WHEREAS under a Net Lease dated December 15, 1986 (the "Original Master Lease"),
James A. Progin and Peter M. Small, Trustees of 401 Elm Street Realty Trust
(together, the "Original Master Landlord"), leased to Honeywell, Inc., a
Delaware corporation (the "Original Tenant"), property in Marlborough,
Massachusetts, as more particularly described in the Original Master Lease (the
"Master Leased Premises"); and
WHEREAS a Notice of Lease dated December 18, 1986, between the Original Master
Landlord and the Original Tenant, concerning the Original Master Lease, was
recorded with the Middlesex South Registry of Deeds at Book 17683, Page 310 (the
"Original Lease Notice").
WHEREAS the Original Master Landlord and the Original Tenant agreed to amend the
Original Master Lease by a First Amendment dated November 17, 1988 (the "First
Master Lease Amendment"); and
WHEREAS the Original Tenant assigned its rights, interests and obligations in,
to and under the Original Master Lease, as so amended, to Loral Corporation, a
New York corporation ("Loral"), by an Assignment and Assumption of Lease dated
December 31, 1989 (the "First Master Lease Assignment"); and
WHEREAS Loral assigned its rights, interests and obligations in, to and under
the Original Master Lease, as so amended, to Loral Infrared & Imaging Systems,
Inc., a Delaware corporation (the "Original Sublandlord"), by an Assignment and
Assumption of Lease dated December 31, 1989 (the "Second Master Lease
Assignment"); and
WHEREAS Lockheed Martin Corporation, a Maryland corporation ("Lockheed"),
assumed and succeeded to the Original Sublandlord's rights, interests and
obligations under the Master Lease, as so amended, and the Original Sublease
under an Assignment and Assumption of Lease and Development Agreement dated
April 19, 1997, between the Original Sublandlord and Lockheed, and recorded with
the Middlesex South Registry of Deeds at Book 27500, Page 405; and
WHEREAS the Original Master Landlord and Lockheed agreed to amend the Original
Master Lease, as so amended, by a Second Amendment to Lease dated as of April
19, 1997, and a Third Amendment to Master Lease dated as of July 17, 1997,
notice of which recorded with the Middlesex South Registry of Deeds at Book
27500, Page 408 (said amendments, together with the First Master Lease
Amendment, being the "Master Lease Amendments"); and
WHEREAS the Original Master Landlord assigned, transferred and conveyed to
Lepercq Corporate Income Fund, L.P., a Delaware limited partnership (the "Master
Landlord"), (a) the Master Lease Premises by a Quitclaim Deed dated as of July,
1997 and recorded with the Middlesex South
<PAGE>
Registry of Deeds on July 22, 1997, as Instrument No. 678, and (b) the
landlord's rights, interests and obligations in, to and under the Master Lease,
as so amended, under an Assignment and Assumption Agreement dated as of July 22,
1997, and recorded with said Registry on July 23, 1997, as Instrument No. 645
(together, the "Master Landlord's Transfers"); and
WHEREAS the Original Master Lease, as amended and affected by the Master Lease
Amendments and as assigned and affected by the First Master Lease Assignment,
the Second Master Lease Assignment and the Master Landlord's Transfers, is
hereinafter referred to as the "Master Lease", a copy of which is attached to
this Second Assignment as a part of Exhibit A; and
WHEREAS under a Sublease Agreement dated October 16, 1992 (the "Original
Sublease"), the Original Sublandlord subleased to Stratus Computer, Inc., a
Massachusetts corporation ("Stratus"), a portion of the Master Leased Premises,
including the building commonly known as 401 Elm Street, Marlborough,
Massachusetts, as more particularly described in the Original Sublease (the
"Premises"); and
WHEREAS the Original Master Landlord consented to the execution of the Original
Sublease under a Consent of Master Landlord dated as of December 1992; and
WHEREAS Stratus assigned its rights, interests and obligations in, to and under
the Original Sublease to Mack by an Assignment of Sublease dated as of January
31, 1996 (the "First Sublease Assignment"); and
WHEREAS the Original Sublandlord consented to the First Sublease Assignment
under a Consent and Agreement dated January 31, 1996, among the Original
Sublandlord, Stratus and Mack, and the Original Master Landlord consented to the
First Sublease Assignment under a Consent and Agreement dated as of January 24,
1996, among the Original Master Landlord, Stratus and Mack (said instruments
entitled Consent and Agreement, together, being the "First Sublease Assignment
Consents"); and
WHEREAS Lockheed and Mack agreed to amend the Original Sublease, as so assigned,
under an agreement dated October 2, 1997 (the "Extension Amendment", a copy of
which is not included in Exhibit B); and
WHEREAS Lockheed and Mack agreed to amend the Original Sublease, as so assigned,
under a First Amendment to Sublease dated as of February 5, 1998 (the "Sublease
Amendment"; the Original Sublease, as assigned and affected by the First
Sublease Assignment, as affected by the First Sublease Assignment Consents and
as amended and affected by the Extension Amendment and the Sublease Amendment,
being hereinafter referred to as the "Sublease", a copy of which is attached to
this Second Assignment as Exhibit B); and
WHEREAS, Mack wishes to assign and transfer its rights, interests and
obligations under the Sublease to ACT as of January 1, 2000 (the "Effective
Date"), and ACT wishes to accept such assignment and transfer and assume all of
Mack's rights and obligations arising or accruing under the Sublease on and
after the Effective Date, on the terms and conditions of this Second Assignment;
<PAGE>
NOW, THEREFORE, in consideration of the mutual covenants set forth in this
Second Assignment, and for other good and valuable consideration, the receipt
and sufficiency of which Mack and ACT acknowledge, Mack and ACT agree as
follows:
1. As of the Effective Date, Mack hereby assigns and transfers to ACT its
rights, interests and obligations arising or accruing under the Sublease on and
after the Effective Date, and ACT hereby accepts such assignment and transfer
and accepts all of Mack's rights, interests and obligations arising or accruing
under the Sublease on and after the Effective Date; provided, however, ACT shall
not have the right to extend the Sublease for the Second Extended Term (as
defined in the Sublease), unless Mack has received from Lockheed and Stratus,
respectively, an irrevocable release and discharge of Mack from all liabilities
and obligations to Lockheed or Stratus, as the case may be, arising or accruing
during such Second Extended Term (the "Release"), except with respect to any
Mack indemnity applicable to Mack's use of hazardous or toxic substances or oil
on the Premises.
2. Beginning on the date of this Second Assignment, ACT shall have access to
the Premises for the sole purpose performing inspections, alterations,
improvements, installations and other work necessary or desired by ACT to
prepare the Premises for ACT's use and occupancy (collectively, "ACT's Work").
All of ACT's Work shall be undertaken by ACT in strict compliance with the terms
of the Sublease, and ACT shall not proceed to undertake any ACT's Work in the
Premises without first obtaining any approvals required under the Sublease, as
if performed after the Effective Date, nor undertake any other activity on or
about the Premises except in full compliance with the terms of the Sublease as
if ACT was then the sublessee thereunder. If either Mack or ACT exercise their
respective rights to terminate this Second Assignment under Sections 11 of this
Second Assignment, or if ACT exercises its right to terminate this Second
Assignment under Section 12 of this Second Assignment, Mack may, at its option,
by written notice to ACT within 30 days after such termination, require ACT to
remove any or all of ACT's Work at ACT's expense. ACT shall hold Mack harmless
from and against any and all costs or expenses associated with the removal of
ACT's Work and the restoration of the Premises to its original condition,
including, without limitation, any reasonable attorneys' fees and expenses
incurred to enforce this Section 2 or to collect such costs or expenses from
ACT.
3. (a) The amount of One Hundred Fifty-three Thousand Five Hundred Ten Dollars
($153,510.00) (the "Security Deposit") shall be paid to Mack by ACT upon
execution of this Second Assignment as security for ACT's performance under the
Sublease and under this Second Assignment. Mack shall deposit the Security
Deposit in a separate, segregated, interest-bearing money-market account
identified as holding ACT's funds and shall pay all interest accruing on such
account to ACT no less frequently than annually. If ACT fails to pay any
amounts due from the subtenant under the Sublease or otherwise fails to perform
any other obligation of ACT under the Sublease, Mack may use, apply or retain
all or any portion of the Security Deposit to the extent necessary to pay any
rent or other charge past due or any cost or expense which Mack may incur by
reason of ACT's default under the Sublease or this Agreement or to compensate
Mack for any loss or damage which Mack may suffer by reason of such failure of
ACT. If Mack so uses or applies all or any portion of the Security Deposit, ACT
shall, within ten (10) days after written demand therefor, deposit cash with
Mack in an amount sufficient to restore the Security Deposit to the full amount
required under this Agreement. Within thirty (30) days following expiration of
the Sublease, Mack shall return the Security Deposit, less any amounts properly
used, applied or retained under this Section 3.
<PAGE>
(b) Upon receipt by Mack and ACT of all Consents (as hereinafter defined)
and the Release, Mack shall promptly pay the Security Deposit to Lockheed, to be
held as a security deposit and returned in accordance with the terms of the
Consent to be executed by Lockheed and ACT, at which time Mack shall be released
from all further obligations to ACT with respect to the Security Deposit. If
either Mack or ACT exercise their respective rights to terminate this Second
Assignment under Sections 11 of this Second Assignment, or if ACT exercises its
right to terminate this Second Assignment under Section 12 of this Assignment,
Mack shall, within 30 days after such termination, return the Security Deposit
to ACT, after first deducting from the Security Deposit any costs and expenses
payable to Mack under Section 2 above.
4. Subject to receipt of all Consents, Mack shall pay to ACT on the Effective
Date the amount of Three Hundred Seventy-eight Thousand Dollars ($378,000.00) as
an allowance for alterations and improvements to the Premises contemplated by
the ACT.
5. To the best of its knowledge, Mack represents and warrants to ACT that:
(a) The copy of the Master Lease attached hereto as Exhibit A is complete and
accurate copy of the Master Lease, which has not been amended except as set
forth in said Exhibit A, and represents the entire agreement between
Lockheed and the Master Landlord with respect to the Premises;
(b) The Master Lease is in full force and effect and is enforceable against the
Master Landlord and Lockheed in accordance with the terms set forth in said
Exhibit A;
(c) The Master Landlord is the holder of the landlord's rights, interests and
obligations under the Master Lease, and Lockheed is the holder of the
tenant's rights, interests and obligations under the Master Lease, and such
rights, interests and obligations have not been assigned except as set
forth in said Exhibit A; and
(d) Mack has no knowledge of a default by the Master Landlord or Lockheed under
the Master Lease or any event which, after the giving of any applicable
notice and the expiration of any applicable cure period, would ripen into a
default under the Master Lease.
6. Mack warrants and represents to ACT that
(a) The copy of the Sublease attached hereto as Exhibit B is complete and
accurate copy of the Sublease, which has not been amended except as set
forth in said Exhibit B, and represents the entire agreement between
Lockheed and Mack with respect to the Premises;
(b) The Extension Amendment did not amend or otherwise affect the Sublease in
any way other than an extension of the Initial Term (as defined in the
Sublease) by one month to April 30, 1998;
<PAGE>
(c) The Sublease is in full force and effect and is enforceable against the
sublandlord in accordance with the terms set forth in said Exhibit B;
(d) To the best of its knowledge, Lockheed is the holder of the sublandlord's
rights, interests and obligations under the Sublease, and Mack is the
holder of the subtenant's rights, interests and obligations under the
Sublease, and such rights, interests and obligations have not been
assigned, mortgaged or otherwise encumbered except as set forth in said
Exhibit B;
(e) Mack has no knowledge of a default by Lockheed under the Sublease or any
event which, after the giving of any applicable notice and the expiration
of any applicable cure period, would ripen into a default by Lockheed under
the Sublease;
(f) Mack is not in default under the Sublease, nor has any event occurred
which, after the giving of any applicable notice and the expiration of any
applicable cure period, would ripen into a default by Mack under the
Sublease;
(g) All rent, additional rent and other charges due under the Sublease have
been or will be paid as billed or required in the normal course through
December 31, 1999;
(h) All improvements installed on the Premises by Mack prior to the date of
this Second Assignment comply with all building codes now in effect or are
otherwise acceptable to governmental authorities by irrevocable waiver or
exemption from the current building code; and Mack shall indemnify and hold
harmless ACT from and against (1) any costs or expenses incurred by ACT in
connection with (a) the removal of any such improvements, if required by
any governmental authority due to non-compliance with the current building
code, and (b) the installation of compliant replacement improvements, and
(2) any claim by any governmental authority or Lockheed or the Master
Landlord (or their respective successors in interest under the Sublease and
the Master Lease) by reason of any improvements which are determined not to
be in compliance with any applicable building code, provided that ACT
present Mack with an estimate of the cost to rectify the situation; and
should Mack not agree with such estimate, Mack may so notify ACT within 30
days after receipt of such estimate and, at its expense, correct the
situation as required by the applicable governmental authority or Lockheed
or the Master Landlord; and
(i) Neither Mack nor its officers, shareholders, employees, agents, contractors
or invitees have released, discharged or otherwise allowed the emission of
Hazardous Materials (as hereinafter defined) at the Premises.
7. Subject to Section 12 of this Second Assignment, and except with respect to
existing environmental conditions, ACT accepts the Premises "AS IS", and the
taking of possession or use of the Premises by ACT for any purpose shall
conclusively establish that ACT has inspected the Premises and accepts them as
being in good and sanitary order, condition and repair. ACT acknowledges that
neither Mack nor any of Mack's brokers or agents has made any representations or
warranties as to the suitability or fitness of the Premises for the conduct of
ACT's business, or for
<PAGE>
any other purpose, except as set forth in this Second Assignment, and that
neither Mack nor any of Mack's agents has agreed to undertake any alterations or
additions or construct any improvements to the Premises, except for the payment
of the allowance under Section 4 of this Second Assignment.
8. Mack shall pay and perform, and shall indemnify and hold harmless ACT from
and against, all obligations of the sublessee under the Sublease arising or
accruing before the Effective Date. ACT shall pay and perform, and shall
indemnify and hold harmless Mack from and against, all obligations and
liabilities of the sublessee under the Sublease arising or accruing after the
Effective Date.
9. All of the rights, interests and obligations of the sublessee under the
Sublease may be reassigned by ACT and any subsequent assignee, but only with (a)
the prior written consent of Lockheed and the Master Landlord, or their
respective successors in interest under the Master Lease, and (b) if Mack has
not then received the Release, the prior written consent of Mack, but only if
the net worth of the assignee is less than the net worth of ACT as of the date
of this Second Assignment, which consent Mack shall not unreasonably withhold,
delay or condition.
10. Mack and ACT each represent and warrant to the other that Spaulding & Slye
("Broker") is the only real estate broker with whom it has dealt in connection
with this Second Assignment. Mack and ACT shall each indemnify and hold
harmless the other from any and all damages, cost, and expenses (including but
not limited to reasonable attorneys' fees and disbursements) incurred as a
result of any claim by any real estate broker, finder, or other person (other
than Broker) alleging to have dealt with the indemnifying party in connection
with this Second Assignment. Mack shall be responsible for the payment of any
real estate brokerage commissions due to Broker as a result of entering into
this Second Assignment.
11. The assignment of the rights, interests and obligations of the sublessee
under the Sublease and the respective rights and obligations of Mack and ACT
under Sections 1 and 8 of this Second Assignment are subject to, and shall be
effective only upon receipt of, a Consent and Agreement, in form and substance
acceptable to Mack and ACT, executed by Mack, ACT and each of Stratus, Lockheed,
and the Master Landlord (collectively, the "Consents"). If Mack and ACT do not
receive all of the consents on or before the Effective Date, then either Mack or
ACT shall have the right to terminate this Second Assignment by written notice
to the other party.
12. Before the Effective Date, ACT shall have the right to enter upon the
Premises to complete such tests, inspections and assessments of the soil, water,
groundwater, air and improvements on or under the Premises, including without
limitation a determination of the presence of any Hazardous Materials (as
hereinafter defined), and to prepare such reports evaluating the results of such
tests, inspections and assessments and the compliance of the Premises with
Environmental Laws (as hereinafter defined). "Environmental Laws" shall mean
any federal, state and local statutes, laws, codes, rules, regulations,
ordinances, by-laws, judgments, orders, standards, permits, licenses and
requirements pertaining to the protection, preservation, conservation or
regulation of the environment and human health. "Hazardous Materials" shall
mean any petroleum, petroleum products, asbestos, asbestos-containing materials,
polychlorinated biphenyls, radioactive materials and any other hazardous,
dangerous or toxic chemicals, materials, wastes, pollutants, contaminants or
other substances, the use, exposure, release, emission, discharge, generation,
manufacture, sale, transport, handling, storage, treatment, presence, disposal
or recycling of which is regulated under
<PAGE>
any Environmental Law. If the results of such tests, inspections, assessments,
determinations, evaluations or reports is unsatisfactory to ACT, in its sole
discretion, ACT shall have the right to terminate this Second Assignment by
written notice to Mack at any time before the Effective Date.
Mack and ACT execute this Second Assignment under seal as of the day and year
first written above.
FOR MACK TECHNOLOGIES, INC.: FOR ACT MANUFACTURING CORPORATION:
Signature: /s/ Ron Jellison Signature: /s/ Jeffrey B. Lavin
----------------- ----------------------
Print Name: Ron Jellison Name: Jeffrey B. Lavin
-------------- ------------------
Title: President/Vice President Title: Vice President and Treasurer
Signature: /s/ Florence M. Belnap
------------------------
Print Name: Florence M. Belnap
--------------------
Title: Treasurer/Assistant Treasurer
<PAGE>
Exhibit 10.53
SUBLEASE AGREEMENT
------------------
THIS SUBLEASE AGREEMENT is made and entered into effective this 16th day of
October 1992 by and between LORAL INFRARED & IMAGING SYSTEMS, INC., a Delaware
corporation and a subsidiary of Loral Corporation, with its principal place of
business at 600 Third Avenue, New York, New York 10016 (hereinafter referred to
as "Sublessor") and STRATUS COMPUTER, INC., a Massachusetts corporation, with
its principal office at 55 Fairbanks Boulevard, Marlboro, Massachusetts 01752
(hereinafter referred to as "Sublessee").
ARTICLE ONE
-----------
References
----------
1.1. Definitions. As used in this Sublease, the following terms shall
-----------
have the following meanings:
A. "Master Lease" shall mean that lease dated December 18, 1986, with
--------------
James A. Progin and Peter M. Small, as Trustees of 401 Elm Street Realty Trust,
as Landlord, and Honeywell, Inc., a Delaware corporation, as Tenant, as such
lease was amended by that, First Amendment to-Lease dated November 17, 1988 and
which lease as so amended was assigned by Honeywell, Inc. to-Loral Corporation
and simultaneously assigned by Loral Corporation to Sublessor by those
Assignments and Assumptions of Lease effective December 31, 1999, and which
lease, First Amendment and Assignments and Assumptions are attached hereto as
Exhibit C.
B. "Master Landlord" shall mean the Landlord named in paragraph A of
-----------------
this Section 1.1 or any successor to such named Landlord which shall be the
Landlord under the Master Lease.
C. "Development Agreement" shall mean that certain Agreement between
-----------------------
Master Landlord and Honeywell, Inc. dated December 18, 1986 pertaining to that
certain
<PAGE>
unimproved land adjacent to that covered by the Master Lease and defined
as the "Unimproved Land" in paragraph E of this Section 1.1, a copy of which has
been given to Sublessee and receipt of which Sublessee acknowledges.
D. "Lot 1" shall mean that certain parcel of land containing
-------
approximately 12.473 acres designated as "Lot 1" on that subdivision plan
entitled "Honeywell Park, Marlborough, MA, November 14, 1988, A Definitive
Subdivision of Land, by H. W. Moore Associates, Inc. recorded with the Middlesex
South Registry of Deeds in Book 19938, Page 221.
E. "Unimproved Property" shall mean that certain parcel of land
---------------------
containing approximately 23.996 acres designated as "Lot 2" on the subdivision
plan referred to in paragraph D of this Section 1.1.
F. "Premises" shall mean Lot 1 .and all of the improvements located
----------
thereon, excluding the portion, thereof covered by that certain lease between
Master Landlord and the Marlboro Historical Society dated July 1, 1981, a copy
of Which is included in Exhibit B.
G. "Building" shall mean the two level building located on Lot 1
----------
containing approximately 126,000 square feet of floor area as shown on Plan I
and Plan 2 attached as Exhibit A.
H. "Common Areas" shall mean all of the area of the Premises outside
--------------
of the Building and including the paved access and parking and all landscaped
areas.
I. "Maverick Production Area" shall mean that space on Plan 1 of
--------------------------
Exhibit A shaded and labeled as "Maverick Production" and containing
approximately 8,800 square feet of floor area.
J. OMITTED INTENTIONALLY.
K. "Term Commencement Date" shall mean September 1, 1992.
------------------------
-9-
<PAGE>
L. "Term" shall mean the term of this Sublease which shall commence
------
on the Term Commencement Date and end on March 31, 1998 unless extended pursuant
to Sections 2.3 or 2.4 or sooner terminated pursuant to the provisions of this
Sublease.
M. "Initial Term" shall mean the period of the Term commencing on the
--------------
Term Commencement Date and ending on March 31, 1998 unless sooner terminated
pursuant to the provisions of this Sublease.
N. "First Extended Term" shall mean the period of the Term if
---------------------
extended pursuant to Section 2.3 commencing on April 1, 1998 and ending on March
31, 2003 unless sooner terminated pursuant to the provisions of this Sublease.
O. "Second Extended Term" shall.-mean the period of the Term if
----------------------
extended pursuant to Section 2.4 commencing on April 1, 2003 and ending on
November 30, 2006 unless sooner terminated pursuant to the provisions of this
Sublease.
P. "Rent Commencement Date" shall mean April 1, 1993.
------------------------
Q. "Fixed Rent" shall mean the rent specified in Section 5.1 as
------------
payable during the Initial Term and shall mean the rent determined pursuant to
Section 5.2 during the First Extended Term and the rent determined pursuant to
Section 5.3 during the Second Extended Term.
R. "Additional Rent" shall mean all other payments which Sublessee is
-----------------
obligated to make under this Sublease in addition to Fixed Rent.
S. "Laws" shall mean all federal, state, county and local laws,
------
statutes and codes applicable to the Premises, the regulations adopted and
publications promulgated pursuant thereto and the regulations and directives of
all authorities having jurisdiction over the Premises, now in existence and
hereafter enacted and promulgated; and all Insurance Requirements (as defined in
Paragraph T of this Section 1.1.).
-10-
<PAGE>
T. "Insurance Requirements" shall mean the requirements and
------------------------
recommendations of the insurer carrying the fire and casualty insurance covering
the Building and those of its consultants.
U. "Hazardous Materials" shall mean materials, substances, gases,
---------------------
chemicals and wastes which are now or in the future defined and regulated under
Laws pertaining thereto as being toxic, radioactive or hazardous or which are
otherwise harmful to health, property or the environment, including, without
limitation,.-.the Laws known as the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 49 U.S.C. Para. 9601 et
--
seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Para.
- ----
1802; the Toxic Substances Control Act, as amended, 15 U.S.C. Para. 2601, et
--
seq.; the Massachusetts Oil and Hazardous Material Release Prevention Act, as
- ----
amended, Massachusetts General Laws Chapter 21E; and the regulations adopted and
publications promulgated pursuant to said Acts.
V. "Sublessor's Representatives" shall mean Sublessor's officers,
-----------------------------
employees, agents, contractors and invitees.
W. "Sublessee's Representatives" shall mean Sublessee's officers,
-----------------------------
employees, agents, contractors and invitees.
X. "Sublessor's Consent and Approval" shall be construed to make it
----------------------------------
reasonable for Sublessor to withhold its consent or approval in any instance in
which Master Landlord's consent or approval is required under the Master Lease
and such consent or approval is withheld by Master Landlord.
1.2. Exhibits and Schedules. The Exhibits and Schedules listed below in
----------------------
this Section are incorporated in this Sublease by reference and are to be
construed as a part of this Sublease:
SCHEDULE I: List of Sublessor's Property.
-----------
-11-
<PAGE>
EXHIBIT A: Plan I and Plan 2 showing the Space Layout of each of the
----------
two levels of the Building.
EXHIBIT B.1. and 2.: Premises Delivery Plans.
--------------------
EXHIBIT C: The Master Lease and Exhibits thereto.
----------
ARTICLE TWO
-----------
Demise-and Term
---------------
2.1. Demise. Sublessor hereby subleases to Sublessee Sublessor's interest
------
in the Premises under the Master Lease upon and subject to terms, covenants and
conditions of this Sublease. Sublessee hereby accepts such Sublease and assumes
all obligations thereunder upon and subject to such terms, covenants and
conditions. This Sublease is subject to the reserved occupancy rights of
Sublessor as specified in Section 3.1 and is subject to and subordinate to the
Master Lease.
2.2. Term. This Sublease shall be in effect for the duration of the
----
Initial Term and shall continue thereafter for the duration of the First
Extended Term if the Term shall have been extended in accordance with Section
2.3 and shall continue-thereafter for the duration of the Second Extended Term
if the Term shall have been extended in accordance with Section 2.4.
Notwithstanding any other provision of this Sublease, the Term shall expire upon
any expiration or termination of the Term of the Master Lease prior to the date
the Term would otherwise have expired pursuant to the provisions of this
Sublease.
2.3. First Extended Term. Subject to the terms and conditions set forth
-------------------
in Section 2.5, Sublessee shall have the option to extend the Term for the First
Extended Term by giving notice to Sublessor of its election so to extend the
Term on or prior to the date six (6) months prior to the date upon which the
Initial Term expires.
-12-
<PAGE>
2.4. Second Extended Term. Subject to the terms and conditions set forth
--------------------
in Section 2.5, Sublessee shall have the option to extend the Term for the
Second Extended Term by giving notice to Sublessor of its election so to extend
the Term on or prior to the date six (6) months prior to the date upon which the
First Extended Term expires.
2.5. Extension Options, Terms and Conditions. Time shall be of the
---------------------------------------
essence with regard to the exercise by Sublessee of the option to extend the
Term for the First Extended Term and the Second Extended-Term. It shall be a
condition upon Sublessee's right to exercise either of such extension options
that Sublessee shall not be in default beyond applicable notice and cure periods
in the performance of any material obligations under this Sublease at the time
its notice of election to exercise such option is given or at the commencement
of the First Extended Term or the Second Extended Term, as the case may be. Any
exercise of either such option by Sublessee later than permitted in Section 2.3
or Section 2.4 or at a time when such a default exists shall be ineffective and
deemed to be null and void. It shall be a further condition upon Sublessee's
right to extend the Term for the Second Extended Term that Sublessee shall have
properly exercised its option to extend the Term for the First Extended Term.
In the event that Sublessee fails to exercise its option to extend the Term for
the First Extended Term in a valid manner in accordance with this Section and
Section 2.3, then the Term shall expire on the expiration of the Initial Term
with no further rights on the part of Sublessee to extend the Term. In the
event that the Term is extended for the First-Extended Term in a valid manner
and-that thereafter Sublessee fails to exercise its option to extend the Term
for the Second Extended Term in a valid manner in accordance with this Section
and Section 2.4, the Term shall expire on the expiration of the First Extended
Term with no further rights on the part of Sublessee to extend the Term. In the
event that the Term is extended for the Second Extended Term in a valid manner,
then the Term shall expire on the expiration of the Second
-13-
<PAGE>
Extended Term with no further rights on the part of Sublessee to extend the
Term. Sublessee shall not have the right to exercise any option granted to
Tenant under the Master Lease to extend the Term of the Master Lease- All of the
terms, covenants and conditions of this Sublease shall apply and govern during
the First Extended Term and the Second Extended Term as fully as during the
Initial Term, except that the Fixed Rent shall be the amounts determined
pursuant to Sections 5.2 and 5.3.
ARTICLE THREE
-------------
Occupancy
---------
3.1. Sublessor's Reserved Occupancy. Sublessor reserves and have the
------------------------------
right to continue to occupy: (a) certain parts of the Premise (as hereinafter
specified) during the months of September and a part of October 1992
(hereinafter referred to as the "Temporary Occupancy Period"); and (b) the
Maverick Production Area until December 31, 1993 or such prior date as Sublessor
shall elect by notice to Sublessee to vacate such Area. Sublessor shall have the
option to continue to occupy the Maverick Production Area for two successive
three-month extension periods as follows:
(a) the first extension-period shall commence January 1, 1994 and
terminate March 31, 1994, Sublessor shall give notice to Sublessee that it
wishes to exercise its option for the first extension period on or before
September 30, 1993; and
(b) the second extension period shall commence April 1, 1994 and
terminate June 30, 1994. Sublessor shall give Sublessee notice that it
wishes to exercise its option for the second extension period on or before
December 31, 1993.
Sublessor shall vacate the Premises (other than the Maverick production Area-)
over the course of the Temporary Occupancy Period so as to deliver possession of
each part of such Premises to Sublessee in phases corresponding to the dates
shown on Exhibit B.1 and 2 attached hereto. In the
-14-
<PAGE>
event of any delay on the part of Sublessor in the delivery of such possession
by such dates, Sublessor shall have no liability to Sublessee as a result of
such delay, and the terms and conditions of this Sublease shall not be affected
thereby, except that the Rent Commencement Date shall be extended by a period of
time equal to that of such delay if in excess of ten (10) business days, unless
such delay was caused by Sublessee. During the period of time that Sublessor
occupies the Maverick Production Area, Sublessor's Representatives shall have
the right to use the Common Areas in common with Sublessee's Representatives and
the right to use the utility and other Building systems presently serving the
Maverick Production Area subject to payment by Sublessor of the utility charges
provided for in Section 6.1.F.
3.2. Sublessee's Initial Occupancy. Sublessee shall have the right to
-----------------------------
occupy the Premises during the months of September through and including
December of 1992 for the purpose of carrying out any such alterations,
improvements, installations-and other work as is necessary or desired by
Sublessee in order to prepare the Premises for its use and-occupancy of the
Premises. Sublessee shall have the right-to occupy the Premises for the purpose
of carrying out and conducting its use of the Premises as permitted by this
Sublease commencing on January 1, 1993 and continuing thereafter for the balance
of the Term. During the Temporary Occupancy Period, Sublessor shall make
reasonable efforts to enable Sublessee to share the occupancy of the parts of
the Premises it continues to occupy for the purpose of performing such
preparation work to the extent that Sublessee's occupancy and activities shall
not unreasonably interfere with Sublessor's occupancy and Sublessor's activities
in connection with vacating the Premises. Sublessor shall, during the Temporary
Occupancy Period, cooperate with Sublessee and cause its employees to advise and
consult with Sublessee in connection with the prosecution of such preparation
work by Sublessee's Representatives.
-15-
<PAGE>
ARTICLE FOUR
------------
Condition of Premises
---------------------
4.1. Delivery of Premises. Sublessor shall deliver and Sublessee shall
--------------------
accept the Premises (including the Maverick Production Area when vacated by
lessor) in "broom clean" condition and otherwise in the same condition as at the
effective date of this Sublease. All alterations, improvements and other work
necessary or desired by Sublessee for its use and occupancy of the Premises
(hereinafter referred to as "Premises Improvements") shall be carried out by
Sublessee at its expense, subject to reimbursement by Sublessor only to the
extent provided in Section 4.3. Attached hereto as Schedule I is a list of
Sublessor's property which was installed in the Premises by Sublessor at its
expense and which shall remain in the Premises during the Term anal which
Sublessee also accepts in its "as is" condition at the effective date of this
Sublease.
4.2. Premises Improvements. The Premises Improvements shall be carried
---------------------
out and performed by Sublessee in accordance with Section 5.1.5 of the Master
Lease and pursuant to plans and specifications approved in advance by Master
Landlord and Sublessor, which approval by Sublessor shall not be unreasonably
withheld or delayed. In the event that Sublessor shall not, within ten (10)
days after submission to it of such plans and specifications, have given to
Sublessee notice of approval or disapproval, such plans and specifications shall
be deemed to be approved by Sublessor, subject to approval by Master Landlord if
not yet received. It shall be Sublessee's responsibility at its cost to furnish
such bond or other security as shall be required by Sublessor and the Master
Landlord in connection with the Premises Improvements and in order to guarantee
completion of and full payment for the Premises Improvements by Sublessee.
Sublessee may, at its cost, utilize the existing monument sign in front of the
Building.
-16-
<PAGE>
4.3. Reimbursement by Sublessor. Sublessor shall pay to sublessee towards
--------------------------
the cost of the Premises Improvements and as sublessor's sole responsibility in
connection therewith the sum of Five Hundred Thousand ($500,000) Dollars,
payable as follows:
a. Two Hundred Fifty Thousand ($250,000) Dollars shall be payable on
the later to occur of April 30, 1993 and the date when the following
conditions have been satisfied:
(i) The Premises Improvements shall have been completed pursuant
to the plans and specifications therefor approved by Sublessor and in full
compliance with Section 5.1.5 of the Master Lease;
(ii) Satisfactory proof shall have been given to Sublessor that
the cost of the Premises Improvements exceeded Five Hundred Thousand
($500,000) Dollars and that all vendors and contractors engaged in the
Premises Improvements shall have been paid in full and shall have provided
to Sublessee acknowledgments of full payment and waivers of liens;
(iii) A Certificate of Occupancy; and
(iv) No material default shall exist on the part of Sublessee in
the performance of any of the terms, covenants and conditions of the
Sublease.
b. Provided that the conditions set forth in paragraph a of this
Section 4.3 were satisfied and the conditions set forth in subparagraph
(iv) of such paragraph a. is true at the time any further payment is due
pursuant to this paragraph, the remaining balance of Two Hundred Fifty
Thousand ($250, 000) Dollars shall be payable in four (4) equal
installments on April 30 in each of the years 1993, 1994, 1995 and 1996.
-17-
<PAGE>
ARTICLE FIVE
------------
Fixed Rent
----------
5.1. Initial Term Fixed Rent. Subject to the rent credits provided for in
-----------------------
Section Sublessee shall pay Fixed Rent for the Premises beginning on the Rent
Commencement Date and continuing during the balance of the Initial Term at the
rental rate per annum of Six Hundred Ninety Three Thousand ($693,000) Dollars,
payable in equal monthly installments of Fifty Seven Thousand Seven Hundred
Fifty ($57,750) Dollars on the first day of each month beginning with the Rent
Commencement Date.
5.2. First Extended Term Fixed Rent. In the event that the Term shall be
------------------------------
extended for the First Extended Term pursuant to Section 2.3, Sublessee shall
pay Fixed Rent for the Premises beginning on the commencement date of the First
Extended Term and continuing during the balance of the First Extended Term at
the rental rate per annum equal to the greater of: (a) Six Hundred Ninety Three
Thousand ($693,000) Dollars; or (b) eighty five (85%) percent of the annual fair
market rental value of the Premises (hereinafter referred to as the "F.M.R.V.")
determined as of the commencement date of the First Extended Term pursuant to
the provisions of Section 5.4; and such Fixed Rent so determined shall be
payable in equal monthly installments on the first day of each month beginning
with the commencement date of the First Extended Term.
5.3. Second Extended Term Fixed Rent. In the event that the Term shall be
-------------------------------
extended for the Second Extended Term pursuant to Section 2.4, Sublessee shall
pay -Fixed Rent for the Premises beginning on the commencement date of the
Second Extended Term and continuing for the balance of the Second Extended Term
at the rental rate per annum equal to the greater of: (a) the Fixed Rent per
annum payable during the First Extended Term; or (b) ninety five (95%) percent
of the F.M.R.V. determined as of the commencement date of the Second Extended
Term pursuant to the provisions
-18-
<PAGE>
of Section 5.4; and such Fixed Rent so determined shall be payable in equal
monthly installments on the first day of each month beginning with the
commencement date of the Second Extended Term.
5.4. Determination of F.M.R.V. The F.M.R.V. shall be the annual rental
------------------------
value as of the date of the commencement of the First Extended Term or as of the
Second Extended Term, whichever date is applicable, of other premises in the
Metro West area of Eastern Massachusetts which are comparable to the Premises in
terms of location, physical condition and legally permitted use, but without
regard to the existing leases of the Premises or to additions or other
improvements to the Premises made by Sublessee at its cost subsequent to the
initial Premises Improvements. Sublessor shall advise Sublessee, by notice
given to Sublessee within thirty (30) days after the receipt by Sublessor of
Sublessee's notice exercising the option to extend the Term, of the amount it
determines to be the F.M.R.V. of the Premises. In the event that Sublessee
disagrees with Sublessor's determination of F.M.R.V., it shall give Sublessor
notice to such effect within thirty (30) days after receipt of such notice of
Sublessor's determined F.M.R.V. In the event Sublessee does not give Sublessor
notice of its disagreement with Sublessor's determination of F.M.R.V. within
such thirty (30) day period, then Sublessor's determination of F.M.R.V. shall be
binding upon Sublessee. In the event Sublessee does give notice to Sublessor
within such thirty (30) day period of its disagreement with Sublessor's
determination of F.M.R.V., then Sublessee and Sublessor shall each select and
notify the other, within ten (10) days after Sublessor's receipt of such notice
of disagreement, of the name of an M.A.I. appraiser selected by each of them to
prepare 0 and submit to both of them a determination of F.M.R.V. within thirty
(30) days thereafter. In the event the two appraisers' determination of
F.M.R.V. are within ten (10%) percent of each other, then the F.M.R.V. shall be
deemed to be the average of the two determined amounts. In the event that such
determined F.M.R.V.'s differ by more than 10%, then the two appraisers shall
promptly select a third appraiser
-19-
<PAGE>
to prepare a determination of F.M.R.V. and the average of the highest two
appraisals of F.M.R.V. shall be deemed to be the F.M.R.V. for the purposes of
this Section. The fees payable to the appraisers shall be shared equally by
Sublessor and Sublessee.
5.5 Maverick Production Area Fixed Rent Credit. During the time that
------------------------------------------
Sublessor continues to occupy the Maverick Production Area, Sublessee shall
receive a credit as a deduction from the monthly installments of Fixed Rent
equal to:
(a) The sum of Four Thousand Thirty Three ($4,033) Dollars for each
month during the Term occurring in 1993 commencing with April that
Sublessor occupies the Maverick Production Area or a pro rata portion of
such sum for the part of any such month in which Sublessor discontinues
such occupancy.
(b) The sum of Five Thousand Thirty Eight ($5,038) Dollars for each of
the months January, February and March 1994 that Sublessor occupies the
Maverick Production Area or a pro rata portion of such sum for the part of
any such month in which Sublessor discontinues such occupancy;
(c) The sum of Six Thousand Fifty ($6,050) Dollars for each of the
months April, May and June 1994 that Sublessor occupies the Maverick
Production Area or a pro rata portion of such sum for the part of any such
month in which Sublessor discontinues such occupancy; and
(d) The sum equal to the entire monthly installment of Fixed Rent for
each month after June 1994 that Sublessor occupies the Maverick Production
Area or a pro rata portion of such sum for the part of any such month in
which Sublessor discontinues such occupancy.
-20-
<PAGE>
5.6. Payment of Fixed Rent and Additional Rent. Fixed Rent and Additional
-----------------------------------------
Rent shall be payable without any offset or reduction for any reason whatsoever
except as expressly provided for in this Sublease and shall be paid to Sublessor
at the address to which notices are to be sent in accordance with the provisions
of Section 6.1.R. In the event that any payment of Fixed Rent or Additional
Rent is not received by Sublessor within five (5) days after the due date
therefor, Sublessee shall pay to Sublessor, as Additional Rent payable along
with the payment of such late Fixed Rent or Additional Rent, an amount equal to
interest on such late payment at the rate per annum equal to the lower of: (a)
two (2%) percent per annum above the so called "prime rate" of interest per
annum charged at that time by the First National Bank of Boston (or any
successor thereto); or (b) the highest interest rate per annum permitted by the
laws of The Commonwealth of Massachusetts.
ARTICLE SIX
-----------
Master Lease
------------
6.1. Incorporation of Master Lease Provisions. Each of the following
----------------------------------------
paragraphs of this Section refer to provisions of the Master Lease which are
either specified as being incorporated into this Sublease, as being omitted from
this Sublease or as being incorporated in part or subject to specific
modifications. Sublessee shall have no rights or obligations with respect to
those provisions of the Master Lease which are specified below as being omitted
from this Sublease and Sublessor shall have no obligations in favor of Sublessee
pursuant to such omitted provisions. The provisions of the Master Lease which
are to be incorporated into this Sublease pursuant to such paragraphs of this
Section shall be incorporated herein as fully as if actually set forth in this
Sublease, subject only to those modifications of any such provision as are
specified in the paragraph of this Section applicable thereto, and each
reference in such provisions to `Tenant" shall be deemed to be a
-21-
<PAGE>
reference to Sublessee; each reference in such provisions to "Landlord" shall be
deemed to be a reference to "Sublessor;" and each reference to "Lease" shall be
a reference to this "Sublease."
A. The provisions of the First Amendment to Lease dated November 17,
1988 are omitted from this Sublease.
B. The provisions of the following Sections of the Master Lease are
incorporated into this Sublease only for Master Lease interpretation purposes:
Section 1.1. References.
----------
Section 1.2. Exhibits.
--------
C. The provisions of the following Sections of the Master Lease are
omitted from this Sublease:
Section 2.1. Premises.
--------
Section 2.2. Partial Releases of Parcels from the Premises.
---------------------------------------------
Section 2.3. Term.
----
Section 2.4. Extended Term.
-------------
Section 3.1. Acceptance of Premises As Is.
----------------------------
Section 3.2. Construction of Addition and Approval of Addition.
-------------------------------------------------
Section 3.3. Addition Commencement Date.
--------------------------
Section 3.4. Acceptance of the Premise.
-------------------------
Section 3.5. Construction Representative.
---------------------------
Section 3.6. Landlord's Guarantee of Construction.
------------------------------------
Section 3.7. Arbitration.
-----------
Section 4.1. The Fixed Rent.
--------------
Section 4.2. Additional Rent.
---------------
-22-
<PAGE>
D. The provisions of Section 4.2.1 Real Estate Taxes are incorporated
-----------------
into this Sublease, except that Sublessee's obligation to pay "taxes and
assessments" pursuant to such provisions shall not commence until the Rent
Commencement Date and shall end upon the expiration of the Term, with
appropriate proration for any partial periods to which any such "taxes and
assessments" are attributable and with reimbursement to either of Sublessor or
Sublessee who shall have paid such "taxes and assessments" to be prorated.
Sublessor shall be responsible and shall reimburse Sublessee for "taxes and
assessments" attributable on a pro rata basis to the Maverick Production Area
during the period of time commencing on the Rent Communicant Date and ending on
the date Sublessor discontinues its occupancy of the Maverick Production Area.
E. The provisions of Section 4.2.3 Insurance are incorporated into
---------
this Sublease, except that the all risk insurance required pursuant to Section
4.2.3.1 shall be taken out and maintained by Sublessor rather than Sublessee.
However, Sublessee shall reimburse Sublessor for all premiums paid by Sublessor
for such insurance coverage for the Term, such reimbursement to be made by
Sublessee by payment to Sublessor, as Additional Rent, within ten (10) days
after submission of a statement therefor and a copy of the insurer or agent's
bill for such premium. However, Sublessee shall have the right to carry such
all risk insurance at its expense by giving written notice of the exercise of
such right to Sublessor at least ten (10) days prior to the effective date of
such insurance coverage. Upon the giving of such notice, Sublessee shall, on
and subsequent to such effective date, have the obligation to carry and maintain
such insurance pursuant to such Section 4.2.3.1. All references in such Section
4.2.3 to Landlord shall be deemed references to both Master Landlord and
Sublessor.
F. Section 4.2.4 Utilities is incorporated into this Sublease,
---------
except that the charges referred to therein shall be paid by
-23-
<PAGE>
Sublessor prior to April 1, 1993 and shall thereafter be paid by Sublessee for
the balance of the Term. Sublessor shall reimburse Sublessee for such utility
charges attributable to its use of the Maverick Production Area.
G. The provisions of Section 4.2.5 Excess Rent are omitted from this
-----------
Sublease.
H. The provisions of Section 4.3 Later Payment of Rent are omitted
---------------------
from this Sublease.
I. The provisions of Section 5.1 Affirmative Covenants and 5.1.1
---------------------
Performance Obligations are incorporated in this Sublease.
- -----------------------
J. The provisions of Section 5.1.2 Use are incorporated in this
---
Sublease with the definition of "Permitted Uses" being that set forth in Section
1.1 of the Master Lease.
K. The provisions of Section 5.1.3 Repair and Maintenance are
----------------------
incorporated into this Sublease, except that:
1) Sublessor shall be responsible for the performance at its cost
of all repair and maintenance obligations under such Section, up to and
including December 31, 1992, and for all such repair and maintenance obligations
other than "normal repairs and maintenance" from January 1, 1993 up to and
including February 28, 1994, except for those required as a result of the
default, wrongful act, misuse or negligence of Sublessee or its Representatives,
which shall be Sublessee's responsibility at its cost. Except for the repair
obligations of Sublessor defined in subparagraphs 2) and 3) of this paragraph K:
(a) Commencing January 1, 1993, Sublessee shall be responsible for the
performance at its cost of all "normal repairs and maintenance" obligations
under such Section; and (b) Sublessee shall be responsible for the performance
at its cost of all repair and maintenance obligations under such Section for the
balance of the Term commencing March 1, 1994. "Normal repairs and maintenance"
shall be defined to mean those periodic repairs, replacements and maintenance
items that are considered as an incidence of normal use of the Premises and
shall include (without limitation) snow removal from the Common Areas.
-24-
<PAGE>
2) Sublessor shall be responsible at its cost for all necessary
repairs to the structural components of the foundations, floor slabs, exterior
walls and roof of the Building and the storm drainage systems, except for those
required as a result of the default, wrongful act, misuse or negligence of
Sublessee or its Representatives, which shall be Sublessee's responsibility at
its cost. Commencing January 1, 1993, Sublessee shall be responsible at its cost
for the periodic inspecting and maintenance of the room in accordance with
generally accepted standards and as required by any bonds or guarantees covering
the roof.
3) Commencing January 1, 1993, Sublessee shall be responsible at
its cost for all periodic inspections and maintenance of the heating,
ventilating and air conditioning equipment and systems servicing the Building
(hereinafter referred to as "H.V.A.C."), including all parts and service
required in connection therewith, in accordance with generally accepted
standards and as required by any bonds or guarantees covering the H.V.A.C.
However, in the event that any major component of the H.V.A.C. needs to be
replaced, other than as a result of the default, wrongful act, misuse or
negligence of Sublessee or its Representatives, and such replacement involves a
cost in excess of Five Thousand ($5,000) Dollars and will have a useful life
(determined in accordance with generally accepted accounting principles) in
excess of the balance of the Term at the time of such replacement, then
Sublessor shall be responsible for making such replacement at its cost; however,
if such replacement occurs on or after January 1, 1993, Sublessee shall
thereafter pay to Sublessor, as Additional Rent payable together with the Fixed
Rent, each month during the balance of the Term, the equal monthly installments
of such replacement cost payable for such balance of the Term when amortized
over such useful life on a straight line, constant payment basis, together with
interest (determined as of the commencement of the amortization period) at the
lower of: (a) the rate of two (2%) percent per annum above the so called "prime
rate" of interest per annum charged at that time
-25-
<PAGE>
by the First National Bank of Boston (or any successor thereto); or (b) the
highest rate per annum permitted by the laws of The Commonwealth of
Massachusetts.
4) Sublessor's repair and replacement responsibilities under
paragraphs 2) and 3) of this paragraph K shall be subject to and conditional
upon Sublessee giving to Sublessor prompt notice of the need for any such repair
or replacement.
5) Notwithstanding anything contained herein to the contrary,
Sublessor shall have no responsibility to maintain or repair any of the Premises
Improvements, or other improvements, additions and alterations made by
Sublessee, which maintenance and repairs shall be the sole responsibility of
Sublessee at its cost.
L. The provisions of Section 5.1.4 Compliance with Law and Section
-------------------
5.1.5 Tenant's Work are incorporated into this Sublease.
-------------
M. The provisions of the first paragraph of Section 5.1.6 Indemnity
---------
are incorporated into this Sublease by the provisions of the second paragraph of
such Section are omitted from this Sublease. Subject to the approval of such
counsel by the Master Landlord, Sublessor shall approve counsel selected by any
insurer which is obligated to defend Sublessor pursuant to such Section 5.1.6
pursuant to any insurance coverage carried by Sublessee. The term "Landlord"
when used in such Section shall be deemed to refer to both Master Landlord and
Sublessor and, accordingly, the reference to "Indemnified Parties" in such
Section and elsewhere in this Sublease shall include both Master Landlord and
Sublessor, and their respective partners, trustees, stockholders, officers,
directors and employees and beneficiaries of Master Landlord or of any of Master
Landlord's beneficiaries, and holders of mortgages on the Premises and any other
party having an interest in the Premises. The reference in clause (a) of such
Section 5.1.6 to "Indemnified Parties" shall not include Sublessor's partners,
trustees, stockholders, officers, directors, employees or beneficiaries.
-26-
<PAGE>
N. The provisions of the following Sections are incorporated in this
Sublease:
Section 5.1.7. Landlord's Right to Enter, with all references
-------------------------
therein to Landlord being deemed a reference to both Master Landlord and
Sublessor.
Section 5.1.8. Personal Property at Tenant's Risk, with all
----------------------------------
references therein to Landlord being deemed a reference to both Master
Landlord and Sublessor .
Section 5.1.10. Yield Up.
--------
Section 5.1.11. Estoppel Certificate.
--------------------
Section 5.1.13. Financial Statements.
--------------------
Section 5.2. Negative Covenants.
------------------
Section 5.2.1. Assignment and Subletting, except that references
-------------------------
to "25%" shall be modified and deemed to be "50%," and the reference to One
Hundred Million Dollars ($100,000,000) shall be Ten Million Dollars
($10,000,000) as it applies to not requiring the consent of Sublessor.
However, in every instance in which the consent of the Master Landlord is
required under such Section 5.2.9 with respect to any assignment, transfer,
mortgage, pledge, granting of a security interest or sublease (as defined
in such Section), Master Landlord's consent shall be required for any such
transaction proposed to be carried out by Sublessee.
Section 5.2.2. Overloading and Nuisance, except that:
------------------------
(l) references to "hazardous substances" and "toxic substances" shall be
deemed to refer to all "Hazardous Materials" within the definition of such
term in this Sublease; (2) Sublessee shall not generate, use, store or
dispose of, or engage in any activity involving, any Hazardous Materials
in, on, under or from the Premises, without Sublessor's prior written
consent which Sublessor may in its sole discretion withhold, whether or not
reasonable, and to the extent so consented to,
-27-
<PAGE>
such generation, use, storage or activity shall be carried out only in
compliance with all Laws applicable thereto; and (3) the second paragraph
of such section shall be omitted from this Sublease.
Section 5.2.3. Installation, Alteration or Additions.
-------------------------------------
0. The provisions of Section 6.1 Termination or Restoration; Rent
--------------------------------
Adjustment, Section 6.2 Eminent Domain, and Section 6.3 Award, of Article VI
- ---------- -------------- -----
Casualty or Taking are incorporated into this Sublease, except that references
- ------------------
to "Landlord" in such Section 6.1 relating to Landlord's obligation to "put the
Premises ... into proper condition for use and occupancy" shall be deemed to be
references solely to Master Landlord so that Sublessor shall have no
responsibility to Sublessee with respect to the performance of such obligation,
except to use reasonable efforts to cause Master Landlord to perform such
obligation; and except that Sublessor expressly reserves the rights of Tenant to
terminate the Master Lease pursuant to Section 6.1 of the Master Lease or such
Section 6.2 of the Master Lease.
P. The provisions of ARTICLE VII Defaults are incorporated into this
--------
Sublease.
Q. The provisions of ARTICLE VIII Mortgages. are not incorporated
---------
into this Sublease but this Sublease shall be subject and subordinate to all of
the terms, covenants, conditions and provisions set forth therein.
R. The provisions of Section 9.1 Notices from One Party to the Other
-----------------------------------
are incorporated herein, except that the "Original Address of Tenant" shall be
that first above set forth for Sublessee and that the "Original Address of
Landlord" shall be that first above set forth for Sublessor and that all such
notices to Sublessor shall be to the attention of its Vice President General
Counsel and all such notices to Sublessee shall be to the attention of its
Director of Real Estate with a copy (by regular mail) to the Attention of its
General Counsel.
-28-
<PAGE>
S. The provisions of the following Sections are incorporated into
this Sublease:
Section 9.2. Quiet Enjoyment.
---------------
Section 9.3. Lease not to be Recorded.
------------------------
Section 9.4. Bind and Inure; Limitation of Landlord's Liability.
--------------------------------------------------
Section 9.5. Acts of God, except that such provisions shall not
-----------
apply to Section 2.3, 2.4 and 7.2 as to which time shall be of the essence
or to Sublessee's obligation to pay Fixed Rent or Additional Rent.
Section 9.6. Landlord's Default.
------------------
Section 9.8. Applicable Law and Construction.
-------------------------------
Section 9.9. Submission Not an Offer.
-----------------------
Section 9.10. Limitation of Damages.
---------------------
Section 9.12. Rule Against Perpetuities.
-------------------------
T. The provisions of Section 9.7. Brokerage and Section 9.11.
---------
Appointment of Tenant Regarding Marlboro Historical Society are not incorporated
- -----------------------------------------------------------
into this Sublease and the "List of Materials" attached to the Master Lease is
not applicable to this Sublease.
6.2. Compliance with Master Lease.
----------------------------
(a) Sublessee agrees to perform all of its obligations under the
Master Lease and to otherwise comply with all of the provisions thereof
incorporated herein for the benefit of both Sublessor and Master Landlord
and not to engage in or permit any act or omission to occur which would
result in or cause a default to occur under the Master Lease. Sublessor
agrees to perform all of its obligations under the Master Lease and to
otherwise comply with all of the provisions thereof and not to engage in or
permit any act or omission to occur which would result in or cause a
default to
-29-
<PAGE>
occur under the Master Lease. Sublessee and Sublessor each agree to
indemnify and hold the other harmless from any and all losses, damages and
costs (including court costs and attorney's fees) incurred as a result of
any default on their part of their covenants and obligations under this
Section.
(b) Without limiting the generality of the indemnity and hold harmless
provision set forth in paragraph (a) of this Section or the indemnity, hold
harmless and defend provisions set forth in or incorporated into this
Sublease, Sublessee shall defend, with counsel approved by Sublessor, which
approval shall not be unreasonably withheld, indemnify and hold harmless
the Indemnified Parties from and against all claims, law suits, causes of
actions, demands, judgments, damages, losses and liabilities, and all
remedial, testing, investigatory, reporting, legal, consulting and court
costs and expenses arising as a result of any default by Sublessee of its
covenants or in the performance of its obligations under Section 5.2.2 of
the Master Lease as incorporated into this Sublease or otherwise arising
with respect to or as a result of Sublessee's generation, use, storage or
disposal of Hazardous Materials in, on, under or from the Premises.
Sublessee's defend, indemnification and hold harmless obligations under
this Section shall survive the expiration of the Term.
6.3. Master Lease Termination and Surrender. Sublessor shall have the
--------------------------------------
right to exercise its options to elect to cancel the Master Lease pursuant to
Article VI thereof, with no liability to Sublessee as a result of such a
termination of the Master Lease. Sublessor shall also have the right, with no
liability to Sublessee to enter into and carry out at any time an agreement with
the Master Landlord pursuant to which the Master Lease shall be terminated and
surrendered so long
-30-
<PAGE>
as the Master Landlord simultaneously enters into a new direct lease with
Sublessee with the same terms, covenants and conditions as this Sublease, except
for the rights of Sublessee under Section 7.2 (which shall terminate); and
Sublessee hereby agrees to enter into and accept such new direct lease with the
Master Landlord at such time and to agree to and assume the
ARTICLE SEVEN
-------------
Development Agreement
---------------------
7.1. Development Agreement Rights and Obligations. The Development
--------------------------------------------
Agreement is an agreement between Master Landlord and Sublessor which is and
shall be independent and separate from this Sublease. Accordingly, this
Sublease does not grant any rights to Sublessee or create any obligations upon
Sublessee pursuant to the Development Agreement, and Sublessee shall have no
rights or interests in or with respect to the Unimproved Property, except for
the limited "Right of Prior Negotiation" provided for in Section 7.2.
7.2. Right of Prior Negotiation.
--------------------------
(a) Subject to the provisions of paragraph (b) of this Section, in the
event that during the Term Sublessor proposes to purchase or purchases all
or any part of the Unimproved Property pursuant to the exercise of any
right or option on the part of Sublessor or Master Lessor under the
Development Agreement (hereinafter referred to as the "Acquired Property"),
then Sublessor shall give to Sublessee, prior to offering the Acquired
Property to third parties (which shall not include Loral Corporation or any
subsidiary or division thereof), notice that it proposes to or has acquired
the Acquired Property and a statement of the principal terms and conditions
upon which Sublessor proposes to offer the Acquired Property for sale or
lease (hereinafter referred to as the "Offered Terms"). Sublessee shall
then have the right to elect to purchase or lease the Acquired Property
upon
-31-
<PAGE>
the Offered Terms by giving to Sublessor written notice of such election
(hereinafter referred to as the "Election Notice") on or prior to the date
which shall be thirty (30) days after the date on which Sublessor shall
have given its notice of Offered Terms to Sublessee. Time shall be of the
essence with respect to the date by which Sublessee must give its Election
Notice. In the event that Sublessee shall give to Sublessor its Election
Notice within such thirty (30) day period, then Sublessor shall be
obligated to sell or lease, and Sublessee shall be obligated to purchase or
lease, the Acquired Property on the Offered Terms, and such transaction
shall be closed and consummated on a date, at a time and at a location to
be designated by Sublessor (subject to Sublessee's reasonable approval) by
written notice given to Sublessee at least thirty (30) days prior to such
closing date. In the event that Sublessee shall not give its Election
Notice to Sublessor wit such thirty (30) day period, or in the event that
Sublessee shall be in default in the performance of any of its obligations
under this Sublease on the date it gives its Election Notice or on such
closing date, then, in such cases, Sublessee's rights under this Section
7.2 shall terminate and shall be of no further force or effect, and
Sublessor shall have the right to offer, sell or lease the Acquired
Property free of any option, rights or interests on the part of Sublessee
pursuant to this Section or otherwise. However, in the event that Sublessor
does not sell or lease the Acquired Property on terms "substantially" as
favorable to Sublessor as the Offered Terms and desires to offer, sell or
lease the Acquired Property at "substantially" less favorable Offered
Terms, then, in each case in which such Offered Terms are so revised by
Sublessor, Sublessor shall be obligated to give notice of such offered
Terms to Sublessee, and Sublessee shall have the right to purchase or lease
the Acquired Property, pursuant to and in accordance with all of the
provisions of this Section 7.2. A reduction in the purchase price or fixed
rent of less than Fifteen (15%) percent shall not be considered
"substantially" less favorable "Offered Terms."
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<PAGE>
(b) All of the rights granted to Sublessee pursuant to paragraph (a)
of this Section 7.2 shall terminate and be of no further force or effect in
the event that:
1) the Development Agreement shall terminate by agreement
between Sublessor and Sublessee or otherwise; or
2) the Master Lease shall terminate or be surrendered by
agreement between Sublessor and Sublessee or otherwise.
ARTICLE EIGHT
-------------
Premises Compliance with Laws
-----------------------------
8.1. Acceptance Subject to Laws. The Premises are leased to and accepted
--------------------------
by Sublessee subject to all Laws. Sublessor, except as provided in Section 8.2,
makes no representations or warranties to Sublessee concerning the Premises
compliance with Laws as of the date hereof other than that, to the best of
Sublessor's knowledge, there are no existing conditions which violate any Laws
which would materially interfere with Sublessee's use of the Premises. Sublessor
makes no representation or warranty to Sublessee regarding the suitability of
the Premises for Sublessee's intended use thereof or regarding the validity of
Sublessee's intended use of the Premises under applicable Laws.
8.2. Hazardous Materials Conditions. Sublessor represents and warrants to
------------------------------
Sublessee that, to the best of its knowledge, there are no Hazardous Materials
existing on the date hereof in, on or under the Premises in sufficient quantity
and density to constitute a violation of any Laws applicable to Hazardous
Materials or to require remedial action thereunder, except for the conditions
described in the Request for Proposals prepared by Honeywell Inc., dated
August 19, 1991, entitled
-33-
<PAGE>
"PHASE IV PROGRAM AT FORMER HONEYWELL INC. SITE MARLBORO, MASS." and which
provides for a Remedial Response Implementation Plan and Ground Water
Recovery/Treatment System which Honeywell Inc. is responsible to carry out at
its cost. A copy of such Request for Proposals has been made available to
Sublessee for its review.
ARTICLE NINE
------------
Brokers
-------
Sublessor and Sublessee each represent to the other that they have dealt
with no real estate brokers, finders, agents or salesmen in connection with this
transaction other than Spaulding & Slye, George Mintz & Company, Inc., Corporate
Real Estate Advisors and Hunneman Commercial Company (hereinafter referred to as
the "Brokers"). Sublessor agrees to pay the Brokers a fee or commission with
respect to this transaction pursuant to separate written agreements with them.
Each party agrees to indemnify, defend and hold harmless the other party from
and against all claims for brokerage commissions, finders, fees or other
compensation made by any agents, brokers, salesmen or finders other than the
Brokers as a consequence of any actions or dealings of such indemnifying party.
ARTICLE TEN
-----------
Master Landlord's Consent
-------------------------
The obligations of both Landlord and Tenant are conditioned upon the
parties hereto receiving the written consent of Master Landlord to this Sublease
as required by Section 5.2.1 of the Master Lease. Sublessor shall submit this
Sublease to Master Landlord after its execution by Sublessee and Sublessor and
shall request its written consent hereto. In the event that Master Landlord
shall not provide such written consent within thirty (30) days after such
submission, then,
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<PAGE>
either party may cancel this Sublease by written notice of cancellation given to
the other at any time after the expiration of such thirty (30) day period and
prior to receipt by Sublessor of such consent.
-35-
<PAGE>
IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease as
of the_____ day September, 1992.
SUBLESSEE: SUBLESSOR:
STRATUS COMPUTER, INC. LORAL INFRARED & IMAGING SYSTEMS, INC.
By: /s/ Robert E. Donahue By: /s/ Stephone L. Jackson
------------------------ -------------------------
Title: Vice President, CFO Title: Vice President
--------------------- ----------------------
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<PAGE>
The undersigned hereby guarantees the performance of the obligations of
Loral Infrared & Imaging Systems, Inc. as Sublessor contained in the within
Sublease.
LORAL CORPORATION
By: /s/ Stephen L. Jackson
----------------------
Stephen L. Jackson
As Vice President
Administration
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<PAGE>
Exhibit 10.54
- --------------------------------------------------------------------------------
STANDARD FORM LEASE
- --------------------------------------------------------------------------------
PARTIES: This Lease, executed in duplicate at Cupertino, California, on
March 15, 2000, by and between Mission West Properties, L.P., a Delaware Limited
Partnership, and A C T Manufacturing, Inc., a Delaware Corporation, hereinafter
called respectively Lessor and Lessee, without regard to number or gender.
USE: Witnesseth: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, for the purpose of conducting therein office, research and development,
light manufacturing, and warehouse activities, and any other legal activity; and
for no other purpose without obtaining the prior written consent of Lessor.
PREMISES: The real property with appurtenances as shown on Exhibit A (the
"Premises") situated in the City of San Jose, County of Santa Clara, State of
California, and more particularly described as follows:
The Premises of Phase I includes 117,740 square feet of building ("Phase
I"), including the loading docks and all improvements thereto, as shown on
Exhibit A.1 including the right to use up to 412 unreserved parking spaces.
The address for the Premises is 5500 Hellyer Avenue, San Jose, California.
Lessee's pro-rata share of the Premises is 100%.
The Premises for Phase II shall be approximately 82,500 square feet of
building("Phase II"), including all improvements thereto, as shown on
Exhibit A.1 including the right to use up to 288 unreserved parking spaces.
The address for the Premises for Phase II is 5550 Hellyer Avenue, San Jose,
California. Lessee's pro-rata share for Phase II is 100%.
TERM: The term for Phase I shall be for One Hundred Twenty (120) months unless
extended pursuant to Section 35 of this Lease (the "Lease Term"), commencing on
the Commencement Date as defined in Section 1 and ending sixty (120) months
thereafter. Phase I & II Leases will end co-terminously.
RENT: Base rent shall be payable in monthly installments as follows:
<TABLE>
<CAPTION>
Base rent Estimated CAC* Total
--------- --------------- --------
<S> <C> <C> <C>
Months 1 through 4 (Phase I only) $181,320 $30,730* $212,050
Months 5 through 14 (Phase I and Phase II) $308,370 $52,262 $360,632
</TABLE>
Monthly base rent to increase by 3.5% on October 31 of each year during the
Lease Term over the prior year's rent effective October 31, 2001
* CAC charges to be adjusted per Common Area Charges Section below.
Base rent and CAC as scheduled above shall be payable in advance on or before
the first day of each calendar month during the Lease Term. The term "Rent," as
used herein, shall be deemed to be and to mean the base monthly rent and all
other sums required to be paid by Lessee pursuant to the terms of this Lease.
Rent shall be paid in lawful money of the United States of America, without
offset or deduction, and shall be paid to Lessor at such place or places as may
be designated from time to time by Lessor. Rent for any period less than a
calendar month shall be a pro rata portion of the monthly installment. Lessee
shall deposit with Lessor the first month's renton the Commencement Date of
Phase I and Phase II.
SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of Two Hundred Twelve
Thousand Dollars ($212,000) for Phase I and One Hundred Forty Eight Thousand Six
Hundred Dollars ($148,600) for Phase II (the "Security Deposit"). The Security
Deposit shall be held by Lessor as security for the faithful performance by
Lessee of all of the terms, covenants, and conditions of this Lease applicable
to Lessee. If Lessee commits a default as provided for herein, including but
not limited to a default with respect to the provisions contained herein
relating to the condition of the Premises, Lessor may (but shall not be required
to) use, apply or retain all or any part of the Security Deposit for the payment
of any amount which Lessor may spend by reason of default by Lessee. If any
portion of the Security Deposit is so used or applied, Lessee shall, within ten
days after written demand therefor, deposit cash or replacement letter of credit
with Lessor in an amount sufficient to restore the Security Deposit to its
original amount. Lessee's failure to do so shall be a default by Lessee. Any
attempt by Lessee to transfer or encumber its
<PAGE>
interest in the Security Deposit shall be null and void. Upon execution of this
Lease, Lessee shall deposit with Lessor the Security Deposit for Phase I in the
form of cash or Letter of Credit at Lessee's option per terms on Exhibit B and
Security Deposit for Phase II in the form of cash or Letter of Credit at
Lessee's option per terms on Exhibit B on Commencement Date of Phase II.
COMMON AREA CHARGES: Lessee shall pay to Lessor, as additional Rent, an amount
equal to Lessee's pro-rata share of the total common area charges of the
Premises as defined below (the common area charges for the Premises is referred
to herein as ("CAC")). Lessee shall pay to Lessor as Rent, on or before the
first day of each calendar month during the Lease Term, subject to adjustment
and reconciliation as provided herein below, the sum of Thirty Thousand Seven
Hundred and Thirty Dollars ($30,730) for Phase I and Fifty Two Thousand Two
Hundred Sixty Two Dollars ($52,262) for Phase I & II combined, said sum
representing Lessee's estimated monthly payment of Lessee's percentage share of
CAC and includes a fixed monthly sum of Three Thousand Five Hundred Thirty Two
Dollars ($3,532) for Phase I and Six Thousand Seven Dollars ($6,007) for Phase
I&II which represents the long term capital reserve for replacement of HVAC
units, parking lot, roof and painting of exterior building ("Capital Reserves").
It is understood and agreed that Lessee's obligation under this paragraph shall
be prorated to reflect the Commencement Date and the end of the Lease Term.
Lessee shall deposit the CAC with Lessor on Commencement Date as part of the
first month's rent for Phase I & II.
Lessee's estimated monthly payment of CAC payable by Lessee during the calendar
year in which the Lease commences is set forth above. At or prior to the
commencement of each succeeding calendar year term (or as soon as practical
thereafter), Lessor shall provide Lessee with Lessee's estimated monthly payment
for CAC which Lessee shall pay to Lessor as Rent. Within 120 days of the end of
each calendar year and the end of the Lease Term, Lessor shall provide Lessee a
statement of actual CAC incurred, including Capital Reserves for the preceding
year or other applicable period in the case of a termination year. If such
statement shows that Lessee has paid less than its actual percentage, then
Lessee shall within 30 days after invoice and no more often than twice a year
(initial and one revision), pay to Lessor the amount of such deficiency. If
such statement shows that Lessee has paid more than its actual percentage, then
Lessor shall, at its option, promptly refund such excess to Lessee or credit the
amount thereof to the Rent next becoming due from Lessee. Lessor reserves the
right to revise any estimate of CAC if the actual or projected CAC show an
increase or decrease in excess of 10% from an earlier estimate for the same
period. In such event, Lessor shall provide a revised estimate to Lessee,
together with an explanation of the reasons therefor, and Lessee shall revise
its monthly payments accordingly. Lessor's and Lessee's obligation with respect
to adjustments at the end of the Lease Term or earlier expiration of this Lease
shall survive the Lease Term or earlier expiration. Lessee shall have the right
to audit Lessor's CAC records and if errors of more than 5% are found, then
Lessor shall pay for the audit.
As used in this Lease, CAC shall include but is not limited to: (i) items as
specified in Sections 5(b), 6, 16 and 31; (ii) all costs and expenses including
but not limited to supplies, materials, equipment and tools used or required in
connection with the operation and maintenance of the Premises; (iii) licenses,
permits and inspection fees; (iv) all other costs incurred by Lessor in
maintaining and operating the Premises; (v) Capital Reserves; and (vi) an amount
equal to five percent (5%) of the aggregate of all CAC, as compensation for
Lessor's accounting and processing services. The monthly amortized portion of
the Capital Expense may be added to the CAC during Lease Term. Lessee shall have
the right to review the basis and computation analysis used to derive the CAC
applicable to this Lease annually. CAC shall not include (i) rent paid to any
ground lessor, (ii) repairs covered by proceeds of insurance; (iii) damage and
repairs necessitated by the gross negligence and willful misconduct of Lessor,
Lessor's employees, contractors, or agents; (iv) executive salaries or salaries
of service personnel to the extent that such personnel perform services not in
connection with the management, operation, repair, or maintenance of the
Building; (v) Lessor's general overhead expenses not related to the Building;
(vi) costs of any service for which Lessor is reimbursed; (vii) repairs,
alterations, additions, improvements or replacements needed to correct defects
in any work paid for by Lessee; (viii) "Capital Expenditures" (capital amounts
over $5,000), except (a) those required as a result of government regulations
imposed on the Premises, (b) those required as a result of alterations of the
Premises by Lessee or (c) those required to create operating efficiencies and
savings at the Premises, and (ix) management fee of 5% of items (i) thru (vii).
(a), (b), and (c) above shall be amortized over their useful life at Wells
Fargo's prime rate plus 1% and the monthly amortization shall be added to
Lessee's CAC, except for those replacement items covered in the Capital
Reserves.
LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee to
Lessor of Rent and other sums due hereunder will cause Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to
Page 2
<PAGE>
ascertain. Such costs include, but are not limited to, processing and accounting
charges, and late charges, which may be imposed on Lessor according to the terms
of any mortgage or trust deed covering the Premises. Accordingly, if any
installment of Rent or any other sum due from Lessee is not received by Lessor
or Lessor's designee within five (5) days after such amount is due, Lessee shall
pay to Lessor a late charge equal to five (5%) percent of such overdue amount.
The parties hereby agree that such late charge represents a fair and reasonable
estimate of the costs Lessor will incur by reason of late payments made by
Lessee. Acceptance of such late charges by Lessor shall in no event constitute a
waiver of Lessee's default with respect to such overdue amount, nor shall it
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. Notwithstanding the above, Lessor will waive late charges up to two
(2) times in any year due to accounting errors provided Lessee pays within 5
days after written or fax notice.
QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee paying
Rent and performing its covenants and conditions under this Lease, Lessee shall
and may peaceably and quietly have, hold and enjoy the Premises for the Lease
Term, subject, however, to the rights reserved by Lessor hereunder.
COMMENCEMENT DATE MEMORANDUM: When the actual Commencement Date is determined,
the parties shall execute a Commencement Date Memorandum setting forth the
Commencement Date, the expiration date of the Lease Term and the actual square
footage of Phase II and any required adjustments to base rent and CAC, but
failure to do so shall not affect the continuing validity and enforceability of
this Lease, which shall remain in full force and effect.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. POSSESSION
1.1 POSSESSION FOR PHASE I: Possession shall be deemed tendered and the term
shall commence for Phase I &II upon the first to occur of the following (the
"Commencement Date for Phase I"): (i) the Premises for Phase I are Substantially
Complete or (ii) Lessee occupies the Premises for Phase I and commences to
conduct business operations or (iii) if Lessor is prevented from or delayed in
completing its work under this Lease due to Lessee Delays, such work will be
deemed Substantially Complete as of the date on which it would have been
Substantially Complete for Phase I had it not been for such Lessee Delays or
(iv) the Premises for Phase I are available for occupancy by Lessee and the
Premises for Phase I meet all requirements for occupancy. It is the intention
of Lessee and Lessor that September 1, 2000 shall be the Commencement Date.
"Substantially Complete for Phase I" shall mean that: (i) Lessor has tendered
possession of Premises for Phase I to Lessee, (ii) Lessor has met all
requirements for occupancy of the Premises for Phase I and obtained a
certificate of occupancy or final inspection for the entire Phase I Premises,
(iii) The Lessee Interior Improvements are materially complete per the approved
plans, exclusive of telephone or other communication systems, punchlist items
and there remains no incomplete or defective items of work which would
materially adversely affect Lessee's intended use of the Premises for Phase I,
and (iv) said interior of the building is in a "broom clean" condition.
1.2 POSSESSION FOR PHASE II: Possession shall be deemed tendered and the term
shall commence for Phase II upon the first to occur of the following (the
"Commencement Date for Phase II"): (i) the Premises for Phase II are
Substantially Complete or (ii) Lessee occupies the Premises for Phase II and
commences to conduct business operations or (iii) if Lessor is prevented from or
delayed in completing its work under Section 2 of this Lease due to Lessee
Delays, such work will be deemed Substantially Complete for Phase II as of the
date on which it would have been Substantially Complete for Phase II had it not
been for such Lessee Delays. It is the intention of Lessee and Lessor that
January 1, 2001 shall be the Commencement Date for Phase II.
"Substantially Complete for Phase II" shall mean that: (i) Lessor has tendered
possession of the Premises for Phase II to Lessee, (ii) Lessor has met all legal
requirements for occupancy of the Premises for Phase II and obtained a
certificate of occupancy or final inspection for the entire Phase II Premises,
(iii) The Lessee Interior Improvements for Phase II are complete per the
approved plans, exclusive of punch list items and there remains no incomplete or
defective items of work which would materially adversely affect Lessee's
intended use of the Premises for Phase II and (iv) said interior of Building II
is in a "broom clean" condition.
Page 3
<PAGE>
2. LESSEE'S IMPROVEMENTS
2.1 BUILDING SHELL FOR PHASE I: The "Building Shell for Phase I", as defined in
the attached Exhibit C shall be constructed at Lessor's sole cost and expense by
independent contractors to be employed by and under the supervision of Lessor in
accordance with the site plan, elevations, plans, specifications, and working
drawings to be prepared by Lessor, which have been approved by Lessee, and
thereafter attached hereto as Exhibit D (collectively the "Shell Plans for Phase
I"). Lessor shall be responsible for ensuring that Building Shell for Phase I
conform to the approved plans and all applicable statutes, rules, regulations,
ordinances, and City of San Jose Building Department interpretations necessary
for occupancy.
2.1.1 LESSEE INTERIOR IMPROVEMENTS FOR PHASE I: The "Lessee Interior
Improvements for Phase I" shall be defined as all items not part of the Building
Shell for Phase I and shall be constructed by independent contractors to be
employed by and under the supervision of Lessor, in accordance with complete
plans and specifications prepared by Lessor for submission to the City of San
Jose ("Lessee Improvement Plans for Phase I"), complete with all mechanical and
electrical design, approved by Lessee, and then to be attached hereto as Exhibit
E. Lessee and its designated representatives, shall at all times during the
construction of the Lessee Interior Improvements for Phase I have access to the
Premises to monitor the progress of construction and Lessor's compliance with
its obligation hereunder; provided however, that such access shall not
unreasonably interfere with the activities of Lessor or its contractors.
2.1.2 BUDGET: Before entering into any contract with a contractor furnishing
labor or materials in connection with the construction of the Lessee Interior
Improvements for Phase I where the payment due under such contract is estimated
by Lessor to be in excess of One Hundred Thousand Dollars ($100,000), Lessor
shall request bids from at least three (3) qualified sub-contractors selected
by Lessor and approved by Lessee (which approval shall not be unreasonably
withheld) for bidding. Lessor will accept the lowest bid. Lessee shall have
the opportunity to review and approve the bidders list prepared by Lessor, which
approval shall not be unreasonable withheld, and may select a bidder of their
choice for the bid, provided the bidder, meets the Lessor's reasonable
requirements.
2.1.3 LESSOR'S ALLOWANCE: Included in the rental rates above would be a Lessee
Interior Improvements allowance for Phase I in the amout of Thirty Five Dollars
($35.00) per square foot. Landlord shall also make available an additional Five
Dollars ($5.00) per square foot allowance to be amortized over the remaining
initial term, at an interest rate of ten percent (10%). Such additional
improvements, if used, shall increase the rental to be paid accordingly.
Should the Lessee not utilize the full Thirty Five Dollars ($35.00) per square
foot allowance for tenant improvements, then Lessee shall have the following
options: (i) receive a rental decrease equal to the unused tenant improvement
allowance amortized at ten percent (10%) over the term of the lease, (ii) the
right to utilize, at a later time, any unused tenant improvement dollars for a
period, not to exceed twelve (12) months from the Commencement Date of Phase I,
or (iii) such dollars can be utilized by Lessee for the cost of moving expenses,
security systems, phone systems and or cabling.
Lessee has the right to allocate the full tenant improvement allowance over the
Phase I and Phase II buildings collectively.
2.1.4 COST STATEMENT & LESSEE'S CONTRIBUTION: Lessor will prepare for Lessee's
approval a cost statement which upon completion and approval shall be attached
as Exhibit F (the "Phase I Cost Statement"), showing the expected construction
cost of the Lessee Interior Improvements for Phase I. Lessor may include in
the Phase I Cost Statement, a construction management fee, covering its
overhead, profit, and other similar costs not otherwise expressly indicated on
the Phase I Cost Statement, equal to six percent (6%) of all costs shown on the
Phase I Cost Statement provided that no general contractor's fee shall be
included in the Phase I Cost Statement. If Lessor's actual cost exceed the
Thirty Five Dollars ($35) per sq. ft., Lessee may pay the excess in cash,
utilize the additional Five Dollars ($5) allowance as set forth above, or
remove items until the total costs are acceptable to Lessee. Lessor and Lessee
shall negotiate in good faith to reduce the costs for construction of the Lessee
Interior Improvements for Phase I by modifying the plans or taking other
appropriate actions so that Lessor shall not exceed the Lessee approved Cost
Statement without approval of Lessee. Lessee shall pay its approved share of the
cost for construction of the Lessee Interior Improvements for Phase I within
thirty (30) days after Lessor has provided Lessee with evidence that the
approved work for the Lessee Interior Improvements for Phase I is complete.
All costs payable by Lessee for construction of the Lessee Interior Improvements
for Phase I shall be reasonably documented and subject to verification by
Lessee.
Page 4
<PAGE>
2.1.5 CHANGE ORDERS: No change made to the plans for the Lessee Interior
Improvements for Phase I and Phase I Cost Statement after the final approval by
the parties thereof shall be effective, unless such change is approved in
writing by Lessor and Lessee, which approval shall not be unreasonably withheld.
In this regard, Lessor shall not be required to approve any change which will
increase its cost contribution above the Phase I TI Allowance, structurally
impair the Premises, or materially and adversely effect the outside appearance
of the subject building and Lessee shall not be required to approve any change
which will increase its cost contribution or interfere with the conduct of
Lessee's business, or materially detract from the inside appearance of the
Premises. Change orders shall be written and shall describe the nature of the
change and the reasonably determined increase or decrease in each item of the
Phase I Cost Statement (including the Lessor's management fee) occasioned by the
change. If Lessee requests a change which will delay the Substantial
Completion of the Lessee Interior Improvements for Phase I beyond the Scheduled
Completion Date (defined below), the maximum amount of Lessee delay that can be
attributed to the change shall also be specified in the change order.
2.1.6 INABILITY TO OBTAIN MATERIALS: If Lessor notifies Lessee that any
fittings, finished or other materials specified by Lessee for the Lessee
Interior Improvements for Phase I that are not regularly used, and cannot be
obtained within ninety (90) days after placing an order therefore and Lessor
reasonably determines that such extended delivery time will prohibit Lessor from
Substantially Completing the Lessee Interior Improvements for Phase I by the
Scheduled Completion Date, and information that will permit Lessee reasonably to
select an alternative fitting, finish, or material, including, without
limitation any expected delays in the Scheduled Completion Date associated with
each alternative, but only if (i) it wasn't a long lead time item when Lessor
approved it or (ii) Lessor notified Lessee that it is a long lead time item when
Lessor delivered the plans for Lessee's approval. Within seven (7) business
days, Lessee shall either (i) execute a change order in accordance with the
foregoing requirements selecting a reasonable alternative presented by Lessor or
developed by Lessee and approved by Lessor, which approval shall not be
unreasonably withheld, or (ii) agree that any delay in the Substantial
Completion of the Lessee Interior Improvements for Phase I as a consequence of
the inability to obtain the item will be a Lessee Delay. Any item that is part
of approved budget that can be obtained within Ninety (90) days will not be a
delay under Section 2.1.8 below.
2.1.7 TIME PERIODS FOR APPROVAL: Lessee shall approve or disapprove any
preliminary plans on or before the seventh (7th) business day following
submission to Lessee of the plan. Lessee shall approve or disapprove on or
before the twelfth (12th) business day following submission to Lessee of any
final plans. All change orders shall be approved or disapproved within three
(3) business days during construction. If plans or change orders are
disapproved, Lessee shall state the reason for disapproval and Lessor and Lessee
shall act in good faith to resolve any issues. Any unresolved issues shall be
submitted to final and binding arbitration before Dennis Kobza.
2.1.8 COMPLETION OF THE WORK & DELAY: Lessor shall use its best efforts to
Substantially Complete the Building Shell and the Lessee Interior Improvements
(collectively the "Improvements") on or before August 30, 2000 (the "Scheduled
Completion Date"). Lessor and Lessee agree that Substantial Completion of the
Lessee Interior Improvements for Phase I after the Scheduled Completion Date
will cause Lessee and Lessor to incur costs not contemplated by this Lease, the
exact amount of which will be extremely difficult to ascertain. Accordingly,
if the Lessee Interior Improvements for Phase I are not Substantially Completed
on or before September 15, 2000, then Lessor agrees to reduce the base monthly
rental by an amount equal to two days of base rental for each day of delay until
payment of the entire penalty. The parties agree that the abatement of base
monthly rent specified herein represents a fair and reasonable settlement for
both parties and neither party shall have further liability to the other for any
damages associated with delay in Substantial Completion of the Lessee Interior
Improvements for Phase I. If the Lessee Interior Improvements for Phase I are
not Substantially Completed on or before October 15, 2000, the ("Required
Completion Date"), Lessee may as its sole remedy, by delivery of written notice
to Lessor at any time after the Required Completion Date, until the Substantial
Completion of the Lessee Interior Improvements for Phase I, terminate this Lease
or continue to accept the abatement of monthly rent as stated above.
Notwithstanding the foregoing, the Scheduled Completion Date and the Required
Completion Date shall be extended one date for each day Lessor's Substantial
Completion of the Improvements is actually delayed due to (i) governmental
action after receipt of the building permits for the Lessee Interior
Improvements for Phase I (other than governmental refusal to approve work which
fails to comply with applicable Law or the building permit), (ii) acts of God,
(iii) due to circumstances beyond Lessor's control and (iv) "Lessee Delay"
means an actual delay in Substantial Completion of the Lessee Interior
Improvements for Phase I resulting from (i) the Lessee's failure to meet
Lessee's deadlines for approval of the plans for the Lessee Interior
Improvements for Phase I as set forth on Exhibit G, (ii) any change in the work
requested by Lessee (up to the maximum delay specified in the change order), and
(iii) any delay Lessee agrees in writing to bear because of the inability to
obtain any fitting, finish or material pursuant to Subsection 2.1.6, above.
Page 5
<PAGE>
2.1.9 STANDARD OF PERFORMANCE: Lessor shall be responsible for ensuring that
the Building Shell and the Lessee Interior Improvements for Phase I conform to
all applicable Laws and the approved plans for the Lessee Interior Improvements
for Phase I and are performed in a good and workmanlike manner. Neither
Lessee's approval of the plans for the Lessee Interior Improvements for Phase I,
the Phase I Cost Estimate, nor Lessee's recommendation of any contractor for
the work, shall relieve Lessor of its obligations under this Lease nor make
Lessee liable to Lessor or any contractor , or their subcontractors with respect
to the work. Lessor shall timely complete punchlist items within 30 days after
receipt of punchlist from Lessee.
2.1.10 INSTALLATION OF LESSEE'S IMPROVEMENTS: Lessee shall be permitted during
the installation of Lessee Improvements by Lessor to inspect Lessor's work and
to install Lessee items such as telephone, security and moveable partitions and
other Lessee related work provided it does not materially interfere with or
delay Lessor's work or final approvals ("Lessee's Work").
2.2 BUILDING SHELL FOR PHASE II: The "Building Shell for Phase II", as defined
in the attached Exhibit B shall be constructed at Lessor's sole cost and expense
by independent contractors to be employed by and under the supervision of Lessor
in accordance with the site plan, elevations, plans, specifications, and working
drawings to be prepared by Lessor, approved by Lessee, and thereafter attached
hereto as Exhibit H (collectively the "Shell Plans for Phase II"). Lessor shall
be responsible for ensuring that Building Shell for Phase II conforms to the
approved plans and all applicable statutes, rules, regulations, ordinances, and
City of San Jose Building Department interpretations necessary for occupancy.
2.2.1 LESSEE INTERIOR IMPROVEMENTS FOR PHASE II: The "Lessee Interior
Improvements for Phase II" shall be defined as all items not part of the
Building Shell for Phase II and shall be constructed by independent contractors
to be employed by and under the supervision of Lessor, in accordance with
complete plans and specifications prepared by Lessor for submission to the City
of San Jose ("Lessee Improvement Plans for Phase II"), complete with all
mechanical and electrical design, approved by Lessee, and then to be attached
hereto as Exhibit I. Lessee and its designated representatives, shall at all
times during the construction of the Lessee Interior Improvements for Phase II
have access to the Premises to monitor the progress of construction and Lessor's
compliance with its obligation hereunder; provided however, that such access
shall not unreasonably interfere with the activities of Lessor or its
contractors.
2.2.2 BUDGET: Before entering into any contract with a contractor furnishing
labor or materials in connection with the construction of the Lessee Interior
Improvements for Phase II where the payment due under such contract is estimated
by Lessor to be in excess of One Hundred Thousand Dollars ($100,000), Lessor
shall request bids from at least three (3) qualified sub-contractors selected
by Lessor and approved by Lessee (which approval shall not be unreasonably
withheld) for bidding. Lessor will accept the lowest bid. Lessee shall have
the opportunity to review and approve the bidders list prepared by Lessor, which
approval shall not be unreasonable withheld, and may select a bidder of their
choice for and bid, provided the bidder, gets the Lessor's reasonable
requirements.
2.2.3 LESSOR'S ALLOWANCE: Included in the rental rates above would be a Lessee
Interior Improvements allowance for Phase II in the amount of Thirty Five
Dollars ($35.00) per square foot. Landlord shall also make available an
additional Five Dollars ($5.00) per square foot allowance to be amortized over
the remaining initial term, at an interest rate of ten percent (10%). Such
additional improvements, if used, shall increase the rental to be paid
accordingly.
Should the Lessee not utilize the full Thirty Five Dollars ($35.00) per square
foot allowance for tenant improvements, then Lessee shall have the following
options: (i) receive a rental decrease equal to the unused tenant improvement
allowance amortized at ten percent (10%) over the term of the lease, (ii) the
right to utilize, at a later time, any unused tenant improvement dollars for a
period, not to exceed twelve (12) months from the Commencement Date of Phase II,
or (iii) such dollars can be utilized by Lessee for the cost of moving expenses,
security systems, phone systems and or cabling.
Lessee has the right to allocate the full tenant improvement allowance over the
Phase I and Phase II buildings collectively.
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In addition to the above, Lessor will give Lessee a credit of Two Hundred
Thirty Seven Thousand Five Hundred Dollars ($237,500) in cash or credit to
improvements.
2.2.4 COST STATEMENT & LESSEE'S CONTRIBUTION: Lessor will prepare for Lessee's
approval a cost statement which upon completion and approval shall be attached
as Exhibit J (the "Phase II Cost Statement"), showing the expected construction
cost of the Lessee Interior Improvements for Phase II. Lessor may include in
the Phase II Cost Statement, a construction management fee, covering its
overhead, profit, and other similar costs not otherwise expressly indicated on
the Phase II Cost Statement, equal to six percent (6%) of all costs shown on the
Phase II Cost Statement provided that no general contractor's fee shall be
included in the Phase II Cost Statement. If Lessor's actual cost exceed the
Thirty Five Dollars ($35) per sq. ft., Lessee may pay the excess in cash,
utilize the additional Five Dollars ($5) allowance as set forth above, or
remove items until the total costs are acceptable to Lessee. Lessor and Lessee
shall negotiate in good faith to reduce the costs for construction of the Lessee
Interior Improvements for Phase II by modifying the plans or taking other
appropriate actions so that Lessor shall not exceed the Lessee approved Cost
Statement without approval of Lessee. Lessee shall pay its approved share of
the cost for construction of the Lessee Interior Improvements for Phase II
within thirty (30) days after Lessor has provided Lessee with evidence that the
approved work for the Lessee Interior Improvements for Phase II is complete.
All costs payable by Lessee for construction of the Lessee Interior Improvements
for Phase II shall be reasonably documented and subject to verification by
Lessee.
2.2.5 CHANGE ORDERS: No change made to the plans for the Lessee Interior
Improvements for Phase II and Phase II Cost Statement after the final approval
by the parties thereof shall be effective, unless such change is approved in
writing by Lessor and Lessee, which approval shall not be unreasonably withheld.
In this regard, Lessor shall not be required to approve any change which will
increase its cost contribution above the Phase II TI Allowance, structurally
impair the Premises, or materially and adversely effect the outside appearance
of the subject building and Lessee shall not be required to approve any change
which will increase its cost contribution or interfere with the conduct of
Lessee's business, or materially detract from the inside appearance of the
Premises. Change orders shall be written and shall describe the nature of the
change and the reasonably determined increase or decrease in each item of the
Phase II Cost Statement (including the Lessor's management fee) occasioned by
the change. If Lessee requests a change which will delay the Substantial
Completion of the Lessee Interior Improvements for Phase II beyond the Scheduled
Completion Date (defined below), the maximum amount of Lessee delay that can be
attributed to the change shall also be specified in the change order.
2.2.6 INABILITY TO OBTAIN MATERIALS: If Lessor notifies Lessee that any
fittings, finished or other materials specified by Lessee for the Lessee
Interior Improvements for Phase II that are not regularly used, and cannot be
obtained within ninety (90) days after placing an order therefore and Lessor
reasonably determines that such extended delivery time will prohibit Lessor from
Substantially Completing the Lessee Interior Improvements for Phase II by the
Scheduled Completion Date, and information that will permit Lessee reasonably to
select an alternative fitting, finish, or material, including, without
limitation any expected delays in the Scheduled Completion Date associated with
each alternative, but only if (i) it wasn't a long lead time item when Lessor
approved it or (ii) Lessor notified Lessee that it is a long lead time item when
Lessor delivered the plans for Lessee's approval. Within seven (7) business
days, Lessee shall either (i) execute a change order in accordance with the
foregoing requirements selecting a reasonable alternative presented by Lessor or
developed by Lessee and approved by Lessor, which approval shall not be
unreasonably withheld, or (ii) agree that any delay in the Substantial
Completion of the Lessee Interior Improvements for Phase II as a consequence of
the inability to obtain the item will be a Lessee Delay. Any item that is part
of the approved budget that can be obtained within ninety (90) days will not be
a delay under Section 2.2.8 below.
2.2.7 TIME PERIODS FOR APPROVAL: Lessee shall approve or disapprove any
preliminary plans on or before the seventh (7th) ) business day following
submission to Lessee of the plan. Lessee shall approve or disapprove on or
before the twelfth (12th) business day following submission to Lessee of any
final plans. All change orders shall be approved or disapproved within three
(3) business days during construction. If plans or change orders are
disapproved, Lessee shall state the reason for disapproval and Lessor and Lessee
shall act in good faith to resolve any issues. Any unresolved issues shall be
submitted to final and binding arbitration by Dennis Kobza.
2.2.8 COMPLETION OF THE WORK & DELAY: Lessor shall use its best efforts to
Substantially Complete the Building Shell and the Lessee Interior Improvements
(collectively the "Improvements") on or before December 31, 2000 (the
"Scheduled Completion Date"). Lessor and Lessee agree that Substantial
Completion of the Lessee Interior Improvements for Phase II after the
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Scheduled Completion Date will cause Lessee and Lessor to incur costs not
contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Accordingly, if the Lessee Interior Improvements for
Phase II are not Substantially Completed on or before January 15, 2001, then
Lessor agrees to reduce the base monthly rental by an amount equal to two days
of base rental for each day of delay until payment of the entire penalty. The
parties agree that the abatement of base monthly rent specified herein
represents a fair and reasonable settlement for both parties and neither party
shall have further liability to the other for any damages associated with delay
in Substantial Completion of the Lessee Interior Improvements for Phase II. If
the Lessee Interior Improvements for Phase II are not Substantially Completed on
or before February 15, 2001, the ("Required Completion Date"), Lessee may as its
sole remedy, by delivery of written notice to Lessor at any time after the
Required Completion Date, until the Substantial Completion of the Lessee
Interior Improvements for Phase II, terminate this Lease or continue to accept
the abatement of monthly rent as stated above as it applies to Phase II.
Notwithstanding the foregoing, the Scheduled Completion Date and the Required
Completion Date shall be extended one date for each day Lessor's Substantial
Completion of the Improvements is actually delayed due to (i) governmental
action after receipt of the building permits for the Lessee Interior
Improvements for Phase II (other than governmental refusal to approve work which
fails to comply with applicable Law or the building permit), (ii) acts of God,
(iii) due to circumstances beyond Lessor's control and (iv) "Lessee Delay" means
an actual delay in Substantial Completion of the Lessee Interior Improvements
for Phase II resulting from (i) the Lessee's failure to meet Lessee's deadlines
for approval of the plans for the Lessee Interior Improvements for Phase II as
set forth on Exhibit K, (ii) any change in the work requested by Lessee (up to
the maximum delay specified in the change order), and (iii) any delay Lessee
agrees in writing to bear because of the inability to obtain any fitting, finish
or material pursuant to Subsection 2.2.6, above.
2.2.9 STANDARD OF PERFORMANCE: Lessor shall be responsible for ensuring that
the Building Shell and the Lessee Interior Improvements for Phase II conform to
all applicable Laws and the approved plans for the Lessee Interior Improvements
for Phase II and are performed in a good and workmanlike manner. Neither
Lessee's approval of the plans for the Lessee Interior Improvements for Phase
II, the Phase II Cost Estimate, nor Lessee's recommendation of any contractor
for the work, shall relieve Lessor of its obligations under this Lease nor make
Lessee liable to Lessor or any contractor or their subcontractors with respect
to the work. Lessor shall timely complete punchlist items within 30 days after
receipt of punchlist from Lessee.
2.2.10 INSTALLATION OF LESSEE'S IMPROVEMENTS: Lessee shall be permitted during
the installation of Lessee Improvements by Lessor to inspect Lessor's work and
to install Lessee items such as telephone, security and moveable partitions and
other Lessee related work provided it does not materially interfere with or
delay Lessor's work or final approvals ("Lessee's Work").
2.3ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: Lessee accepts the
Premises in an "AS IS" condition and "AS IS" state of repair, subject to
Lessor's representation that the Premises are in good order and repair, and
comply with all requirements for occupancy and comply with 2.1.9 for Phase I and
2.2.9 for Phase II as of the Commencement Date and all improvements have been
completed as shown on the Exhibits. Lessee shall have the benefit of any
existing construction or equipment warranties Lessee agrees on the last day of
the Lease Term, or on the sooner termination of this Lease, to surrender the
Premises to Lessor in Good Condition and Repair. "Good Condition and Repair"
shall generally mean that the Premises are in the condition that one would
expect the Premises to be in, if throughout the Lease Term Lessee (i) uses and
maintains the Premises in a commercially reasonable manner and in an accordance
with the requirements of this Lease and (ii) makes all Required Replacements.
"Required Replacements" are the replacements to worn-out equipment, fixtures,
and improvements that a commercially reasonable owner-user would make excluding
HVAC replacements, roof replacement, exterior painting and parking lot
replacement. Notwithstanding the above Good Condition and Repair shall not mean
in a new condition. All of the following shall be in Good Condition and Repair:
(i) the interior walls and floors of all offices and other interior areas, (ii)
all suspended ceilings and any carpeting shall be clean and in good condition,
(iii) all glazing, windows, doors and door closures, plate glass, and (iv) all
electrical systems including light fixtures and ballasts, plumbing, and
temperature control systems. Lessee, on or before the end of the Lease Term or
sooner termination of this Lease, shall remove all its personal property and
trade fixtures including any manufacturing equipment, even though it may be
hardwired and bolted to the Premises, and all such property not so removed shall
be deemed to be abandoned by Lessee. Lessee shall reimburse Lessor for all
disposition costs incurred by Lessor relative to Lessee's abandoned property.
If the Premises are not surrendered at the end of the Lease Term or earlier
termination of this Lease, Lessee shall indemnify Lessor against loss or
liability resulting from any delay caused by Lessee in surrendering the Premises
including, without limitation, any claims made by any succeeding Lessee founded
on such delay. Lessee shall have no obligation to remove Lessee Interior
Improvements.
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3. USES PROHIBITED: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the buildings in
which the subject Premises are located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any improper, immoral, unlawful
or objectionable purpose, or place any loads upon the floor, walls, or ceiling
which will endanger the structure, or use any machinery or apparatus which will
in any manner unreasonably vibrate or shake the Premises or the building of
which it is a part, or place any harmful liquids in the drainage system of the
building. No waste materials or refuse shall be dumped upon or permitted to
remain upon any part of the Premises outside of the building proper. No
materials, supplies, equipment, finished products or semi-finished products, raw
materials or articles of any nature shall be stored upon or permitted to remain
on any portion of the Premises outside of the building structure, unless
approved by the local, state federal or other applicable governing authority.
Lessor consents to Lessee's use of materials which are part of the normal, day-
to-day operations of Lessee's business at the Premises provided Lessee has all
required governmental approvals but this does not relieve Lessee of any of its
obligations not to contaminate the Premises and related real property or violate
any Hazardous Materials Laws.
4. ALTERATIONS AND ADDITIONS: Lessee shall not make, or suffer to be made, any
alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor not to be unreasonably withheld or
delayed; any addition or alteration to said Premises, except movable furniture
and trade fixtures, shall become at once a part of the realty and belong to
Lessor at the end of the Lease Term or earlier termination of this Lease.
Alterations and additions which are not deemed as trade fixtures shall include
HVAC systems, lighting systems, electrical systems, hardwall partitioning,
carpeting, or any other installation which has become an integral part of the
Premises. Lessee agrees that it will not proceed to make such alterations or
additions until all required government permits have been obtained and after
having obtained consent from Lessor to do so, until five (5) days from the
receipt of such consent, so that Lessor may post appropriate notices to avoid
any liability to contractors or material suppliers for payment for Lessee's
improvements. Lessee shall at all times permit such notices to be posted and to
remain posted until the completion of work. At the end of the Lease Term or
earlier termination of this Lease, Lessee shall remove and shall be required to
remove its special tenant improvements, all related equipment installed after
the Commencement Date, and any additions or alterations installed by Lessee at
or during the Lease Term and Lessee shall return the Premises to the condition
that existed before the installation of such tenant improvements.
Notwithstanding the above, Lessor agrees to allow any reasonable alterations and
improvements and will notify Lessee at the time of approval if such
improvements or alterations are to be removed at the end of the Lease Term or
earlier termination of this Lease. Subject to the above, Lessee may without the
consent of Lessor, (a) make nonstructural alterations costing up to Fifty
Thousand Dollars ($50,000).
5. MAINTENANCE OF PREMISES:
(a) Lessee shall at its sole cost and expense keep, repair, and maintain the
interior of the Premises in Good Condition and Repair, including, but not
limited to, the interior walls and floors (i.e. carpet and VCT) of all offices
and other interior areas, doors and door closures, all lighting systems,
temperature control systems, and plumbing systems, including any Required
Replacements. Lessee shall provide interior and exterior window washing as
needed.
(b) Lessor shall, at Lessor's expense, keep, repair, and maintain in Good
Condition and Repair but subject to reimbursement by Lessee unless covered by
warranty, pursuant to this Lease (based on a pro-rata share of (i) costs
based on square footage or (ii) costs directly related to Lessee's use of the
Premises as reasonably determined by Lessor) the following, which shall be
included in the monthly CAC:
1. The exterior of the building, any appurtenances and every part thereof,
including but not limited to, glazing, sidewalks, parking areas, electrical
systems, and painting of exterior walls. The parking lot to receive a
finish coat every five to seven years.
2. The HVAC by a service contract with a licensed air conditioning and
heating contractor which contract shall provide for a minimum of quarterly
maintenance of all air conditioning and heating equipment at the Premises
including HVAC repairs or replacements which are either excluded from such
service contract or any existing equipment warranties. Lessee may at its
option provide all requirements of this paragraph by a licensed contractor
and CAC will be adjusted to reflect decreased cost upon 60 days written
notice to Lessor.
3. The landscaping by a landscape contractor to water, maintain, trim and
replace, when necessary, any shrubbery, irrigation parts, and landscaping
at the Premises.
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4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of semi-
annual maintenance, cleaning of storm gutters, drains, removing of debris,
and trimming overhanging trees, repair of the roof and application of a
finish coat every five years to the building at the Premises.
5. Exterior pest control.
6. Fire monitoring services.
7. Parking lot sweeping.
(c) Lessee hereby waives any and all rights to make repairs at the expense of
Lessor as provided in Section 1942 of the Civil Code of the State of
California, and all rights provided for by Section 1941 of said Civil Code.
However, in an emergency Lessee may make any repairs required of Lessor that
Lessor has not made, provided Lessor has received notice of the need for the
repair, and Lessor will always reimburse Lessee for reasonable costs incurred
in the repairs.
(d) Lessor shall be responsible for the repair of any structural defects in
the Premises including the roof structure (not membrane), exterior walls and
foundation during the Lease Term.
6. INSURANCE:
A) HAZARD INSURANCE: Lessee shall not use, or permit said Premises, or any
part thereof, to be used, for any purpose other than that for which the
Premises are hereby leased; and no use shall be made or permitted to be made
of the Premises, nor acts done, which may cause a cancellation of any
insurance policy covering the Premises, or any part thereof, nor shall Lessee
sell or permit to be kept, used or sold, in or about said Premises, any
article which may be prohibited by an all risk insurance policy including
flood and earthquake. Lessee shall comply with any and all requirements,
pertaining to said Premises, of any insurance organization or company,
necessary for the maintenance of reasonable all risk insurance with flood and
earthquake, covering the Premises. Lessor shall, at Lessee's sole cost and
expense, purchase and keep in force fire and extended coverage insurance,
covering loss or damage to the Premises in an amount equal to the full
replacement cost of the Premises, as determined by Lessor, with proceeds
payable to Lessor. In the event of a loss per the insurance provisions of
this paragraph, Lessee shall be responsible for deductibles up to Twenty Five
Thousand Dollars ($25,000). If the deductible exceeds Twenty Five Thousand
Dollars ($25,000), then Lessee may cancel the lease by written notice to
Lessor within ten (10) days of claim unless Lessor agrees to pay the amount
deductible above Twenty Five Thousand Dollars ($25,000). Lessor may also
cancel lease at his option if Lessee is unwilling to pay entire policy
deductible. Lessee acknowledges that the insurance referenced in this
paragraph does not include coverage for Lessee's personal property.
B) LOSS OF RENTS INSURANCE: Lessor shall, at Lessee's sole cost and expense,
purchase and maintain in full force and effect, a policy of rental loss
insurance, in an amount equal to the amount of Rent payable by Lessee
commencing on the date of loss if reasonably available for the next ensuing
one (1) year, as reasonably determined by Lessor with proceeds payable to
Lessor ("Loss of Rents Insurance").
C) LIABILITY AND PROPERTY DAMAGE INSURANCE: Lessee, as a material part of the
consideration to be rendered to Lessor, hereby waives all claims against
Lessor and Lessor's Agents for damages to goods, wares and merchandise, and
all other personal property in, upon, or about the Premises, and for injuries
to persons in, upon, or about the Premises, from any cause arising at any
time, and Lessee will hold Lessor and Lessor's Agents exempt and harmless from
any damage or injury to any person, or to the goods, wares, and merchandise
and all other personal property of any person, arising from the use or
occupancy of the Premises by Lessee, or from the failure of Lessee to keep the
Premises in Good Condition and Repair, as herein provided. Lessee shall, at
Lessee's sole cost and expense, purchase and keep in force a standard policy
of commercial general liability insurance and property damage policy covering
the Premises and all related areas insuring the Lessee having a combined
single limit for both bodily injury, death and property damage in an amount
not less than three million dollars ($3,000,000.00) and Lessee's insurance
shall be primary. The limits of said insurance shall not, however, limit the
liability of Lessee hereunder. Lessee shall, at its sole cost and expense,
comply with all of the insurance requirements of all local, municipal, state
and federal authorities now in force, or which may hereafter be in force,
pertaining to Lessee's use and occupancy of the said Premises.
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D) PERSONAL PROPERTY INSURANCE: Lessee shall obtain, at Lessee's sole cost and
expense, a policy of fire and extended coverage insurance including coverage
for direct physical loss special form, and a sprinkler leakage endorsement
insuring the personal property of Lessee. The proceeds from any personal
property damage policy shall be payable to Lessee.
All insurance policies required in 6 C) and 6 D) above shall: (i) provide for a
certificate of insurance evidencing the insurance required herein, being
deposited with Lessor ten (10) days prior to the Commencement Date, and upon
each renewal, such certificates shall be provided 15 days prior to the
expiration date of such coverage, (ii) be in a form reasonably satisfactory to
Lessor and shall provide the coverage required by Lessee in this Lease, (iii) be
carried with companies with a Best Rating of A- minimum, (iv) specifically
provide that such policies shall not be subject to cancellation, reduction of
coverage, or other change except after 30 days prior written notice to Lessor,
(v) name Lessor, Lessor's lender, and any other party with an insurable interest
in the Premises as additional insureds by endorsement to policy, and (vi) shall
be primary.
Lessee agrees to pay to Lessor, as additional Rent, on demand, the full cost of
the insurance policies referenced in 6 A) and 6 B) above as evidenced by
insurance billings to Lessor which shall be included in the CAC. If Lessee does
not occupy the entire Premises, the insurance premiums shall be allocated to the
portion of the Premises occupied by Lessee on a pro-rata square footage or other
equitable basis, as determined by Lessor. It is agreed that Lessee's obligation
under this paragraph shall be prorated to the reflect the Commencement Date and
the end of the Lease Term. Notwithstanding the above on sixty (60) days written
notice prior to Commencement Date, Lessee may provide insurance required in 6A &
6B at its sole expense, on terms stated herein and CAC shall be reduced
accordingly.
Lessor and Lessee hereby waive any rights each may have against the other
related to any loss or damage caused to Lessor or Lessee as the case may be, or
to the Premises or its contents, and which may arise from any risk covered by
fire and extended coverage insurance and those risks required to be covered
under Lessee's personal property insurance. The parties shall provide that
their respective insurance policies insuring the property or the personal
property include a waiver of any right of subrogation which said insurance
company may have against Lessor or Lessee, as the case may be.
7. ABANDONMENT: Lessee shall not vacate or abandon the Premises at any time
during the Lease Term; and if Lessee shall vacate, abandon, or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor. Notwithstanding the above, the Premises
shall not be considered vacated or abandoned if Lessee maintains the Premises in
Good Condition and Repair, provides security and is not in default.
8. FREE FROM LIENS: Lessee shall keep the subject Premises and the property in
which the subject Premises are situated, free from any and all liens including
but not limited to liens arising out of any work performed, materials furnished,
or obligations incurred by Lessee. However, the Lessor shall allow Lessee to
contest a lien claim, so long as the claim is discharged prior to any
foreclosure proceeding being initiated against the property and provided Lessee
provides Lessor a bond if the lien exceeds $15,000, notwithstanding the
foregoing, no bond will be required if the lien is discharged within thirty(30)
days of filing.
9. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Lessee shall, at its sole cost and
expense, comply with all of the requirements of all local, municipal, state and
federal authorities now in force, or which may hereafter be in force, pertaining
to the Premises, and shall faithfully observe in the use and occupancy of the
Premises all local and municipal ordinances and state and federal statutes now
in force or which may hereafter be in force.
10. INTENTIONALLY OMITTED.
11. ADVERTISEMENTS AND SIGNS: Lessee shall not place or permit to be placed, in,
upon or about the Premises any unusual or extraordinary signs, or any signs not
approved by the city, local, state, federal or other applicable governing
authority. A sign so placed on the Premises shall be so placed upon the
understanding and agreement that Lessee will remove same at the end of the Lease
Term or earlier termination of this Lease and repair any damage or injury to the
Premises caused thereby, and if not so removed by Lessee, then Lessor may have
the same removed at Lessee's expense.
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12. UTILITIES: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Premises. Any charges for sewer
usage, PG&E and telephone site service or related fees shall be the obligation
of Lessee and paid for by Lessee. Lessor and Lessee agree that Lessor shall
not be liable to Lessee for any disruption in any of the utility services to the
Premises so long as all utilities are separately metered to Lessee.
13. ATTORNEY'S FEES: In case suit should be brought for the possession of the
Premises, for the recovery of any sum due hereunder, because of the breach of
any other covenant herein, or to enforce, protect, or establish any term,
conditions, or covenant of this Lease or the right of either party hereunder,
the losing party shall pay to the Prevailing Party reasonable attorney's fees
which shall be deemed to have accrued on the commencement of such action and
shall be enforceable whether or not such action is prosecuted to judgment. The
term "Prevailing Party" shall mean the party that received substantially the
relief requested, whether by settlement, dismissal, summary judgment, judgment,
or otherwise.
14.1 DEFAULT: The occurrence of any of the following shall constitute a default
and breach of this Lease by Lessee: a) Any failure by Lessee to pay Rent or to
make any other payment required to be made by Lessee hereunder when due if not
cured within ten (10) days after written notice thereof by Lessor to Lessee; b)
The abandonment or vacation of the Premises by Lessee except as provided in
Section 7; c) A failure by Lessee to observe and perform any other provision of
this Lease to be observed or performed by Lessee, where such failure continues
for thirty days after written notice thereof by Lessor to Lessee; provided,
however, that if the nature of such default is such that the same cannot be
reasonably cured within such thirty (30) day period, Lessee shall not be deemed
to be in default if Lessee shall, within such period, commence such cure and
thereafter diligently prosecute the same to completion; d) The making by Lessee
of any general assignment for the benefit of creditors; the filing by or against
Lessee of a petition to have Lessee adjudged a bankrupt or of a petition for
reorganization or arrangement under any law relating to bankruptcy; e) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets or Lessee's interest in this Lease, or the attachment, execution
or other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease.
14.2 SURRENDER OF LEASE: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity, Lessor
shall have the immediate option to terminate this Lease before the end of the
Lease Term and all rights of Lessee hereunder, by giving written notice of such
intention to terminate. In the event that Lessor terminates this Lease due to a
default of Lessee, then Lessor may recover from Lessee: a) the worth at the time
of award of any unpaid Rent which had been earned at the time of such
termination; plus b) the worth at the time of award of unpaid Rent which would
have been earned after termination until the time of award exceeding the amount
of such rental loss that the Lessee proves could have been reasonably avoided;
plus c) the worth at the time of award of the amount by which the unpaid Rent
for the balance of the Lease Term after the time of award exceeds the amount of
such rental loss that the Lessee proves could have been reasonably avoided; plus
d) any other amount necessary to compensate Lessor for all the detriment
proximately caused by Lessee's failure to perform his obligations under this
Lease or which in the ordinary course of things would be likely to result
therefrom; and e) at Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by applicable
California law. As used in (a) and (b) above, the "worth at the time of award"
is computed by allowing interest at the rate of Wells Fargo's prime rate plus
two percent (2%) per annum. As used in (c) above, the "worth at the time of
award" is computed by discounting such amount at the discount rate of the
Federal Reserve Bank of San Francisco at the time of award plus one percent
(1%).
14.3 RIGHT OF ENTRY AND REMOVAL: In the event of any such default by Lessee,
Lessor shall also have the right, with or without terminating this Lease, to re-
enter the Premises and remove all persons and property from the Premises; such
property may be removed and stored in a public warehouse or elsewhere at the
cost of and for the account of Lessee.
14.4 ABANDONMENT: In the event of the vacation or abandonment, except as
provided in Section 7, of the Premises by Lessee or in the event that Lessor
shall elect to re-enter as provided in paragraph 14.3 above or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, and Lessor does not elect to terminate this Lease as
provided in Section 14.2 above, then Lessor may from time to time, without
terminating this Lease, either recover all Rent as it becomes due or relet the
Premises or any part thereof for such term or terms and at such rental rates and
upon such other terms and conditions as Lessor, in its sole discretion, may deem
advisable with the right to make alterations and repairs to the Premises. In
the event that Lessor elects to relet the Premises, then Rent received by Lessor
from such reletting shall be applied;
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first, to the payment of any indebtedness other than Rent due hereunder from
Lessee to Lessor; second, to the payment of any cost of such reletting; third,
to the payment of the cost of any alterations and repairs to the Premises;
fourth, to the payment of Rent due and unpaid hereunder; and the residue, if
any, shall be held by Lessor and applied to the payment of future Rent as the
same may become due and payable hereunder. Should that portion of such Rent
received from such reletting during any month, which is applied by the payment
of Rent hereunder according to the application procedure outlined above, be less
than the Rent payable during that month by Lessee hereunder, then Lessee shall
pay such deficiency to Lessor immediately upon demand therefor by Lessor. Such
deficiency shall be calculated and paid monthly. Lessee shall also pay to
Lessor, as soon as ascertained, any costs and expenses incurred by Lessor in
such reletting or in making such alterations and repairs not covered by the
rentals received from such reletting.
14.5 NO IMPLIED TERMINATION: No re-entry or taking possession of the Premises by
Lessor pursuant to Section 14.3 or Section 14.4 of this Lease shall be construed
as an election to terminate this Lease unless a written notice of such intention
is given to Lessee or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Lessor because of any default by Lessee, Lessor may at any time after such
reletting elect to terminate this Lease for any such default.
15. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall, at
the option of Lessor, terminate all or any existing subleases or sub tenancies,
or may, at the option of Lessor, operate as an assignment to him of any or all
such subleases or sub tenancies.
16. TAXES: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, all real estate taxes, personal property
taxes, taxes based on vehicles utilizing parking areas in the Premises, taxes
computed or based on rental income (other than federal, state and municipal net
income taxes), environmental surcharges, privilege taxes, excise taxes, business
and occupation taxes, school fees or surcharges, gross receipts taxes, sales
and/or use taxes, employee taxes, occupational license taxes, water and sewer
taxes, assessments (including, but not limited to, assessments for public
improvements or benefit), assessments for local improvement and maintenance
districts, and all other governmental impositions and charges of every kind and
nature whatsoever, regardless of whether now customary or within the
contemplation of the parties hereto and regardless of whether resulting from
increased rate and/or valuation, or whether extraordinary or ordinary, general
or special, unforeseen or foreseen, or similar or dissimilar to any of the
foregoing (all of the foregoing being hereinafter collectively called "Tax" or
"Taxes") which, at any time during the Lease Term, shall be applicable or
against the Premises, or shall become due and payable and a lien or charge upon
the Premises under or by virtue of any present or future laws, statutes,
ordinances, regulations, or other requirements of any governmental authority
whatsoever. The term "Environmental Surcharge" shall include any and all
expenses, taxes, charges or penalties imposed by the Federal Department of
Energy, Federal Environmental Protection Agency, the Federal Clean Air Act, or
any regulations promulgated thereunder, or any other local, state or federal
governmental agency or entity now or hereafter vested with the power to impose
taxes, assessments or other types of surcharges as a means of controlling or
abating environmental pollution or the use of energy in regard to the use,
operation or occupancy of the Premises. The term "Tax" shall include, without
limitation, all taxes, assessments, levies, fees, impositions or charges levied,
imposed, assessed, measured, or based in any manner whatsoever (i) in whole or
in part on the Rent payable by Lessee under this Lease, (ii) upon or with
respect to the use, possession, occupancy, leasing, operation or management of
the Premises, (iii) upon this transaction or any document to which Lessee is a
party creating or transferring an interest or an estate in the Premises, (iv)
upon Lessee's business operations conducted at the Premises, (v) upon, measured
by or reasonably attributable to the cost or value of Lessee's equipment,
furniture, fixtures and other personal property located on the Premises or the
cost or value of any leasehold improvements made in or to the Premises by or for
Lessee, regardless of whether title to such improvements shall be in Lessor or
Lessee, or (vi) in lieu of or equivalent to any Tax set forth in this Section
16. In the event any such Taxes are payable by Lessor and it shall not be
lawful for Lessee to reimburse Lessor for such Taxes, then the Rent payable
thereunder shall be increased to net Lessor the same net rent after imposition
of any such Tax upon Lessor as would have been payable to Lessor prior to the
imposition of any such Tax. It is the intention of the parties that Lessor
shall be free from all such Taxes and all other governmental impositions and
charges of every kind and nature whatsoever. However, nothing contained in this
Section 16 shall require Lessee to pay any Federal or State income, franchise,
estate, inheritance, succession, transfer or excess profits tax imposed upon
Lessor. If any general or special assessment is levied and assessed against
the Premises, Lessor agrees to use its best reasonable efforts to cause the
assessment to become a lien on the Premises securing repayment of a bond sold to
finance the improvements to which the assessment relates which is payable in
installments
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of principal and interest over the maximum term allowed by law. It is understood
and agreed that Lessee's obligation under this paragraph will be prorated to
reflect the Commencement Date and the end of the Lease Term. It is further
understood that if Taxes cover the Premises and Lessee does not occupy the
entire Premises, the Taxes will be allocated to the portion of the Premises
occupied by Lessee based on a pro-rata square footage or other equitable basis,
as determined by Lessor. Taxes billed by Lessor to Lessee shall be included in
the monthly CAC.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall have
the right to contest or review the amount or validity of any Tax by appropriate
legal proceedings but which is not to be deemed or construed in any way as
relieving, modifying or extending Lessee's covenant to pay such Tax at the time
and in the manner as provided in this Section 16. However, as a condition of
Lessee's right to contest, if such contested Tax is not paid before such contest
and if the legal proceedings shall not operate to prevent or stay the collection
of the Tax so contested, Lessee shall, before instituting any such proceeding,
protect the Premises and the interest of Lessor and of the beneficiary of a deed
of trust or the mortgagee of a mortgage affecting the Premises against any lien
upon the Premises by a surety bond, issued by an insurance company acceptable to
Lessor and in an amount equal to one and one-half (1 1/2) times the amount
contested or, at Lessor's option, the amount of the contested Tax and the
interest and penalties in connection therewith. Any contest as to the validity
or amount of any Tax, whether before or after payment, shall be made by Lessee
in Lessee's own name, or if required by law, in the name of Lessor or both
Lessor and Lessee. Lessee shall defend, indemnify and hold harmless Lessor
from and against any and all costs or expenses, including attorneys' fees, in
connection with any such proceedings brought by Lessee, whether in its own name
or not. Lessee shall be entitled to retain any refund of any such contested Tax
and penalties or interest thereon which have been paid by Lessee. Nothing
contained herein shall be construed as affecting or limiting Lessor's right to
contest any Tax at Lessor's expense.
17. NOTICES: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in connection
with this Lease shall be given in writing and shall be given by personal
delivery, by mailing by registered or certified mail with postage thereon or
recognized overnight courier, fully prepaid, in a sealed envelope addressed to
the intended recipient as follows:
(a) to the Lessor at:
10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax (408) 725-1626
(b) to the Lessee at:
Before Lease Commencement:
ACT Manufacturing, Inc.
4950 Patrick Henry Drive
Santa Clara, CA 95054
Attn Michael Carter
Fax 408 970 9557
After Lease Commencement
ACT Manufacturing, Inc.
5500 Hellyer Ave.
San Jose, CA 95138
Attn: Michael Carter
Fax 408 970-9557
With a copy to in either event:
ACT Manufacturing, Inc.
1 Cabot Road
Hudson, Mass 01749
Attn: CFO
Fax 978 562 8395
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or such other addresses, individual as may be designated by a Communication
given by a party to the other parties as aforesaid. Any Communication given by
personal delivery shall be conclusively deemed to have been given and received
on a date it is so delivered at such address provided that such date is a
business day, otherwise on the first business day following its receipt, and if
given by registered or certified mail, on the day on which delivery is made or
refused or if given by recognized overnight courier, on the first business day
following deposit with such overnight courier, on the day on which it was
transmitted provided such day is a business day, failing which, on the next
business day thereafter.
18. ENTRY BY LESSOR: Lessee shall permit Lessor and its agents to enter into and
upon said Premises at all reasonable times with at least twenty-four (24) hours
prior notice, except in an emergency. using the minimum amount of interference
and inconvenience to Lessee and Lessee's business, subject to any security
regulations of Lessee, for the purpose of inspecting the same or for the purpose
of maintaining the building in which said Premises are situated, or for the
purpose of making repairs, alterations or additions to any other portion of said
building, including the erection and maintenance of such scaffolding, canopies,
fences and props as may be required, without any rebate of Rent and without any
liability to Lessee for any loss of occupation or quiet enjoyment of the
Premises; and shall permit Lessor and his agents, at any time within One Hundred
Twenty (120) days prior to the end of the Lease Term, to place upon said
Premises any usual or ordinary "For Sale" or "For Lease" signs and exhibit the
Premises to prospective tenants at reasonable hours.
19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the said
Premises during the Lease Term from any cause which is covered by Lessor's
property insurance, Lessor shall forthwith repair the same, provided such
repairs can be made within one hundred eighty (180) days after receipt of
building permit under the laws and regulations of State, Federal, County, or
Municipal authorities, but such partial destruction shall in no way annul or
void this Lease, except that Lessee shall be entitled to a proportionate
reduction of Rent while such repairs are being made. With respect to any
partial destruction which Lessor is obligated to repair or may elect to repair
under the terms of this paragraph, the provision of Section 1932, Subdivision 2,
and of Section 1933, Subdivision 4, of the Civil Code of the State of California
are waived by Lessee. In the event that the building in which the subject
Premises may be situated is destroyed to an extent greater than fifty percent
(50%) of the replacement cost thereof, Lessor may, at its sole option, elect to
terminate this Lease, whether the subject Premises is insured or not. A total
destruction of the building in which the subject Premises are situated shall
terminate this Lease. Notwithstanding the above, Lessor is only obligated to
repair or rebuild to the extent of available insurance proceeds including any
deductible amount paid by Lessee. Should Lessor determine that insufficient or
no insurance proceeds are available for repair or reconstruction of Premises,
Lessor, at its sole option, may terminate the Lease. Lessee shall have the
option of continuing this Lease by agreeing to pay all repair costs to the
subject Premises and if the destruction is within the last twelve (12) months of
the Lease Term, the Lessee shall have the right to terminate this Lease within
twenty (20) days of date of destruction by written notice to Lessor.
20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Premises or any part thereof, or
any right or privilege appurtenant thereto, or cause any other person or entity
(a bona fide subsidiary or affiliate of Lessee excepted) to occupy or use the
Premises, or any portion thereof, without the advance written consent of Lessor,
which shall not be unreasonably withheld or delayed. Any such assignment or
subletting without such consent shall be void, and shall, at the option of the
Lessor, terminate this Lease. This Lease shall not, or shall any interest
therein, be assignable, as to the interest of Lessee, by operation of law,
without the written consent of Lessor, which shall not be unreasonably withheld
or delayed. Notwithstanding Lessor's obligation to provide reasonable approval,
Lessor reserves the right to withhold its consent for any proposed sublessee or
assignee of Lessee if the proposed sublessee or assignee is a user or generator
of Hazardous Materials. If Lessee desires to assign its rights under this Lease
or to sublet for the remaining Term of the Lease, all of the subject Premises
to a party other than a bona fide subsidiary or affiliate of Lessee, Lessee
shall first notify Lessor of the proposed terms and conditions of such
assignment or subletting. Lessor shall have the right of first refusal to enter
into a direct Lessor-lessee relationship with such party under such proposed
terms and conditions, in which event Lessee shall be relieved of its obligations
hereunder to the extent of the Lessor-lessee relationship entered into between
Lessor and such third party. Notwithstanding the foregoing, Lessee may assign
this Lease to a successor in interest, whether by merger or acquisition,
provided there is no substantial reduction in the net worth of the resulting
entity and the resulting entity is not a user or generator of Hazardous
Materials. Whether or not Lessor's consent to a sublease or assignment is
required, in the event of any sublease or
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assignment, Lessee shall be and shall remain primarily liable for the
performance of all conditions, covenants, and obligations of Lessee hereunder
and, in the event of a default by an assignee or sublessee, Lessor may proceed
directly against the original Lessee hereunder and/or any other predecessor of
such assignee or sublessee without the necessity of exhausting remedies against
said assignee or sublessee.
21. CONDEMNATION: If any part of the Premises shall be taken for any public or
quasi-public use, under any statute or by right of eminent domain or private
purchase in lieu thereof, and a part thereof remains which in Lessee's
reasonable opinion is susceptible of occupation hereunder for Lessee's intended
purposes, this Lease shall as to the part so taken, terminate as of the date
title vests in the condemnor or purchaser, and the Rent payable hereunder shall
be adjusted so that the Lessee shall be required to pay for the remainder of the
Lease Term only that portion of Rent as the value of the part remaining. The
rental adjustment resulting will be computed at the same Rental rate for the
remaining part not taken; however, Lessor shall have the option to terminate
this Lease as of the date when title to the part so taken vests in the condemnor
or purchaser. If all of the Premises, or such part thereof be taken so that
there does not remain a portion susceptible for occupation hereunder, this Lease
shall thereupon terminate. If a part or all of the Premises be taken, all
compensation awarded upon such taking shall be payable to the Lessor. Lessee
may file a separate claim and be entitled to any award granted to Lessee.
22. EFFECTS OF CONVEYANCE: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and building constituting the Premises,
so that, in the event of any sale of said land or building, or in the event of a
Lease of said building, Lessor shall be and hereby is entirely freed and
relieved of all covenants and obligations of Lessor hereunder, and it shall be
deemed and construed, without further agreement between the parties and the
purchaser of any such sale, or the Lessor of the building, that the purchaser or
lessor of the building has assumed and agreed to carry out any and all covenants
and obligations of the Lessor hereunder. If any security is given by Lessee to
secure the faithful performance of all or any of the covenants of this Lease on
the part of Lessee, Lessor will transfer and deliver the security, as such, to
the purchaser at any such sale of the building, and thereupon the Lessor shall
be discharged from any further liability.
23. SUBORDINATION: This Lease, in the event Lessor notifies Lessee in writing,
shall be subordinate to any ground lease, deed of trust, or other hypothecation
for security now or hereafter placed upon the real property at which the
Premises are a part and to any and all advances made on the security thereof and
to renewals, modifications, replacements and extensions thereof. Lessee agrees
to promptly execute any documents which may be required to effectuate such
subordination. Notwithstanding such subordination, if Lessee is not in default
and so long as Lessee shall pay the Rent and observe and perform all of the
provisions and covenants required under this Lease, Lessee's right to quiet
possession of the Premises shall not be disturbed or effected by any
subordination.
24. WAIVER: The waiver by Lessor or Lessee of any breach of any term, covenant
or condition, herein contained shall not be construed to be a waiver of such
term, covenant or condition or any subsequent breach of the same or any other
term, covenant or condition therein contained. The subsequent acceptance of
Rent hereunder by Lessor shall not be deemed to be a waiver of Lessee's breach
of any term, covenant, or condition of the Lease.
25. HOLDING OVER: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which,
notwithstanding any other provisions of this Lease, Lessor may withhold. Such
holding over shall be construed to be a tenancy at sufferance from month to
month. Lessee shall pay to Lessor monthly base rent equal to one and one-half
(1.5) times the monthly base rent installment due in the last month of the Lease
Term and all other additional rent and all other terms and conditions of the
Lease shall apply, so far as applicable. Holding over by Lessee without written
approval of Lessor shall subject Lessee to the liabilities and obligations
provided for in this Lease and by law, including, but not limited to those in
Section 2.1 of this Lease. Lessee shall indemnify and hold Lessor harmless
against any loss or liability resulting from any delay caused by Lessee in
surrendering the Premises, including without limitation, any claims made or
penalties incurred by any succeeding lessee or by Lessor provided Lessor has
given Lessee 30 (thirty) days prior written notice that such holdover will
result in damages to Lessor. No holding over shall be deemed or construed to
exercise any option to extend or renew this Lease in lieu of full and timely
exercise of any such option as required hereunder.
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26. LESSOR'S LIABILITY: If Lessee should recover a money judgment against Lessor
arising in connection with this Lease, the judgment shall be satisfied only out
of the Lessor's interest in the Premises except to the extent of the Security
Deposit and neither Lessor or any of its partners shall be liable personally for
any deficiency.
27. ESTOPPEL CERTIFICATES: Lessee shall at any time during the Lease Term, upon
not less than ten (10) business days prior written notice from Lessor, execute
and deliver to Lessor a statement in writing certifying that, this Lease is
unmodified and in full force and effect (or, if modified, stating the nature of
such modification) and the dates to which the Rent and other charges have been
paid in advance, if any, and acknowledging that there are not, to Lessee's
knowledge, any uncured defaults on the part of Lessor hereunder or specifying
such defaults if they are claimed. Any such statement may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises.
Lessee's failure to deliver such a statement within such time shall be
conclusive upon the Lessee that (a) this Lease is in full force and effect,
without modification except as may be represented by Lessor; (b) there are no
uncured defaults in Lessor's performance.
28. TIME: Time is of the essence of the Lease.
29. CAPTIONS: The headings on titles to the paragraphs of this Lease are not a
part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed by
all of the parties hereto or their respective successors in interest.
30. PARTY NAMES: Landlord and Tenant may be used in various places in this Lease
as a substitute for Lessor and Lessee respectively.
31. RIGHT OF FIRST OFFER TO PURCHASE: Prior to Lessor accepting any offer to
purchase the Premises (all or any buildings under Lease), or prior to Lessor
making any offer to sell the Premises, Lessor shall give Lessee written notice
of such offer and shall include in such notice the price and terms and a
statement that Lessor is willing to sell at that price and on those terms.
Lessee shall have the option, which may be exercised by written notice to Lessor
at any time within thirty (30) days from the receipt of the Lessor's notice, to
agree to purchase the Premises at the price and on the terms specified in the
notice to Lessee, provided, however, that if such terms provided for an exchange
of property as part of the purchase of the Premises, Lessee shall cooperate with
Lessor provided Lessee assumes no liability and has no additional costs as a
result of its cooperation with Lessor on exchange. If Lessee fails to exercise
its option within the 30-day period, Lessor shall have 180 days thereafter to
sell the Premises at the price and on the terms specified in the notice to
Lessee.
If Lessor elects, within 180 days of Lessor's notice, to sell the Premises to a
third party on terms more favorable to the third party buyer than the terms set
forth in Lessor's notice to Lessee, then Lessor must re-offer the Premises to
Lessee on the same terms and conditions offered to the third party buyer
("Lessor's Second Notice to Sell"). Lessee shall have five (5) business days
from Lessee's receipt of Lessor's Second Notice to elect to buy the Premises.
If Lessee does not respond in writing accepting all terms and conditions offered
to third party, Lessor shall thereafter be entitled to sell the Premises to the
third party on the terms and conditions set forth in Lessor's Second Notice to
Sell or on other terms and conditions at least as favorable to Lessor as said
terms and conditions in Lessor's Second Notice for a period of 180 days after
which Lessee's Right of First Offer to Purchase shall again be in effect for the
Premises.
If Lessor does not sell the Premises during the period stated above, Lessor will
re-offer the Premises to Lessee before offering the Premises to any other
purchaser giving Lessee five (5) days to accept the price and terms.
Notwithstanding the above, Lessor will not be obligated to offer the Premises to
Lessee upon a sale to Mission West Properties or its affiliates or if sale is
part of a sale of multiple properties owned or controlled by Lessor or
Lessor's affiliates. In the event of a sale to a party other than Mission West
Properties or its affiliates as stated in this paragraph, thereafter Section 31
shall be null and void.
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32. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have defaulted
in the payment of Rent for more than two times during any twelve month period
during the Lease Term, then such conduct shall, at the option of the Lessor,
represent a separate event of default which cannot be cured by Lessee. Lessee
acknowledges that the purpose of this provision is to prevent repetitive
defaults by the Lessee under the Lease, which constitute a hardship to the
Lessor and deprive the Lessor of the timely performance by the Lessee hereunder.
33. HAZARDOUS MATERIALS
33.1 DEFINITIONS: As used in this Lease, the following terms shall have the
following meaning:
a. The term "Hazardous Materials" shall mean (i) polychlorinated biphenyls;
(ii) radioactive materials and (iii) any chemical, material or substance
now or hereafter defined as or included in the definitions of "hazardous
substance" "hazardous water", "hazardous material", "extremely hazardous
waste", "restricted hazardous waste" under Section 25115, 25117 or 15122.7,
or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined
as "hazardous substance" under Section 25316 of the California Health and
Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous
Substances Account Act), (iii) defined as "hazardous material", "hazardous
substance", or "hazardous waste" under Section 25501 of the California
Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials
Release, Response, Plans and Inventory), (iv) defined as a "hazardous
substance" under Section 25181 of the California Health and Safety Code,
Division 20l, Chapter 6.7 (Underground Storage of Hazardous Substances),
(v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as
"hazardous" or "extremely hazardous" pursuant to Article II of Title 22 of
the California Administrative Code, Division 4, Chapter 20, (viii) defined
as "hazardous substance" pursuant to Section 311 of the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section
1004 of the Federal Water Pollution Control Act (33 U.S.C. 1317), (ix)
defined as a "hazardous waste", pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined
as "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responsibility Compensations, and Liability Act, 42 U.S.C.
9601 et seq., or (xi) regulated under the Toxic Substances Control Act, 156
U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation, release,
discharge, storage or disposal of Hazardous Material.
c. The term "Lessor's Agents" shall mean Lessor's agents, representatives,
employees, contractors, subcontractors, directors, officers and partners.
d. The term "Lessee's Agents" shall mean Lessee's agents, representatives,
employees, contractors, subcontractors, directors, officers, partners,
invitees or any other person in or about the Premises.
33.2 LESSEE'S RIGHT TO INVESTIGATE: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to Lessee's employees and other persons to any Hazardous Materials used
and stored by previous occupants in or about the Premises. Lessee shall provide
Lessor with copies of all inspections, tests and evaluations. Lessee shall
indemnify, defend and hold Lessor harmless from any cost, claim or expense
arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.
33.3 LESSOR'S REPRESENTATIONS: Lessor hereby represents and warrants to the best
of Lessor's knowledge that the Premises are, as of the date of this Lease, in
compliance with all Hazardous Material Laws.
33.4 LESSEE'S OBLIGATION TO INDEMNIFY: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all cost or expenses, including those described under
subparagraphs i, ii and iii herein below set forth, arising from or caused in
whole or in part, directly or indirectly by:
a. Lessee's or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of Hazardous
Material to, in, on, under, about or from the Premises; or
b. Lessee's or Lessee's Agents failure to comply with Hazardous Material
laws; or
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c. Any release of Hazardous Material to, in, on, under, about, from or onto
the Premises caused by or occurring as a result of acts or omissions of
Lessee or Lessee's Agents or occurring during the Lease Term, except ground
water contamination from other parcels where the source is from off the
Premises not arising from or caused by Lessee or Lessee's Agents.
The cost and expenses indemnified against include, but are not limited to the
following:
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive damages,
cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury (including
sickness, disease, or death), tangible or intangible property damage,
compensation for lost wages, business income, profits or other economic
loss, damage to the natural resources of the environment, nuisance,
pollution, contamination, leaks, spills, release or other adverse effects
on the environment;
iii. The cost of any repair, clean-up, treatment or detoxification of the
Premises necessary to bring the Premises into compliance with all Hazardous
Material Laws, including the preparation and implementation of any closure,
disposal, remedial action, or other actions with regard to the Premises,
and expenses (including, without limitation, reasonable attorney's fees and
consultants fees, investigation and laboratory fees, court cost and
litigation expenses).
33.5 LESSEE'S OBLIGATION TO REMEDIATE CONTAMINATION: Lessee shall, at its sole
cost and expense, promptly take any and all action necessary to remediate
contamination of the Premises by Hazardous Materials during the Lease Term as a
result of acts or omissions of Lessee or Lessee's Agents.
33.6 OBLIGATION TO NOTIFY: Lessor and Lessee shall each give written notice to
the other as soon as reasonably practical of (i) any communication received from
any governmental authority concerning Hazardous Material which related to the
Premises and (ii) any contamination of the Premises by Hazardous Materials which
constitutes a violation of any Hazardous Material Laws.
33.7 SURVIVAL: The obligations of Lessee under this Section 33 shall survive the
Lease Term or earlier termination of this Lease.
33.8 CERTIFICATION AND CLOSURE: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting from
Lessee's obligation in Paragraph 33. If pursuant to local ordinance, state or
federal law, Lessee is required, at the expiration of the Lease Term, to submit
a closure plan for the Premises to a local, state or federal agency, then Lessee
shall comply at its sole cost and expense with the requirements of the closure
plan and furnish to Lessor a copy of such plan.
33.9 PRIOR HAZARDOUS MATERIALS: Lessee shall have no obligation to clean up or
to hold Lessor harmless with respect to any Hazardous Material or wastes
discovered on the Premises, except as a result of Environmental Surcharges,
which were not introduced into, in, on, about, from or under the Premises during
the Lease Term or ground water contamination from other parcels where the source
is from off the Premises not arising from or caused by Lessee or Lessee's
Agents.
34. BROKERS: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease other than
Colliers International and Spaulding & Slye("C & S") and Lessee agrees to
indemnify and hold Lessor harmless against any claim, cost, liability or cause
of action asserted by any broker or finder claiming through Lessee other than
C&S. Lessor shall at its sole cost and expense pay the brokerage commission per
previously agreed upon fee to C&S in connection with this transaction. Lessor
represents and warrants that it has not utilized or contacted a real estate
broker or finder with respect to this Lease other than C&S and Lessor agrees to
indemnify and hold Lessee harmless against any claim, cost, liability or cause
of action asserted by any broker or finder claiming through Lessor. Lessor
agrees to pay a market commission to C&S on any expansion by Lessee throughout
the term of the Lease, provided C&S is still representing ACT Manufacturing.
Page 19
<PAGE>
35. OPTION TO EXTEND
A. Option: Lessor hereby grants to Lessee two (2), five (5) year options to
------
extend the Lease Term, on the following terms and conditions:
(i) Lessee shall give Lessor written notice of its exercise of its option
to extend no earlier than twelve (12) , nor later than six (6) calendar
months before the Lease Term would end but for said exercise. If Lessee
and Lessor have not agreed to rental terms in writing, Lessee may withdraw
its notice of exercise of an extension option prior to six (6) months
before the Lease Term would end but for said exercise. Lessor shall
provide Lessee with Lessor's proposed base monthly rent for the option
period within twenty (20) days of Lessee's written request. However, once
Lessee delivers a notice of exercise of an option to extend the Lease Term
it may not be withdrawn except as provided for herein and subject to the
provisions of this Section 35, such notice shall operate to extend the
Lease Term. Upon any extension of the Lease Term pursuant to this Section
35, the term "Lease Term" as used in this Lease shall thereafter include
the then extended term. Time is of the essence.
(ii) Lessee may not extend the Lease Term pursuant to any option granted by
this Section 35 if Lessee is in default as of the date of the exercise of
its option. If Lessee has committed a default by Lessee as defined in
Section 14 or 32 that has not been cured or waived by Lessor in writing by
the date that any extended term is to commence, then Lessor may elect not
to allow the Lease Term to be extended, notwithstanding any notice given by
Lessee of an exercise of this option to extend.
(iii) All terms and conditions of this Lease shall apply during the
extended term, except that the base rent and rental increases for each
extended term shall be determined as provided in Section 35 (B) below
(iv) The option rights of A C T Manufacturing, Inc. granted under this
Section 35 are granted for A C T Manufacturing, Inc.'s personal benefit or
related entity and may not be assigned or transferred by A C T
Manufacturing, Inc. or related entity or exercised if A C T Manufacturing,
Inc. or related entity is not occupying the Premises at the time of
exercise.
B. Extended Term Rent - Option Period: The monthly Rent for the Premises during
----------------------------------
the extended term shall equal the fair market monthly Rent for the Premises as
of the commencement date of the extended term, but in no case, less than the
Rent during the last month of the prior Lease term. Promptly upon Lessee's
exercise of the option to extend, Lessee and Lessor shall meet and attempt to
agree on the fair market monthly Rent for the Premises as of the commencement
date of the extended term. In the event the parties fail to agree upon the
amount of the monthly Rent for the extended term prior to commencement thereof,
the monthly Rent for the extended term shall be determined by appraisal in the
manner hereafter set forth; provided, however, that in no event shall the
monthly Rent for the extended term be less than in the immediate preceding
period excluding any rent as a result of the Five Dollar ($5.00) per square foot
allowance that has been fully amortized over initial lease. Annual base rent
increases during the extended term shall be three and a half percent (3.5%) per
year. In the event it becomes necessary under this paragraph to determine the
fair market monthly Rent of the Premises by appraisal, Lessor and Lessee each
shall appoint a real estate appraiser who shall be a member of the American
Institute of Real Estate Appraiser ("AIREA") and such appraisers shall each
determine the fair market monthly Rent for the Premises taking into account the
value of the Premises and the amenities provided by the outside areas, the
common areas, and the Building, and prevailing comparable Rentals in the area
for like kind and age. Such appraisers shall, within twenty (20) business days
after their appointment, complete their appraisals and submit their appraisal
reports to Lessor and Lessee. If the fair market monthly Rent of the Premises
established in the two (2) appraisals varies by five percent (5%) or less of the
higher Rent, the average of the two shall be controlling. If said fair market
monthly Rent varies by more than five percent (5%) of the higher Rental, said
appraisers, within ten (10) days after submission of the last appraisal, shall
appoint a third appraiser who shall be a member of the AIREA and who shall also
be experienced in the appraisal of Rent values and adjustment practices for
commercial properties in the vicinity of the Premises. Such third appraiser
shall, within twenty (20) business days after his appointment, determine by
appraisal the fair market monthly Rent of the Premises taking into account the
same factors referred to above, and submit his appraisal report to Lessor and
Lessee. The fair market monthly Rent determined by the third appraiser for the
Premises shall be controlling, unless it is less than that set forth in the
lower appraisal previously obtained, in which case the value set forth in said
lower appraisal shall be controlling, or unless it is greater than that set
forth in the higher appraisal previously obtained in which case the Rent set for
in said higher appraisal shall be controlling. If either Lessor or Lessee fails
to appoint an appraiser, or if an appraiser appointed by either of them fails,
after his appointment to submit his appraisal within the required period in
accordance with the foregoing, the appraisal submitted by the appraiser properly
appointed and timely submitting his appraisal shall be controlling. If the two
appraisers appointed by Lessor and Lessee are unable to agree upon a third
appraiser within the required period in accordance
Page 20
<PAGE>
with the foregoing, application shall be made within twenty (20) days thereafter
by either Lessor or Lessee to AIREA, which shall appoint a member of said
institute willing to serve as appraiser. The cost of all appraisals under this
subparagraph shall be borne equally be Lessor and Lessee.
36. APPROVALS: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that the Lessor or Lessee does not respond to a request
for any consents which may be required of it in this Lease within ten business
days of the request of such consent in writing by the Lessee or Lessor, such
consent shall be deemed to have been given by the Lessor or Lessee.
37. AUTHORITY: Each party executing this Lease represents and warrants that he
or she is duly authorized to execute and deliver the Lease. If executed on
behalf of a corporation, that the Lease is executed in accordance with the by-
laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and that
the Lease is binding upon said individual, corporation (or partnership) as the
case may be in accordance with its terms.
38. INDEMNIFICATION OF LESSOR: Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's Agents, Lessee shall
defend, indemnify and hold Lessor harmless from and against any and all
obligations, losses, costs, expenses, claims, demands, attorney's fees,
investigation costs or liabilities on account of, or arising out of the use,
condition or occupancy of the Premises or any act or omission to act of Lessee
or Lessee's Agents or any occurrence in, upon, about or at the Premises,
including, without limitation, any of the foregoing provisions arising out of
the use, generation, manufacture, installation, release, discharge, storage, or
disposal of Hazardous Materials by Lessee or Lessee's Agents. It is understood
that Lessee is and shall be in control and possession of the Premises and that
Lessor shall in no event be responsible or liable for any injury or damage or
injury to any person whatsoever, happening on, in, about, or in connection with
the Premises, or for any injury or damage to the Premises or any part thereof.
This Lease is entered into on the express condition that Lessor shall not be
liable for, or suffer loss by reason of injury to person or property, from
whatever cause, which in any way may be connected with the use, condition or
occupancy of the Premises or personal property located herein. The provisions of
this Lease permitting Lessor to enter and inspect the Premises are for the
purpose of enabling Lessor to become informed as to whether Lessee is complying
with the terms of this Lease and Lessor shall be under no duty to enter, inspect
or to perform any of Lessee's covenants set forth in this Lease. Lessee shall
further indemnify, defend and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any obligation
to Lessee's part to be performed under the terms of this Lease. The provisions
of Section 38 shall survive the Lease Term or earlier termination of this Lease
with respect to any damage, injury or death occurring during the Lease Term.
39. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained shall,
subject to the provisions as to assignment, apply to and bind the heirs,
successors, executors, administrators and assigns of all of the parties hereto;
and all of the parties hereto shall be jointly and severally liable hereunder.
40. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are cumulative
and not alternative to the extent permitted by law and are in addition to all
other rights or remedies in law and in equity.
41. RIGHT OF FIRST OFFER TO LEASE: Lessee shall have a first right of offer to
lease any buildings of Lessor north of Silver Creek Blvd. ("NSCB") that become
available for lease in the future, subject to prior rights of other Lessee's
existing at Lease signing. Prior to Lessor making any offer to lease any NSCB
building, Lessor shall give Lessee written notice of such offer and Lessee shall
have the opportunity to lease the NSCB building, or the part thereof offered
for lease, on the terms and conditions set forth in Lessor's notice of offer.
Lessee shall have the option, which may be exercised by written notice to Lessor
at any time within ten (10) business days from the receipt of the Lessor's
notice to agree to lease the NSCB building on the terms and conditions specified
in Lessor's notice to Lessee. If Lessee fails to exercise its option within the
10-day period, Lessor shall have 180 days thereafter to lease NSCB building
specified in the notice, but in no case on terms more favorable than those
available to Lessee pursuant to this section.
Page 21
<PAGE>
If Lessor shall thereafter offer to lease the NSCB building to a third party on
the terms and conditions more favorable than Lessee's terms and conditions,
Lessor shall then offer Lessee the more favorable terms and conditions and if
not accepted in five (5) days then Lessor may lease to a third party.
42. CHOICE OF LAW: This lease shall be construed and enforced in accordance
with the substantive laws of the State of California. The language of all parts
of this lease shall in all cases be construed as a whole according to its fair
meaning and not strictly for or against either Lessor or Lessee.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease, the day and year
first above written.
<TABLE>
<S> <C>
LESSOR LESSEE
MISSION WEST PROPERTIES, L.P. A C T MANUFACTURING INC.
Mission West Properties, Inc., General Partner
By: /s/ Carl E. Berg By: /s/ Jeffrey B. Lavin
------------------------------------------------------- ------------------------------------------------------
signature of authorized representative signature of authorized representative
Carl E. Berg Jeffrey B. Lavin
- ----------------------------------------------------------- ------------------------------------------------------------
printed name printed name
President of General Partner VP Finance, Chief Financial Officer
- ----------------------------------------------------------- ------------------------------------------------------------
title title
3/17/00 3/15/00
- ----------------------------------------------------------- ------------------------------------------------------------
date date
</TABLE>
Page 22
<PAGE>
Exhibit 11.1
ACT MANUFACTURING, INC. AND SUBSIDIARIES
Computation of Net Income Per Common Share
Twelve Months Ended December 31, 1999 and 1998
(in thousands except per share data)
(unaudited)
<TABLE>
<CAPTION>
Twelve Months
Ended
---------------
1999 1998
------- -------
<S> <C> <C>
BASIC NET INCOME PER COMMON SHARE
Net income as reported......................................... $ 6,234 $ 3,093
Weighted average number of common shares outstanding:
Common Stock................................................. 13,265 12,665
------- -------
Basic net income per common share............................ $ .47 $ .24
DILUTED NET INCOME PER COMMON SHARE
Net income as reported......................................... $ 6,234 $ 3,093
Weighted average number of common shares outstanding:
Common stock................................................. 13,265 12,665
Effect of stock options...................................... 651 311
------- -------
Diluted net income per common share.......................... $ .45 $ .24
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-91964, No. 333-36751 and No. 333-83241 of ACT Manufacturing, Inc. and
subsidiaries on Form S-8 of our report dated February 16, 2000, appearing in
this Annual Report on Form 10-K of ACT Manufacturing, Inc. for the year
endedDecember 31, 1999.
Boston, Massachusetts
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,558
<SECURITIES> 0
<RECEIVABLES> 153,422
<ALLOWANCES> 2,939
<INVENTORY> 171,762
<CURRENT-ASSETS> 341,327
<PP&E> 63,405
<DEPRECIATION> 25,358
<TOTAL-ASSETS> 402,326
<CURRENT-LIABILITIES> 170,907
<BONDS> 50,555
0
0
<COMMON> 165
<OTHER-SE> 177,964
<TOTAL-LIABILITY-AND-EQUITY> 402,326
<SALES> 696,282
<TOTAL-REVENUES> 696,282
<CGS> 641,856
<TOTAL-COSTS> 676,993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,262
<INCOME-PRETAX> 14,027
<INCOME-TAX> 7,793
<INCOME-CONTINUING> 6,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,234
<EPS-BASIC> .47
<EPS-DILUTED> .45
</TABLE>
