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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997 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: 0-25862
AG ASSOCIATES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2776181
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4425 FORTRAN DRIVE, SAN JOSE, CALIFORNIA 95134-2300
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 935-2000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK
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 non-affiliates of the
Registrant, based on the closing price of the Common Stock on November 28, 1997
as reported by the Nasdaq National Market ($5.88), was approximately
$35,619,596. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such person may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The Registrant had 6,062,910 shares of Common Stock outstanding as of November
28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Report on Form 10-K incorporates information by reference from
the Registrant's definitive Proxy Statement for its 1998 Annual Meeting of
Shareholders to be held on February 26, 1998 that is to be filed with the
Securities and Exchange Commission within 30 days after the date hereof.
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22
INDEX
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Description Page Number
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PART I.
Item 1. Description of Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of 12
Shareholders
PART II.
Item 5. Market for the Registrant's Common 13
Stock and Related Shareholder Matters
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis 15
of Financial Condition and Results of
Operations
Item 7A. Quantitative and Qualitative 22
Disclosures About Market Risk
Item 8. Consolidated Financial Statements and 22
Supplementary Data
Item 9. Changes in and Disagreements with 23
Accountants on Accounting and
Financial Disclosure
PART III.
Item 10. Directors and Executive Officers of 23
the Registrant
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain 23
Beneficial Owners and Management
Item 13. Certain Relationships and Related 23
Transactions
PART IV.
Item 14. Exhibits, Financial Statement 23
Schedules and Reports on Form 8-K
Signatures 24
Index to Financial Statements 25
Index to Financial Statement Schedules 25
Index to Exhibits 26
Schedule II: Valuation and Qualifying Accounts 29
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the matters discussed
in this Annual Report on Form 10-K, and specifically in the Sections entitled
"Description of Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," are forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. These forward-looking
statements are subject to significant risks and uncertainties, including those
identified within the "Factors That May Affect Future Results" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The actual results that AG Associates, Inc. (the "Company")
achieves may differ materially from any forward-looking projections due to such
risks and uncertainties. The Company has identified with a preceding asterisk
("*") various sentences within this Annual Report on Form 10-K which contain
such forward-looking statements, and words such as "believes," "anticipates,"
"expects," "future," "intends" and similar expressions are intended to identify
forward-looking statements. In addition, the section labeled "Factors That May
Affect Future Results," which has no asterisks for improved readability,
consists primarily of forward-looking statements. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
THE COMPANY AND ITS PRODUCTS
AG Associates, Inc. designs, manufactures, markets and supports advanced
single-wafer rapid thermal processing ("RTP") equipment used in manufacturing
integrated circuits. The Company's products, marketed under the Heatpulse(R)
name, utilize high-intensity light to heat precisely a single silicon wafer,
causing a chemical process needed to produce an integrated circuit. In addition,
during fiscal 1997, the Company introduced its new Starfire(TM) RTP system which
is intended to provide previously unavailable RTP capabilities for the .18 and
.25 micron linewidths. *The Company anticipates that production shipments of the
Starfire RTP system will commence in the first half of calendar 1998. In
addition, the Company is currently developing an RTP system for processing 300mm
wafers. In October 1997, the Company announced that it had received the 1997
Editors' Choice Best Product Award from Semiconductor International magazine for
its Heatpulse 8800 RTP system. The Company was incorporated under the laws of
California in 1981.
Historically, thermal processing has been performed in conventional batch
furnaces where 100 to 200 wafers are processed at one time. However, as
integrated circuit feature size has become smaller, semiconductor manufacturers
have encountered significant technical and practical constraints which have made
thermal processing in batch furnaces impractical, and in some cases impossible
with regard to certain steps in the integrated circuit manufacturing process.
These constraints include severe limitations on how long a wafer can be held at
high temperature, the need for an impurities-free thermal processing
environment, inefficiencies of batch processing in a predominantly single wafer
processing environment and the potential significant financial loss from
processing errors.
The Company was the first to introduce products utilizing a new thermal
processing method, known as rapid thermal processing, to address many of the
limitations of traditional batch furnaces. The Company's RTP products have been
widely adopted for use by most of the manufacturers of technologically advanced
integrated circuits such as four megabit and larger dynamic memory chips, one
megabit and larger static memory chips and 486 class and higher-performance
microprocessors. The Company believes that, as integrated circuit feature size
decreases and processing power and performance increase, more process steps in
manufacturing integrated circuits will continue to be converted to RTP from
batch furnace processing, and new process steps will be made possible by RTP.
TRADITIONAL THERMAL PROCESSING
Integrated circuits are fabricated by repeating a complex series of chemical
and physical process steps on a silicon wafer. The principal steps in
manufacturing integrated circuits are heating the wafer to cause a chemical
reaction or structural
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change that modifies the electrical and physical properties on the wafer surface
(thermal processing), the deposition of insulating or conducting materials on a
wafer (deposition), the projection of a pattern through a mask onto light
sensitive materials known as photoresist (photolithography) and the etching or
removal of the deposited materials not covered by the pattern (etching). Each of
these steps is typically repeated many times during the fabrication process.
Historically, thermal processing has been performed in conventional batch
furnaces where loads of 100 to 200 wafers are processed at one time. However, as
feature size of integrated circuits has become smaller, semiconductor
manufacturers have encountered significant technical and practical constraints
which have made thermal processing in batch furnaces impractical, and in some
cases, impossible. These constraints include:
- Limited thermal budget. Thermal budget is the total number of minutes that
a wafer can be held at high temperature during the fabrication process. As
integrated circuits have become more complex, their thermal budget has
decreased dramatically. Certain furnace heating steps require exposure of
between 30 to 90 minutes at high temperature, while the total thermal
budget for certain more complex integrated circuits is on the order of five
minutes.
- Inability to achieve pure wafer environment. Large batch furnace chambers
reduce the ability to eliminate contaminants, such as oxygen, that may be
present in the chamber during the heating process. These contaminants
produce defects in the processed wafer, reducing yield.
- Inefficiencies of batch processing in a single wafer environment. Most
integrated circuit fabrication equipment processes individual wafers in a
cassette of 25 wafers at a time. Diffusion furnaces process wafers in
batches of up to 200 (eight cassettes) at a time, resulting in bottlenecks
and inefficiencies in the integrated circuit manufacturing process.
- Cost of processing failure. As the cost of a wafer has increased to several
thousand dollars, manufacturers have focused increasingly on minimizing
wafer loss in the fabrication cycle. Batch furnace processing creates a
significant risk of loss in the case of misprocessing or equipment
malfunction, since up to 200 wafers may need to be scrapped as a result of
one error.
These limitations, which became critical in the early 1990's, have driven
semiconductor manufacturers to search for alternative thermal processing
methods.
RAPID THERMAL PROCESSING -- THE AG ASSOCIATES SOLUTION
The Company was the first to introduce a product utilizing a new thermal
processing method, known as rapid thermal processing, which addresses many of
the limitations of traditional batch furnaces. Since its introduction, RTP has
become integrated into the production of many advanced integrated circuits. The
Company's RTP products have been widely adopted for use by many of the
manufacturers of technologically advanced integrated circuits such as four
megabit and larger dynamic memory chips, one megabit and larger static memory
chips and 486 class and higher-performance microprocessors.
RTP involves radiating a single wafer with high intensity light in a precise
manner. During RTP processing, individual wafers are rapidly heated from room
temperature to steady state temperatures between 400 degrees centigrade and 1200
degrees centigrade, held there for a short time and then rapidly cooled.
Typically, the entire heating and cooling process takes between 30 to 100
seconds per wafer. The Company's RTP systems have enabled its customers to
overcome the limitations of traditional thermal processing and to process
today's complex devices by:
- Meeting thermal budget limitations. RTP permits the thermal processing of
advanced integrated circuits to be completed within their limited thermal
budgets. By heating and cooling a wafer more rapidly than a furnace, RTP
permits processing at higher temperatures for a shorter duration than a
furnace. This reduces thermal budget demands and improves performance
characteristics at approximately the same cost of ownership.
- Providing superior contamination control. The small size and ambient purge
capabilities of RTP processing chambers permit the removal of unwanted
gases from the wafer processing environment, thereby reducing the
possibility of contamination. For the past six years, RTP has been used
extensively to heat wafers with metal layers that are sensitive to residual
oxygen. Such precise contamination control is impractical in a batch
furnace.
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- Improving wafer process flow. RTP's single wafer technology is well matched
to the single wafer cassette processes used in modern wafer fabrication
facilities. Since most other integrated circuit process steps are single
wafer processes, RTP streamlines the process flow of wafers, avoiding
bottlenecks in production, and enables users to reduce work-in-process.
- Reducing cost of processing errors. RTP's single wafer processing
technology has dramatically reduced the cost of processing errors. In the
event of a malfunction, self-tests and interlock mechanisms shut down the
processing equipment, generally limiting loss to one or two wafers. The
reduced wafer loss also enables cost-efficient testing of new technologies.
RTP has been widely adopted for use by most manufacturers of integrated
circuits and is a necessary ingredient in the production of certain integrated
circuits. The Company believes that with the production of 486 microprocessors,
most static memory chips larger than one megabit and most dynamic memory chips
greater than four megabits utilize at least one RTP step. More powerful
integrated circuits such as advanced microprocessors and very large memories
often require multiple RTP steps in the manufacturing process.
PRODUCTS
AG Associates' products, marketed under the Heatpulse name, use a processing
chamber which includes two arrays of linear lamps that supply the heating energy
to the wafer, advanced temperature measurement and control subsystems and an
ultra clean gas delivery system. The wafer is positioned inside a quartz tube,
which ensures the purity of the chamber atmosphere during the heating process.
The wafer is then heated between the two banks of lamps. The heating cycle
typically includes a short purge step to drive contaminants out of the quartz
tube, a ramp-up to the processing temperature, a steady state step at the
processing temperature of between 10 to 60 seconds and a cool-down period prior
to removing the wafer from the processing chamber. In fiscal 1997 the Company
introduced the Starfire RTP system which utilizes a totally new design and will
be able to be used on .18 and .25 micron linewidths. The Company did not ship
any of this new product in fiscal 1997.
The Company's products also incorporate an automated wafer-handling robotic
subsystem and software for advanced system and process control and host
communication that, except for the operating system and certain module
components, are designed, developed and tested by the Company. The Company
believes, based upon comments by its customers, that its Heatpulse products are
reliable and compare favorably with other products in the market.
Heatpulse 8800. The Company's Heatpulse 8800 Rapid Thermal Processing
system is the most recent model of the Company's production systems and was
introduced to the market at Semicon West in July 1996. This system is based on
the Company's previous model, the Heatpulse 8108, with significant cost and
performance improvements. This model incorporates an individual lamp power
supply which is controlled by sophisticated closed-loop AG lamp power modules
that provide fine control of wafer temperature uniformity. An additional feature
is a high throughput purge system that allows a 30% savings of the heating
cycle, thereby increasing throughput and reducing cost per wafer. The Heatpulse
8800 system is targeted for R&D and production of devices utilizing .25 micron
technology.
Heatpulse 8108. The Company's Heatpulse 8108 rapid thermal processing system
was first shipped in October 1992. *This machine has been the Company's flagship
product targeted for volume production processes that utilize wafer sizes from
125 to 200 millimeters (5 to 8 inches) for feature sizes as small as .35 micron,
but the Company expects that sales of the Heatpulse 8108 will decline in favor
of the Heatpulse 8800 as customer technology requirements increase. This system
is designed to accommodate periodic upgrades to meet evolving customer needs.
Heatpulse 8108 incorporates a number of unique features that offer semiconductor
manufacturers improved thermal processing capability, reliability and
performance. These features include patented adjustable lamp heating zones to
provide process and temperature uniformity, a patented temperature measurement
method to ensure process accuracy and repeatability, as well as a proprietary
automation package for equipment-to-host communication. These and other product
features of the Heatpulse 8108 typically enable the device manufacturer to
improve throughput, uniformity and repeatability and to reduce wafer particle
contamination.
Heatpulse 4100 Series. The Heatpulse 4100S, first shipped in February 1988,
is the successor to the Heatpulse 4100 and was the first through-the-wall,
environmentally isolated automatic RTP system for the manufacture of 100 to 150
millimeter (4 to 6 inches) wafers. The Heatpulse 4100S is used in the processing
of wafers with sizes up to 150 millimeters and with feature sizes as small as .6
micron. This product currently accounts for a small percentage of net sales. In
March of 1997 the
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Company announced that it was discontinuing the Heatpluse 4100 RTP system. *In
fiscal 1998, product shipments will be phased out, even though many of the units
shipped are still in use throughout the world.
Heatpulse 610. The Heatpulse 610, the successor to the Company's first
table-top manual system, is the Company's current RTP tool targeted for research
and development and small-scale production applications. The Heatpulse 610 is
suitable for processing wafers of up to 150 millimeters (6 inches). Although
this product currently accounts for a small percentage of the Company's net
sales, many of the units shipped are still in use throughout the world.
Upgrades. The Company currently offers a variety of upgrades that improve
throughput and yield for its products. In fiscal 1997, the Company released it's
Ceramic Shield and Enhanced Z-axis Direct Thermocouple Control ("ez-DTC")
upgrades to the Heatpluse 8000 series of RTP systems. This upgrade allows
semiconductor manufacures to lower their cost of ownership and achieve better
yield with higher throughput and improved temperatue measurement and control
with their existing systems.
RTP TECHNOLOGY
During the fabrication process, wafers undergo between 100 to 200 principal
steps, nine to fifteen of which are thermal process steps. The following two
examples are only a subset of a number of processes in which RTP provides
significant technical and economic advantages to its users. The processes
described below were among the first processes in which RTP gained widespread
acceptance as an industry standard.
A significant portion of all current RTP applications involve titanium
silicide, an important step in manufacturing integrated circuits with reduced
feature size and the step that first led to widespread acceptance of RTP in the
wafer fabrication process. In integrated circuit manufacturing, a thin titanium
layer is used to assure adequate conductivity between the silicon material and
the overlaying metal conductor. To create a good contact between the titanium
and the silicon it must be heated to approximately 650(Degree)C in an inert gas
(creating a thin conductive alloy called titanium silicide). Since titanium is
very sensitive to even minute traces of oxygen, it is impossible to perform this
operation in a conventional large batch furnace. RTP allows quick heating of
individual wafers in a small quartz chamber that ensures an extremely low level
of residual oxygen. The Company believes that titanium silicide processes will
become increasingly important since titanium silicide permits extremely small
contact areas while maintaining low contact resistance.
Another critical thermal process which is limited by conventional furnaces is
the activation of foreign dopants introduced into the wafer to build the
transistor (the switching element in the circuit). The high temperatures, 950 to
1,050(Degree)C, necessary to activate the dopants and complete the creation of
the transistor, when achieved in a furnace, cause the dopants to propagate
(diffuse) into the material, adversely affecting transistor speed. The use of a
very short and precise high temperature RTP step, 1,100(Degree)C for 10 seconds,
allows the needed activation but prevents diffusion of the dopants, resulting in
a significantly faster transistor.
RESEARCH AND DEVELOPMENT
Rapid Thermal Processing. The market served by the Company is characterized
by rapid technological change. The Company believes that continued and timely
development of new products and enhancements to existing products are necessary
for it to maintain its competitive position. Accordingly, the Company devotes a
significant portion of its resources to sustaining and upgrading the Company's
existing products to improve serviceability or add new capabilities and
features, to decreasing the cost of owning and operating such products, to
developing new products with improved capabilities and to maintaining close
relationships with its customers in order to identify their product needs. From
time to time, the Company enters into joint development efforts with other
organizations.
Product Development. In August 1995, the Company undertook a major
development program to design and manufacture a .18 micron capable RTP system.
To properly execute this plan, the Company increased its R&D and engineering
personnel dedicated and focused on this program. In fiscal 1997, the Company
announced the introduction of it's next generation of products, the Starfire
product series, for .18 and .25 micron and 200mm (8" wafer size) and 300mm (12"
wafer size) applications. *The Company expects to spend approximately $12
million to develop the 200mm system and $6 million to develop the 300mm system,
which uses much of the same technology as the 200mm system. *The Company could
begin shipping Beta units in early calendar 1998.
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Integrated Processing. In 1992, the Company became involved in the
development of integrated chemical vapor deposition ("CVD") processing systems
through its acquisition of Rapro Technology, Inc. ("Rapro"), a research and
development stage company. Integrated processing involves the use of more than
one process chamber that permits wafers to undergo two or more sequential
process steps without removing the wafer from a clean vacuum environment. In May
1995, the Company's CVD cluster tool development activities were transferred to
AG Associates (Israel) Ltd. ("AG Israel"). The Company currently owns a 28%
voting interest of AG Israel.
During the fiscal years ended September 30, 1997, 1996 and 1995, the Company
expended $14.3 million, $16.7 million and $8.9 million, respectively, on
research and development, representing approximately 29%, 23% and 14% of net
sales for such periods. See Part II, Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
There can be no assurance that the Company's research and development efforts
will be successful or that any new products will achieve significant market
acceptance.
SALES, SERVICE AND MARKETING
The Company believes that close working relationships with leading integrated
circuit manufacturers help to ensure that the Company's products are technically
advanced and designed in conjunction with the development of the semiconductor
manufacturers' advanced process requirements. These relationships typically
involve exchange of material and information to develop processes and equipment
needed to manufacture state of the art integrated circuits or to lower the
semiconductor manufacturer's cost of ownership. The Company's close working
relationships with customers involve working with the customer in a continuous
improvement process on selected technical aspects of the Company's products.
Such improvements, after testing with selected customers, often become standard
on all the Company's products sold worldwide. Financial support for these
development programs is generally not provided by the customer.
The Company's sales cycle is between three and nine months. The shorter
cycles relate to existing customers who desire to gradually increase the
capacity of their existing fabrication lines. The longer cycles are related to
customers who have long-term plans for constructing new production facilities,
which are typically planned at least a year in advance. Historically, the
Company has worked with potential customers for long periods of time prior to
their acceptance of the Company's products, in some cases as long as five years.
Since RTP has gained increased acceptance, this period of time has decreased.
Nonetheless, customers generally purchase evaluation units prior to making
substantive commitments to purchase the Company's products.
Acceptance periods vary widely from customer to customer.
Warranty periods vary from customer to customer, but generally average 15
months. A limited number of training classes is included in the purchase price
of the Company's products. Subsequent training is provided for a nominal fee.
The Company markets its products both directly, through in-house sales
personnel in conjunction with independent sales representatives, or indirectly
through independent distributors. To promote its products, the Company uses
demonstration laboratories in its San Jose, California facility. The Company and
its sales representatives and distributors have sales and support centers
located in the United States, Japan, Korea, Taiwan, Singapore, Europe and
Israel. When a higher level of technical expertise is needed, the sales effort
is supported by product marketing managers and process engineers who work
closely with customers and potential customers to find solutions to their
current and future processing challenges. The Company has established
relationships with key international distributors, including among others, Canon
Sales Co., Inc. ("Canon") and MSE Metron Semiconductors Europa, B.V. and MSA
Metron Semiconductors Asia Ltd. (collectively, "Metron"). Canon has represented
the Company in Japan since 1985, and Metron has represented the Company in
Europe and Korea since 1989 and 1994, respectively. Canon is a principal
shareholder of the Company and provides a representative on the Company's Board
of Directors.
The Company's distributors and independent representatives provide essential
pre- and post-sale support for the Company's products in their territories and
account for a substantial percentage of the Company's sales worldwide. The
Company believes that strong sales in the major semiconductor manufacturing
markets internationally are important to its future success. All of the
Company's sales in Japan are through Canon and those in Europe and Korea are
through Metron. Metron and Canon both sell the Company's products under their
own warranties and provide service and support to their customers. Canon also
customizes systems purchased from the Company for redelivery according to
Canon's customers' specifications. Sales to Canon amounted to 12%, 25% and 15%
of the Company's net sales for the years ended September
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30, 1997, 1996 and 1995, respectively. Sales to Metron amounted to 14% of the
Company's net sales for the year ended September 30, 1996. Sales to Metron for
the years ended September 30, 1997 and 1995 accounted for less than 10% of the
Company's net sales for each of those fiscal years.
International sales represented 31%, 54% and 32% of the Company's net sales
for the years ended September 30, 1997, 1996 and 1995, respectively. Because of
the magnitude of its international sales, the Company is subject to the normal
risks of conducting business internationally. The Company is also subject to
general geopolitical risks in connection with its international operations.
Because sales of the Company's products are denominated in United States
dollars, fluctuations in the value of the dollar could increase or decrease the
prices in local currencies of the Company's products in foreign markets and make
the Company's products relatively more or less expensive than competitors'
products that are denominated in local currencies. See Note 12 of Notes to
Consolidated Financial Statements.
Other than its distributor agreements, the Company currently has no long-term
contracts with any of its customers and sales are generally made pursuant to
purchase orders. None of the Company's distributors or independent sales
representatives has the power to enter into contracts on the Company's behalf or
otherwise bind the Company.
CUSTOMERS
The Company's end-user customers include most of the leading semiconductor
manufacturers worldwide. For the year ended September 30, 1997, Intel
Corporation ("Intel") accounted for 25% of net sales and Micron Technology, Inc.
("Micron") accounted for 10% of net sales. For the year ended September 30,
1996, Intel accounted for 20% of net sales and NEC accounted for 17% of net
sales. Sales to International Business Machines Corporation ("IBM") accounted
for 12% of net sales for the year ended September 30, 1995. No other end-user
customer accounted for more than 10% of the total sales for the fiscal years
ended September 30, 1997, 1996 and 1995.
The Company's business depends upon the capital expenditures of semiconductor
manufacturers, which in turn depend on the current and anticipated market demand
for integrated circuits and products utilizing integrated circuits. No assurance
can be given that the Company's revenue and operating results will not continue
to be adversely affected if downturns in the semiconductor industry continue to
occur.
BACKLOG
The Company's systems backlog (consisting of product scheduled for delivery
within the next six months) as of September 30, 1997, 1996 and 1995 was
approximately $14.6 million, $8.4 million and $29.6 million, respectively. The
Company includes in its backlog customer purchase orders that have been accepted
and to which shipment dates have been assigned within the next six months. All
orders are subject to cancellation or delay with limited or no penalty. Because
of possible changes in delivery schedules and cancellations of orders, the
Company's backlog at any particular date is not necessarily indicative of actual
sales for any succeeding period.
COMPETITION
The semiconductor equipment industry, including the Company's segment of the
market, is intensely competitive and is characterized by rapid technological
change, product obsolescence and heightened competition in many markets. The
Company competes with several major domestic and international semiconductor
equipment companies, most of which have substantially greater financial,
technical, marketing, distribution and other resources than the Company, as well
as broader product lines. Additionally, the Company competes with several small
semiconductor equipment companies.
The Company's principal RTP competitors compete based upon both price and
performance, having incorporated features similar to those offered by the
Company into their RTP products, as well as features such as cluster tool
performance, which the Company did not offer in fiscal 1997. The Company
competes by providing complete process solutions to customers, including
training for customer personnel, helping identify and resolve process problems
on a continuous basis and emphasizing customer service and product quality and
reliability. Some competitors attempt to gain market share primarily through
pricing products with features similar to the Company's products at prices below
those typically offered by the Company. *Such competitive pricing pressure has
in certain cases necessitated and may continue to necessitate significant price
reductions by the Company and has and may continue to result in lost orders
which could adversely affect the Company's business. For example, the Company
has experienced intensifying price competition from AST Elektronik
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("AST"), a German-based competitor. In addition, many companies, particularly
certain Japanese and United States companies, have the financial and technical
resources to participate in these markets and have broader product lines than
the Company. For example, Applied Materials, Inc. ("Applied Materials"), a large
manufacturer of semiconductor manufacturing equipment located in the United
States, entered the RTP segment of the thermal processing market in which the
Company competes, and in fiscal 1997 has captured the dominate share of the RTP
market. Other manufacturers have also announced their intention to enter the RTP
market. *Some integrated circuit manufacturers may attempt to consolidate all
their capital equipment purchases through a single or a small number of vendors.
There can be no assurance that companies with broader product lines and greater
resources will not become more formidable competitors in the future.
The Company also competes with manufacturers of batch diffusion furnaces for
application of their differing technologies in various steps of the integrated
circuit fabrication process. The Company believes that its ability to compete
depends upon its continued success in developing new product features. Moreover,
the ability to achieve process uniformity and repeatability, improve breadth of
process capability and flexibility, reduce the overall cost of ownership and
protect the Company's proprietary technology play an important role in the
Company's ability to compete.
MANUFACTURING
Production is based upon firm customer commitments and anticipated orders and
is generally planned six months in advance. The Company's manufacturing
operations consist primarily of assembly, integration and final testing of parts
and subassemblies supplied by third-party suppliers, all of which are conducted
at the Company's manufacturing facility. Once the manufacturing department has
completed final testing of all electronic and electromechanical subassemblies
which make up one of the Company's products, the completed system is tested by
the Company's test engineers. To test each product, the Company's engineers
process wafers in the system to ensure that each system meets the customer's
process specifications. To increase the efficiency of the Company's
manufacturing process, the Company selectively utilizes outside contractors to
assemble subassemblies and components. The use of subcontractors enables the
Company to focus on its design strengths, minimize fixed costs and capital
expenditures and access diverse manufacturing technologies without bearing the
full risk of obsolescence. This has allowed the Company to increase production
rates while avoiding investment in additional facilities and minimizing
inventory growth.
Certain components and subassemblies included in the Company's products are
obtained from a single source or a limited group of suppliers and subcontractors
in order to assure overall quality and timeliness of delivery. The Company's
reliance on sole or a limited group of suppliers involves several risks,
including a potential inability to obtain adequate supplies of certain
components and reduced control over pricing and timely delivery of components.
*Although the timeliness, quality and pricing of deliveries to date from the
Company's suppliers have been acceptable and the Company believes that
additional sources of supply will be available should one or more of its
suppliers be unable to meet the Company's needs, there can be no assurance that
supplies will be available on an acceptable basis. Inability to obtain adequate
supplies of components or to manufacture such components internally could delay
the Company's ability to ship its products, which could result in the loss of
customers who may seek alternative sources of supply.
PATENTS AND OTHER PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright, trademark and trade
secret laws, non-disclosure agreements and other intellectual property
protection methods to protect its proprietary technology. The Company believes
that the duration of its patents generally exceeds the life cycles of the
technologies disclosed and claimed therein. Though the Company has additional
patent applications pending in various foreign countries, there can be no
assurance that any patents will result from these applications. In addition, the
Company has registered the name "Heatpulse" with the U.S. Patent and Trademark
Office, restricts access to its technology and enters into confidentiality
agreements with its employees and consultants. Finally, the Company relies on
copyright protection for the software imbedded in its Heatpulse systems.
However, the Company has not registered any portion of the software with any
domestic or foreign copyright office.
There can be no assurance that the Company's patents or other means of
intellectual property protection, including the Company's confidentiality
agreements and applicable trade secret laws, will provide adequate protection
for the Company's intellectual property rights. Further, it is possible that
others will develop, copyright or patent similar technology or reverse engineer
the Company's products. In addition, the laws of certain territories in which
the Company's products are or may be developed, manufactured or sold, including
Asia, Europe or Latin America, may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. While the Company intends to continue to
9
<PAGE> 10
seek patent, copyright, trademark and trade secret protection for its products
and manufacturing technology where appropriate, the Company believes that its
success depends more on the technical expertise and innovative abilities of its
personnel, rather than the protections that these laws can provide.
The Company is currently involved in intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. in the United States District Court
for Northern California, San Jose Division. Applied Materials alleges that the
Company's products infringe on two of Applied Materials patents relating to RTP
process and heater head design and seeks a permanent injunction against
infringement, and award of damages for infringement, treble damages for
intentional and willful infringement, attorneys' fees and costs of suit. On July
23, 1997, the Company answered Applied Materials' complaint and counterclaimed
for declaratory relief that the Company's products do not infringe the two
Applied Materials patents and that the patents are invalid. On October 3, 1997,
the Company filed a counterclaim in United States District Court for Northern
California, San Jose Division against Applied Materials for infringement of one
of the Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and counterclaims
is set for March 1, 1999. Management cannot predict the outcome of litigation
and believes Applied Materials' claims are without merit and intends to defend
the Company vigorously. However, there can be no assurance that this litigation
will be resolved in favor of the Company, and, in any event, litigation could
result in significant expense to the Company and could divert efforts of the
Company's technical management personnel from other tasks, whether or not such
litigation is determined in favor of the Company. In the event of an adverse
ruling in any such litigation, the Company might be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, discontinue
the use of certain processes or expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology.
There can be no assurance that other third parties will not assert claims
against the Company with respect to existing or future products or technologies
or that, in case of a dispute, licenses will be available on commercially
reasonable terms, or at all, with respect to disputed third-party technology.
See Item 3, "Legal Proceedings."
The Company has licensed to Canon certain of the Company's proprietary
technology to design and manufacture modifications to its products for resale in
Japan. In addition, the Company has transferred joint ownership of the CVD
cluster tool technology to AG Israel, together with a license of the Company's
RTP temperature measurement technology. See Part III, Item 13 "Certain
Relationships and Related Transactions."
EMPLOYEES
As of September 30, 1997, the Company had 257 full-time employees, including
89 in engineering, research and development, 53 in manufacturing, 63 in service,
26 in marketing and sales and 26 in administration. None of the Company's
employees is subject to a collective bargaining agreement, and the Company has
never experienced a work stoppage. The Company believes that its relations with
its employees are good.
Many of the Company's employees are highly skilled, and the Company believes
its future success will depend in part upon its ability to identify, attract and
retain such employees, particularly highly skilled design engineers involved in
new product development, for whom competition is intense. In addition, the
Company is highly dependent on the skill and experience of its Chairman of the
Board, Arnon Gat.
ITEM 2. PROPERTIES
In October 1995, the Company moved its headquarters from Sunnyvale,
California to a facility in San Jose, California. The leased San Jose facility
houses the Company's management, administrative, manufacturing, engineering,
marketing, sales and customer support personnel in two buildings in
approximately 115,000 square feet. An option to expand the San Jose facilities
by approximately 38,000 square feet is available to the Company within three
years. Currently the Company is negotiating to exercise the option. In August
1997, the Company entered into a one-year lease for 5,000 square feet of
manufacturing space adjacent to it's San Jose facility. The Company also leases
approximately 1,500 square feet of office space for its customer support
personnel in Austin, Texas, through April 1999.
10
<PAGE> 11
In addition, the Company leases approximately 2,800 square feet of office
space for its sales and customer support personnel in Hsin-Chu, Taiwan, Republic
of China, under a lease which expires in July, 1998 with a 3 year extension
option.
The Company believes that its existing facilities are suitable and adequate
to meet the Company's current requirements. The Company will continue to
consider leasing additional facilities as necessary to support its operations in
the future.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently involved in intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company, AST
Elektronik GmbH and AST Elektronik U.S.A. in the United States District Court
for Northern California, San Jose Division. Applied Materials alleges that the
Company's products infringe on two of Applied Materials patents relating to RTP
process and heater head design and seeks a permanent injunction against
infringement, and award of damages for infringement, treble damages for
intentional and willful infringement, attorneys' fees and costs of suit. On July
23, 1997, the Company answered Applied Materials' complaint and counterclaimed
for declaratory relief that the Company's products do not infringe the two
Applied Materials patents and that the patents are invalid. On October 3, 1997,
the Company filed a counterclaim in United States District Court for Northern
California, San Jose Division against Applied Materials for infringement of one
of the Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and counterclaims
is set for March 1, 1999. Management cannot predict the outcome of litigation
and believes Applied Materials' claims are without merit and intends to defend
the Company vigorously. However, there can be no assurance that this litigation
will be resolved in favor of the Company, and, in any event, litigation could
result in significant expense to the Company and could divert efforts of the
Company's technical management personnel from other tasks, whether or not such
litigation is determined in favor of the Company. In the event of an adverse
ruling in any such litigation, the Company might be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, discontinue
the use of certian processes or expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology.
There has been substantial litigation regarding patent and other
intellectual property rights in the semiconductor industry. General Signal
Corporation has made a claim against at least two manufacturers of cluster tools
that have resulted in litigation to the effect that certain of their cluster
tool technologies infringe on General Signal patents. In 1991, at the time that
General Signal first raised patent claims in the cluster tool area, the Company
joined with six major semiconductor process tool equipment manufacturers in
forming an "Ad Hoc Committee for Defense against General Signal Cluster Tool
Patents" (the "Ad Hoc Committee"). Based in part on an opinion of patent
counsel, the members of the Ad Hoc Committee notified General Signal that the
member companies were of the opinion that the General Signal patents were
invalid based on (a) prior art, (b) inequitable conduct before the Patent &
Trademark Office and (c) estoppel as a result of General Signal's activities in
establishing standards for cluster tools and interfaces within the semiconductor
industry. The Company believes that the position taken by the Ad Hoc Committee
remains valid. Previously, the Company approached General Signal to explore
interest in licensing the same patents at issue in the General Signal
litigation. The general conditions of the license discussed by General Signal
were unacceptable to the Company. Based upon a review of the subject patents,
the Company believes that the subject patents are invalid or, if somehow found
to be valid, that the Company's cluster tool technology does not infringe.
Additionally, the Company has received an opinion of its patent counsel, to the
same effect. However, if such a claim were successfully enforced against the
Company regarding the cluster tool technology transferred to AG Israel, the
value of the Company's investment in AG Israel could diminish. The Company could
also be adversely affected as a result of the Company's liability under an
indemnity provision with AG Israel for any resulting royalties and other damages
payable.
From time to time, the Company may receive or initiate claims or inquiries
against third parties for infringement of the Company's proprietary rights or to
establish the validity of the Company's proprietary rights. Such claims or
inquiries may result in litigation and could result in significant expense to
the Company and divert the efforts of the Company's technical and management
personnel from other tasks, whether or not such claims or inquiries are
determined in favor of the Company. In the event of an adverse ruling in any
such litigation, the Company might be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, discontinue the use of
certain processes or expend significant resources to develop non-infringing
technology or obtain licenses to the infringing technology.
11
<PAGE> 12
On April 30, 1997, an action was filed against the Company alleging wrongful
termination and discrimination in violation of California Fair Employment and
Housing Act and the Americans with Disabilities Act. The matter is in the early
discovery stage of litigation. The Company believes that the claims are invalid
and will defend itself vigorously.
On October 6, 1997, the Company was served with a demand for arbitration by
Cook & Weil, Inc. ("Cook & Weil"), a small manufacturer's representative firm
located in New Jersey, which the Company engaged as manufacturer's
representative but terminated in 1996. Cook & Weil asserts that the Company owes
it approximately $250,000 in unpaid commissions. The Company believes that it
has fully paid all commissions due to Cook & Weil. The Company believes that
such claim is invalid and will defend itself vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
Not applicable.
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<PAGE> 13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
COMMON STOCK TRADING RANGE
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol AGAI since the company's initial public offering on May 16,
1995. The following table sets forth for the Company's Common Stock, the range
of high and low closing prices on the Nasdaq National Market for the period from
the Company's initial public offering until the end of fiscal 1997.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1995
3rd Quarter $17.75 $13.00
4th Quarter 36.81 17.00
Fiscal 1996
1st Quarter $31.00 $13.25
2nd Quarter 15.00 6.38
3rd Quarter 9.00 6.50
4th Quarter 7.25 4.75
Fiscal 1997
1st Quarter $7.13 $4.75
2nd Quarter 7.00 4.88
3rd Quarter 5.98 4.38
4th Quarter 7.94 5.75
</TABLE>
The closing price of the Company's Common Stock on November 28, 1997, as
reported by the Nasdaq National Market, was $5.88.
COMMON SHAREHOLDERS OF RECORD AND DIVIDENDS
At November 28, 1997, there were approximately 170 shareholders of
record of the Company's Common Stock, as shown in the records of the Company's
transfer agent, excluding shareholders whose stock is held in nominee or street
name by brokers. The Company has never paid dividends on its Common Stock and
its present policy is to retain earnings to finance it's future operations.
13
<PAGE> 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
(in thousands, except per share data) 1997 1996 1995 1994 1993
--------- ---------- ---------- --------- ---------
Consolidated Statement of Income Data:
<S> <C> <C> <C> <C> <C>
Net sales $49,604 $71,089 $62,725 $40,251 $27,792
Gross profit $16,907 $31,725 $29,028 $17,578 $ 7,074
Research and development $14,329 $16,653 $ 8,893 $ 6,078 $ 7,665
Selling, general and administrative $ 9,247 $10,204 $10,562 $ 7,035 $ 5,894
Restructuring charges -- -- -- -- $ 2,645
Income (loss) from operations $(6,669) $ 4,867 $ 9,573 $ 4,465 $(9,130)
Income (loss) before income taxes $(6,236) $ 4,487 $ 9,221 $ 3,361 $(9,467)
Net income (loss) $(4,687) $ 2,743 $ 9,753 $ 3,224 $(9,496)
Net income (loss) per share $ (0.78) $ 0.45 $ 2.05 $ 0.87 $ (2.52)
Shares used in per share calculation 5,981 6,137 4,770 3,772 3,755
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------------------------
(in thousands) 1997 1996 1995 1994 1993
--------- ---------- ---------- --------- ---------
Consolidated Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 4,157 $11,985 $18,858 $ 1,598 $899
Working capital (deficiency) $22,867 $26,851 $28,649 $(1,257) $(4,817)
Total assets $42,947 $45,852 $48,825 $14,676 $14,142
Long-term obligations $ 275 $ 11 $ 193 $ 691 $ 422
Convertible subordinated debentures -- -- -- $ 2,107 $ 2,045
Minority interest in subsidiary -- -- -- $ 1,979 $ 1,979
Shareholders' equity (deficiency) $31,522 $35,694 $32,300 $(3,740) $(7,445)
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------
(in thousands, except per share data) SEP 30 JUNE 30 MARCH 31 DEC. 31
---------- ---------- --------- ---------
Consolidated Statement of Income Data: (unaudited)
1997
<S> <C> <C> <C> <C>
Net sales $15,951 $13,380 $11,140 $9,133
Gross profit 6,762 4,935 1,811 3,399
Income (loss) from operations (514) (1,255) (3,033) (1,867)
Income (loss) before income taxes (439) (1,147) (2,923) (1,727)
Net income (loss) (351) (849) (2,192) (1,295)
Net income (loss) per share $ (0.06) $ (0.14) $ (0.37) $(0.22)
1996
Net sales $8,833 $17,196 $23,200 $21,860
Gross profit 2,805 7,235 11,229 10,455
Income (loss) from operations (3,562) 374 3,870 4,185
Income (loss) before income taxes (3,394) 66 3,775 4,040
Net income (loss) (1,907) 39 2,227 2,384
Net income (loss) per share $(0.32) $ 0.01 $ 0.37 $ 0.38
Gross profit 9,349 7,953 6,301 5,425
Income from operations 3,490 2,445 2,036 1,602
Income before income taxes 3,398 2,444 1,858 1,521
Net income 2,876 3,669 1,761 1,447
Net income per share $ 0.46 $ 0.75 $ 0.47 $ 0.38
</TABLE>
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's common stock price may be subject to significant volatility.
For any given period, a shortfall in the Company's announced revenue or earnings
from the levels expected by securities analysts could have an immediate and
adverse effect on the trading price of the Company's common stock. The Company
may not learn of, nor be able to confirm, revenue or earnings shortfalls until
late in the period or following the end of the period. In general, the Company
participates in a very dynamic high technology industry, which can result in
significant fluctuations in the Company's Common Stock price at any time.
FORWARD-LOOKING STATEMENTS
Except for the historical information contained herein, the matters
discussed in this Annual Report on Form 10-K, and specifically in the Sections
entitled "Description of Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", are forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. These
forward-looking statements are subject to significant risks and uncertainties,
including those identified within the "Factors That May Affect Future Results"
section of "Managements Discussions and Analysis of Financial Condition and
Results of Operations." The actual results that the Company achieves may differ
materially from any forward-looking projections due to such risks and
uncertainties. The Company has identified with a preceding asterisk ("*")
various sentences within this Annual Report on Form 10-K which contain such
forward-looking statements, and words such as "believes," "anticipates,"
"expects," "future," "intends" and similar expressions are intended to identify
forward-looking statements. In addition, the section labeled "Factors That May
Affect Future Results," which has no asterisks for improved readability,
consists primarily of forward-looking statements. The Company undertakes no
obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances
after the date hereof. Readers are urged to carefully review and consider the
various disclosures made by the Company in this report and in the Company's
other reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect the Company's
business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
RAPID TECHNOLOGICAL CHANGE AND DEVELOPMENT RISKS. The Company derives
substantially all of its revenue from a single line of rapid thermal processing
products. The RTP industry is subject to rapid technological change, and the
Company and its competitors continuously seek to introduce new products that
provide improved process results and manufacturing performance at prices
acceptable to RTP customers. There can be no assurance that the Company can
develop new products more quickly than its competitors or that the Company's
products will have better price/performance characteristics than competitors'
products. During fiscal 1997, the Company introduced its new Starfire RTP
system, which is intended to provide previously unavailable RTP capabilities for
the .18 and .25 micron linewidths. The Company anticipates that production
shipments of the Starfire RTP system will commence in the first half of calendar
1998. In addition, the Company is currently developing an RTP system for
processing 300mm wafers. However, there can be no assurance that production
shipments of the Starfire RTP system will commence on schedule or that any of
the Company's new products will achieve market acceptance.
SEMICONDUCTOR INDUSTRY VOLATILITY. The semiconductor industry has
historically been cyclical and subject to unexpected periodic downturns
associated with sudden changes in supply and demand. In recent quarters, the
Company has experienced net sales that were significantly lower than net sales
achieved in respective year ago quarters, and has incurred net losses on a
quarterly basis as a result of the effects of a semiconductor equipment industry
downturn, as well as the Company's continuation of a high level of research and
development spending on its new products and competitive pressures. Although the
Company's new orders and net sales are improving, which leads the Company to
believe it will return to profitability during the first half of fiscal 1998,
and although the semiconductor industry appears to be recovering from the
current downturn, the Company cannot predict the industry's cycle and its effect
on the RTP market, rate of orders for the Company's products or the degree to
which the Company's new products will achieve market acceptance. In particular,
the semiconductor industry may experience a cyclical downturn over the next few
quarters as a result of economic
15
<PAGE> 16
instability in Asia. For these reasons, the Company's analysts' and investors'
expectations with respect to the Company's new orders, net sales and operating
results with respect to future quarters may not be met.
STOCK PRICE VOLATILITY. The Company's common stock price may be subject to
significant volatility. For any given quarter, a shortfall in the Company's
announced revenue or earnings from the levels expected by securities analysts or
investors could have an immediate and adverse effect on the trading price of the
Company's common stock. The Company may not learn of, nor be able to confirm,
revenue or earnings shortfalls until late in the quarter or following the end of
the quarter. In general, the Company participates in a very dynamic high
technology industry, which can result in significant fluctuations in the
Company's common stock price at any time.
COMPETITION. The Company's ability to compete depends upon the Company's
ability to develop new RTP product features that enhance uniformity and
repeatability, improve process capability and flexibility and reduce cost of
ownership. The Company's competitors, many of whom have substantially greater
resources than the Company, also seek to compete in these areas, and certain
competitors have introduced products that have additional functionality compared
to the Company's products or offer similar products to those of the Company at
lower prices. In addition, the Company expects to see increased competition from
batch furnace vendors as those companies increased functionality available in
such machines. Applied Materials has made significant gains in the Company's
market and has offered certain functionality the Company was not able to provide
with it's products, allowing Applied Materials to capture significant customers.
Applied Materials and AST are significantly larger companies with greater
resources than the Company. There are also larger Japanese and domestic
companies that possess the technical resources to enter the RTP market.
CLAIMS OF PATENT INFRINGEMENT. The Company is currently involved in an
intellectual property litigation. On April 24, 1997, Applied Materials filed a
complaint against the Company, AST Elektronik GmbH and AST Elektronik U.S.A. in
the United States District Court for the Northern District of California, San
Jose Division. Applied Materials alleges that the Company's products infringe on
two Applied Materials patents relating to RTP processes and heater head design
and seeks a permanent injunction against infringement, and award of damages for
infringement, treble damages for intentional and willful infringement,
attorneys' fees and costs of suit. On July 23, 1997, the Company answered
Applied Materials' complaint and counterclaimed for declaratory relief that the
Company's products do not infringe the patents and that the patents are invalid.
On October 3, 1997, the Company filed a counterclaim in the United States
District Court for Northern California, San Jose Division against Applied
Materials for infringement of one of the Company's RTP process patents. On
October 27, 1997, Applied Materials answered the counterclaim by alleging that
it does not infringe the Company's patent and that the patent is invalid. The
trial on all claims and counterclaims is set for March 1, 1999. Management
believes Applied Materials' claims are without merit and intends to defend the
Company vigorously. However, there can be no assurance that this litigation will
be resolved in favor of the Company, and, in any event, litigation could result
in significant expense to the company and could divert the efforts of the
Company's technical and management personnel from other tasks, whether or not
such litigation is determined in favor of the Company. In particular, the
Company expects to incur significant legal expenses in fiscal 1999 in the event
Applied Materials' claims are not resolved by then. In the event of an adverse
ruling in any such litigation, the Company might be required to pay substantial
damages, cease the manufacture, use and sale of infringing products, discontinue
the use of certain processes or expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology.
INVENTORY OBSOLESCENCE. Because the Company's industry is subject to rapid
technological change, the Company has experienced, and expects to experience,
obsolescence of certain of its products as the Company and its competitors
introduce new products with improved price/performance characteristics. In
particular, the Company discontinued its Heatpulse 4100 product line in the
quarter ended March 31, 1997 and consequently wrote down $1.4 million of
inventory in that quarter. During the quarter ended June 30, 1997, the Company,
for the first time in its history, booked more orders for its Heatpulse 8800
product line than for its Heatpulse 8100 product line and this trend continued
in the fourth quarter of fiscal 1997. To the extent sales of new products do not
offset, or generate lower margins than sales of older products, the Company's
business, results of operation and financial condition would be materially
adversely affected. In addition, the Company believes that the Heatpulse 8100
product line will become obsolete as acceptance of the Heatpulse 8800 and
Starfire products increases.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. The Company's operating results
are subject to quarterly and other fluctuations due to a variety of factors,
including the volume and timing of orders received, potential cancellation or
rescheduling of orders, competitive pricing pressures, the Company's ability to
manage costs during periods of low or negative earnings growth, the availability
and cost of component parts and materials from the Company's suppliers, the
16
<PAGE> 17
adequate forecasting of the mix of product demand due to production lead times
and capacity constraints, the timing of new product announcements and
introductions by the Company or its competitors, changes in the mix of products
sold, research and development expenses associated with new product
introductions, the timing and level of development costs, market acceptance of
new or enhanced versions of the Company's products, seasonal customer demand,
the cyclical nature of the semiconductor industry, the impact of the company's
efforts to implement its evolving long-term strategy, the uncertainties of
ongoing negotiations and economic conditions generally or in various geographic
areas. In addition, because of the relatively high selling prices of the
Company's products, a significant portion of the Company's net sales in any
given period is derived from the sale of a relatively small number of units, and
a change, even though minor, in the number of units sold during a quarter can
result in a large fluctuation in net sales for the quarter.
EMPLOYEE RISK. Competition in recruiting personnel in the semiconductor
industry is intense. The Company believes that its future success will depend in
part on its ability to recruit and retain highly skilled management, marketing
and technical personnel. The Company believes it must provide personnel with a
competitive compensation package, which necessitates the continued availability
of stock options and requires ongoing shareholder approval of such option
programs.
YEAR 2000 INFRASTRUCTURE RISK. The Company is currently in the process of
evaluating its information technology infrastructure for the Year 2000
compliance. The Company does not expect that the cost to modify its information
technology infrastructure to be Year 2000 compliance will be material to its
financial condition or results of operations. The Company does not anticipate
any material disruption in its operations as a result of any failure by the
Company to be in compliance. The Company does not currently have any information
concerning the Year 2000 compliance status of its suppliers and customers. In
the event that any of the Company's significant suppliers or customers does not
successfully and timely achieve Year 2000 compliance, the Company's business or
operations could be adversely affected.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations as a percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997(tau) 1996(tau) 1995
--------- --------- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 66 55 54
---- ---- ----
Gross profit 34 45 46
---- ---- ----
Operating expenses:
Research and development 29 23 14
Selling, general and administrative 19 14 17
---- ---- ----
Total operating expenses 48 37 31
---- ---- ----
Income (loss) from operations (13) 7 15
Other income (expense), net 1 1 *
Equity in loss of unconsolidated
subsidiary -- (2) *
---- ---- ----
Income (loss) before income taxes (12) 6 15
Provision (benefit) for income taxes (3) 2 (1)
---- ---- ----
Net income (loss) (9)% 4% 16%
==== ==== ====
</TABLE>
* Less than 1 percent
(tau) Percentages may not total 100% due to rounding
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1996
Net sales decreased to $49.6 million in fiscal 1997 from $71.1 million in
fiscal 1996, a decrease of 30%. Substantially all net sales were derived from
RTP operations for both periods. The sales decline in the current fiscal year
was primarily due to the decrease in unit sales of the Company's Heatpulse
products, as reflected in a decrease in sales to Intel, the Company's largest
customer in fiscal 1997 and 1996, which accounted for $12.0 million of the
Company's net sales in fiscal
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<PAGE> 18
1997 compared to $14.0 million in fiscal 1996. The sales decline reflects the
global semiconductor industry's slowing order rate at the end of fiscal 1996 and
the beginning of fiscal 1997 and competition from two competitors with greater
financial resources than the Company.
Sales to distributors were $9.8 million in fiscal 1997 compared to $27.0
million in the prior fiscal year. The Company utilizes distributors in certain
geographic regions. All of the Company's sales in Japan are through Canon, and
those in Europe and Korea are through Metron. Sales to distributors generally
result in a lower gross profit, caused by lower selling prices, which are
largely offset by reduced selling and marketing expenses. In fiscal 1997, Canon
represented 12% of net sales, compared to 24% of net sales in fiscal 1996, and
Metron represented 8% of net sales, compared to 14% of net sales in fiscal 1996.
The decrease in sales to distributors was primarily due the decline of the
global semiconductor industry's order rate at the end of fiscal 1996 and the
beginning of fiscal 1997. Domestic sales for the Company increased to $34.0
million in the current fiscal year from $32.5 million in fiscal 1996. The
increase in domestic sales is primarily due increased revenues from Micron.
International sales for the Company decreased to $15.6 million in the current
fiscal year from $38.6 million in fiscal 1996, a decrease of 60 percent. The
decrease of international sales results from the decline of the global
semiconductor industry's order rate at the end of fiscal 1996 and the beginning
of fiscal 1997. *Based upon the geographic locations of semiconductor
manufacturers, the Company anticipates that international sales in general will
continue to account for a significant portion of net sales in fiscal 1998.
*However, international sales as a percentage of net sales will vary on a
quarterly basis depending on the impact of the economic instability in Asia, the
timing of orders and the relative strength of domestic sales. International
sales are typically denominated in United States dollars. *Because sales of the
Company's products are denominated in United States dollars, fluctuations in the
value of the dollar could increase or decrease the prices in local currencies of
the Company's products in foreign markets and make the Company's products
relatively more or less expensive than competitors' products that are
denominated in local currencies. Inflation has not had a material impact on the
Company's net sales or results of operations.
The Company's end-user customers include most of the leading semiconductor
manufacturers worldwide. For the year ended September 30, 1997, Intel accounted
for 24% of total net sales and Micron accounted for 10% of total net sales. For
the year ended September 30, 1996, Intel Corporation accounted for 20% of total
net sales and NEC accounted for 17% of total net sales. Sales to IBM accounted
for 12% of total net sales for the year ended September 30, 1995. No other
end-user customer accounted for more than 10% of the total net sales for fiscal
years ended September 30, 1997, 1996 and 1995. *The Company expects increasing
competition from a competitor who has substantially greater resources than the
Company, particularly in the sale of RTP systems designed for .18 and .25 micron
applications and in 200mm and 300mm applications. In addition, the Company has
experienced, and continues to experience, competition from other RTP equipment
suppliers. *These competitors' impact on future sales cannot be estimated. *As a
result of competitive pressures, there can be no assurance that the Company will
be able to retain its strategic customers or that such customers will not
cancel, reschedule or significantly reduce the volume of orders or, in the event
orders are canceled, that such orders will be replaced by other sales. *The loss
of any significant end-user customer, even if replaced by a different
significant end-user customer, could have a material adverse effect on the
Company's business, results of operations and financial condition.
Gross profit decreased to $16.9 million in fiscal 1997 from $31.7 million in
the prior fiscal year, a decrease of 47%. However, gross profit for the fourth
quarter of fiscal 1997 increased to $6.8 million as compared to $2.8 million in
the fourth quarter of fiscal 1996. This increase reflects the global
semiconductor industry's gradual recovery over the course of fiscal 1997. Gross
profit decreased from fiscal 1996 to fiscal 1997 primarily as a result of
decreased sales volume. Gross profit as a percentage of net sales declined to
34% in the current fiscal year from 45% in fiscal 1996. The reduced gross profit
percentage resulted primarily from a decline in sales volume and a one time
charge in the second quarter for obsolete inventory related to the Heatpulse
4108 product. *As the Company pursues volume production of Heatpulse 8800
systems, the Company expects gross margins on sales of such systems to improve.
However, attaining such improved gross margins requires the Company to decrease
manufacturing costs as production of Heatpulse 8800 systems ramps, to increase
the number of systems it produces and sells, and to keep average selling prices
of Heatpulse 8800 systems constant. There can be no assurance that the Company
will be successful in these efforts.
Research and Development ("R&D") expenses decreased to $14.3 million in the
current fiscal year from $16.7 million in the prior fiscal year, a decrease of
14%. As a percentage of net sales, R&D expenses increased to 29% in fiscal 1996
from 23% in fiscal 1996, reflecting the Company's commitment to bring new
products to market and the decrease in net sales from fiscal 1996 to fiscal
1997. During fiscal year 1997, the Company announced the Starfire .18 micron
platform for 200mm and 300mm RTP products. *Because the Starfire platform is not
fully developed for production status, the Company plans to continue to expend a
significant portion of it's R&D dollars on this platform in fiscal 1998, and
expects Beta testing
18
<PAGE> 19
in early calendar 1998 with production in 1999. *The Company also expects
development of 300mm RTP product platforms to account for a significant portion
of R&D expenses. *The Company expects that total R&D spending related to its
Starfire product and technology (including amounts spent to date) to reach $10
million and that total R&D spending related to its 300mm platforms and
technology (including amounts spent to date) to reach $6 million. *The failure
of the Company to timely develop new platforms, the failure of new platforms to
meet customer expectations regarding performance and cost or the failure of new
platforms to achieve market acceptance following product introduction would each
have a material adverse effect on the Company's business, results of operations
and financial condition. *The Company continues to believe that significant
investment in R&D is required to remain competitive, thought the Company expects
that R&D as a percentage of net sales will decrease if it's sales expectations
are met. All R&D costs are expensed as incurred.
Selling, general and administrative ("SG&A") expenses decreased to $9.2
million in fiscal 1997 from $10.2 million in fiscal 1996, a decrease of 9%. As a
percentage of net sales, SG&A expenses increased to 19% in fiscal 1997 from 14%
in fiscal 1996, reflecting lower sales in the more recent period. The decrease
in absolute dollars for the current fiscal year was due primarily to the
Company's management of expenses in response to the decline in sales, most
notably the decrease in payroll expenditures realized from the work force
reduction in July 1996, and reduced direct commissions resulting from lower net
sales in fiscal 1997 compared to fiscal 1996. *In fiscal 1998, SG&A spending in
absolute dollars is expected to increase; however, actual spending may fluctuate
depending on, among other things, the level of net sales. *As a percentage of
net sales, SG&A spending may vary from quarter to quarter.
Other income (expense), net was $432,000 in fiscal 1997 and $772,000 in
fiscal 1996, and decreased in fiscal 1997 primarily as a result of lower
interest income earned on the Company's reduced cash and investment balances.
Other income also included commissions on quartz sales of $134,000 earned in
fiscal 1997 and $190,000 in fiscal 1996.
Equity in loss of unconsolidated subsidiary was $1.2 million for fiscal 1996.
This represents the Company's share of the losses of AG Associates (Israel) Ltd.
("AG Israel") during fiscal 1996. In May 1995, a 51% interest in AG Israel was
acquired by Clal Electronics Industries Ltd. ("Clal Electronics"), and from June
1, 1995 to November 1997, the Company retained a 49% interest in AG Israel. The
Company has accounted for its investment on the equity method since June 1,
1995. Prior to that, AG Israel was accounted for as a wholly-owned subsidiary of
the Company and its results of operations were included in the consolidated
financial statements of the Company. In November 1997, AG Israel completed a
private placement of $13.0 million, in which the Company did not participate.
The effect of this financing was to dilute the Company's voting interest to 28%.
*Additional losses from AG Israel's operations will be recorded only to the
extent of any future investments by the Company.
For fiscal 1997, the Company recorded an income tax benefit of $1.5 million
compared to an income tax expense of $1.7 million in fiscal 1996. In fiscal
1997, the effective income tax rate used to compute the Company's income tax
benefit was lower than the federal statutory rate due both to an increase in the
Company's valuation allowance as a result of management's estimate that deferred
tax assets were more likely than not to be recognized and other permanent items
not being deductible for tax purposes.
The Company's systems backlog (consisting of product scheduled for delivery
within the next six months) as of September 30, 1997 was approximately $14.6
million, as compared to $8.4 million at September 30, 1996. The increase in
backlog was a result of the global semiconductor industry's gradual recovery
over fiscal 1997. The Company includes in its backlog customer purchase orders
that have been accepted and to which shipment dates have been assigned within
the next six months. All orders are subject to cancellation or delay with
limited or no penalty. *Because of possible changes in the delivery schedules
and additions or cancellations of orders, the Company's backlog at any
particular date is not necessarily indicative of actual sales for any succeeding
period.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
1995
Net sales increased to $71.1 million in fiscal 1996 from $62.7 million in
fiscal 1995, an increase of 13 percent. Substantially all net sales were derived
from RTP operations for both periods. The sales growth in the current fiscal
year was primarily due to the increase in unit sales of the Company's Heatpulse
8108 product and included sales to one customer of $14.0 million compared to
$18.1 million in fiscal 1995. However, sales for the fourth quarter of fiscal
1996 declined to $8.8 million as compared to $17.2 million in the third quarter
of fiscal 1996 and $19.7 million in the fourth quarter of fiscal 1995. This
decline reflected the semiconductor industry's slowing order rate and
competitive pressures. The average selling price
19
<PAGE> 20
of the Heatpulse 8108 decreased in fiscal 1996 due primarily to an increasing
proportion of distributor sales, which generally have lower selling prices than
direct sales.
Sales to distributors were $27.0 million in fiscal 1996 compared to $12.3
million in the prior fiscal year. The Company utilizes distributors in certain
geographic regions. All of the Company's sales in Japan are through Canon, and
those in Europe and Korea are through Metron. Sales to distributors generally
result in a lower gross profit, caused by lower selling prices, which are
largely offset by reduced selling and marketing expenses. In fiscal 1996, Canon
represented 24% of net sales, compared to 14% of net sales in fiscal 1995, and
Metron represented 14% of net sales, compared to 5% of net sales in fiscal 1995.
The increase in sales to distributors was primarily due to increased
international sales both in terms of actual sales and as a percent of total
sales, as most international sales of the Company are made through distributors.
Domestic sales for the Company decreased to $32.5 million in the current fiscal
year from $42.9 million in fiscal 1995, a decrease of 24 percent. The decrease
in domestic sales is primarily due to the semiconductor industry's slowing order
rate and the loss of sales from a major customer to a competitor. International
sales for the Company increased to $38.6 million in the current fiscal year from
$19.8 million in fiscal 1995, an increase of 95 percent. As a percentage of net
sales, international sales increased to 54% for the current fiscal year from 32%
in the prior fiscal year. This increased percentage of international sales
results primarily from substantially increased sales in terms of absolute
dollars, combined with declining domestic sales in terms of absolute dollars.
The increase in absolute dollars for international sales in fiscal 1996 was
primarily due to increased sales to Europe and Asia, including Japan.
The Company's end-user customers include most of the world's leading
semiconductor manufacturers. For the year ended September 30, 1996, Intel
accounted for 20% of total net sales and NEC accounted for 17% of total net
sales. For the year ended September 30, 1995, Intel accounted for 29% of total
net sales, and IBM accounted for 12% of total net sales.
Gross profit increased to $31.7 million in fiscal 1996 from $29.0 million in
the prior fiscal year, an increase of 9 percent. However, gross profit for the
fourth quarter of fiscal 1996 declined to $2.8 million as compared to $7.2
million in the third quarter of fiscal 1996 and $9.3 million in the fourth
quarter of fiscal 1995. This decline reflects the semiconductor industry's
slowing order rate and competitive pressures. Gross profit increased from fiscal
1995 to fiscal 1996 as a result of increased sales volume. Gross profit as a
percentage of net sales declined to 45% in the current fiscal year from 46% in
fiscal 1995. The reduced gross profit percentage resulted primarily from a
decline in systems margin as the number of systems sold to distributors
increased, an increase in cost incurred on systems sold in Europe that required
additional customization to meet more stringent European electronics regulatory
standards, and an increase in overhead costs as a result of the Company's move
to a new facility. This decrease in systems margin was partially offset by an
improvement in spares margin.
Research and Development ("R&D") expenses increased to $16.7 million in the
current fiscal year from $8.9 million in the prior fiscal year, an increase of
87%. As a percentage of net sales, R&D expenses increased to 23% in fiscal 1996
from 14% in fiscal 1995, reflecting the Company's commitment to bring new
products to market. During fiscal year 1996, the Company introduced its
Heatpulse 8800 system. The Heatpulse 8800 product was a new RTP system designed
for volume production environments, where process repeatability, productivity
and cost are critical considerations. This product was developed to help
semiconductor manufacturers improve performance in all three areas for the full
range of RTP process applications. All R&D costs are expensed as incurred.
Selling, general and administrative ("SG&A") expenses decreased to $10.2
million in fiscal 1996 from $10.6 million in fiscal 1995, a decrease of 3
percent. As a percentage of net sales, SG&A expenses decreased to 14% in fiscal
1996 from 17% in fiscal 1995, reflecting higher sales in the more recent period.
The decrease in absolute dollars for the current fiscal year was due primarily
to increased sales to distributors, which have lower selling and marketing
expenses than direct sales, and the Company's management of expenses in response
to the decline in sales during the second half of fiscal 1996, as well as a
reduction in sales commissions as a result of lower sales.
Other income (expense), net was $772,000 of income in fiscal 1996 and $12,000
of income in fiscal 1995. Interest income (net of interest expense) was $649,000
in fiscal 1996, reflecting interest earned on investment of the Company's cash
and investments. Other income also included commissions on quartz sales of
$190,000 earned in fiscal 1996.
Equity in loss of unconsolidated subsidiary was $1.2 million for fiscal 1996.
This represents the Company's share of the losses of AG Israel during fiscal
1996 as compared to $364,000 from May 1995 through the end of fiscal 1995.
20
<PAGE> 21
For fiscal 1996, the Company recorded income tax expense of $1.7 million
compared to a benefit for income taxes of $532,000 in fiscal 1995. As a result
of the significant increase in profitability during fiscal 1995, the completion
of the Company's initial public offering and the closing of the AG Israel
transaction with Clal Electronics, the Company reversed its valuation allowance
for deferred income taxes, resulting in a tax benefit for fiscal 1995. In fiscal
1996, the effective tax rate of 39% more closely approximates the statutory
rates of the jurisdictions in which the Company operates. The impact of AG
Israel losses, which are not deductible on the U.S. federal tax return of the
Company (9.0%), were offset in part by the tax benefits received from the
Company's export sales (4.9%).
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had cash, cash equivalents and
short-term investments of $4.2 million, compared to $12.0 million as of
September 30, 1996 and $18.9 million as of September 30, 1995. The decrease of
$7.8 million from fiscal 1996 to fiscal 1997 was primarily attributable to
capital expenditures relating to the Company's upgrade of it's facility to build
the Starfire products and to build internal Starfire tools for engineering
development. The increase of $17.3 million from fiscal 1994 to fiscal 1995 was
primarily due to the Company's initial public offering in May 1995. Working
capital decreased to $22.9 million at September 30, 1997 from $26.9 million at
September 30, 1996 from $28.6 million at September 30, 1995. During fiscal 1997,
the Company renewed a $5 million revolving line of credit, which is available
through July 31, 1998. The line is collateralized by primarily all assets of the
Company. Borrowings bear interest at prime plus 1% per annum when the Company
has a net loss and prime plus 0.5% per annum when the Company has net income.
There were no outstanding borrowings at September 30, 1997.
The Company's operating activities used cash of $4.6 million during fiscal
1997. Net loss of $4.7 million, increases in accounts receivable of $4.9 million
and prepaids of $434,000, and decreases in accrued liabilities of $327,000,
customer advances of $245,000 and income taxes payable/refundable of $189,000
were offset by increases in accounts payable of $1.6 million, loss on disposal
of fixed assets of $919,000 and a decrease in deferred income taxes of $846,000.
The increase in accounts receivable was due to increasing sales in the fourth
quarter of fiscal 1997 compared to the fourth quarter of fiscal 1996. The
increase in prepaids was primarily due to the addition of an asset exchanged for
services. The decrease in customer advances was primarily due to the return of
an experimental tool and subsequent refund to the customer. The decrease in
accrued liabilities was primarily due to a decrease in the reserve for warranty
parts and labor, resulting from the decrease in the number of tools under
warranty coverage, and in a change in the calculation method of reserve
requirements. The decrease in deferred income taxes was due primarily to an
increase in the valuation allowance to reduce net deferred tax assets to an
amount expected more likely than not to be recognized. The increase in payables
was primarily due to an increase in fixed asset purchases and R&D spending in
the fourth quarter of fiscal 1997 compared to the fourth quarter of fiscal 1996.
The loss on disposal of fixed assets was primarily due to the decommission of
engineering systems. In addition, inventories remained constant despite a
write-down of $1.4 million in inventory during fiscal 1997 related to the
discontinuance of the Heatpulse 4100 product line, as the Company increased
inventories during the fourth quarter of fiscal 1997 to support anticipated Beta
testing of its Starfire products and potential net sales growth.
Cash provided by operating activities was $673,000 during fiscal 1996. Net
income of $2.7 million, a decrease in accounts receivable of $4.9 million and
losses from equity in AG Israel of $1.2 million were offset by increases in
inventory of $3.3 million along with decreases in accounts payable of $2.4
million, accrued liabilities of $2.2 million and refundable income taxes of $2.1
million. The decrease in accounts receivable was due to increased collection
activity and declining sales during the fourth quarter of fiscal 1996. The
increase in inventory was primarily due to increased levels of raw materials in
preparation for meeting the Company's shipment targets for fiscal 1996, as well
as the stocking of offsite spares inventories. The decrease in payables was
primarily due to a decrease in purchases during the second half of fiscal 1996.
The decrease in accruals was primarily due to reduced commission expense and
other payroll accruals and lower level of operations during the second half of
1996. Cash provided by operating activities was $1.4 million in fiscal 1995, as
net income of $9.8 million and an increase in accounts payable of $3.2 million,
due largely to increased purchases of inventory and the growth in operating
expenses, were partially offset by an increase in accounts receivable of $7.3
million, reflecting an increase in net sales, an increase in inventories of $4.1
million to support higher production volumes and an increase in deferred tax
assets of $3.9 million, principally due to increased profitability resulting in
a reversal of the valuation allowance.
Cash provided by (used in) investing activities was $4.9 million in fiscal
1997, ($7.3) million in fiscal 1996 and ($13.5) million in fiscal 1995. Capital
expenditures and purchases of short-term investments totaling $12.9 million were
the principal uses of cash in investment activities in fiscal 1997 and were
offset by maturities of short term investments of $17.8 million. Capital
expenditures, purchases of short term investments and a required $1 million
equity investment in AG Israel
21
<PAGE> 22
were the principal uses of cash in investment activities in fiscal 1996.
Purchases of short term investments, capital expenditures and an equity
investment in AG Israel were the principal uses of cash in investment activities
in fiscal 1995. Capital expenditures were approximately $3.5 million in fiscal
1997, $6.9 million in fiscal 1996 and $2.2 million in fiscal 1995. The Company
leased assets with a cost of $496,000 in fiscal 1997; the Company did not enter
into any lease agreements in fiscal 1996; the Company leased assets with a cost
of $280,000 in fiscal 1995. Capital expenditures in fiscal 1997 were made
primarily to support Starfire engineering and manufacturing requirements.
Capital expenditures in fiscal 1996 were made primarily to support increased
personnel levels and facilities upgrades. The Company relocated its entire
operations from Sunnyvale, California to San Jose, California during October
1995. The cost of leasehold improvements for this relocation was $2.2 million.
*The Company expects that capital expenditures will be approximately $4.0
million in fiscal 1998, principally to support facilities and new product
development.
Financing activities provided cash of $239,000 in fiscal 1997 from the sale
of common stock to employees, partially offset by the reduction in long-term
lease obligations. Financing activities provided cash of $316,000 in fiscal 1996
primarily from the sale of common stock to employees and collections of employee
notes receivable, partially offset by the reduction in long-term lease
obligations. Financing activities provided cash of $18.8 million in fiscal 1995
principally from net proceeds of $20.2 million resulting from the Company's
initial public offering of Common Stock and short-term borrowings to support the
cash used by operating activities during the period partially offset by
repayments of short-term borrowings.
*The Company believes that current cash and short-term investment balances,
together with existing sources of liquidity, will satisfy the Company's
anticipated liquidity and working capital requirements through the next twelve
months. *However, due to the uncertain nature of the industry, competitive
market conditions and the strong commitment to developing the Company's
next-generation products, liquidity and working capital are difficult to
anticipate beyond the next twelve months. *There can be no assurance that
additional financing, when required, will be available, or if available, can be
obtained on terms satisfactory to the Company. The Company reserves the right to
obtain funds for working capital or other purposes.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements as of September 30, 1997
and 1996 and for the Three Years in the period ended September 30, 1997 and
Independent Auditors' Report follow. The pages of the Company's Consolidated
Financial Statements are independently numbered from this Form 10-K.
22
<PAGE> 23
AG ASSOCIATES, INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF
SEPTEMBER 30, 1997 AND 1996 AND FOR THE
THREE YEARS IN THE PERIOD ENDED SEPTEMBER 30, 1997
AND INDEPENDENT AUDITORS' REPORT
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
AG Associates, Inc.:
We have audited the accompanying consolidated balance sheets of AG Associates,
Inc. and its subsidiary (the Company) as of September 30, 1997 and 1996 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AG Associates, Inc. and its
subsidiary at September 30, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended September
30, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
November 4, 1997
<PAGE> 25
AG ASSOCIATES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
ASSETS 1997 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and equivalents $ 2,485 $ 1,996
Short-term investments 1,672 9,989
Receivables (net of allowances of $903 in 1997 and 1996) 13,415 8,560
Inventories 11,676 11,668
Income taxes refundable 1,652 1,463
Deferred income taxes 2,221 2,859
Prepaid expenses and other current assets 896 462
-------- --------
Total current assets 34,017 36,997
Property and equipment - net 8,493 8,210
Deferred income taxes 437 645
-------- --------
Total $ 42,947 $ 45,852
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,272 $ 4,669
Accrued liabilities 4,684 5,011
Current portion of capital lease obligations 194 222
Customer advances -- 245
-------- --------
Total current liabilities 11,150 10,147
Capital lease obligations 275 11
Commitments and contingences (Notes 7, 13 and 14)
Shareholders' equity:
Common stock, no par value: 25,000,000 shares authorized;
shares outstanding: 1997 - 6,061,196; 1996 - 5,943,503 36,139 35,640
Deferred stock compensation -- (17)
Net unrealized loss on short-term investments (10) (10)
Retained earnings (accumulated deficit) (4,607) 81
-------- --------
Total shareholders' equity 31,522 35,694
-------- --------
Total $ 42,947 $ 45,852
======== ========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 26
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales (including sales to a shareholder/distributor
of $5,719, $17,333 and $9,132) $ 49,604 $ 71,089 $ 62,725
Cost of sales 32,697 39,365 33,697
-------- -------- --------
Gross profit 16,907 31,724 29,028
-------- -------- --------
Operating expenses:
Research and development 14,329 16,653 8,893
Selling, general and administrative 9,247 10,204 10,562
-------- -------- --------
Total 23,576 26,857 19,455
-------- -------- --------
Income (loss) from operations (6,669) 4,867 9,573
-------- -------- --------
Other income and expense:
Interest income 377 708 352
Interest expense (71) (59) (370)
Equity in loss of unconsolidated subsidiary -- (1,152) (364)
Other, net 126 123 30
-------- -------- --------
Income (loss) before provision (benefit) for income taxes (6,237) 4,487 9,221
Provision (benefit) for income taxes (1,549) 1,744 (532)
-------- -------- --------
Net (loss) income $ (4,688) $ 2,743 $ 9,753
======== ======== ========
Net (loss) income per share $ (0.78) $ 0.45 $ 2.05
======== ======== ========
Shares used in per share calculations 5,981 6,140 4,770
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 27
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY) (DOLLARS IN
THOUSANDS)
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE RECEIVABLE
PREFERRED STOCK COMMON STOCK FROM
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, September 30, 1994 31,250 $ 50 2,927,328 $ 8,765 $ (14)
Conversion of minority equity interest -- -- 271,739 1,979 --
Initial public offering of common stock -- -- 2,070,000 20,232 --
Conversion of preferred stock (31,250) (50) 7,813 50 --
Conversion of subordinated debentures -- -- 271,739 2,000 --
Exercise of warrants -- -- 173,750 1,529 --
Common stock issued for services -- -- 18,750 170 --
Exercise of options -- -- 95,280 410 (78)
Amortization of deferred stock compensation -- -- -- -- --
Preferred stock dividends -- -- -- -- --
Net income -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCES, September 30, 1995 -- $ -- 5,836,399 35,135 (92)
---------- ========== ---------- ---------- ----------
Common stock issued under employee stock
purchase plan 52,694 310 --
Exercise of options 54,410 195 --
Amortization of deferred stock compensation -- -- --
Net unrealized loss on short-term investments -- -- --
Cancellation of notes receivable -- -- 92
Net income -- -- --
---------- ---------- ----------
BALANCES, September 30, 1996 5,943,503 35,640 --
---------- ---------- ----------
Common stock issued under employee stock
purchase plan 61,781 256 --
Exercise of options 55,912 243 --
Amortization of deferred stock compensation -- -- --
Net loss -- -- --
---------- ---------- ----------
BALANCES, September 30, 1997 6,061,196 $ 36,139 $ --
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
NET
UNREALIZED
LOSS ON RETAINED TOTAL
DEFERRED SHORT- EARNINGS SHAREHOLDERS'
STOCK TERM (ACCUMULATED EQUITY
COMPENSATION INVESTMENTS DEFICIT) (DEFICIENCY)
------------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, September 30, 1994 $ (128) $ -- $ (12,413) $ (3,740)
Conversion of minority equity interest -- -- -- 1,979
Initial public offering of common stock -- -- -- 20,232
Conversion of preferred stock -- -- -- --
Conversion of subordinated debentures -- -- -- 2,000
Exercise of warrants -- -- -- 1,529
Common stock issued for services -- -- -- 170
Exercise of options -- -- -- 332
Amortization of deferred stock compensation 47 -- -- 47
Preferred stock dividends -- -- (2) (2)
Net income -- -- 9,753 9,753
---------- ---------- ---------- ----------
BALANCES, September 30, 1995 (81) -- (2,662) 32,300
---------- ---------- ---------- ----------
Common stock issued under employee stock
purchase plan -- -- -- 310
Exercise of options -- -- -- 195
Amortization of deferred stock compensation 64 -- -- 64
Net unrealized loss on short-term investments -- (10) -- (10)
Cancellation of notes receivable -- -- -- 92
Net income -- -- 2,743 2,743
--------- --------- --------- ---------
BALANCES, September 30, 1996 (17) (10) 81 35,694
--------- --------- --------- ---------
Common stock issued under employee stock
purchase plan -- -- -- 256
Exercise of options -- -- -- 243
Amortization of deferred stock compensation 17 -- -- 17
Net loss -- -- (4,688) (4,688)
--------- --------- --------- ---------
BALANCES, September 30, 1997 $ -- $ (10) $ (4,607) $ 31,522
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE> 28
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (4,688) $ 2,743 $ 9,753
Reconciliation to net cash provided by (used in) operating activities:
Depreciation and amortization 2,746 2,078 1,073
Loss on disposal of fixed assets 662 -- --
Equity in loss of unconsolidated subsidiary -- 1,152 364
Deferred income taxes 846 400 (3,904)
Deferred stock compensation and stock issued for services rendered 17 64 217
Interest accrued (paid) on convertible subordinated debentures -- -- (107)
Other -- 17 105
Changes in assets and liabilities:
Receivables (4,855) 4,948 (7,276)
Inventories (8) (3,274) (4,071)
Prepaid expenses and other current assets (177) 94 (327)
Accounts payable 1,603 (2,372) 3,201
Accrued liabilities (327) (2,159) 2,164
Customer advances (245) (905) (259)
Income taxes payable/refundable (189) (2,113) 441
-------- -------- --------
Net cash provided by (used in) operating activities (4,615) 673 1,374
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments (9,474) (3,199) (10,600)
Maturities of short-term investments 17,791 3,800 --
Investment in AG Israel -- (1,000) (782)
Other assets -- -- 15
Capital expenditures (3,452) (6,852) (2,173)
-------- -------- --------
Net cash provided by (used in) investing activities 4,865 (7,251) (13,540)
-------- -------- --------
Cash flows from financing activities:
Short-term borrowing -- -- 2,000
Repayments of short-term borrowing -- -- (4,400)
Reductions in long-term obligations (260) (281) (865)
Proceeds from initial public offering -- -- 20,232
Sales of common stock 499 505 1,861
Collection of notes receivable -- 92 --
Preferred stock dividends -- -- (2)
-------- -------- --------
Net cash provided by financing activities 239 316 18,826
-------- -------- --------
Net increase (decrease) in cash and equivalents 489 (6,262) 6,660
Cash and equivalents at beginning of period 1,996 8,258 1,598
-------- -------- --------
Cash and equivalents at end of period $ 2,485 $ 1,996 $ 8,258
======== ======== ========
</TABLE>
(Continued)
F-5
<PAGE> 29
AG ASSOCIATES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Supplemental schedule of noncash investing and financing activities:
Assets acquired under capital leases $ 496 $ -- $ 280
====== ======= ======
Exchange of equipment for services $ 257 $ -- $ --
====== ======= ======
Conversion of subordinated debentures, preferred stock and minority
interests $ -- $4,029
======= ======
Conversion of minority equity interest $ -- $ -- $1,979
====== ======= ======
Exercise of stock options in exchange for notes receivable $ -- $ -- $ 78
====== ======= ======
Transfer of net liabilities to unconsolidated subsidiary:
Property $ 101
Current liabilities (285)
Capital leases (82)
------
Net $ (266)
======
Supplemental disclosure of cash flow information Cash paid during the period
for:
Interest $ 71 $ 50 $ 369
====== ======= ======
Income taxes $ -- $ 3,207 $2,930
====== ======= ======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 30
AG ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - AG Associates, Inc. (the Company) was incorporated in
California in October 1981. The Company designs, manufactures, markets and
supports advanced single-wafer, rapid thermal processing (RTP) equipment
used in the manufacture of integrated circuits. The Company's products,
marketed under the Heatpulse(R) and StarfireTM names, utilize high
intensity light to precisely heat a single silicon wafer which results in a
chemical process needed to produce an integrated circuit. These products
are manufactured at the Company's California location and sold primarily to
semiconductor manufacturers through a direct sales force in the United
States and through foreign distributors.
CONSOLIDATION - The consolidated financial statements include the accounts
of AG Associates, Inc. and its wholly-owned subsidiary, Rapro Technology,
Inc. (Rapro). All significant intercompany balances and transactions have
been eliminated. The consolidated financial statements of the Company also
include the results of operations of AG Associates (Israel) Ltd. (AG
Israel) for the period through May 31, 1995. As a result of the sale of the
controlling interest of AG Israel (see Note 13), the Company has accounted
for its remaining minority interest in AG Israel using the equity method
since June 1, 1995.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to a concentration of credit risk consist primarily of
cash, cash equivalents and short-term investments, as well as accounts
receivable. The Company has placed the majority of its cash and cash
equivalents and short-term investments with high-quality financial
institutions.
The Company sells its products primarily to large companies in the
semiconductor industry. Credit risk is further mitigated by the Company's
credit evaluation process. The Company does not require collateral or other
security to support receivables. While the Company maintains allowances for
potential credit losses, actual bad debt losses to date have not been
material.
FINANCIAL STATEMENT ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Such estimates
include the level of the allowance for potentially uncollectible
receivables, inventory reserves for obsolete, slow moving or nonsalable
inventory, certain accruals and estimated costs for installation, warranty
and other customer support obligations. Actual results could differ from
these estimates.
CASH EQUIVALENTS - Cash equivalents are highly liquid debt investments
acquired with a maturity of three months or less at date of purchase.
SHORT-TERM INVESTMENTS - The Company has classified its short-term
corporate debt securities and its adjustable rate preferred stock
investments as "available for sale" securities, and the carrying value of
these securities is fair market value, as determined by quoted market
prices. Net unrealized losses on these investments have been recorded as a
separate component of shareholders' equity, net of related tax.
INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out) or market. The Company reviews the levels of its inventories in
light of current and forecasted demand to identify and provide reserves for
obsolete, slow-moving, or nonsalable inventory.
F-7
<PAGE> 31
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over estimated
useful lives of three to five years. Equipment under capital lease and
leasehold improvements are amortized over the shorter of their estimated
useful lives or the lease term.
STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock-Based Compensation".
REVENUE RECOGNITION - Sales are generally recognized upon shipment.
Estimated costs for installation, warranty and other customer support
obligations which are considered insignificant, are accrued in the period
that sales are recognized. Services outside the warranty period are
generally provided to customers on a "time and materials" basis, and are
recognized when the services are performed.
RESEARCH AND DEVELOPMENT - All research and development costs are expensed
as incurred. The Company's products include certain software applications
which are integral to the operation of the product. The costs to develop
such software have not been capitalized as the Company believes its current
software development process is essentially completed concurrent with the
establishment of the technological feasibility of the software and/or
development of the related hardware.
INCOME TAXES - The Company provides for income taxes using the asset and
liability approach defined by Statement of Financial Accounting Standards
No. 109 (SFAS 109), "Accounting for Income Taxes."
NET INCOME (LOSS) PER SHARE - Net income per share is based upon the
weighted average number of common and dilutive common equivalent shares
(common stock options, warrants and securities convertible into the
Company's common stock) outstanding.
Net loss per share excludes common equivalents as such amounts are
anti-dilutive.
In February 1997, the Financial Accounting Standard Board (FASB) issued
SFAS No. 128, "Earnings per Share." The Company is required to adopt SFAS
128 in the first quarter of fiscal 1998 and will restate at that time
earnings per share (EPS) data for prior periods to conform with SFAS 128.
Earlier application is not permitted.
SFAS 128 replaces current EPS reporting requirements and requires a dual
presentation of basic and diluted EPS. Basic EPS excludes dilution and is
computed by dividing net income attributable to common stockholders by the
weighted average of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock.
Pro forma amounts for basic and diluted EPS assuming SFAS 128 had been in
effect for the periods presented are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Basic EPS $ (0.78) $ 0.47 $ 2.22
Diluted EPS $ (0.78) $ 0.45 $ 2.05
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS - In June 1997, the FASB issued SFAS
No. 130, "Reporting Comprehensive Income," which requires an enterprise to
report, by major components and as a single total , the change in its net
assets during the period from nonowner sources; and No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
annual and interim reporting
F-8
<PAGE> 32
standards for an enterprise's business segments and related disclosures
about its products, services, geographic areas and major customers.
Adoption of these statements will not impact the Company's financial
position, results of operations or cash flows. Both statements are
effective for fiscal years beginning after December 15, 1997.
2. INVESTMENTS
Short-term investments at September 30 consist of (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
1997 COST GAINS LOSSES VALUE
------- ------- ------- -------
<S> <C> <C> <C> <C>
Available-for-sale investments:
Adjustable rate preferred stocks $ 500 $ -- $ -- $ 500
Corporate debt securities 1,182 -- (10) 1,172
------- ------- ------- -------
$ 1,682 $ -- $ (10) $ 1,672
======= ======= ======= =======
1996
Available-for-sale investments:
Adjustable rate preferred stocks $ 2,500 $ -- $ -- $ 2,500
Corporate debt securities 7,499 10 (20) 7,489
------- ------- ------- -------
$ 9,999 $ 10 $ (20) $ 9,989
======= ======= ======= =======
</TABLE>
There were no realized gains or losses for the years ended September 30,
1997 and 1996. All corporate debt securities held at September 30, 1997
mature within one year.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1997 1996
------- -------
<S> <C> <C>
Raw materials $ 7,500 $ 7,865
Work-in-process 4,176 3,803
------- -------
$11,676 $11,668
======= =======
</TABLE>
Inventories are shown net of reserves for obsolete, slow-moving, and
nonsalable inventory of $3,666,000 and $3,289,000 at September 30, 1997 and
1996, respectively.
F-9
<PAGE> 33
4. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
Machinery and equipment $ 10,289 $ 9,534
Furniture and fixtures 888 643
Leasehold improvements 2,893 2,273
Construction in progress 1,315 235
-------- --------
Total 15,385 12,685
Accumulated depreciation and amortization (6,892) (4,475)
-------- --------
Property and equipment - net $ 8,493 $ 8,210
======== ========
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------
1997 1996
------ ------
<S> <C> <C>
Warranty reserve $1,687 $2,440
Compensation and benefits 1,354 1,186
Commissions 473 502
Other 1,170 883
------ ------
$4,684 $5,011
====== ======
</TABLE>
6. BORROWING ARRANGEMENTS
The Company has a line of credit with a bank which provides for borrowings
of up to $5,000,000, limited to outstanding accounts receivable, as
defined, which expires July 31, 1998. The line of credit is collateralized
by primarily all of the Company's assets. Advances bear interest at the
bank's prime rate plus 1.0% per annum when the Company has a net loss and
prime rate plus 0.5% per annum when the Company has net income (as
defined). There were no outstanding borrowings at September 30, 1997. The
line of credit is subject to certain financial covenants. At September 30,
1997, the Company is in compliance with these covenants.
7. LEASES
Equipment with a cost and accumulated amortization of $1.3 million and
$818,000 at September 30, 1997, respectively, ($714,000 and $499,000 at
September 30, 1996) has been leased under capital leases.
In 1995, the Company entered into a seven-year lease, with an option for a
five-year extension, for a 115,000 square foot office and manufacturing
facility, located in San Jose, California. An option to expand the San Jose
facilities by approximately 38,000 square feet is available to the Company
within three years. Currently the Company is negotiating to exercise the
option.
On August 25, 1997 the Company entered into a one-year lease for an
additional 5,000 square foot manufacturing space adjacent to its
manufacturing facility in San Jose, California.
F-10
<PAGE> 34
Future minimum annual capital and operating lease commitments at September
30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- ---------
<S> <C> <C>
1998 $ 869 $ 210
1999 897 188
2000 931 123
2001 966 -
2002 1,001 -
------- -----
Total minimum lease payments $ 4,664 $ 521
=======
Amount representing interest (52)
Present value of minimum lease payments $ 469
=====
</TABLE>
Rent expense for operating leases was approximately $1,240,000, $1,134,000
and $684,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
8. SHAREHOLDERS' EQUITY
SERIES A CONVERTIBLE PREFERRED STOCK
Upon consummation of the Company's initial public offering in May 1995, all
Series A convertible preferred stock was automatically converted into 7,813
shares of common stock.
COMMON STOCK
In May 1995, the Company completed an initial public offering of 2,070,000
shares of common stock, including the underwriter's overallotment of
270,000 shares, resulting in total proceeds to the Company of $20,232,000,
net of issuance costs.
During fiscal 1993, the Company issued $2,000,000 in convertible
subordinated debentures (the Debentures) to the Investment Company of Bank
of Hapoalim Ltd. (Hapoalim Investment Co.). In May 1995, at the election of
Hapoalim Investment Co. and upon consummation of the Company's initial
public offering, principal on the Debentures was converted into 271,739
shares of the Company's voting common stock at a price of $7.36 per share.
In addition, Hapoalim Investment Co. had a warrant to purchase 173,750
shares of the Company's common stock. In connection with the public
offering in May 1995, the warrant was exercised, resulting in proceeds to
the Company of $1,529,000.
NOTES RECEIVABLE FROM SHAREHOLDERS
Certain notes had been received from officers for the acquisition of shares
of common stock. All notes were canceled as of September 30, 1997.
F-11
<PAGE> 35
STOCK OPTION AND PURCHASE PLANS
Under the Company's stock option plans (the Plans), 1,500,000 shares of
Common Stock are reserved for the grant of incentive or non-statutory stock
options and the direct award or sale of shares to employees, directors,
contractors and consultants. Under the Plans, options are granted at fair
value at the date of grant as determined by the Board of Directors.
Generally, such options become exercisable over periods of one to four
years and expire ten years from the grant date.
Option activity under the Plans was as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
----------- ---------------
<S> <C> <C> <C>
Outstanding, October 1, 1995 462,780 $ 4.06
Granted 414,824 $ 15.92
Exercised (95,280) $ 4.04
Canceled (63,347) $ 4.56
--------
Outstanding, September 30, 1995 (132,481 exercisable
at a weighted average price of $11.04) 718,977 $ 10.70
Granted (weighted average fair value of $3.19 per share) 868,363 $ 8.87
Exercised (54,410) $ 4.01
Canceled (725,014) $ 13.85
--------
Outstanding, September 30, 1996 (229,979 exercisable
at a weighted average price of $6.44) 807,916 $ 6.31
Granted (weighted average fair value of $2.43 per share) 385,680 $ 6.09
Exercised 55,912 $ 4.14
Canceled (170,777) $ 6.59
--------
Outstanding, September 30, 1997 (194,426 exercisable
at a weighted average price of $5.91) 966,907 $ 6.31
=======
</TABLE>
At September 30, 1997, 487,775 options were available for future grant.
As of September 30, 1997, nonqualified options to purchase 100,084 shares
were outstanding to consultants and directors at prices ranging from $5.88
to $29.94.
In June 1996, the Company canceled options to purchase 495,439 shares of
common stock exercisable at $7.38 to $33.19 per share and issued
replacement options with an exercise price of $7.21 per share.
In connection with certain grants of certain stock options to employees in
fiscal 1994, the Company had recorded $230,000 for the difference between
the deemed fair value for accounting purposes and the option price as
determined by the Board at the date of grant. Of such amount, $102,000
related to option grants which had previously vested and accordingly were
expensed in fiscal 1994; the remaining $128,000 was presented as a
reduction of shareholders' equity and is being amortized over the 48-month
vesting period of the related stock options. Amortization of deferred stock
compensation for 1997 and 1996 was $17,000 and $64,000, respectively.
F-12
<PAGE> 36
In November 1994, the Company reserved 50,000 shares for a directors stock
option plan. Options to purchase 8,000 shares at prices ranging from $5.88
to $17.50 have been issued under this plan at September 30, 1997.
Additional information regarding options outstanding as of September 30,
1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------
WEIGHTED OPTIONS EXERCISABLE
------------------------
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
---------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.40 - $5.25 260,479 6.62 $4.21 71,746 $3.83
$5.31 - $7.02 216,099 8.92 $6.21 10,400 $6.49
$7.13 - $7.13 343,062 7.90 $7.13 106,184 $7.13
$7.13 - $25.79 147,267 8.65 $8.05 6,096 $8.31
----- ------ ------- ---- ----- ----- -----
$2.40 - $25.79 966,907 7.91 $6.31 194,426 $5.91
</TABLE>
ADDITIONAL STOCK PLAN INFORMATION - The Company continues to account for
its stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. Accordingly, no compensation
expense has been recognized in the financial statements for employee stock
arrangements.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires the disclosure of pro forma
net income (loss) as if the Company had adopted the fair value method as of
the beginning of fiscal 1996. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models,
even though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models
also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the
Black-Scholes option pricing model with the following weighted average
assumptions: expected life, 4 years; risk-free interest rates, 6.14% in
1997 and 6.04% in 1996; volatility, 40% in 1997 and 40% in 1996 and no
dividends during the expected term. The Company's calculations are based on
a single option valuation approach, and forfeitures are recognized as they
occur. If the computed fair values of the 1997 and 1996 awards had been
amortized to expense over the vesting period for the awards, pro forma net
income (loss) would have been ($5,097,000) in 1997 or ($0.85) per share and
$2,222,000 in 1996 or $0.36 per share. However, the impact of outstanding
non-vested stock options granted prior to 1996 has been excluded from the
pro forma calculation; accordingly, the 1997 and 1996 pro forma adjustments
are not indicative of future period pro forma adjustments when the
calculation will apply to all applicable stock options.
EMPLOYEE STOCK PURCHASE PLAN - In November 1994, the Company reserved
250,000 shares for sale under the 1994 Employee Stock Purchase Plan,
designed to qualify under Internal Revenue Code Section 423(b). Stock may
be offered for purchase by employees at a price equal to 85% of the lower
of the market value of the stock at the beginning or end of each six-month
offer period, subject to annual limitation. In fiscal 1997 and 1996, 61,781
and 52,694 shares were issued at weighted average prices of $4.15 and $5.87
under this Plan for net proceeds to the Company of $243,000 and $310,000.
The weighted average fair market value of the fiscal 1997 and 1996 awards
was $1.54 and $4.57 per share, respectively. No shares had been issued
under this Plan in fiscal 1995.
F-13
<PAGE> 37
9. INCOME TAXES
Income (loss) before provision (benefit) for income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Domestic $ (6,237) $ 5,639 $ 10,043
Foreign -- (1,152) (822)
-------- -------- --------
Total $ (6,237) $ 4,487 $ 9,221
======== ======== ========
</TABLE>
The provision (benefit) for income taxes consists of (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Federal:
Current $(2,197) $ 1,253 $ 2,650
Deferred 772 334 (3,200)
------- ------- -------
(1,425) 1,587 (550)
State:
Current (198) 91 722
Deferred 74 66 (704)
------- ------- -------
Provision (benefit) for income taxes $(1,549) $ 1,744 $ (532)
======= ======= =======
</TABLE>
A reconciliation between the Company's effective tax rate and the U.S.
statutory rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax at federal statutory rate $(2,121) $ 1,570 $ 3,227
State taxes (1) 87 436
Foreign sales corporation benefit -- (220) (238)
Foreign losses not deductible -- 403 177
Other (302) (28) 95
Tax impact of AG Israel transaction -- -- 2,136
Increase (decrease) in valuation allowance 875 (68) (6,365)
------- ------- -------
Provision (benefit) for income taxes $(1,549) $ 1,744 $ (532)
======= ======= =======
</TABLE>
The tax impact of the AG Israel transaction arises primarily from the
transfer of technology, assets and liabilities of Rapro to AG Israel;
preacquisition net operating loss carryforwards of Rapro were utilized as a
result of this transaction.
F-14
<PAGE> 38
The components of the net deferred tax assets as of September 30 were as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carryforwards of Rapro $ 1,408 $ 1,408
Credit carryforwards 861 106
Reserves not currently deductible for tax purposes 2,235 2,753
Book depreciation over tax depreciation 437 645
------- -------
4,941 4,912
Gross deferred tax assets:
Valuation allowances :
Rapro net operating loss and credit carryforwards (1,408) (1,408)
Other (875) --
------- -------
Net deferred tax assets $ 2,658 $ 3,504
======= =======
</TABLE>
Realization of the tax benefits related to the Company's deferred tax
assets is dependent upon the generation of future taxable income. The
valuation allowance at September 30, 1997 of $875,000 reduces gross
deferred tax assets to the amount determined by management more likely than
not to be recognized. The valuation allowance at September 30, 1997 and
1996 of $1,408,000 relates to amounts arising from Rapro's preacquisition
carryforwards. The credit carryforwards expire in 2006.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) tax-deferred savings plan under which participants
may contribute up to 15% of their compensation, subject to certain Internal
Revenue Service limitations. The Company has not contributed to the Plan to
date.
11. SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS
The Company leased a facility during fiscal years 1996 and 1995 from a
shareholder. Rent expense related to this lease for 1996 and 1995 was
$72,000 and $396,000, respectively. The Company did not lease from this
shareholder in 1997.
Sales and accounts receivable related to significant customers were:
<TABLE>
<CAPTION>
SALES AS A PERCENTAGE
ACCOUNTS OF NET REVENUES
RECEIVABLE YEARS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- -------------------------
1997 1996 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Distributor/shareholder * * 12% 25% 15%
Distributor * 37% * 14 *
Intel 15% * 25 20 29
NEC * * * 17 *
IBM * * * * 12
Micron 23 * 10 * *
Masca 10 * * * *
</TABLE>
* Less than 10% of net revenues or accounts receivable
F-15
<PAGE> 39
12. GEOGRAPHIC AND CUSTOMER INFORMATION
Information concerning the Company's operations by geographic area as of
and for the three years ended September 30, 1997 follows (in thousands).
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net sales:
From the United States to:
United States $ 34,007 $ 32,460 $ 42,882
Japan 5,719 19,263 9,132
Europe 3,566 10,108 3,078
Taiwan 2,785 7,044 7,134
Other Far East countries 3,527 2,214 274
Other -- -- 225
-------- -------- --------
$ 49,604 $ 71,089 $ 62,725
Operating income (loss): ======== ======== ========
United States $ 10,319
Middle East (746)
--------
$ 9,573
========
</TABLE>
Export revenues as a percentage of net sales were 31%, 54% and 32% in 1997,
1996 and 1995, respectively.
13. AG ISRAEL
In 1992, the Company established AG Israel for the purpose of developing,
manufacturing and marketing platforms for moving and controlling silicon
wafers for the semiconductor industry. During fiscal 1993, the Company sold
an approximate 49.9% interest in AG Israel to Hapoalim Investment Co. and
Yozma Venture Capital (Yozma). The Company retained a 50.1% voting
interest. Hapoalim Investment Co. and Yozma had the right to convert all of
their interests in AG Israel to shares of the Company's common stock.
Accordingly, the Company had recognized 100% of AG Israel's losses since
its inception.
In April 1994, the Company obtained the right to induce conversion of this
minority interest at any time. In return, Hapoalim Investment Co. purchased
the shares held by Yozma and the Company revised the exchange rate at which
Hapoalim Investment Co. could exchange its interest in AG Israel from $9.20
to $7.36 per share, and also revised the conversion rate of the debentures
from $9.20 to $7.36. The Company also modified the terms of the warrant
held by Hapoalim Investment Co., decreasing the exercise price to the lower
of $9.15 or 80% of the price of the shares in an initial public offering.
The fair value at April 1994 of these revisions to the exchange rate,
conversion rate and warrant price were estimated to be $400,000 and was
included in other expense.
F-16
<PAGE> 40
In February 1995, the Company exercised its exchange right and issued
271,739 shares of common stock to acquire all of the outstanding shares of
AG Israel. Also, in February 1995, the Company entered into an agreement
for the sale of the controlling interest in the research, development and
other business operations of its Rapro and AG Israel operations. Under the
agreement, effective upon the close of the Company's initial public
offering in May 1995, the Company contributed rights to the chemical vapor
deposition (CVD) and cluster tool technologies, certain assets and
liabilities of Rapro and cash of $500,000 to AG Israel. AG Israel issued
stock equal to a 51% interest to Clal Electronics Industries Ltd. (Clal
Electronics) in exchange for $2,500,000. In addition, Clal Electronics had
agreed to permit reimbursement to the Company for advances made to AG
Israel subsequent to September 30, 1994 through the closing of this
transaction in May 1995; such reimbursements totaled $521,000. AG Israel is
devoting its principal efforts to the development of cluster tools using
the technologies received from the Company; the Company and Clal
Electronics paid AG Israel an additional $1,000,000 and $2,000,000,
respectively, under the agreement. The Company had a right for a five-year
period to repurchase Clal Electronics interest in AG Israel and to
terminate the joint ownership of the technology for a repurchase price
equal to 100% of amounts contributed to AG Israel by Clal Electronics plus
simple interest at 25% of such contributions for each year from the date
the contribution was made, plus, under certain circumstances, $500,000 (the
"Clal" option). The Company also entered into a voting agreement with Clal
Electronics that covers, among other items, rights to elect directors of AG
Israel and rights of each of the parties to acquire additional shares of AG
Israel.
Pursuant to the terms of the agreement, Clal Electronics acquired
approximately 544,000 shares (9.9%) of the Company's outstanding shares of
common stock from existing shareholders of the Company. After three years,
Clal Electronics may increase its ownership in the Company up to 12% and,
if its ownership exceeds 10%, Clal Electronics has the right to nominate a
member for election to the Company's Board of Directors.
As a result of AG Israel's stock sale, the Company accounted for its 49%
investment in AG Israel using the equity method from June 1, 1995. In
November 1997, AG Israel completed a private placement equity financing of
$13 million in which the Company did not participate. As a result of the
financing, the Company's voting interest was diluted to 28% and its fully
diluted ownership interest to 25.2%. Also at that time, the Clal option was
terminated, the Company, Clal Electronics and new AG Israel investors
entered into a new shareholders agreement containing, among other things,
the rights of the parties to elect directors of AG Israel and terminated
the prior voting agreement between the Company and Clal Electronics.
Results of operations of AG Israel and Rapro prior to June 1, 1995 have
been included in the consolidated statement of operations. These operations
had combined net sales of $339,000 and a net loss of $822,000 for the eight
months ended May 31, 1995.
Condensed summary financial information (unaudited) of AG Israel is as
follows (in thousands):
<TABLE>
<S> <C>
As of September 30, 1997:
Current assets $ 7,961
Total assets $ 11,919
Current liabilities $ 5,407
Noncurrent liabilities $ 1,977
For the year ended September 30, 1997:
Net sales $ 199
Total expenses $ 5,442
--------
Net loss $ (5,243)
========
</TABLE>
F-17
<PAGE> 41
14. CONTINGENCIES
The Company is currently involved in intellectual property litigation. On
April 24, 1997, Applied Materials filed a complaint against the Company,
AST Elektronik GmbH and AST Elektronik U.S.A. in the United States District
Court for Northern California, San Jose Division. Applied Materials alleges
that the Company's products infringe on two of Applied Materials patents
relating to RTP process and heater head design and seeks a permanent
injunction against infringement, and award of damages for infringement,
treble damages for intentional and willful infringement, attorneys' fees
and costs of suit. On July 23, 1997, the Company answered Applied
Materials' complaint and counterclaimed for declaratory relief that the
Company's products do not infringe the two Applied Materials patents and
that the patents are invalid. On October 3, 1997, the Company filed a
counterclaim in United States District Court for Northern California, San
Jose Division against Applied Materials for infringement of one of the
Company's RTP process patents. On October 27, 1997, Applied Materials
answered the counterclaim alleging that it does not infringe the Company's
patent and that the patent is invalid. The trial on all claims and
counterclaims is set for March 1, 1999. Management cannot predict the
outcome of litigation and believes Applied Materials' claims are without
merit and intends to defend the Company vigorously. However, there can be
no assurance that this litigation will be resolved in favor of the Company,
and, in any event, litigation could result in significant expense to the
Company and could divert efforts of the Company's technical management
personnel from other tasks, whether or not such litigation is determined in
favor of the Company. In the event of an adverse ruling in any such
litigation, the Company might be required to pay substantial damages, cease
the manufacture, use and sale of infringing products, discontinue the use
of certain processes or expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology.
There has been substantial litigation regarding patent and other
intellectual property rights in the semiconductor industry. General Signal
Corporation has made a claim against at least two manufacturers of cluster
tools that have resulted in litigation to the effect that certain of their
cluster tool technologies infringe on General Signal patents. In 1991, at
the time that General Signal first raised patent claims in the cluster tool
area, the Company joined with six major semiconductor process tool
equipment manufacturers in forming an "Ad Hoc Committee for Defense against
General Signal Cluster Tool Patents" (the "Ad Hoc Committee"). Based in
part on an opinion of patent counsel, the members of the Ad Hoc Committee
notified General Signal that the member companies were of the opinion that
the General Signal patents were invalid based on (a) prior art, (b)
inequitable conduct before the Patent & Trademark Office and (c) estoppel
as a result of General Signal's activities in establishing standards for
cluster tools and interfaces within the semiconductor industry. The Company
believes that the position taken by the Ad Hoc Committee remains valid.
Previously, the Company approached General Signal to explore interest in
licensing the same patents at issue in the General Signal litigation. The
general conditions of the license discussed by General Signal were
unacceptable to the Company. Based upon a review of the subject patents,
the Company believes that the subject patents are invalid or, if somehow
found to be valid, that the Company's cluster tool technology does not
infringe. Additionally, the Company has received an opinion of its patent
counsel, to the same effect. However, if such a claim were successfully
enforced against the Company regarding the cluster tool technology
transferred to AG Israel, the value of the Company's investment in AG
Israel could diminish. The Company could also be adversely affected as a
result of the Company's liability under an indemnity provision with AG
Israel and Clal Electronics Industries, Ltd. for any resulting royalties
and other damages payable.
From time to time, the Company may receive or initiate claims or inquiries
against third parties for infringement of the Company's proprietary rights
or to establish the validity of the Company's proprietary rights. Such
claims or inquiries may result in litigation and could result in
significant expense to the Company and divert the efforts of the Company's
technical and management personnel from other tasks, whether or not such
claims or inquiries are determined in favor of the Company. In the event of
an adverse
F-18
<PAGE> 42
ruling in any such litigation, the Company might be required to pay
substantial damages, cease the manufacture, use and sale of infringing
products, discontinue the use of certain processes or expend significant
resources to develop non-infringing technology or obtain licenses to the
infringing technology.
On April 30, 1997 an action was filed against the Company alleging wrongful
termination and discrimination in violation of California Fair Employment
and Housing Act and the American withDisabilities Act. The matter is in the
early discovery stage of litigation. The Company believes that the claims
are invalid and will defend itself vigorously.
On October 6, 1997, the Company was served with a demand for arbitration by
Cook & Weil, Inc., a small manufacturer's representative firm located in
New Jersey, whom the Company engaged as manufacturer's representative but
terminated in 1996. Cook & Weil asserts that the Company owes it
approximately $250,000 in unpaid commissions. The Company believes that it
has fully paid all commissions due to Cook & Weil. The Company believes
that such claim is invalid and will defend itself vigorously.
F-19
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors required by this Item is
incorporated by reference to the Company's definitive Proxy Statement for its
1998 Annual Meeting of Shareholders to be filed with the Securities and Exchange
Commission (the "Proxy Statement") under the headings "Election of Directors"
and "Compliance with Section 16(a) of the Securities Exchange Act of 1934." The
information concerning the Company's executive officers required by this Item is
incorporated by reference to the Proxy Statement under the headings "Executive
Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of
1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Security Ownership of Certain Beneficial
Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the heading "Certain Relationships and Related
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements: See Index to Financial Statements,
page 25.
(2) Financial Statement Schedules: See Index to Financial
Statement Schedules, page 25.
(3) Exhibits: See Index to Exhibits, pages 26-28.
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1997. However, the Company previously reported that
it had filed no reports on Form 8-K during the quarter ended June
30, 1997, when, in fact, the Company did file a report on Form
8-K on June 4, 1997 reporting, under Item 5, Other Events, that
Applied Materials has made patent infringement allegations
against the Company and another leading supplier of rapid thermal
processing systems.
23
<PAGE> 44
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 in the City of San
Jose, State of California, on the 29th day of December, 1997.
AG ASSOCIATES, INC.
By: /s/ KIRK W. JOHNSON
-----------------------------------------------
Vice President, Finance & Chief Financial Officer
(Duly Authorized and Principal Financial and
Accounting Officer)
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>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ ARNON GAT Director, Chairman of the Board and December 29, 1997
- -------------------------------
Arnon Gat, Ph.D. Chief Executive Officer (Principal
Executive Officer)
/s/ KIRK W. JOHNSON Vice President, Finance & Chief Financial December 29, 1997
- -------------------------------
Kirk W. Johnson Officer (Principle Financial and Accounting
Officer)
/s/ ANITA GAT Director, Vice President Administration December 29, 1997
- -------------------------------
Anita Gat and Secretary
/s/ NORIO KURODA Director December 29, 1997
- -------------------------------
Norio Kuroda
/s/ CECIL PARKER Director December 29, 1997
- -------------------------------
Cecil Parker
</TABLE>
24
<PAGE> 45
AG ASSOCIATES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s) in
Consolidated
Financial
Statements
----------
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets - September 30,1997 and 1996 F-2
Consolidated Statements of Operations - Years Ended September 30, 1997, 1996 F-3
and 1995
Consolidated Statements of Shareholders' Equity (Deficiency) - Years Ended F-4
September 30, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - Years Ended September 30, 1997, 1996 F-5 - F-6
and 1995
Notes to Consolidated Financial Statements F-7 - F-19
</TABLE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
Schedule II: Valuation and Qualifying Accounts 29
Report of Independent Auditors on Financial Statement Schedule 30
</TABLE>
25
<PAGE> 46
AG ASSOCIATES, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- --------- --------
<S> <C>
3.01 (1) Registrant's Amended and Restated Articles of Incorporation
3.02 (1) Certificates of Amendment to Registrant's Articles of Incorporation
3.03 (1) Form of Registrant's Amended and Restated Articles of Incorporation filed upon
closing of initial public offering
3.04 (1) Registrant's Amended and Restated Bylaws
4.01 (1) Form of Specimen Certificate for Registrant's Common Stock
10.01 (1)(*) Registrant's 1982 Stock Option Plan, as amended, and forms of related documents
10.02 (2)(*) Registrant's 1993 Stock Option Plan and related documents
10.03 (1)(*) Registrant's 1994 Directors Stock Option Plan and related documents
10.04 (1)(*) Registrant's 1994 Employee Stock Purchase Plan
10.05 (1) Form of Indemnification Agreement entered into by Registrant with each of its
directors and executive officers
10.06 (1) Separation Agreement, dated September 30, 1994, by and between Registrant and
Mickey Margalit
10.07 (1) Letter Agreement with David Yoffie, dated February 23, 1995
10.08 (1) Lease Agreement, dated June 4, 1985, by and between
Registrant and Menlo Caspian Investment Company, including
amendments one and two thereto, all related letter agreements and
a related stock purchase agreement
10.09 (1) Lease Agreement, dated August 11, 1994, by and between Registrant and RREEF USA
FUND-II Inc.
10.10 (1) Line of Credit Agreement by and between Registrant and the Fuji Bank, Ltd. dated
February 28, 1992, and all modifications and extensions relating thereto
10.11 (1) Contract by and between Registrant, AG Associates (Israel) Limited and Investment
Company of Bank of Hapoalim, Ltd. dated January 8, 1993, as amended
10.12 (1) Form of Convertible Debenture issued by Registrant to Investment Company of Bank
Hapoalim on January 8, 1993 and February 21, 1993
10.13 (1) Security Agreement, dated January 8, 1993 by and between Registrant and Investment
Company of Bank Hapoalim
10.14 (1) Investment Representation Letter, dated February 21, 1995, from Investment Company
of Bank Hapoalim, Ltd. to Registrant
10.15 (1) Registration Rights Agreement, dated February 26, 1995, by and among Investment
Company of Bank Hapoalim, Clal Electronics Industries, Ltd. and Registrant
10.16 (1) Voting Agreement, dated February 26, 1995, by and among Registrant, Investment
Company of Bank Hapoalim, Arnon Gat and Anita Gat
10.17 (1) International Distributor Agreement, dated December 10, 1993, by and between
Registrant's wholly owned subsidiary, AG Associates Foreign Sales, Inc. and MSA
Metron Semiconductors Asia Ltd
10.18 (1) International Distributor Agreement, dated February 1, 1994,
by and between AG Associates Foreign Sales, Inc. and MSE Metron
Semiconductors Europa B.V.
10.19 (1) International Distributor Agreement, dated December 12, 1985, by and between AG
Associates Foreign Sales, Inc. and Canon Sales Co., Inc as amended
10.20 (1) Stock Purchase Agreement, dated July 28, 1989, by and among Registrant, Canon
a Sales Co., Inc. and Nippon Typewriter Corporation
</TABLE>
26
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBITS
- ------ --------
<S> <C>
10.21 (1) Stock Purchase Agreement, dated August 30, 1989, by and between Registrant and Appex
Corporation
10.22 (1) Technology Transfer and License Agreement by and between Registrant and Canon Sales
Co., Inc. dated July 28, 1989, as amended
10.23 (1) Improvement License Agreement, dated March 14, 1994, by and between Registrant and
Canon Sales Co., Inc.
10.24 (1) Purchase Agreement, dated June 23, 1993, by and between Registrant and Equipe
10.25 (1) Technologies Letter Agreement between Fuji Bank, Limited and Registrant,
dated April 11, 1995
10.26 (1) Agreement, dated February 27, 1995, by and among, Registrant,
Clal Electronics Industries Ltd., AG Associates (Israel) Ltd.,
Arnon Gat, Anita Gat and Rapro Technology Inc.
10.27 (1) Amendments and PreClosing Agreement among the parties to the Agreement filed as
Exhibit 10.26 to the Registration Statement, dated April 13, 1995, April 18, 1995,
April 20, 1995, and April 24, 1995, respectively
10.28 (1) Amendment to Convertible Debentures, dated April 25, 1995, between Investment
Company of Bank Hapoalim and Registrant
10.29 (3) Lease Agreement, dated July 21, 1995, by and between
Registrant and South Bay/Fortran, including amendment one, dated
October 6, 1995
10.30 (3) Separation Agreement, dated November 8, 1995, by and between Registrant and
David Yoffie
10.31 (3)(*) Letter Agreement and Promissory Note with Julio L. Guardado, dated July 20, 1995
10.32 (3)(*) Letter Agreement with Susan Salvesen, dated December 6, 1995
10.33 (4)(*) Executive Bonus Plan
10.34 (4) Transition Services Agreement, dated as of March 25, 1996, by and between Registrant, AG Israel and
AGI, Inc.
10.35 (4) Sublease, for reference purposes only, dated August 20, 1996, by and between Registrant, AGI, Inc. and
AG Israel
10.36 (4) Separation Agreement, dated July 29, 1996, by and between Registrant and Patrick B. Halahan
10.37 (4) Separation Agreement, dated July 29, 1996, by and bewteen Registrant and Ronald G. Manley
10.38 (4) Loan Agreement, dated August 2, 1996, by and between Registrant and Silicon Valley Bank
10.39 (5)(*) Employment Agreement, dated February 10, 1997, between the Registrant and Patrick Verderico
10.40 (6) Amendment to Loan & Security Agreement, dated August 1, 1997, by and between Registrant and Silicon Valley Bank
10.41 (6) Amendment to Loan & Security Agreement, August 25, 1997, by and between Registrant and Silicon Valley Bank
10.42 (6)(*) 1998 Executive Bonus Plan
10.43 (6) Technology Agreement, dated January 28, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.44 (6) Amendment Agreement, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.45 (6) Clarification of Field of Use, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.46 (6) Shareholders Agreement, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.47 (6) Registration Rights Agreement, dated August 7, 1997, by and between the Registrant and AG Israel and AGI, Inc.
10.48 (6)(*) Form of Executive Employment Agreement with the Registrants Executive Officers
</TABLE>
27
<PAGE> 48
<TABLE>
<S> <C>
10.49 (6) Sublease of Manufacturing Space, dated August 25, 1997, by and between the Registrant and 3DFX
Interactive
11.01 (6) Computation of Earnings Per Share
23.02 (6) Consent of Deloitte & Touche LLP, Independent Auditors
27 (6) Financial Data Schedule
</TABLE>
- -------------------
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-90382) filed with and declared effective by
the Securities and Exchange Commission on May 15, 1995.
(2) Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 333-02360) filed with and declared effective by
the Securities and Exchange Commission on March 14, 1996.
(3) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year Ended September 30, 1995.
(4) Incorporated by reference to the Registrant's Annual Report on Form
10-K for the Fiscal Year Ended September 30, 1996.
(5) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the Quarterly Period Ended March 31, 1997.
(6) Filed herewith
(*) Management contract or compensatory plan or arrangement
28
<PAGE> 49
AG ASSOCIATES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Charged Charged
Balance at to Costs to Other Balance at
Beginning and Accounts- End
Description of Period Expenses Describe Deductions of Period
- ------------------------------ ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Year Ended September 30, 1997 $903 $0 $0 $0 $903
Year Ended September 30, 1996 1,456 0 0 553 (1) 903
Year Ended September 30, 1995 534 1,161 0 239 (1) 1,456
- ------------------------------
INVENTORY RESERVES
Year Ended September 30, 1997 $3,289 $2,377 $0 $2,000 (5) $3,666
Year Ended September 30, 1996 2,669 1,385 0 765 (4) 3,289
Year Ended September 30, 1995 1,517 2,304 0 1,152 (4) 2,669
- ------------------------------
WARRANTY RESERVES
Year Ended September 30, 1997 $2,440 $2,710 $0 $3,463 (3) $1,687
Year Ended September 30, 1996 2,651 3,713 0 3,924 (3) 2,440
Year Ended September 30, 1995 2,313 3,420 0 3,082 (2) 2,651
</TABLE>
- ------------------------------
(1) Represents writeoffs of uncollectible accounts
(2) $2,832 represents actual warranty expense incurred,
$250 represents transfer to AG Associates (Israel), Ltd.
(3) Represents actual warranty expense incurred
(4) Represents write offs of inventories
(5) Represents scrap of obsolete parts and devaluation of inventory
29
<PAGE> 50
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
We have audited the consolidated financial statements of AG Associates, Inc. as
of September 30, 1997 and 1996 and for each of the three years in the period
ended September 30, 1997 and have issued our report thereon dated November 4,
1997; such financial statements and report are included in this 1997 Annual
Report on Form 10-K. Our audits also included the financial statement schedule
of AG Associates, Inc., listed in Item 14(a)2. Such financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statements schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
San Jose, California
November 4, 1997
30
<PAGE> 1
EXHIBIT 10.40
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement is entered into as of
August 1, 1997, by and between Silicon Valley Bank ("Bank") and AG Associates,
Inc. ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of August 2, 1996, as amended, (the "Agreement"). Borrower
has asked Bank to amend certain provisions of the Agreement.
Bank has agreed to do so, in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The definition in Section 1.1 of "Maturity Date" is amended to
read "July 31, 1998."
2. Bank approves Accounts owing to Borrower by Lucky Goldstar as
"Eligible Foreign Accounts".
3. Section 2.3(a) is amended to read as follows:
(a) Interest Rate. Except as set forth in Section 2.3(b), any
Advances shall bear interest, on the average Daily Balance, at a rate
equal to One Percent (1.0%) above the Prime Rate; provided the interest
rate shall be One Half of One Percent (0.5%) above the Prime Rate,
effective as of the first day of the fiscal quarter following the fiscal
quarter in which Borrower is profitable.
4. Section 6.3 is amended by adding a new paragraph at the end of
Section 6.3, as follows:
Notwithstanding the foregoing, beginning the fiscal quarter
following the fiscal quarter in which Borrower is first profitable, the
financial statements and backlog and bill-to-book report required under
clause (a) of the first paragraph of this Section 6.3 shall be due
within twenty (20) days of the last day of each fiscal quarter.
5. Section 6.11 is amended to read as follows (and Exhibit D is
amended to reflect such change to be in the form of Exhibit D attached
hereto):
6.11 Profitability. Borrower shall not suffer a loss in excess
of $500,000 for the fiscal quarter ending September 30, 1997. Borrower
shall be profitable for each fiscal quarter thereafter.
6. Unless otherwise defined, all capitalized terms in this
Amendment shall be as defined in the Agreement. Except as amended, the
Agreement remains in full force and effect.
7. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the
date of this Amendment, and that no Event of Default has occurred and
is continuing.
8. This Amendment may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one instrument.
1
<PAGE> 2
9. As a condition to the effectiveness of this Amendment, Borrower shall
pay a fee equal to Twenty Five Thousand Dollars ($25,000) and shall reimburse
Bank for the Bank Expenses incurred in connection with this Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
AG ASSOCIATES, INC.
By
---------------------------------------------
Title
------------------------------------------
SILICON VALLEY BANK
By
---------------------------------------------
Title
------------------------------------------
2
<PAGE> 1
EXHIBIT 10.41
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
This Amendment to Loan and Security Agreement is entered into as of
August 25, 1997, by and between Silicon Valley Bank ("Bank") and AG Associates,
Inc. ("Borrower").
RECITALS
Borrower and Bank are parties to that certain Loan and Security
Agreement dated as of August 2, 1996, as amended, (the "Agreement"). Borrower
has asked Bank to amend certain provisions of the Agreement.
Bank has agreed to do so in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Sections 6.8 and 6.11 are amended to read as follows (and
Exhibit D is amended to reflect such changes to be in the form of Exhibit D
attached hereto):
6.8 Quick Ratio. Borrower shall maintain, as of the last day of
each fiscal quarter, a ratio of Quick Assets to Current Liabilities of at least
1.25 to 1.00.
6.11 Profitability. Borrower shall not suffer a loss in excess of
$550,000 for the fiscal quarter ending September 30, 1997 or a loss in excess of
$100,000 for the fiscal quarter ending December 31, 1997. Borrower shall be
profitable for each fiscal quarter thereafter.
2. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
3. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
4. This Amendment may be executed in two or more counterparts, each
of which shall be deemed an original, but all of which together shall constitute
one instrument.
5. As a condition to the effectiveness of this Amendment, Borrower
shall reimburse Bank for the Bank Expenses incurred in connection with this
Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the first date above written.
AG ASSOCIATES, INC.
By
--------------------------------------------
Title
-----------------------------------------
SILICON VALLEY BANK
By
--------------------------------------------
Title
-----------------------------------------
1
<PAGE> 1
EXHIBIT 10.42
AG ASSOCIATES 1998 Bonus Plan
1998 Bonus Plan
November 5, 1997 Compensation Committee
AG Associates Confidential
10/30/97
<PAGE> 2
AG ASSOCIATES 1998 Bonus Plan
Bonus to pay in two parts with three factors
- - Revenue factor
- - Operating profit factor
- - Personal goal factor
AG Associates Confidential
10/30/97
<PAGE> 3
AG ASSOCIATES 1998 Bonus Plan
- - President and Vice Presidents have a 30% plan
- - Directors have a 15% plan
- - Plans are calculated exactly the same way
AG Associates Confidential
10/30/97
<PAGE> 4
AG ASSOCIATES 1998 Bonus Plan
- REVENUE FACTOR
- Paid out each quarter
- Paid out on cumulative revenue
- Min revenue factor 85%; Max revenue factor 140% of plan revenue
- Revenue achievement % is multiplied by the personal goal achievement %
for that quarter, then multiplied by one half of the total plan
percentage*, then multiplied by the participants quarterly salary
- *30% x 1/2 = 15% for President and Vice Presidents
- *15% x 1/2 = 7.5% for Directors
AG Associates Confidential
10/30/97
<PAGE> 5
AG ASSOCIATES 1998 Bonus Plan
- OPERATING PROFIT FACTOR
- Paid out at year end, after annual audit
- Paid out on year end results (excluding Amat legal Costs)
- Min ops profit factor 3% of revenue (40%); Max revenue factor 10% of
revenue (200%)
- Ops profit achievement % is multiplied by the personal goal
achievement ave % for the year, then multiplied by one half of the
total plan percentage*, then multiplied by the participants yearly
salary
- *30% x 1/2 = 15% for President and Vice Presidents
- *15 % x 1/2 = 7.5 % for Directors
AG Associates Confidential
10/30/97
<PAGE> 1
EXHIBIT 10.43
AGREEMENT
This Agreement (the "Agreement") is made and entered effective as of the 29th
day of January, 1997, by and between AG Associates, Inc., a California
corporation formerly known as AG Processing Technologies, Inc., (hereinafter
"AGA"), and AG Associates (Israel) Ltd., an Israeli company (hereinafter "AGI").
WHEREAS prior to entering into this Agreement, the parties hereto entered into a
certain Agreement dated February 27, 1995 (the "Original Agreement"), by
and among AGA, AGI, Rapro Technology Inc. ("RAPRO"), CLAL Electronics
Industries Ltd.. ("CLAL"), and Arnon Gat ("GAT") pursuant to which,
among other matters, AGA and RAPRO: (a) transferred to AGA and AGI joint
ownership of the technology, owned by AGA and RAPRO, which related to a
chemical vapor deposition cluster tool used in the manufacture of
semiconductors and (b) licensed to AGI additional technology relating to
temperature measurements of rapid thermal processes, used in the
manufacture of semiconductors; and
WHEREAS the parties herein, with the approval of RAPRO, CLAL and GAT, set forth
in a separate document, desire to make amendments to the abovementioned
technology transfer and license provisions in the Original Agreement, as
set forth in this Agreement; and
WHEREAS AGA has developed certain technologies relating to the rapid thermal
processing of semiconductors, which AGI wishes to license from AGA and
AGA has agreed to grant AGI license thereto, all under the terms and
conditions set forth herein;
NOW THEREFORE, in consideration of the mutual representations, warranties,
covenants and conditions contained herein, the parties to this Agreement hereby
agree as follows:
1. PREAMBLE AND ANNEXES
The preamble to this Agreement and all annexes attached hereto form an
integral part of this Agreement.
<PAGE> 2
2
2. DEFINITIONS
2.1 Unless otherwise noted herein, all capitalized terms used herein,
shall have the meaning given to such terms in the Original
Agreement.
2.2 The following capitalized terms shall have the respective meaning
ascribed to them hereinbelow:
2.2.1 "Additional Technology" or "AT" means any Intellectual Property
Right relating to the technology described in Annex "2.2" attached
hereto as the technology exists on the date thereof, including,
without limitation, Intellectual Property Rights, with respect to
Documentation and Devices and Components related thereto.
2.2.2 "AT Improvements" means Improvements to the Additional Technology,
that are made, discovered or first reduced to practice, directly or
indirectly, alone or jointly with others from the date hereof, until
June 30, 1998, by either AGA or AGI.
3. AMENDMENTS TO THE ORIGINAL AGREEMENT
Section 5.3.2.4 to the Original Agreement is being hereby replaced by the
following Section 5.3.2.4:
"5.3.2.4 Trademark or Other License Rights. Without additional consideration,
AGA hereby grants AGI a non- transferable license to use the name "AG
Associates," but only in conjunction with the word "Israel", and to use
the AGA trademark (a diagonal set of yellow lines in triangular form),
but only in conjunction with the name "AG Associates Israel", "AG
Israel" or "AGI". However, AGA shall be entitled to terminate such
license by a prior written notice to AGI of not less than 18 (eighteen)
months."
<PAGE> 3
3
4. THE ADDITIONAL TECHNOLOGY
4.1 Grant of License
(a) In consideration for the royalty payments set forth in Section
4.2(a) below, AGA hereby grants AGI a perpetual, irrevocable,
worldwide, non-exclusive license, to make, use and distribute
products embodying the Additional Technology, and to modify
and prepare derivative works of, and otherwise use, the
Additional Technology. Subject to Section 4.5 hereto, and
without derogatingtherefrom, such license shall be
non-transferable without the prior written consent of AGA.
(b) At AGI's reasonable request, AGA shall take any action, or
authorize and empower AGI or AGI's designee, including its
attorneys, to take on AGAs behalf, but at AGI's expense, any
action deemed necessary to AGIin order to protect AGA's
Intellectual Property Rights in the Additional Technology.
4.2 Payment of Royalties
(a) In consideration for the license to the Additional Technology,
granted to AGI hereunder, AGI shall pay AGA royalties, as
follows:
(i) for any system module that incorporates both an
axisymmetric heater, which is based on theAdditional
Technology received from AGA (hereinafter: the
"Heater"), and a parallel plate temperature measurement
device based on the Additional Technology received from
AGA (hereinafter. the "Measurement Device") (all
together hereinafter: the "Combined Module") for which
AGI actually receives revenues - US$ 17,000;
(ii) for any system module that incorporates either a Heater
or a Measurement Device (hereinafter: the
<PAGE> 4
4
"Non-Combined Module") for which AGI actually receives revenues -US$ 8,500.
It is hereby clarified that AGI's obligation to pay royalties to AGA shall only
be for the sales of Combined Modules or Non-Combined Modules.
Notwithstanding anything to the contrary herein, the aggregate sum of royalties
paid by AGI to AGA shall in no event exceed the total sum of US$ 2,000,000,
whereafter AGI shall be exempted from any obligation to pay royalties.
It in hereby provided that AGI's obligation to pay royalties, as aforesaid,
shall be due only when, and as long as, AGI's annual financial statements
reflect profits stemming from current business activities, and, further
provided, that the sum of royalties paid in any quarter according to subsection
(b) below, shall not exceed 20% of the operating profits for the previous
calendar quarter. It Is hereby clarified that any amount of royalty payments not
paid in accordance with the above, shall be retained on account to be paid in
subsequent quarters, subject to the abovesaid conditions regarding AGI's profits
and the bar of the 20% of operating profits in said quarters as aforesaid.
(b) The royalties provided for in this Section 4.2 (a) shall be paid within
thirty (30) days following the end of each calendar quarter with respect
to sales revenues actually received in the previous quarter. Payment will
be accompanied by a written statement, certified by the Chief Financial or
Executive Officer of AGI stating the number of Combined and non-Combined
Modules sold.
(c) In connection with the payment of royalties, AGA will be entitled, at
AGA's expense, to audit the books and records of AGI in order to verify
the accuracy of the royalties paid. Audits may be conducted by an
Independent CPA at reasonable places during normal business hours, but no
more frequently than once in any particular calendar quarter. The CPA will
undertake not to disclose to AGA and/or any
<PAGE> 5
5
third party any confidential information or other valuable commercial
information.
4.3 AT Improvements
Subject to Section 4.5 herein, each of AGI and AGA hereby covenants and
undertakes that all the AT Improvements which are: (a) made. discovered or
first reduced to Practice by AGA, or on its behalf, and are thus licensed
to AGI and (b) made. discovered or first reduced to practice by ACT, or on
its behalf, and thus cross-licensed to AGA, without any additional
consideration. such license or cross-license will be perpetual.
irrevocable. worldwide, non-exclusive and will confer upon the licensee Or
cross-licensee the same rights, granted under Section 4 hereto, with
respect to the Additional Technology, and
All provisions hereunder pertaining to the Additional Technology, except
for the obligation to pay royalties, shall apply, mutatis mutandis, to the
AT improvements.
AGA and AGI will each provide the other with such AT Improvements to be licensed
or cross-licensed, pursuant to the terms herein, within a commercially
reasonable time after such AT Improvements have been made, discovered or first
reduced to practice by such party. AGA and AGI will have the rights that are to
be licensed or cross-licensed, under this Agreement respecting the other party's
AT Improvements, when created. developed or invented, regardless of whether or
not physically delivered to such party.
4.4 Grant of Rights to the Additional Technology
4.4.1 (i) Any sale, transfer or license of the Additional Technology shall
require the prior written consent of AGA.
(ii) Any sale, transfer or license of any of the AT Improvements, by the party
who has a license or cross-license to such AT Improvement, shall require
the prior written consent of the party who developed or made such
improvement.
<PAGE> 6
6
4.4.2 It is hereby clarified that:
(i) AGA can sell, transfer or license the Additional
Technology without any limitation; and
(ii) The party who developed or made the AT Improvement can sell, transfer or
license such improvement without any limitation; provided however, that if
such sale or license includes any additional Technology or AT Improvement
developed or made by the other Party, such grant shall require the other
Party's prior written consent.
4.5 Governmental Restrictions
(a) In order to enable AGI to receive funds under the 0.25
Micron Consortium of the Magnet Program (the
"Consortium") managed by the Chief Scientist of the
Ministry of Industry and Commerce ("Chief Scientist"), in
which Consortium AGI is currently a member, AGA hereby
grants its consent to AGI's granting of a license or
sub-license, as applicable, to the CVD Technology and/or
to any CVD Improvements and/or to the RTPT Technology
and/or to any RTPT Improvements and/or to the Additional
Technology and/or to any AT Improvements, to the other
members of the Consortium, all as required under the
agreements of the Consortium; provided however that:
(1) AGI shall receive the prior consent of the members of
the Consortium, and of the Chief Scientist, to the
transfer to AGA of the Improvements made by AGI to the
technologies which originated from AGA, which Improvements
were developed by AGI within the Consortium; and (2) that
the Consortium agreements shall contain a provision,
according to which, upon the purchase of more than 25% of
the share capital or the voting power of any member of the
Consortium by a single non-member, and any of its
affiliates (i.e. any entity controlled by it, or
controlling it or under same controlling parties, if any,
in one transaction or series of related transactions,
<PAGE> 7
7
then to the extent that any such non-member or any of its affiliates is a
competitor of any member of the Consortium or might be a competitor of any other
member - such member whose shares or voting power is acquired as aforesaid,
shall be deemed to have retired from the Consortium and its membership shall
expire, unless all of the other Consortium members approve of the purchase; and
(3) that Opal Ltd. and Orbot Instruments Ltd. shall cease to be members of the
Consortium; and (4) that the consortium agreements shall provide adequate
provisions regarding the non-disclosure of the technologies and the non-transfer
of the technologies to non-members.
(b) Notwithstanding anything to the contrary herein or in the Original
Agreement, if AGI submits an application for development of any
technology to the Israeli Chief Scientist under the Law for the
Encouragement of Industrial Research and such application, if granted,
could
(i) prohibit AGI from performing any of its obligations, if any, to deliver
technology to AGA or to license such technology to AGA; or
(ii) require AGI to transfer any rights in, or disclose such technology to any
third party and such transfer or disclosure would constitute a violation
of AGI's obligations under this Agreement or the Original Agreement,
then in either event, AGI must obtain AGA's prior written. consent to submit
such application. If any application is granted by the Israeli Chief Scientist
having the effects described in clause (i) or (ii) above, and AGA's consent ham
not already been obtained to such application prior to submission, then AGI will
not enter into the development described in such application without first
obtaining AGA's written consent. AGA hereby approve its consent to the current
application which AGI have submitted for the approval of the Chief Scientist and
consent that AGI shall submit the application which it stands to submit which
application covers the R&D plans set forth in Annex "4.5" attached hereto, and
agree that the grant of a license to,
<PAGE> 8
8
cross-license to, or co-ownership, as applicable, in the Improvements which
shall be made by AGI under the plans covered by said applications shall be
subject to the approval of the Chief Scientist, and shall be granted in
accordance with the terms of such approval, if any. AGI will use diligent,
repeated, good-faith efforts to obtain the approval of the Israeli Chief
Scientist to the delivery and license of technology to AGA and to keeping the
technology confidential in accordance with this Agreement and the Original
Agreement.
4.6 Termination of License
The license granted herein to a Party by the other Party, to the
Additional Technology and/or to any AT Improvement, as applicable, and the
license granted by a Party to the other Party under the Original Agreement
to the RTPT Technology and/or to any RTPT Improvement, as applicable,
shall be terminated and such Party who received such licenses to said
technologies (the "Licensee Party') shall have no rights with respect to
such technologies, in the event the (a) the Licensee makes a general
assignment for the benefit of creditors: or (b) the Licensee files a
voluntary petition of bankruptcy; or (c) a permanent liquidator is
appointed over the Licensee pursuant to a liquidation proceeding against
it; or (d) the Licensee has wound-up or liquidated its business
voluntarily or otherwise.
4.7 Representations by AGA
AGA hereby represents, warrants, covenants and undertakes towards AGI the
following to be true and correct as of the date of execution hereof:
(a) AGA is the sole and exclusive owner of all rights, title and interests
in and to the Additional Technology, and such rights are free and
clear of all liens, adverse claims, security interests or encumbrances
or other third parties rights.
(b) AGA has the full right and authority to grant AGI the license to the
Additional Technology as provided herein.
<PAGE> 9
9
Without derogating from that which is stated in clause (a) above, the use of the
Additional Technology by AGI, and the implementation of AGI's rights hereunder,
will not violate or infringe any third party's rights whatsoever.
In the event of a breach of any representation, warranty, covenant or
undertaking set forth in this Section 4.7, AGA shall pay to AGI, as sole and
exclusive pecuniary liability, 50 cents of any US$1 actually paid by AGI to any
third party by reason of such breach (the "Payment Sum"), but in no event shall
AGA's obligation to pay the Payment Sum exceed an amount equal to the aggregate
amount of royalties paid or to be paid by AGI to AGA pursuant to the provisions
herein, whereas the payment of any Payment Sum which exceeds the aggregate
amount of royalties payments already paid to AGA by AGI, shall be made only by
way of set off from future royalties payments coming to AGA from AGI hereunder,
and not by way of actual cash payments.
4.9 Incorporation by Reference
Sections 5.3.6.2 ("CVD Documentation'), 5.3.6.3 ("Improvements
Documentation"), 5.3.8 ("Compliance with Law"), 5.3.11
("Covenant"), 18 ("Governing Law"), 20 ("Expenses and Taxes"), 21
("Confidentiality"), 22 ("Non-Assignability"), 23 ("Execution in
Counterparts"), 24 ("Captions") and 26 ("Further Cooperation") to the
Original Agreement (as amended herein), shall apply, mutatis mutandis,
with respect to the Additional Technology and the AT Improvements.
4.10 It in hereby clarified that the license granted herein to the Additional
Technology and to the AT Improvements, does not permit either Party to be
engaged in the other Party's exclusive field of use, set forth in Annex Y
attached to the Original Agreement and as further clarified in writing, or
derogate in any other way from the Parties' obligations not to be engaged
each in the other's said exclusive field of use during the Non-Compete
Term, and therefore each Party shall continue to be restricted during the
Non-Compete Term from being engaged, including by using the AT
<PAGE> 10
10
Technology or the AT improvements, in the other Party's field of use, as set
forth in said Annex Y as further clarified in writing.
5. NOTICES
All notices given by one party to the other hereunder, will be given in
writing, and will be deemed to have been delivered to the addresee
immediately on their delivery if delivered by hand, or upon transmission,
if sent by facsimile, and confirmed by written reply by facsimile, or
within five (5) business days after being sent by mail, express airmail,
or via international courier, as per the addresses indicated hereinbelow,
or to such other address or facsimile number as a party may thereafter
give notice in writing, to the other parties of this Agreement.
If to AGA:
AG Associates, Inc. 4425 Fortran Drive San Jose, California 95134
U.S.A., Facsimile No. (408) 935-2732, Attention: Chief Executive
Officer.
If to AGI:
AG Associates (Israel) Ltd Industrial Park at Ramat Gabriel, P.O.B.
171, Migdal HeEmeq 10551 Israel, Facsimile No. 06-440551, Attention:
General Manager.
IN WITNESS WHEREOF the parties have signed:
- ----------------------------
AGA ASSOCIATES, INC. (AGA)
- ----------------------------------
AG ASSOCIATES (ISRAELI LTD. (AGI)
<PAGE> 11
ANNEX 2.2
Following is the specific additional technology ("AT") created by AGA that is
being licensed to AGI by AGA pursuant to the term of this Agreement:
1. Axisymmetric heater assembly comprised of the detailed design and
simulation files for multiple ring with point source vertical filament
lamps. The design includes reflector optimization, spacing and density of
lamps, water-and air cooling manifolds Ids.
2. Reflectivity enhanced temperature measurement subsystem elements which
include the AGA's vendor name for reflective coating, optimization of
fiber rod distance from wafer, software algorithm and simulation files for
temperature measurement spot correction for the AGA's parallel plate
design configuration.
<PAGE> 12
ANNEX 4.5 TO THE TECHNOLOGY AGREEMENT
The following program that was submitted by AGI to the chief scientist and was
approved, constitutes improvements to the heater technology as received form
AGA:
Improvements of the axisymetric heater design for higher reliability and ease of
Manufacturability. The program includes CIP (continuous improvement program) and
use of simulation and optimization to improve heater performance based on field
feedback.
<PAGE> 1
EXHIBIT 10.44
AMENDMENT AGREEMENT
This amendment agreement (the "Agreement") is made and entered
into on this 7th day of September 1997 by and among AG Associates,
Inc., a California corporation (hereinafter: "AGA"), AG Associates
(Israel) Ltd., an Israeli corporation (hereinafter: "AGI"), Arnon
Gat, a U.S. resident (hereinafter: "GAT"), Clal Electronics
Industries Ltd., an Israeli corporation (hereinafter: "CLAL") and
Rapro Technology Inc., a Delaware corporation (hereinafter: "Rapro").
WHEREAS priorto entering this Agreement, the Parties hereto
entered into a certain agreement, dated February 27,
1995 (the "Original Agreement"), by and among AGA,
AGI, GAT, CLAL and Rapro under which, among other
matters, AGA and CLAL invested in AGI's capital in
consideration for shares and pursuant to certain
representations and warranties made by the Parties ,
and certain matters regarding AGI's management and
their relations as shareholders were decided among
them; and
WHEREAS AGI is currently negotiating the execution and
performance of a private placement transaction; and
WHEREAS the Parties hereto desire to make amendments to the provisions
in the Original Agreement, as set forth in this Agreement. in
order to facilitate the forthcoming Private Placement
transaction.
NOW THEREFORE. in consideration of the mutual representations, warranties,
covenants and conditions contained herein, the Parties to this Agreement hereby
agree as follows:
1. Preamble and Annexes
The preamble to this Agreement and all annexes attached hereto form an
integral part of this Agreement.
<PAGE> 2
2
2. Construction
2.1 Any reference to a Section of the Original Agreement shall be
deemed to include all of the subsections of such Section,
unless otherwise specifically stated.
2.2 Unless otherwise noted herein. all capitalized terms used
herein, shall have the meaning given to such terms in the
Original Agreement.
3. Condition Precedent
This Amendment Agreement and the consummation of the amendments made hereunder
shall be subject to and conditional upon the occurrence of the two following
events:
(i) Consummation of an Investment of capital in AGI of not less than four
million five hundred thousand U.S. Dollars (US$4,500,000) to be made by
investor(s) (who may include AGA and CLAL as well) not later than
December 31, 1997; and
(ii) the execution of a shareholders agreement among AGA, CLAL, and the other
investor(s) as an integral part of the abovesaid investment transaction.
Notwithstanding that this Amendment Agreement is binding upon the parties hereto
as of the date of its execution, the amendments made herein shall become
effective only upon the fulfillment of the above conditions precedent, ipso
facto, whereas in the event the above conditions precedents are not fulfilled by
December 31, 1997, the Amendment Agreement shall be ipso facto, terminated and
the amendments set forth herein shall be null and void.
4. Amendments to the Original Agreement
The parties agree and consent to make the following amendments to the
Original Agreement, which amendments shall become effective only upon
the fulfillment of the aforementioned conditions precedent, ipso facto:
<PAGE> 3
3
4.1 Representations by AGA and GAT
GAT's personal duty and obligation with respect to the
representations. warranties, covenants and undertakings under
Section 6 of the Original Agreement, exceptfor those representations
and warranties under subsection 6.8 and that part of subsection 6.10
insofar as it relates to GAT, are hereby terminated, and deemed null
and void ab initio. such that GAT shall not be responsible in any
way whatsoever and shall have no obligation whatsoever towards any
Party hereto, with respect to the representations, warranties,
covenants and undertakings made thereunder, as if same had not been
made by GAT ab initio.
4.2 Representations AGI, AGA, RAPRO, and GAT
4.2.1 The duty and obligation of each of AGI, AGA,
Rapro and GAT with respect to the
representations, warranties, covenants and
undertakings under Section 7 of the Original
Agreement (excluding AGA's duty and
Obligation under subsection 7.25.7, which
shall continue to be valid and in effect
subject to the terms herein), is hereby
terminated and deemed null and void ab
initio, such that each of the above parties,
their respective directors, officers,
employees, shareholders and representatives,
shall not be responsible in any way
whatsoever and shall have no obligation
whatsoever towards any, Party hereto, with
respect to the representations, warranties,
covenants and undertakings made thereunder,
as if same had not been made by each of said
parties ab initio.
<PAGE> 4
4
4.2.2 AGA shall continue to be liable under section 7.25.7 of the Original
Agreement but, notwithstanding anything to the contrary in the original
Agreement as amended, only towards AGI and not towards
CLAL.
4.3 Representations by CLAL
CLAL's duty and obligation with respect to the representations,
warranties, covenants and under takings made under Section 8 of the
Original Agreement toward AGI and GAT are hereby terminated, and deemed
null and void ab initio, such that CLAL, its directors, officers,
employees, shareholders and representatives, shall not be responsible in
any way whatsoever and shall have no obligation whatsoever toward AGI
and GAT, with respect to the representations, warranties, covenants and
undertakings made thereunder, as if same had not been made by CLAL
toward said parties ab initio.
It is hereby clarified that the representations, warranties, covenants and
undertakings made by CLAL under Section 8 of the Original Agreement toward AGA
shall remain valid and in effect.
4.4 The CVD Activities (the "Technology Agreement").
4.4.1 Sections 5.3.9 termination of co-ownership and licensee) and
5.3.12 (purchase of CLAL's Shares if AGI ceases operations) of
the Original Agreement are hereby terminated and shall be deemed
as deleted from the Original Agreement.
4.4.2 The remaining provisions of Section (excluding sub-sections 5.1
and 5.2 of the original Agreement, after deleting
<PAGE> 5
5
sub-Sections 5.3.9 and 5.3.12 as aforesaid, are hereby amended to create a
contractual obligation between AGA and AGI only. It is hereby clarified that, as
a result of the foregoing, all other persons and/or entities constituting
parties to the original agreement shall not be parties to such amended
provisions.
4.5 Option
Section 10 of the Original Agreement is hereby terminated.
4.6 Indemnification
The provisions of Section 11 shall apply to each Party hereto only
with respect to those obligations under the representations,
warranties, covenants and undertakings, which shall remain under the
Original Agreement after executing the amendments herein.
4.7 Covenants of AGI
Sections 13.1, 13-2. 13.3. 13.4. 13.5, 13.6, 13.7,
13.8 and 13.9 of the Original Agreement are hereby
terminated.
4.8 Shareholder's Relations
All of the provisions of Section 14 of the Original Agreement, except
for sub-section 14.4 which shall remain in force - are hereby
terminated.
4.9 Covenant Not to Compete
GAT covenants under Section 16.8 of the Original Agreement shall
terminate following the lapse of a 36 month period commencing from the
date of the first Closing, conducted within the framework of AGI's
capital raising transaction, referred to in Section 3(i) hereinabove.
<PAGE> 6
6
It is hereby confirmed that the engagement of GAT and his activities with AGA
shall not be deemed as a breach of his undertakings under Section 16.8 of the
Original Agreement as long as AGA fulfills its undertakings under Section 5.3.7
of the Original Agreement not to compete and not to be engaged in AGI's field of
use, set forth in Annex Y attached to the Original Agreement, and any amendment
thereto.
5. Incorporation by Reference
Sections 18 ("Governing Law"), 12 ("Execution in Counterparts"), 19
("Arbitration"), 24 ("Captions"), and 29 ("Notices") of the Original
Agreement are hereby incorporated herein by reference.
6. AGA's address for purposes of notice is hereby changed to 4425 Fortran
Drive, Santa Clara, California, 95134-2000 Fax No. (408) 935-2701.
In witness whereof, the parties hereto have caused this Agreement be
duly executed on the day and year first above written.
- ----------------------------- ---------------------------------
AGA Associates, Inc. AG Associates (Israel) Ltd.
- ----------------------------- ---------------------------------
Clal Electronics Industries Ltd. Arnon Gat
- ------------------------------
Rapro Technology Inc.
<PAGE> 1
EXHIBIT 10.45
Date: 7 - 9 - 97
Pursuant to that certain agreement executed on February 27, 1995, among the
undersigned parties hereto, under which AGA and AGI each undertook not to be
engaged in the other's exclusive field of use set forth in Annex "Y" attached to
that certain agreement, the parties hereby clarify that under the said Annex "Y"
the parties agreed that:
1. AGA shall not be restricted from developing, manufacturing, marketing
and selling stand-alone, low-vacuum systems for CVD applications in
which none of the gasses involved is a silicone gas, or from developing,
manufacturing, marketing and selling systems in batch configurations
without any limitation as to process performed by such systems. The
above activities shall be free for both AGA and AGI.
2. AGA's field of use set forth in the above said Annex "Y" applies only to
the following processes:
a. The annealing and reaction of metals and metal alloys with
semiconductor surfaces.
b. The thermal formation and annealing of Metal Silicides and Metal
Nitrides.
c. Oxidation, Nitridation and annealing of Single crystal and
polysilicon.
d. Nitridation and annealing of previously grown or deposited
undoped or doped oxides.
e. Annealing, activation and diffusion of doped species in
semiconductors.
f. Annealing, reaction and activation of previously grown
dielectric, ferroelectric and ferromagnetic films.
- -------------- -------------------
AG Associates, Inc. AG Associates (Israel) Ltd.
- -------------- --------------------
Clal Electronics Industries, Ltd. Arnon Gat
--------------------
Rapro Technology Inc.
<PAGE> 1
EXHIBIT 10.46
SHAREHOLDERS AGREEMENT
Made and entered into in Tel-Aviv on this _______day of August, 1997 by and
among AG Associates (Israel) Ltd., an Israeli company of Ramat Gabriel
Industrial Park, P.O.B. 171, Migdal Haemek 10551, Israel (the "Company"), AG
Associates Inc., a Californian corporation of 4425 Fortran Drive, San Jose,
California 95134, USA ("AGA"), Clal Electronics Industries Ltd., an Israeli
company of Druyanov 5, Tel Aviv, Israel ("CLAL"), and each of the Subscribers
(as defined herein). All of the above parties are collectively referred to
herein as the "Parties" and each of the parties is individually referred to
herein as a "Party".
The Parties hereby covenant and agree as follows:
1. Binding Effect
This Shareholders Agreement shall become effective, be valid and binding,
among and between the Company, AGA, CLAL and each Subscriber (as defined
herein), only if and when a Closing under the Subscription Agreement (as
hereinbelow defined) has been held, ipso facto.
2. Definitions
2.1 The "Subscription Agreement" - the Preferred Shares Subscription
Agreement executed by subscribers for the purchase of the Company's
Preferred Shares, to which the form of this Shareholders Agreement
is attached as an Annex thereto.
2.2 Unless otherwise noted herein, all capitalized terms used herein
shall have the meaning ascribed to them in the Subscription
Agreement.
2.3 The term "Subscribers' as used herein shall mean any and all
Subscribers, as this term is defined in the Subscription Agreement
(excluding CLAL), and each of the Subscribers shall herein be
referred to as a "Subscriber".
3. Board of Directors
Until an Initial Public Offering of the Company's Securities ("IPO") is the
following shall apply:
3.1 Each tranche of shares constituting 11% of the Company's
shareholdings based on their par value, shall entitle the holder(s)
thereof to appoint one (1) director, to remove him from office and
to replace him whenever his place is vacated.
Such appointment, removal and replacement of directors shall be made by written
notice delivered to the Company at the Company's registered office,
<PAGE> 2
2
by the holders of the tranche of shares by virtue of which the director is so
appointed, removed, or replaced.
3.2 Notwithstanding Section 3.1 above, as of the Closing, for as long as and
provided that, AGA and transferees of its shares, if any (the "AGA
Holders"), CLAL, and transferees of its shares, if any (the "CLAL
Holders"), and the Subscribers and transferees of their shares, if any
(the "Subscribers Holders"), shall be entitled to appoint, pursuant to the
shareholdings requirement of Section 3.1 above, not less than three
directors with respect to CLAL Holders, two directors with respect to AGA
Holders, and two directors with respect to the Subscribers Holders, then
each of the CLAL Holders, the AGA Holders and the Subscribers Holders may
appoint directors only by virtue of their respective shares without
joining shares with shares of any other shareholder.
3.3 It is hereby agreed, that any single Subscriber, or transferee of
Subscribers' shares, shall have the right to have one (1) observer
appointed by him to the Board, by written notice given to the Company, for
as long as such Subscriber or transferee holds a tranche of shares
constituting 5% or more of the Company's shareholdings, based on their par
value and is not using any of his shares as part of a tranche of shares,
by virtue of which a director is appointed pursuant to Section 3.1 above.
Such observer shall be entitled to attend all meetings of the Board of
Directors in a non-voting observer capacity, and shall receive notices of
such meetings and the information provided by the Company to the Board of
Directors; provided h that as a condition precedent to the right under
this Section 3.3, the proposed observer shall execute a confidentiality
and non-competition undertaking towards the Company in a form similar to
the provisions of Sections 3.4 and I I below, provided to such observer by
the Company, under which such observer shall undertake to hold in
confidence all information received by it during such meetings or
otherwise provided to it by the Company or on the Company's behalf in such
observer's capacity as an observer, and to abide by the non competition
and prohibition of conflict of interest obligation which applies to a
director under the law and under Section 3.4 hereinbelow. Section 3.3
above notwithstanding: (i) for as long as the provisions of Section 3.2
above apply, the Subscribers shall be entitled to appoint one observer-,
and (ii) , the Subscribers Holders may appoint or have observers in such
number that, together with the number of directors to which they are
entitled to appoint pursuant to Section 3.1 or 3.2 above, and the
directors actually appointed in participation with other shareholders of
the Company - not be more than three (3).
3.4 No person may be appointed or serve as a director or observer in the
Board, if at such time he serves as a director, officer or representative
and/or has any ownership tights of more than 5%, in any company, entity or
business, which competes with the Company. It is agreed that the
provisions of this Section 3.4 shall not apply to a person who serves as a
director, officer or
<PAGE> 3
3
representative, and/or has ownership rights as aforesaid, in AGA or any
subsidiary thereof
3.5 (i) the Board shall meet as frequently as reasonably necessary, and in
any event at least once every quarter, unless otherwise determined
by the majority of the directors; and
(ii) information regarding the operations and financial aspects of the
Company shall be presented by the Company's management at each Board
meeting.
3.6 (a) The chairman of the Board shall be one of the members of the Board,
who shall be appointed, dismissed and replaced by the shareholder
who has the right to appoint the largest number of directors to the
Board, provided such shareholder has the right to appoint no less
than 3 members to the Board. Such appointment, dismissal or
replacement of the Chairman shall be carried out by giving notice to
this effect to the Company.
(b) In the event the chairman is not appointed, or cannot be appointed,
pursuant to subsection (a) above, or if no single shareholder has
the right to appoint directors in a number greater than that of any
other single shareholder, the chairman shall be appointed, dismissed
and replaced by the Board.
4. Restrictive Provisions
4.1 Until an IP0, the Company shall not:
(i) amend the rights, preferences, or privileges attached to the
Preferred Shares without first obtaining the consent of
holders of at least 2/3 of Preferred Shares (excluding CLAL)
(based upon their respective shareholdings out of the
Preferred Shares).
(ii) enter into a transaction with an "Interested Party" ("Ba'alei
Inyan") as defined in the Israeli Companies Ordinance (New
Version) 5743- 1983 (the "Companies Ordinance")- without the
approval of the audit committee to be established by the
Company immediately following the Closing. Such audit
committee shall consist of three (3) members who shall be
appointed by the Board of Directors, from among the directors
then serving on the Board, provided that at least one,
director who has been appointed by each of. (a) the CLAL
Holders ; (b) the AGA Holders ; and (c) the Subscribers
Holders ; shall serve as a member of the committee (unless he
is barred by the provisions of the Companies Ordinance). The
Board, subject to the consent of the audit committee, may
however increase the number of the members of the audit
committee in case the Company issues shares to a third party
or entity, who will be entitled to appoint at least one
director to the Board, and the Board
<PAGE> 4
4
may then appoint such director as an additional member to the committee.
It is provided that any member of the audit committee who has a personal
interest in the transaction which is brought for the approval of the committee,
shall not participate in the discussion and the approval procedure held with
respect to such transaction.
It is further provided that, for the purpose of approvals required above and/or
pursuant to the Companies Ordinance, any director or member of the audit
committee shall be deemed to have a personal interest in a transaction brought
for the approval of the audit committee or the Board, if such director or member
is the appointee of a shareholder who has an interest in the transaction.
It is hereby clarified that such approval of the audit committee shall not
derogate from the provisions of the Companies Ordinance.
4.2 Until the lapse of two years from the Closing or the conversion of
the Preferred Shares into Ordinary Shares, according to the earlier,
the Company shall not issue securities which have a priority over the
Preferred Shares (except where such priority is only expressed as a
right of the holders thereof to receive, prior to the other classes
of shares, the purchase price for the securities paid to the
Company), without the affirmative vote of at least one director
appointed by the holders of Preferred Shares (excluding CLAL), if
appointed, provided that such requirement for an affirmative vote
shall not apply if none of the directors appointed by the holders of
Preferred Shares attends the meeting wherein a notice of such meeting
was given to such director(s) in the manner provided in the Company's
Articles.
4.3 the Company shall not issue Preferred A Shares or Preferred B Shares
(but may issue, subject to the foregoing, preferred shares of other
series), without the consent of the holders of 2/3 of the Preferred
Shares (excluding CLAL).
5. Preemptive Rights
Until the IPO, all shareholders in the Company, except for employees who
were issued shares in the framework of an employee share option plan, shall
have a right of pro rata participation in any future issuance of securities
by the Company, as provided under the Company's Articles of Association,
except for an issuance within the framework of the IPO, under an employee
share option plan, to a Strategic Investor, or pursuant to the exercise of
the Preferred Shares' anti-dilution right.
6. Transfer of Shares
6.1 Any transfer of the Company's shares shall be executed in accordance
with the Company's Articles of Association, as in effect at the
relevant time, including, without limitation, in accordance with the
right of first refusal and the approval required by the Company's
Board of Directors.
<PAGE> 5
5
6.2 Right of Co-Sale. In addition to the provisions in Section 6.1 above, if
AGA or CLAL proposes to sell its Ordinary Shares in the Company (i.e. the
shares held by it prior to the Closing) (the "Tag Along Shares") prior to
the IPO, a third party, it shall first offer each of the Subscribers, in
writing (the "Notice of Sale"), to participate in such sale. The Notice of
Sale is to specify the total number of shares proposed to be sold, the
identity of the buyer and the proposed terms of the sale. Each Subscriber
who wishes to participate, must notify AGA or CLAL, as applicable, in
writing (the "Notice of Reply"), within thirty (30) days after receipt of
the Notice of Sale, of its election to participate in such sale,
specifying the number of shares which it wishes to sell in such sale. Each
Subscriber shall be entitled to participate in such sale in a number of
shares which shall not exceed the product obtained by multiplying the
aggregate number of shares from the Tag Along Shares offered by AGA or
CLAL, as applicable, by a fraction, the numerator of which is the number
of shares issued to such Subscriber pursuant to the Subscription Agreement
which are owned by it at the time it receives the Notice of Sale (subject
to adjustments for stock splits, recapitalization, reorganization, etc.),
and the denominator of which is the total number of shares owned by all of
the Subscribers who participates in the sale, plus the Tag Along Shares
owned by AGA or CLAL, as applicable, at that time (subject to adjustments
for stock splits, recapitalization, reorganization, etc.) (the "Co-Sale
Right"). By sending such Notice of Reply, such Subscriber will be
obligated by the terms agreed upon between AGA or CLAL, as applicable, and
the buyer, as specified in the Notice of Sale. Failure by any of the
Subscribers to deliver the Notice of Reply as aforesaid, or to complete
the sale within the time period specified in the Notice of Sale, shall be
deemed to be a refusal by such Subscriber to exercise its Co-Sale Right.
No transfer of the Tag Along Shares by AGA or CLAL, as applicable, shall
be concluded unless the purchaser thereof concurrently purchases, on the
same terms, all of the shares included in the Notices of Reply received by
AGA or CLAL, as applicable, provided however that the Subscribers given
such Notice of Reply have My complied with the terms of the sale.
It is hereby clarified that notwithstanding anything to the contrary, upon
the transfer of the Tag Along Shares made in accordance with the
provisions of this Section 6.2, such shares and the transferee thereof
shall no longer be subject to the Co-Sale Right.
6.3 No transfer of shares shall be permitted unless the transferee undertakes
in writing and in advance to be bound by the provisions of this
Shareholders Agreement such that the transferee shall comply with the
undertakings herein in place of the transferor as if the transferee was a
party to this Shareholders Agreement as the holder of the shares being
transferred.
7. Sale of the Company
In the event that the holders of 65% or more of the issued share capital of the
Company (based on the par value of the shares), decide to sell the Company by
means of selling all of the Company's shares (in this Section 7 the "Deciding
Shareholders"), in consideration for cash, for shares of other company(ies), or
in
<PAGE> 6
6
consideration for a combination of both, then the other shareholders, if any,
shall be obligated to join such sale and to sell their entire shares in the
Company under those terms, pursuant to which the Deciding Shareholders shall
sell their shares; provided however that if such sale is made within four (4)
years from the date of the Closing , AGA shall not be obligated to comply with
such obligation to sell, nor shall any other shareholder be so bound, if such
sale is directed to a person or entity who, at the time of the sale transaction,
is a direct competitor of AGA within its Field of Use, as defined in that
certain agreement dated February 27, 1995 executed between AGA, CLAL and several
other parties, as further clarified in the clarification letter dated _______,
1997.
Information Rights and Books of Account
8.1 The Company will keep at its main office true records and books of account
in which full, true and correct entries will be made of all dealings and
transactions in relation to its business and affairs, all in accordance
with Israeli GAAP, applied on a consistent basis.
8.2 Until the IPO the Company shall prepare and furnish to: (i) any single
holder of Preferred Shares, who holds at least 5% of the Company's
shareholdings, based on their par value, ; and (ii) CLAL, as long as it
holds at least 5% of the Company's shareholdings, based on their par value
; and (iii) AGA, as long as it holds at least 5% of the Company's
shareholdings, based on their par value - of the following:
(a) Annual, audited financial statements - within 45 days after the end
of each fiscal year, and
(b) Quarterly interim financial statements, reviewed by the Company's
CPA, and setting forth, in comparative form, the figures for the
parallel calendar quarter in the previous year - within 35 days
after the end of each calendar quarter, and
(c) Monthly reports prepared by the Company's general manager setting
forth material events which occurred in the reported month and any
executed orders for the purchase of the Company's products, all to
the extent the Company's general manager believes that the
disclosure as abovesaid will not result in material harm to the
Company, and
(d) Within 21 days after the approval of the budget by the Company's
board of directors, a general outline of the Company's budget; and
(e) Pursuant to a request made by any of the persons or entities under
(i), (ii) or (iii) who is a public company, any information
necessary for such requesting Party by virtue of its status as a
public company, subject to reporting requirements under law, where
such information shall be delivered within the time period required
under such reporting requirements.
<PAGE> 7
7
(f) For the purpose of obtaining the holding of shares required
under this Section 8.2 for the receipt of the aforementioned
information, shareholders which are - (i) under common control
of, or (ii) controlling; or (iii) under control of - another
shareholder in the Company, may be deemed to be a single
holder, upon giving notice in writing to the Company,
detailing the relationship between such shareholders.
(g) The Company shall be obligated to furnish the aforementioned
information only to one designated person of each of the
aforesaid parties which are entitled to receive the
information. The designation shall be made by a written notice
given to the Company.
9. Initial Public Offering
9.1 The Parties hereto shall use reasonable commercial efforts to
initiate and consummate an IPO, as soon as commercially feasible,
provided that such IPO is economical, viable and advantageous to the
Company.
9.2 It is agreed that in the event that the holders of 5 1 % or more of
the issued share capital of the Company (based on the par value of
the shares) decide on initiating a public offering for the Company's
shares (in this Section 10 the "Deciding Shareholders"), then all of
the other shareholders shall exercise their voting rights in such a
manner to cause the initiation of such public offering as decided by
the Deciding Shareholders, including by voting in favor of making
the required changes in the Company's Articles of Association and by
voting in favor of adopting the necessary corporate resolutions.
10. Confidentiality
Each of the Subscribers, AGA and CLAL (and any transferee of their
respective shares, if any) will hold in strict confidence all information
concerning the Company, its business, financial, commercial and/or
technological information, operations, sales, marketing, customers,
suppliers and all information pertaining to any of the Company's
intellectual property rights and technology and any other proprietary
information of the Company whatsoever including, without limitation, any
reports provided by the Company to such parties hereunder (all hereinafter
referred to as the "Confidential Information"). Each of the parties also
undertake not to use the Confidential Information in any way, directly or
indirectly, for purposes other than for the Company and/or with respect to
such party's rights as shareholders in the Company. A party may disclose
such Confidential Information, to its officers, directors, consultants,
counsel and their representatives, only on a need to know basis, under
confidentiality agreement, and in connection with the transactions
contemplated by this Shareholders Agreement and shall ensure that all such
persons shall protect all Confidential Information as provided herein. The
obligations hereunder shall not apply as to any Confidential Information
which is proven: (i) known by it at the time of receiving such information
and provided that such other party has given notice to this effect; or
(ii) in the public domain through no fault of the party; or (iii)
information lawfully received by the party from a third party who was not
in breach of confidentiality in delivering or exposing the
<PAGE> 8
8
information; or (iv) information independently developed by the party as shown
in such party's written records. Disclosure of any Confidential Information
pursuant to any compelling judicial or administrative order or proceeding, or as
required by law, or if it is imperative by virtue of such party's being a
publicly traded company, shall not be deemed a breach hereof.
The provisions hereof shall survive any termination of this Shareholders
Agreement.
11. Assignment
Each of the Subscribers, CLAL and AGA may assign any of their rights or
obligations under this Shareholders Agreement, to any person or entity,
only as part of a transfer of their shares, duly made under the
Subscription Documents and the Company's Articles of Association, provided
that the rights and obligations assigned are only such rights and
obligations which relate to those shares so transferred, and only with
respect to those shares being so transferred.
12. Further Cooperation
The Parties agree to use the powers and rights conferred upon them, by
virtue of their shares in the Company, including their voting power and
rights, to cause the fulfillment of the provisions herein.
Furthermore, the Parties agree to execute any and all documents required, in
order to consummate and implement the provisions herein, including, without
limitation by means of corporate resolutions and powers of attorney.
13. Governing Law and Forum
This Shareholders Agreement, its interpretation, validity and breach shall
be governed by the laws of the State of Israel, without regard to its
choice of law rules, and any dispute or claim with respect thereto shall be
submitted to the competent courts in Tel Aviv, Israel, who shall have
exclusive jurisdiction in such matter.
14. Entire Agreement
This Shareholders Agreement constitutes the entire agreement between the
Parties with respect to the subject matter hereof, and no previous
agreement, term, memorandum, promise, negotiation, consent, undertaking,
representation, warranty and/or any other document exchanged or provided
prior to the execution hereof between all of the Parties hereto with
respect to the subject matter hereof shall have any force or effect. Any
amendment, addition or omission will be valid upon all parties if made in
writing by the Company, CLAL, AGA and the Subscribers holding a majority of
all Preferred Shares issued under the Subscription Agreement, , and if so
executed by the Company, AGA, CLAL and such Subscribers, such amendment,
addition and omission shall obligate all of the Parties to this
Shareholders Agreement.
15. Counterparts
This Agreement may be executed in any number of counterparts, each of which
shall be an original, but all of which together shall constitute one
instrument.
<PAGE> 9
9
The Company shall deliver to each Subscriber, a copy of the signature pages
executed with each of the other Subscribers who constitute Parties hereto.
16. Captions
The captions to Sections herein have been inserted for identification and
reference purposes only and shall not be used or construed to interpret
this Agreement.
17. Notices
All notices given by one Party to the other hereunder will be given in
writing, and will be deemed to have been delivered to the addressee
immediately upon their delivery, if delivered by hand, or upon
transmission if sent by facsimile and confirmed by machine printout
verifying such sending, or by written reply by facsimile, or within seven
(7) business days after being sent by mail, express airmail, or via
international courier, as per the addresses indicated herein, or to such
other address or facsimile number as a Party may thereafter give notice in
writing, to the other Parties hereto.
IN WITNESS WHEREOF the Parties have signed this Shareholders Agreement as of the
date first hereinabove set forth:
- ------------------------------------ -----------------------------------
AG Associates (Israel) Ltd. AG Associates, Inc.
By:_________________________________ By:________________________________
- ------------------------------------ -----------------------------------
Clal Electronics Industries Ltd. Charter AGI L.L.C.
By:_________________________________ By:________________________________
- ------------------------------------ -----------------------------------
The Israel Private Equity Fund L.P. Evergreen International Investments
N.V.
By:_________________________________ By:________________________________
- ------------------------------------ -----------------------------------
The Israel Private Equity Fund Yarok Az Investment (1994) Ltd.
(Cayman) L.P.
By:_________________________________ By:________________________________
-----------------------------------
UT Technologies Ltd. Fund By:
<PAGE> 1
EXHIBIT 10.47
REGISTRATION RIGHTS AGREEMENT
Made and entered into this __________ day of August 1997 by and and among AG
Associates (Israel) Ltd., an Israeli company of Ramat Gabriel Industrial Park,
P.O.B. 171, Migdal Haemek 10551, Israel (the "Company"), AG Associates Inc., a
California corporation of 4425 Fortran Drive, San Jose, California 95134, USA
("AGA,'), Clal Electronics Industries Ltd., an Israeli company of Druyanov 5,
Tel Aviv, Israel ("CLAL"), and each of the Subscribers (as defined herein). All
of the above parties, are collectively referred to herein as the "Parties" and
each party is individually referred to herein as a "Party".
The parties hereby covenant and agrees as follows:
1. Binding Effect
This Registration Rights Agreement shall become effective, be valid and
binding, among and between the Company, AGA, CLAL and each of the
Subscribers (as defined herein), only if and when a Closing under the
Subscription Agreement (as hereinbelow defined), has been held, ipso facto.
2. Definitions
2.1 The "Subscription Agreement" - the Preferred Shares Subscription
Agreement executed by subscribers for the purchase of the Company's
Preferred Shares, to which the form of this Registration Rights
Agreement is attached as an Annex thereto.
2.2 Capitalized terms unless otherwise defined herein shall have the
meanings ascribed to such terms in the Subscription Agreement.
2.3 The term "Subscriber(s) " as used herein shall mean any and all
Subscribers, as this term is defined in the Subscription Agreement
(excluding CLAL), and each of the Subscribers shall herein be
referred to as a "Subscriber".
2.4 The term "Securities Act" as used herein shall mean the U.S.
Securities Act of 1933, as amended, or any similar successor federal
statute and the rules and regulations thereunder, all as the same
shall be in effect from time to time.
2.5 The term "Exchange Act" as used herein shall mean the U.S. Securities
Exchange Act of 1934, as amended, or any similar successor federal
statute and the rules and regulations thereunder, all as the same
shall be in effect from time to time.
2.6 The term "Registrable Securities" as used herein shall mean any of the
following:
<PAGE> 2
2
(i) all of the Ordinary Shares of the Company held on the date of
execution hereof by each of CLAL and AGA; and
(ii) all of the Ordinary Shares issued upon conversion of the Preferred
Shares purchased under the Subscription Agreement (and/or upon
conversion of any preferred shares issued by virtue of the
abovesaid Preferred Shares as a result of issuance under the
Anti-Dilution provision set forth in Section 6.2 to the
Shareholders Agreement any stock split, bonus shares or the like);
and
(iii) all Ordinary Shares purchased pursuant to a pre-emptive right and
right of first refusal by virtue of the shares described in this
Section 2.6, and all Ordinary Shares issued on conversion of other
securities so purchased; and
(iv) all Ordinary Shares issued by virtue of such Ordinary Shares
described in clauses (i), (ii) and (iii) above, as a result of any
stock split, bonus shares or the like;
excluding in all cases: (i) any shares sold in a transaction, in which the
rights under this Agreement are not assigned in accordance herewith; and
(ii) shares which have previously been registered; and (iii) shares sold
to the public or pursuant to Rule 144, promulgated under the Securities
Act.
2.7 The term "AGA's Registrable Securities" as used herein shall mean
Registrable Securities which are held by AGA at the time in question and
by any assignee(s) to whom AGA's Registrable Securities were transferred,
provided that such transfer was made in accordance with the terms herein
and in accordance with the terms of any other applicable agreement,
including, without limitation, the Company's Articles of Association.
2.8 The term "CLAL's Registrable Securities" as used herein shall mean
Registrable Securities which are held by CLAL at the time in question and
by any assignee(s) to whom CLAL's Registrable Securities were transferred,
provided that such transfer was made in accordance with the terms herein
and in accordance with the terms of any other applicable agreement,
including, without limitation, the Companys Articles of Association.
2.9 The term "the Subscribers' Registrable Securities" 'as used herein shall
mean Registrable Securities which are held by the Subscribers at the time
in question and by any assignee(s) to whom the Subscribers' Registrable
Securities were transferred, provided that such transfer was made in
accordance with the terms herein and in accordance with the terms of any
other applicable agreement, including, without limitation, the Company's
Articles of Association.
<PAGE> 3
3
2.10 The term "Majority Holders" as used herein shall mean holders of
Registrable Securities holding, at the time in question, more than 50% of
the shareholdings of the particular Registrable Securities in question.
2.11 The term "SEC" as used herein means the securities exchange commission or
successor agency that administers the Securities Act.
3. Demand Registration
(a) Request by holders
If the Company receives at any time after the lapse of one hundred and
eighty (180 days) following the Company's initial public offering of
securities, a written demand from the Majority Holders of AGA's
Registrable Securities, or from the Majority Holders of CLAL's
Registrable Securities, or from the Majority Holders of the
Subscribers' Registrable Securities, or from the Majority Holders of
all Registrable Securities (the "Initiating Holders"), that the
Company effect a registration under the Securities Act covering all or
part of the Registrable Securities of such Initiating Holders, the
Company will promptly give each of the holders of Registrable
Securities written notice thereof and as soon as practicable, and
subject to the terms and limitations set forth herein, shall act to
effect such registration of the Registrable Securities requested to be
registered by the Initiating Holders, in the aforesaid written demand
together with the Registrable Securities of holders who are joining in
such request as provided in such holder's written reply received by
the Company within 20 days after deliver of the Company's abovesaid
notice.
The Company shall not be obligated to effect more than a total of four
(4) registrations, in response to a demand made hereunder of which:
one (1) registrations demanded by the Majority Holders of AGA's
Registrable Securities, one (1) registrations demanded by the Majority
Holders of CLAL's Registrable Securities, one (1) registrations
demanded by the Majority Holders of the Subscribers' Registrable
Securities and one (1) registration demanded by the Majority Holders
of all Registrable Securities.
(b) Limitation on demands
The Company shall not be obligated to effect, or to take any action to
effect, any registration in any of the following periods or events:
1. If the demand was made before the lapse of one (1) year after the
Company's initial public offering of securities - in any case,
where the aggregate proceeds of such registration do not exceed US$
10,000,000 (ten million U.S. Dollars); and if the demand was made
after the lapse of one (1) year after the Company's initial public
offering of securities - in any case where the aggregate proceeds
of such registration do not exceed US$ 5,000,000 (five million U.S.
Dollars).
2. During the period beginning upon the Company's receipt of a demand
for registration from any of its shareholders or upon the
<PAGE> 4
4
actual beginning of the process of preparing for or actual filing
and effecting of a registration, for its own account (where such
registration is of the kind which, according to Section 4(a)
hereinbelow, may be joined by holders of Registrable Securities),
and ending on a date one hundred and eighty (180) days following the
effective date of any such registration.
3. If in the good faith judgment of the Board of Directors of the
Company, the registration would be seriously detrimental to the
Company, and the Board of Directors of the Company, as a result,
concludes, that it is essential to defer the filing of such
registration statement at such time, and the Company shall furnish
to the Initiating Holders of such demand a certificate signed by the
President or Chief Executive Officer of the Company stating the
above, then the Company shall have the right to defer such filing
for a period of not more than one hundred twenty (120) days after
receipt of the demand of the Initiating Holders, and, provided
further, that the Company shall not defer its obligation in this
manner more than once in any eighteen month period.
(c) Underwriting
If the Initiating Holders intend to distribute the Registrable
Securities, covered by their demand, by means of an underwriting,
then they shall so advise the Company as a part of their demand made
pursuant to clause (a) above, and the Company shall include such
information in its written notice to the other holders of Registrable
Securities as set forth in section 3(a) above. In such event, the
right of any holder of Registrable Securities to join the demand and
to include Registrable Securities in the registration shall be
conditioned upon its participation in the underwriting and the
inclusion of the Registrable Securities, requested by it to be
included, in the underwriting, to the extent provided herein. All
holders proposing to distribute their Registrable Securities in whole
or in part, by joining the demand, shall enter into an underwriting
agreement, in customary form, with the managing underwriter(s)
selected for the offering by the Initiating Holders and provided such
selected underwriter(s) is/are acceptable to the Company.
It is agreed that the underwriter who served as the underwriter for
the Company's IPO and any underwriter who, during the previous
calendar year, executed at least 20 public offerings, each resulting
in gross proceeds to the issuer of at least US $15,000,000, under a
firm commitment underwriting, shall be acceptable to the Company.
4. Piggyback Registrations
(a) If the Company proposes to register any of its securities, either for
its own account or for the account of any of its shareholders, (other
than a registration relating solely to benefit plans, on Form S-8 or
the like a registration in connection with an exchange offer or
merger or a registration on any form which does not include
substantially the same information about the Company as would be
required to be included in a registration covering
<PAGE> 5
5
the sale of a Registrable Securities), it shall promptly give to each
holder of Registrable Securities written notice thereof, and shall act to
include in such registration, except as otherwise provided herein, all the
Registrable Securities specified in the written request made by any such
holder of Registrable Securities to whom it sent the aforesaid notice,
which request is delivered to the Company within twenty (20) days after
the written notice of the Company is delivered. The Company may also
include securities for its own account in registrations initiated by
shareholders.
(b) Underwriting. If the registration of which the Company gives notice for
pursuant to this Section 4 is for an underwritten registration, the
Company shall so advise the holders of Registrable Securities, as part of
the Company's notice set forth in clause (a) above. In such event, the
right of any holder of Registrable Securities, to be included in the
registration, shall be conditioned upon such holder's participation in
such underwriting and the inclusion of such holder's Registrable
Securities, which it requested to include in the registration, in the
underwriting, to the extent-provided herein. All holders proposing to
distribute their Registrable Securities, in whole or in part, by joining
the registration, shall enter into an underwriting agreement, in customary
form, with the managing underwriter(s) selected for the offering by the
Company, in case of registration for its own account or by the initiating
shareholders in case of registration for the account of shareholders.
5. Underwriter's cut-back and withdrawal from registration
(a) Notwithstanding any provision herein, if the underwriter(s)
advise(s) the Company that market factors require a limitation of
the number of securities to be underwritten, then the number of
securities that may be included in the underwriting and the
registration shall be reduced as required by the underwriter(s) and
allocated as follows:
(i) If the Company initiated the registration; there will be
included in
the underwritten registration, first all of the securities to
be issued by the Company and second if remaining, the
Registrable Securities of holders executing their piggyback
registration rights, pursuant to Section 4 herein,. pro rata
to their shareholdings of Registrable Securities having
piggyback rights at the time in question.
(ii) If shareholder(s) of the Company initiated the registration
pursuant to Section 3 herein - there will be included in the
underwritten registration, first the securities of the
Initiating Holders and the other joining Holders of
registrable Securities who are joining the registration by
exercising their right under Section 3 and second if
remaining, the securities to be issued by the Company.
(b) If the registration is an underwritten registration, then any holder
who disapproves of the terms of the underwriting, may elect to
withdraw therefrom by written notice to the Company and the
underwriter(s),
<PAGE> 6
6
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any securities excluded or withdrawn from such
underwriting shall be excluded and withdrawn from the registration.
If shares are so withdrawn from the registration and if the number of shares to
be included in such registration was previously reduced as a result of marketing
factors as provided in clause (a) above, then the Company shall offer to all
holders who have retained rights to include securities in the registration, the
right to include the additional securities they would have been entitled to
include had the number of shares not been reduced, in the registration, in an
aggregate amount equal to the number of shares so withdrawn, with such shares to
be allocated among such holders requesting additional inclusion, in accordance
with the allocation set forth in Clause (a) above.
6. Expenses
All expenses incurred in effecting a registration pursuant to one demand
initiated hereunder, by each of (i) the holders of AGA's Registrable
Securities; (ii) the holders of CLAL's Registrable Securities; and (iii)
the holders of the Subscribers' Registrable Securities, (i.e., a total of
up to three demands) including, without limitation, all registration,
filing and qualification fees, printing expenses, reasonable fees of one
counsel for the shareholders who are including their shares in such
registration pursuant to Section 3 herein, blue sky fees and expenses,
costs of any regular or special audit if required, shall be paid for and
borne by the Company; provided however that all underwriters' discounts
and commissions, and stock transfer taxes, applicable to the securities of
shareholders included in the registration, and such shareholders' counsel
fees (other than the counsel fees which are to be borne by the Company as
provided in this Section 6 above), shall be paid for by the shareholders
who are including their shares in the registration, pro rata to the number
of shares of such shareholders included in the registration, and shall not
be paid for by the Company.
It is hereby clarified that all expenses incurred in effecting a
registration which is made in response to the demand made by the Majority
Holders of all Registrable Securities, shall be paid for by the
shareholders who are including their shares in such registration, pro rata
to the number of shares of such shareholders included in the registration,
and shall not be paid for by the Company.
Furthermore, in effecting any registration of Registrable Securities which
are included therein as a result of an exercise of the right to join the
registration under Section 4 (a) herein, the additional expenses incurred
as a result of the inclusion thereof in the registration, shall be paid
for by the holders of such Registrable Securities, pro rata. to the number
of shares of such holders included in the registration, and shall not be
paid for by the Company.
7. Obligations of the Company
Whenever required to effect registration of Registrable Securities
pursuant to the terms herein, the Company shall as soon as practicable:
<PAGE> 7
7
(a) Prepare and file with the SEC a registration statement with respect to
such Registrable Securities and use all reasonable efforts to cause such
registration statement to become effective, within ninety (90) days after
the lapse of the twenty (20) days period given in Section 4 hereof for the
reply of holders of Registrable Securities to join the registration, and
shall keep such registration effective for a period of ninety (90) days,
or until the holder(s) whom Registrable Securities are included in the
registration have completed the distribution, whichever first occurs;
(b) Prepare and file with the SEC such amendments and supplements to such
registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions
of the Securities Act with respect to the disposition of the securities
covered by such registration statement;
(c) Furnish to the holders of Registrable Securities included in the
registration such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, which
such a holder may reasonably request, from time to time, in order to
facilitate the disposition of the securities;
(d) Notify each holder of Registrable Securities covered by such registration
statement at any time when a prospectus relating thereto is required to be
delivered under the Securities Act of the happening of any event, as a
result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in the fight of the
circumstances then existing, and at the request of any such holder prepare
and furnish to such holder copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered to
the purchasers of such shares, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading or incomplete in the fight of the circumstances then existing;
(e) In the event that the Initiating Holders require that the registration
which the Company shall effect in response to their demand, made under
Section 3 herein, shall be underwritten, the Company will, without
derogating from Section 4(b) herein, enter into an underwriting agreement
in form reasonably necessary to effect the offer and sale of the
Registrable Securities to be included in the registration, provided such
underwriting agreement contains customary underwriting provisions, and
that all the shareholders whose Registrable Securities are included in the
registration shall enter into such agreement and perform their obligations
thereunder.
(f) Cause all Registrable Shares registered pursuant hereunder to be fisted on
each securities exchange or NASDAQ on which same class of securities
issued by the Company are then listed.
<PAGE> 8
8
(g) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant hereunder and a CUSIP number for all such Registrable
Securities, in each case not later than the effective date of such
registration.
8. Indemnification
(a) To the extent permitted by law, the Company will indemnify each
holder of Registrable Securities which are included in a
registration effected pursuant to the terms herein, each of its
officers, directors and partners, and each person controlling such
holder within the meaning of Section 15 of the Securities Act, and
each underwriter of such registration, if any, and each person who
controls within the meaning of Section 15 of the Securities Act such
underwriter (all of the above entities and persons shall hereinafter
be referred to as the "Holder's Indemnified Persons"), against all
losses and damages by virtue of any liabilities to which they shall
become subject under the Securities Act, the Exchange Act or other
federal or state law insofar as such liabilities arising out of or
based on: (i) any untrue statement (or alleged untrue statement in
case of amounts paid in settlement of liability) of a material fact
contained in such registration statement, including any prospectus,
and any amendments and supplements thereto, or other document
incident to any such registration; or (ii) any omission (or alleged
omission in case of amounts paid in settlement of liability) to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (iii)
any violation by the Company of the Securities Act the Exchange Act
any federal or state securities law or any rule or regulation
thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such
registration, and will promptly reimburse each of the Holder's
Indemnified Persons for any reasonable legal and other expenses,
incurred by them by reason of defending or settling any such
liability, or action in respect thereof, provided that the Company
will not be liable in any such case to the extent that any such
liability arises out of or is based on any untrue statement or
omission made in reliance upon or in conformity with information
furnished to the Company by any of the Holder's Indemnified Persons
stated to be used with such registration, or in any case where any
of the Holder's Indemnified Persons had an obligation to deliver a
prospectus, amended or supplemented by the Company, to the
purchasers of the shares, prior to or at the time the sale is
confirmed, and failed to do so, if such amended or supplemented
prospectus would have cured the defect giving rise to such
liability. It is agreed that the indemnity agreement contained in
this Section 8(a) shall not apply to amounts paid in settlement of
any such liability or action in respect thereof if such settlement
is effected without the written consent of the Company (which
consent shall not be unreasonably withheld).
(b) To the extent permitted by law, each holder of Registrable
Securities included in the registration which is being effected,
shall indemnify the Company, each other holder of shares included in
the registration, and each of their respective directors, officers,
partners, and representatives (including counsels and accountants)
and each underwriter of such registration, if any,
<PAGE> 9
9
and each person who controls the Company, the other holder(s) or such
underwriter, within the meaning of Section 15 of the Securities Act, (all
of the above entities and persons shall hereinafter be referred to as the
"Company's Indemnified Persons") against all losses and damages by virtue
of any liabilities to which they shall become subject under the Securities
Act, the Exchange Act or other federal or state law, insofar as such
liabilities arising out of or based on: (i) any untrue statement (or
alleged untrue statement in case of amounts paid in settlement of
liability) of a material fact contained in any such registration statement
including any prospectus and any amendments and supplements thereto or
other document incident to any such registration; (ii) or any omission (or
alleged omission in case of amounts paid in settlement of liability) to
state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, and will promptly reimburse
the Company's Indemnified Persons for any reasonable legal and other
expenses, incurred in connection with defending any such liability, or
action in respect thereof in each case to the extent, but only to the
extent, that such untrue statement or omission is made in reliance upon
and in conformity with information furnished in writing to the Company by
any of the Holder's Indemnified Persons stated to be used with the
registration, or in any case where any of the Holder's Indemnified Persons
had an obligation to deliver a prospectus, amended or supplemented by the
Company, to the purchasers of the shares, prior to or at the time the sale
is confirmed, and failed to do so, if such amended or supplemented
prospectus would have cured the defect giving rise to such liability. It
is agreed that the indemnity agreement contained in this Section 8(b)
shall not apply to amounts paid in settlement of any such liability or
action in respect thereof if such settlement is effected without the
consent of the indemnifying holder(s) (which consent shall not be
unreasonably withheld), and that the indemnification amounts to be paid by
such holders under this provision, shall not exceed the gross proceeds
received by such holder from the offering with respect to which the
registration was effected.
(c) Each party entitled to indemnification under this Section 8 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim or action as to which indemnity
may be sought, and shall permit the Indemnifying Party to assume the
defense of such claim or any litigation resulting therefrom, provided that
counsel for the Indemnifying Party, who shall conduct the defense of such
claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not unreasonably be withheld);
provided that the failure of any Indemnified Party to give notice as
provided above shall not relieve the Indemnifying Party of its obligations
under this Section 8, to the extent such failure is not prejudicial. The
Indemnified Party may participate in such defense at such Indemnified
Party's expense; however it is provided that in the event where the
defendants in an action include both the Indemnified Party and the
Indemnifying Party and there is a conflict of interest which would prevent
counsel for the Indemnifying Party from also representing the Indemnified
Party, then to the extent that the Company has to indemnify such party;
such
<PAGE> 10
10
indemnification shall also apply to the reasonable attorneys fees of
one counsel on behalf of all Indemnified Parties who shall
participate in the defense of such parties in such case. No
Indemnifying Party, in the defense of any such claim or litigation,
shall, except with the consent of each Indemnified Party, enter into
any settlement that does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified
Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question, as an Indemnifying Party
may reasonably request and as shall be reasonably required in
connection with defense of such claim and litigation resulting
therefrom.
(d) The foregoing indemnity agreement with respect to any preliminary
prospectus, shall not inure to the benefit of any Holders'
Indemnified Persons if a copy of the prospectus as then amended or
supplemented, eliminating or remedying the untrue statement,
omission, or other violation, was furnished to the holder of
Registrable Securities in question.
(e) If recovery is not available under the foregoing indemnification
provisions, for any reason, except for a reason as specified therein
or except by reason of the exercise of any right or remedy available
to any party - such party which is entitled to indemnification by
the terms hereof shall be entitled to receive contribution to its
liabilities and expenses. In determining the amount of contribution
to which the respective parties are entitled, there shall be
considered the parties' relative knowledge and access to information
concerning the matter with respect to which the underlying claim was
asserted, the opportunity to correct and prevent any statement or
omission, and any other equitable consideration appropriate under
the circumstances.
9. Information by Selling Shareholders
9.1 The Company's obligation to take action pursuant to Sections 3 and 4
hereto, shall be conditioned and subject to the furnishing by the
selling shareholders to the Company, information regarding
themselves, their Registrable Securities and other securities held by
them, if any, and the intended method of disposition of the
securities, which is required for the purpose of the registration.
9.2 Each holder of Registrable Securities undertakes to furnish the
Company, with respect to the registration of such holder's shares,
true and correct information, such that the information contained
therein which was furnished by such holder shall be true and correct
and shall not omit to state any material fact required to be stated
therein or necessary to not make the statement misleading.
10. Delay of Registration
No holder of Registrable Securities shall have any right to obtain or seek
an injunction remaining or otherwise delaying any registration as the
result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
<PAGE> 11
11
11. Rule 144 Reporting
With a view of making available the benefits of certain rules and
regulations permitting the sale of the Registrable Securities to the
public, without registration, after such time as the Company shall
consummate a public offering for its shares, the Company agrees to:
(i) make and keep public information regarding the Company available, as
those terms are understood and defined in Rule 144 promulgated under
the Securities Act, at all times from and after ninety (90) days
following the effective date of the first registration under the
Securities Act filed by the Company for an offering of its securities
to the general public;
(ii) use reasonable efforts to file with the SEC in a timely manner all
reports and other documents required of the Company under the
Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements);
(iii)so long as a holder owns any Registrable Securities, to furnish to
such holder forthwith upon its written request, a written statement
by the Company as to the Company's compliance with the reporting
requirements of said Rule 144 (at any time after 90 days after the
effective date of the first registration statement filed by the
Company for an offering of its securities to the general public), and
of the Securities Act and the Exchange Act (at any time after it has
become subject to the reporting requirements of the Exchange Act), a
copy of the most recent annual or quarterly report of the Company,
and such other reports and documents of the Company as a holder may
reasonably request in availing itself of any rule or regulation
allowing a holder to sell any such securities without registration
(at any time after the Company has become subject to the reporting
requirements of the Exchange Act).
12. Termination of the Company's Obligations
The Company shall have no obligations pursuant to Sections 3 and 4 herein
with respect to: (a) any request or requests for registration made after
the lapse of a seven year period after the closing date of the Company's
initial public offering; or (b) any Registrable Securities that in the
opinion of counsel to the Company, may be sold in a three-month period
without registration under the Securities Act pursuant to Rule 144
promulgated thereunder.
13. Market stand off Agreement
If requested by the Company or by the underwriter(s) of securities of the
Company, any shareholder of the Company shall not sell or otherwise
transfer or dispose of any securities of the Company held by such
shareholder (other than securities sold pursuant to a registration
statement), during the one hundred and eighty (180) day period following
the effective date of a registration statement of the Company filed under
the Securities Act, or for a longer period if requested by the
underwriter(s)s, which shall not exceed the market stand off period which
is customary at the time so requested, and provided that all of the
executive officers and directors of the Company, then holding securities of
the Company, enter into
<PAGE> 12
12
agreements with similar terms and that no other parties entering into a market
stand-off agreement, if any, shall be subject to a shorter period.
In order to enforce the foregoing covenants, the Company shall have the right to
place restrictive legends on the certificates representing the shares subject to
this Section and to impose stop transfer instructions with respect to such
securities until the end of such period.
14. Assignment of Registration Rights
The rights to demand that the Company register securities, granted herein,
and the right to join a registration provided under Sections 3 and 4
herein, may be assigned by a holder only to a transferee of Registrable
Securities of the transferor and with respect to such Registrable
Securities transferred only, provided further that the Company is promptly
given written notice of said transfer of the Registrable Securities and the
assignment of the registration rights, stating the name and address of the
assignee and identifying the securities with respect to which such
registration rights are being assigned, and, provided further, that the
assignee of such rights shall receive such rights subject to all of the
terms and conditions herein and shall assume in writing the obligations of
the transferor hereunder, with respect to the Registrable Securities
transferred, including those under this Section 14. It is provided that the
Company shall not have any obligation to any assignee or transferee,
pursuant to the terms of this agreement until it has received the aforesaid
written notice.
15. Amendment of Rights
Any provision of this Agreement may be amended only with the written
consent of the Company and the Majority Holders of each type of Registrable
Securities (i.e. the Majority Holders of AGA's Registrable Securities, the
Majority Holders of CLAL's Registrable Securities and the Majority Holders
of the other Registrable Securities).
16. Governing Law and Forum
This Registration Rights Agreement, its interpretation, validity and breach
shall be governed by the laws of the State of New York, USA, without regard
to its choice of law rules, and any dispute or claim with respect thereto
shall be submitted to the competent courts in New York, USA, who shall have
exclusive jurisdiction in such matter.
17. Entire Agreement
This Registration Rights Agreement constitutes the entire agreement between
the Parties with respect to the subject matter hereof, and no previous
agreements, terms, memoranda, promises, negotiations, consents,
undertakings, representations, warranties and/or any other documents
exchanged or provided prior to the execution hereof between any of the
Parties, shall have any force or effect.
18. Captions
The captions to sections herein have been inserted for identification and
reference purposes only and shall not be used to construe or interpret this
Agreement.
<PAGE> 13
13
19. Adjustments for Stock Splits, etc.
Wherever in this Agreement there is a reference to a specific number of
shares of the Company of any class or series then, upon the occurrence of
any subdivision, combination or stock dividend of such class or series of
shares, the specific number of shares so referenced in this Agreement shall
automatically be proportionally adjusted to reflect the affect on the
issued and outstanding shares of such class or series of stock by such
subdivision, combination or stock dividend.
20. Public Offering Not in the U.S.A.
If relevant, and to the extent possible, the provisions of this
Registration Rights Agreement shall apply, mutatis mutandis, on any
registration of securities of the Company, made in any territory other
than the U.S.A. e.g. in the event the Company registers its securities in
Israel then the Company shall also register for trading all of the
Registrable Securities, subject to any applicable law.
21. Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
22. Notices
AU notices given by one Party to the other hereunder will be given in
writing, and will be deemed to have been delivered to the addressee
immediately on their delivery, if delivered by hand, or upon transmission
if sent by facsimile and confirmed by machine printout verifying such
sending or by written reply by facsimile, or within seven (7) business days
after being sent by mail, express airmail, or via international courier, as
per the addresses indicated herein, or to such other address or facsimile
number as a Party may thereafter give notice in writing, to the other
Parties hereto.
IN WITNESS WHEREOF the Parties have signed this Registration Rights
Agreement as of the date first hereinabove set forth:
----------------------------- -------------------------------
AG Associates (Israel) Ltd. AG Associates, Inc.
By:__________________ By:__________________
----------------------------- -------------------------------
Clal Electronics Industries Ltd. Charter AGI L.L.C.
By:___________________ By:___________________
----------------------------- -------------------------------
The Israel Private Equity Fund L.P. Evergreen International Investments
N.V.
By:___________________ By:____________________
<PAGE> 14
14
- ----------------------------- -------------------------------
The Israel Private Equity Fund Yarok Az Investment (1994) Ltd.
(Cayman) L.P.
By:_____________________ By:_________________________
-------------------------------
UT Technologies Ltd. Fund
By:_____________________
<PAGE> 15
Annex "A"
<TABLE>
<CAPTION>
Investment Preferred Shares Preferred Shares
Amount Serial A Serial B
------ -------- --------
<S> <C> <C> <C>
Clal Electronics AGA $4,000,000 2,000,000 0
Charterhouse AGI L.L.C. $4,000,000 1,600,000 400,000
IJT Technologies Ltd. Fund $1,000,000 500,000 0
Yarok Az Investment (1994) Ltd. $500,000 250,000 0
Evergreen International Investment $500,000 250,000 0
N.V.
The Israel Private Equity Fund L.P. $2,098,800 1,049,400 0
The Israel Private Equity Fund $901,200 450,600 0
(Cayman) L.P.
Option reserved for employees
Options reserved for the CEO
Total Investment Amount $13,000,000
Total Shares 6,100,000 400,000
</TABLE>
<PAGE> 1
EXHIBIT 10.48
AG ASSOCIATES. INC.
EMPLOYMENT AGREEMENT
This Agreement is entered into as of _____________________, 1997 by and
between AG Associates, Inc., a California corporation (the "Company"), and
_____________________________ ("Employee"). In consideration of the terms and
conditions set forth in this Agreement, the parties agree as follows:
1. DEFINITIONS.
1.1 For purposes hereof "Cause" for termination of any Employee's
employment will exist at any time after the happening of one or more of the
following events: (a) the Employee's conviction of a felony involving moral
turpitude; (b) any willful act or acts of dishonesty undertaken by the Employee
and intended to result in substantial gain or personal enrichment of the
Employee, directly or indirectly, at the expense of the Company or a Successor,
Parent, Subsidiary or Affiliate of the Company (as such terms are defined in the
Company's 1994 Stock Option Plan); (c) any willful act or misconduct which is
materially and demonstrably injurious to the Company or a Successor, Parent,
Subsidiary or Affiliate of the Company; (d) substantial and repeated neglect of
the Employee's responsibility, or malfeasance thereof, that remains uncured
after 30 days written notice of such neglect or malfeasance; or (e) the
Employee's death or disability (within the meaning of Section 22(e)(3) of the
Internal Revenue Code of 1986, as amended.
1.2 A "Merger" shall mean (a) a merger or consolidation in which
the Company is not the surviving corporation (other than a merger or
consolidation with a wholly owned subsidiary, a reincorporation of the Company
in a different jurisdiction, or other transaction in which there is no
substantial change in the stockholders of the Company or their relative stock
holdings), or (b) a merger in which the Company is the surviving corporation but
after which the stockholders of the Company (other than any stockholder which
merges (or which owns or controls another corporation which merges) with the
Company in such merger) cease to own at least 50% of the issued and outstanding
capital stock or other equity interests in the Company.
1.3 A "Sale" means a Merger, the sale of all or substantially all
of the assets of the Company as a going concern in a single transaction or
series of related transactions or the sale or transfer of a majority of the
outstanding shares of the Company by the stockholders of the Company in a single
transaction or a series of related transactions other than market transactions
to unrelated purchasers.
1.4 A "Transaction "means:
(a) a dissolution or liquidation of the Company;
(b) a merger or consolidation in which the Company is not
the surviving corporation (other than a merger or consolidation with a
wholly owned subsidiary, a reincorporation of the Company in a different
jurisdiction, or other transaction in which there is no substantial
change in the stockholders of the Company);
1
<PAGE> 2
(c) a merger in which the Company is the surviving corporation
but after which the stockholders of the Company (other than any stockholder
which merges (or which owns or controls another corporation which merges) with
the Company in such merger) cease to own at least 50% of the issued and
outstanding capital stock or other equity interests in the Company;
(d) the sale of all or substantially all of the assets of the
Company; or
(e) any other transaction which qualifies as a "corporate
transaction" under Section 424(a) of the Internal Revenue Code of 1986, as
amended, wherein the stockholders of the Company give up all of their equity
interest in the Company (except for the acquisition, sale or transfer of all or
substantially all of the outstanding shares of the Company from or by the
stockholders of the Company).
2. Employment. The Company hereby continues to employ Employee and
Employee hereby continues to accept employment with the Company upon the terms
and conditions set forth in this Agreement. Employee hereby represents and
warrants to the Company that he is free to enter into and fully perform this
Agreement and the Proprietary Rights and Confidentiality Agreement he has signed
for the benefit of the Company (the "Confidentiality Agreement").
3. Salary and Benefits. For the performance of all of Employee's
obligations under this Agreement, the Company shall set the Employee's salary
and bonuses from time to time, which salary and bonuses will be payable as
earned in accordance with the payroll policies of the Company as constituted
from time to time. During the term of this Agreement, Employee shall be entitled
to receive fringe benefits of employment generally available to the Company's
other similarly situated employees as he becomes eligible for them.
4. Term. Employee's employment with the Company is not for a specified
term, is at will and may be terminated by either party with or without cause as
described in this Section 4. Employee, in his sole discretion, may, at any time,
terminate his employment, with or without cause (which will also terminate this
Agreement) after giving the Company two weeks prior written notice. The Company,
in its sole discretion, may terminate the employment of Employee, with or
without cause, immediately upon giving Employee written notice, but may not
terminate this Agreement. This Agreement shall also terminate upon the first to
occur of the fifth anniversary of this Agreement (except as provided in Section
5.2 below as to any effective employment or consulting obligations subsequent to
a Sale), the death of Employee or upon written notice given by the Employee to
the Company.
5. Termination in Connection with Transaction.
5.1 Continuation of Employment. In the event of a Transaction,
then the Employee's employment may be continued with the successor company, if
any, under such terms as the Employee and the successor company may mutually
agree and:
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<PAGE> 3
(a) any or all shares of the Company's capital stock,
with respect to the vesting thereof, and any options for the purchase of
the same (collectively, as to all such shares and options, "Awards")
shall be assumed, converted, substituted or replaced by the successor
company, if any, by options or shares that are substantially equivalent
to the Awards, which assumption, conversion or replacement will be
binding on Employee; or
(b) subject to Section 5.4 below, the successor
corporation may provide substantially similar consideration to Employee
as was provided to stockholders with respect to any options to purchase
the Company's capital stock (after taking into account the existing
provisions. of the Awards) and provide, with respect to shares of the
Company's capital stock, the same consideration as provided to
stockholders of the Company subject to repurchase restrictions no less
favorable to the Employee.
With respect to a Sale of the Company, if the successor company or any of its
affiliates, if any, does not offer Employee a position with the successor or any
of its affiliates that is within Employee's expertise and is reasonably similar
in duties and responsibilities to Employee's position with the Company, and as a
result, Employee declines employment with the successor company or any of its
affiliates, then (a) such failure shall be deemed a termination in connection
with the Sale with notice as provided in Section 5.2.1 below, (b) Employee shall
be deemed an employee for 12 months subsequent to the closing of the Sale
entitled to the benefits of Section 5.2.1 below, it being understood that
Employee may, at Employee's option during such 12-month period, seek and obtain
full-time employment elsewhere to the exclusion of the Company and its
successor, without affecting his rights under Section 5.2.1 below and (c)
Employee shall perform consulting services and be entitled to the benefits
provided in Section 5.2.3 below.
5.2 Termination on a Sale.
5.2.1 Notice and Continuation of Employment Upon a Sale.
The Employee's employment may not be terminated by the Company or any potential
acquirer in connection with the Sale without the acquirer giving the Employee 12
months prior written notice of termination at the closing of the Sale (the
"Effective Date"). During the period of such notice, if any, the Employee will
be paid an amount for the 12-month period that is equal to his then current
salary and bonuses, whether or not the Employee's services are actually required
by the Company, its successor or this Agreement during the notice period, which
annual amount will be payable in 12 equal monthly installments, as earned, in
accordance with the Company's normal payroll policy in effect from time to time,
and the Employee will be obligated to render consulting services to the Company
as specified in Section 5.2.3 below. Employee benefits will continue, and the
Employee's options and shares of Common Stock will continue to vest, during the
12-month period after the Effective Date of the Sale so long as the Employee's
employment is not terminated for Cause.
5.2.2 Notice and Continuation of Employment During the
Year after Sale. During the 12-month period after the Sale, assuming the notice
of termination described in Section 5.2.1 above was not given, the Employee's
employment may be terminated by the Company (which, for purposes of this Section
5.2.2 and Section 5.2.3 below, shall mean the Company
3
<PAGE> 4
or its successor) for Cause at any time and may be terminated without Cause by
the Company only if such termination is effective on the date 12 months after
the Effective Date of the Sale. Such termination, whether with or without Cause,
must be effected by giving the Employee at least 14 days prior written notice.
Employee benefits will continue, and the Employee's options and shares of Common
Stock will continue to vest, during the 12-month period after the Effective Date
of the Sale so long as the Employee's employment is not terminated for Cause.
5.2.3 Consulting Obligations. If the Employee's employment
is terminated upon the Sale as described in Section 5.2.1 above or is terminated
by the Company without Cause during the 12-month period after the Effective Date
of the Sale as described in Section 5.2.2 above, the Employee will be obligated
to hold himself available to consult, at the request of the Company and on such
projects within the Employee's professional expertise as the Company shall
designate, during the 12-month period following the first anniversary of the
Effective Date. Such services will be rendered for up to 10 hours per month and
will be paid an hourly rate equal to $300 for each hour actually worked, payable
monthly, as earned, in accordance with the Company's normal payroll policy in
effect from time to time. For so long as the Employee's consulting obligation is
not terminated for Cause, each of his options and shares will continue to vest
while the consulting arrangement is in effect, the Board having determined that
the Employee will be performing substantial services for the Company during that
time. The Employee's services as a consultant may be terminated by the Company
for Cause upon 14 days advance written notice.
5.2.4 Supersede Other Rights, Unless Greater. Subject to
any greater rights granted to Employee under any Award, this provision will
supersede and replace any other provision for accelerated vesting that applies
to such Award held by the Employee, whether such Award is now granted or is
granted in the future and whether such Award is now owned or will be owned in
the future.
5.3 Termination of Awards on a Transaction. Except as provided in
this Section 5 and provided that the successor corporation (if any) does not
assume, replace, convert or substitute or pay for all outstanding Awards as
provided in Section 5.1 above, in the event of a Transaction, such Awards will
expire on such event at such time and on such conditions as the Board shall
determine upon 20 days advance written notice to Employee.
5.4 Other Treatment of Awards. Subject to any greater rights
granted to Employee under the foregoing provisions of this Section 5, in the
event of the occurrence of any Transaction, any outstanding Awards will be
treated as provided in the applicable agreement or plan of merger,
consolidation, dissolution, liquidation, sale of assets or other "corporate
transaction. "
6. Collateral Agreements. Employee and the Company acknowledge that the
Confidentiality Agreement previously entered into between Employee and the
Company will continue in full force and effect in accordance with its terms
irrespective of any termination of this Agreement.
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<PAGE> 5
7. General Provisions.
7.1 Withholding. All sums payable to Employee under this
Agreement shall be reduced by all federal, state, local and other withholding
and similar taxes and payments required by applicable law.
7.2 Notices. All notices required under this Agreement shall be
in writing and shall be deemed to have been duly given when delivered personally
or mailed by certified mail, return receipt requested, postage prepaid, to the
address of the relevant party as set forth below such party's signature hereto,
or as may be changed by notice given hereafter in accordance with the provisions
of this Section 7.2.
7.3 Arbitration. Employee and the Company shall submit to
binding arbitration in any controversy or claim arising out of, or relating to,
this Agreement or any breach hereof, provided, however, that the Company retains
its right to, and shall not be prohibited, limited or in any other way
restricted from, seeking or obtaining equitable relief from a court having
jurisdiction over the parties. Such arbitration shall be conducted in accordance
with the Rules of the American Arbitration Association in effect at that time,
and judgment upon the determination or award rendered by the arbitrator may be
entered in any court having jurisdiction thereof.
7.4 Enforceability. If any provision of this Agreement shall be
found by any arbitrator or court of competent jurisdiction to be invalid. or
unenforceable, the parties hereby waive such provision to the extent that it is
found to be invalid or unenforceable and to the extent that to do so would not
deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect. Remedies provided for in this
Agreement are cumulative and are in addition to any other right or remedy
granted to any party by contract, at law, in equity or otherwise. ,
7.5 No Waiver. The failure by either party at any time to
require performance or compliance by the other of any of its obligations or
agreements shall in no way affect the right to require such performance or
compliance at any time thereafter. The waiver by either party of a breach of any
provision hereof shall not be taken or held to be a waiver of any preceding or
succeeding breach of such provision or any other provision of this Agreement. No
waiver of any kind shall be effective or binding, unless it is in writing and is
signed by the party against whom such waiver is sought to be enforced.
7.6 Assignment. This Agreement and all rights hereunder are
personal to Employee and may not be transferred or assigned by Employee at any
time. The Company may assign its rights, together with its obligations
hereunder, to any parent, subsidiary, affiliate or successor, in connection with
any sale, transfer or other disposition of all or substantially all of its
business and assets, provided, however, that any such assignee assumes the
Company's obli-
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<PAGE> 6
gations hereunder. This Agreement shall be binding upon, and inure to the
benefit of, the permitted successors and representatives of the respective
parties hereto.
7.7 Entire Agreement; amendment. This Agreement constitutes the
entire and only agreement between the parties relating to employment of Employee
with the Company, and supersedes and cancels any and all previous contracts,
arrangements or understandings with respect thereto. This Agreement may be
amended, modified, superseded, canceled, renewed or extended only by an
agreement in writing executed by both parties hereto.
7.8 General Interpretation. The headings contained in this
Agreement are for reference purposes only and shall in no way affect the meaning
or interpretation of this Agreement. In this Agreement, the singular includes
the plural, the plural included the singular, and the masculine gender includes
both male and female referents. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original but all of which,
taken together, constitute one and the same agreement. This Agreement and the
rights and obligations of the, parties hereto shall be construed in accordance
with the laws of the State of California, without giving effect to the
principles of conflict of laws.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first written above.
EMPLOYEE:___________________ AG ASSOCIATES, INC.
____________________________ By:______________________________________________
(Signature) Dr. Arnon Gat, Chairman, CEO
Address:____________________ Address: 4425 Fortran Drive
San Jose, California 95134
____________________________ Attn: President
6
<PAGE> 1
EXHIBIT 10.49
CONSENT OF LANDLORD
TO PROPOSED SUBLEASE
Subject to the conditions set forth herein, the undersigned (sometimes
referred to herein as the "Landlord") hereby consents to the attached Sublease
Agreement (defined below) entered into on or about August 25, 1997, between 3Dfx
Interactive, a California corporation ("Sublessor") and AG Associates, a
California corporation ("Sublessee"), and all its terms (the "Sublease
Agreement"). This Consent does not release or discharge Sublessor from any
liability as lessee under that certain Lease dated August 7, 1996, between South
Bay/Fortran, a California limited partnership, Landlord's predecessor in
interest, and Sublessor (the "Lease") including, without limitation the
obligation to pay rent. This consent is granted by Landlord subject to the
following terms and conditions:
1. Sublessee shall not assign the Sublease Agreement nor sublet the
premises described in the Sublease Agreement (the "Subleased Premises") in whole
or part; and shall not permit Sublessee's interest in the Sublease Agreement to
be vested in any third party by operation of law or otherwise.
2. This Consent shall not be deemed to be a consent to any subsequent
assignment or subletting. Sublessor shall not make any subsequent amendment to
the Sublease Agreement without Landlord's prior written consent, which consent
shall not be unreasonably withheld. Landlord shall not be deemed to have waived
any rights under the Lease. by virtue of this Consent.
3. The Sublease Agreement is in all respects subordinate to the terms of
the Lease. Insofar as the specific terms of the Sublease Agreement purport to
amend or modify or are in conflict with the specific terms of the Lease, the
terms of the Lease shall control. Landlord assumes no liability whatsoever on
account of anything contained in the Sublease Agreement.
4. Any rights under the Sublease Agreement may be enforced only against
Sublessor, and Sublessee shall have no right to enforce any of Sublessor's
rights under the Lease against Landlord by virtue of the Sublease Agreement,
this Consent, or otherwise.
5. Sublessor shall pay in addition to all other amounts due Landlord
under the Lease, the sum of (i) $200 (which sum represents the reasonable costs
incurred by Landlord in connection with the review of the Sublease Agreement and
the processing of this Consent thereto, and (ii) the amount, if any, which
represents fifty percent (50%) of the positive difference between the rent
received by Sublessor under the Sublease and the rent payable by Sublessor to
Landlord under the Lease for the Sublease Premises.
IN WITNESS WHEREOF, the undersigned has executed this Consent of
Landlord as of this lst day of September, 1997.
LANDLORD:
CARRAMERICA REALTY CORPORATION,
a Maryland corporation
By:_______________________________
Its: Managing Director
<PAGE> 2
SUBLEASE AGREEMENT
1. Parties. This Sublease Agreement (Sublease") is entered into by and
between 3Dfx Interactive, a California corporation (Sublessor"), and AG
Associates, a California corporation ("Sublessee"), as a sublease under that
certain lease dated for reference purposes only August 7, 1996 entered into by
and between South Bay/Fortran, a California Limited Partnership predecessor to
Carr Realty Corporation, a Maryland corporation, as Landlord ('Lessor"), and
Sublessor, as Tenant (the "Lease"). The Lease and all Exhibits thereto is
attached hereto as Exhibit "A.".
2. Provisions Constituting Sublease.
(a). Subordination: Default Under Master Lease. This Sublease is
subject and subordinate to all of the terms and conditions of the Lease, and to
the matters to which the Lease is subject and subordinate in accordance with its
terms. Sublessee shall assume and perform the obligations of Sublessor as
"Tenant' in the Lease, to the extent said terms and conditions are applicable to
the Premises subleased pursuant to this Sublease. Sublessee shall not commit or
permit its agents, employees, contractors, or invitees to commit any act or
omission which shall violate any term or condition of the Lease. In the event of
the termination of Sublessors interest as Tenant under the Lease for any reason
other than a voluntary termination negotiated between Lessor and Sublessor which
is not otherwise permitted under the terms of the Lease, then this Sublease
shall terminate coincidentally therewith without any liability of Sublessor to
Sublessee. Sublessor shall not voluntarily commit or permit its agents,
employees, contractors, or invitees to commit any act or omission which shall
materially violate any term or condition of the Lease.
(b). Provisions Constituting Sublease. All of the terms and
conditions contained in the Lease are incorporated herein, except for Sections
2, 3,4A, 4B, 4C, 4F, 4G, 23, 24, 37-39C,39D,and39L. For purposes of this
Sublease, with respect to those sections incorporated from the Lease, all
references to "Landlord" and "Tenant' shall be deemed to be references to
"Sublessor" and "Sublessee,' respectively; all references to the "Lease" shall
be deemed to be references to this "Sublease;" and all references to "Premises!'
shall be deemed to be references to the Premises as defined under this Sublease.
The foregoing notwithstanding, all references to "Landlord" in Sections 7A, 7B,
7C, 8B, 8C, 10A, 10B, 10C, 11, 13, 27, and 38A shall mean and refer to the
"Lessor" hereunder (except with respect to any payments to be made by Sublessee,
which shall be made directly to Sublessor and not Lessor); all references to
"Landlord" in Sections 6, the last paragraph of 7B, 8A, 8E, 9, 14, 18, 19, 21,
25, 28, 32, 35, 38B-H, 39F, 39G, 391, 39J, 39K, and 39N of the Lease shall mean
and refer to both "Sublessor" and "Lessor" hereunder. Those provisions
incorporated into this Sublease from the Lease, together with the paragraphs set
out in this Sublease, shall be the complete terms and conditions of the
Sublease.
3. Premises. Sublessor leases to Sublessee and Sublessee hires from
Sublessor the following described premises, together with appurtenances,
situated in the City of San Jose, County of Santa Clara, State of California:
four thousand nine hundred fifty-nine (4,959) square feet of warehouse space
(the "Premises") situated in that certain building located at: 4435 Fortran
Court, San Jose, California (the "Building"), and more particularly illustrated
on the plan attached hereto as Exhibit "B." The Building is located on a larger
parcel containing other buildings.
4. Rental.
(a) Base Rent. Sublessee shall pay to Sublessor at 4435 Fortran
Court, San Jose, CA Attn: Mr. Gary Martin, CFO as monthly base rent ("Rent") for
the Premises in advance on the first day of each calendar month of the term of
this Sublease without deduction, offset, prior notice or demand, in lawful money
of the United States, the sum of Four Thousand Nine Hundred Fifty-nine Dollars
and No Cents ($4,959.00). If the Commencement Date (defined in Section 5 below)
is not the first day of the month or if the Sublease termination date is not the
last day of the month, a prorated monthly installment shall be paid for the
fractional month during which the Sublease commences and/or terminates at the
rate of one-thirtieth (1/30th) thereof per day.
August 20, 1997
<PAGE> 3
(b) Additional Rent. Sublessee shall timely pay to Sublessor all
charges, costs expenses, and other sums which Sublessee is required to timely
pay hereunder together with all interest and charges that may accrue thereon and
all payments due under the provisions of the Lease, as incorporated herein,
together with all interest and charges that may accrue thereon, and all damages,
costs and expenses which Sublessor may incur by reason of any default by
Sublessee (collectively, "Additional Rent"). Any payments or charges due in
accordance with the provisions of the Lease, as incorporated herein, shall be
due in the same manner, upon the same terms and conditions and at the same time
as required under the Lease, except that payment shall be made to Sublessor.
In the event of nonpayment by Sublessee of any Additional Rent,
Sublessor shall have all rights and remedies with respect thereto as Sublessor
has for nonpayment of Rent. The term "Rentals" as used in this Sublease shall
mean Rent and Additional Rent.
(c) Security Deposit. The provisions of Section 5 of the Lease
shall apply except that Sublessee, as Tenant, shall deposit with Sublessor the
sum of Four Thousand Nine Hundred Fifty-nine Dollars and No Cents ($4,959.00) as
the security deposit.
(d) Sublessee's Prorata Share. The provisions of Section 7B to the
contrary notwithstanding, as of the Commencement Date, Sublessee's Prorata Share
is six and thirty-seven hundredths percent (6.37%).
5. Term. The term of this Sublease ("Sublease Term") shall commence on
August 15, 1997 ('Commencement Date!') and shall terminate at 5:00 p.m. PDT on
August 14, 1998, unless sooner terminated pursuant to the terms of this Sublease
or the Lease.
If Sublessee takes possession of the Premises Nor to the Commencement
Date, Sublessee shall do so subject to all of the terms, covenants, and
conditions hereof and shall pay Rentals for the period from the date of
possession until the Commencement Date at the same Rentals as those prescribed
for the first month of the Sublease Term prorated at the rate of one-thirtieth
(1 /30th) thereof per day.
6. Use. The provisions of Section 6 of the Lease notwithstanding,
Sublessee shall only use the Premises for shipping, receiving, and warehouse
use, and for no other purpose, without Sublessor's Nor written consent.
Sublessee's business shall be established and conducted throughout the Sublease
Term hereof in a first class manner. Sublessee shall not do or suffer anything
to be done upon the Premises which will cause injury to the Premises or the
Building. No use shall be made of the Premises which will in any way impair the
efficient operation of the sprinkler system (if any) within the Building.
Sublessee shall not leave the Premises vacant for more than twenty (20)
consecutive days during the Sublease Term. Sublessee shall not use or permit the
use of the Premises or any part thereof for any purpose which will increase the
existing rate of insurance upon the Building, or cause a cancellation of any
insurance policy covering the Building or any part thereof. If any act on the
part of Sublessee or use of the Premises by Sublessee shall cause, directly or
indirectly, any increase of Sublessor's insurance expense, said additional
expense shall be paid by Sublessee to Sublessor upon demand. No such payment by
Sublessee shall limit Sublessor in the exercise of any other rights or remedies,
or constitute a waiver of Sublessor's right to require Sublessee to discontinue
such act or use.
7. Notices. Any notice or demand required or desired to be given under
this Sublease shall be in writing addressed to the party to be served at the
address set forth below and shall be (i) personally served, or (ii) deposited
with the United States Postal Service as first class, registered or certified
mail, return receipt requested, and postage prepaid, or (iii) delivered by a
national overnight courier service, or (iv) sent by facsimile provided such
notice is also sent by one of the other forms of delivery set forth in (i),
(ii), or (iii) above. Such notice shall be deemed delivered if personally served
or sent by facsimile on the date of such personal service or facsimile
transmission, if given by mail, on the date set forth on the return receipt, but
in no event longer than forty-eight (48) hours following the time when such
notice was deposited in the United States mail, or if sent by overnight courier
service on the next business day following the date deposited with such courier.
The parties may change its address by giving notice of
August 20,1997 2
<PAGE> 4
such new address in accordance with this section. The parties agree that any
notice required pursuant to California Civil Code Section 1946 or California
Code of Civil Procedure Section 1161 and 1161(a) may be served to the address
below as Tenant's primary residence and in the foregoing manner, and if so
served, shall constitute proper service of process under said statutory
provisions. Sublessee shall send to Sublessor a copy of all notices and other
communications it shall send to or receive from Lessor within twenty-four (24)
hours of delivery or receipt, as the case may be.
SUBLESSEE: SUBLESSOR:
AG Associates 3Dfx Interactive
4425 Fortran Drive 4435 Fortran Court
San Jose, CA 95134-2300 San Jose, CA 95134
Attn: Ms. Anita Gat Attn: Mr. Gary Martin, CFO/VP Admin.
Fax: (408) 935-2700 Fax: (408) 262-8874
LESSOR: WITH A COPY TO:
Carr Realty Corporation Carr Realty Corporation
1820 Gateway Drive, Suite 107 1700 Pennsylvania Avenue, NW
San Mateo, CA 94404 Washington DC 20006
Attn: Mr. Byron Woodworth Attn: Leasing Administration
Fax: (650) 655-6803
8. Utilities. The provisions of Section 9 of the Lease to the contrary
notwithstanding, Sublessee shall pay to Sublessor on a monthly basis with the
payment of Rent following written demand therefore, Sublessee's Prorata Share of
all water, gas, light, heat, power, electricity, trash pick-up, sewer charges
and any and all other services supplied to or consumed on the Premises, which
are not separately
metered, and all taxes and surcharges thereon.
9. Damage and Destruction. Sublessor shall have no obligation to
rebuild, restore or repair any of the Premises in the event of any damage or
destruction thereto, Sublessor and Sublessee acknowledging that such obligation
is Lessor's pursuant to Section 16 of the Lease. If Lessor elects to terminate
the Lease pursuant to the terms and conditions of Section 16 of the Lease, this
Sublease shall terminate concurrently therewith without any liability of
Sublessor to Sublessee.
If Sublessor is entitled to terminate the Lease pursuant to Section 16
thereof, and Sublessor elects to so terminate the Lease, then this Sublease
shall terminate concurrently with the termination of the Lease. Sublessee hereby
waives the provisions of Section 1932, Subdivision 2, and Section 1933,
Subdivision 4, of the California Civil Code, as amended from time to time, and
the provisions of any similar law hereinafter enacted, which relate to the
termination of the hiring of a thing upon its substantial damage and
destruction. In the event of damage to the Premises which does not result in the
termination of this Sublease, Rent and Additional Rent shall be reduced
proportionately in the same proportion and for the same period that Monthly
Installments (defined in Section 4A. of the Lease) and Additional Rent (defined
in Section 4E of the Lease) for the Premises (defined in Section 2 of the Lease)
is reduced pursuant to Section 16 of the Lease. Sublessee shall not be entitled
to any compensation or damages from Sublessor or Lessor for loss of Sublessee's
property or any inconvenience or annoyance caused by such damage and destruction
or repair and restoration.
10. Condemnation. If Lessor elects to terminate the Lease pursuant to
the terms and conditions of Section 17 of the Lease, this Sublease shall
terminate concurrently therewith without any liability of Sublessor to
Sublessee.
If Sublessor is entitled to terminate the Lease pursuant to Section 17
thereof, and Sublessor elects to so terminate the Lease, then this Sublease
shall terminate concurrently with the termination of the Lease. Sublessee shall
have no right to any part of any condemnation award.
August 20,1997 3
<PAGE> 5
11. Condition of Premises. Sublessor shall not be required to make any
alterations, additions or improvements to the Premises and the Premises shall be
leased to Sublessee in an "as-is" condition, without representation or warranty,
actual or implied, on the part of Sublessor or Sublessors agents,
representatives, officers, or employees as to the suitability of the Premises
for Sublessee's use.
12. Maintenance. The provisions of Section 10B of the Lease to the
contrary notwithstanding, Sublessor shall maintain in effect the HVAC service
contract and shall make any repairs required in connection therewith, Sublessee
shall pay to Sublessor Sublessee's Prorata Share of any costs arising in
connection with the maintenance or repair of the HVAC within fifteen (15) days
following receipt of written demand for payment from Sublessor. The reference to
Landlord in the last paragraph of Section 10B of the Lease shall refer to
"Lessor". The provisions of the Lease to the contrary notwithstanding, (a)
Sublessee shall not make any alterations, additions, or modifications to the
Premises without the prior written consent of Sublessor, and (b) Except as
expressly agreed in this Sublease, Sublessor shall have no obligation to repair
or replace all or any part of the Premises it being understood by the parties
that such obligations are Lessors under the Lease or Sublessee's under this
Sublease. In the event Lessor fails to maintain, repair or otherwise provide
those services required to be performed by Lessor under the Lease with respect
to the Premises, Sublessor, following written notice by Sublessee, shall request
such performance by Lessor.
In the event Sublessor incurs any costs in connection with the
replacement of the HVAC as provided in Section 10C of the Lease, Sublessee shall
pay to Sublessor within thirty (30) days after receipt of billing, as Additional
Rent, its Prorata Share of a portion of the cost of the HVAC replacement, which
portion shall be calculated by multiplying such replacement cost by a percentage
expressed as a fraction the numerator of shall be the number of calendar months
remaining in the Sublease Term at the time of replacement of the HVAC and the
denominator shall be the number of calendar months in the useful life to the
HVAC
13. Common Areas. The provisions of Section 11 to the contrary
notwithstanding, Sublessee shall have no right to use any of the parking space
located in the Common Area. The reference to Landlord in the last paragraph of
Section 11 shall refer to Lessor.
14. Attorneys' Fees. In the event any party shall bring any action,
arbitration proceeding or legal proceeding alleging a breach of any provision of
this Sublease, to recover rent, to terminate this Sublease, or to enforce,
protect, determine or establish any term or covenant of this Sublease or the
rights or duties hereunder of either party, the prevailing party shall be
entitled to recover from the non-prevailing party as part of such action or
proceeding, or in a separate action for that purpose brought within one year
from the determination of such proceeding, reasonable attorneys! fees, expert
witness fees, court costs and other reasonable expenses incurred by the
prevailing party. In the event that Sublessor shall be required to retain
counsel to enforce any provision of this Sublease, and if Sublessee shall
thereafter cure (or desire to cure) such default, Sublessor shall be
conclusively deemed the prevailing party and Sublessee shall pay to Sublessor
all attorneys' fees, expert witness fees, court costs and other reasonable
expenses so incurred by Sublessor promptly upon demand. Sublessor may enforce
this provision by either (i) requiring Sublessee to pay such fees and costs as a
condition to curing his default or (ii) bringing a separate action to enforce
such payment, it being agreed by and between Sublessor and Sublessee that
Sublessee's failure to pay such fees and costs upon demand shall constitute a
breach of this Sublease in the same manner as a failure by Sublessee to pay the
Rent, giving Sublessor the same rights and remedies as if Sublessee failed to
pay the Rent.
15. Compliance with Laws. It is the intent of the parties to this
Sublease that Sublessee shall comply with all laws, rules, and regulations as
provided in the Lease, including without limitation, as provided in Section 6
and 20 of the Lease, but that any costs arising in connection with such
compliance shall be governed by this Section 15 as follows:
If during the Sublease Term any structural or non-structural alteration,
addition, or change of any sort to all or any portion of the Building is
required by law, regulation, ordinance or order of any public agency (a) as a
result of Sublessee's particular use of the Premises or Sublessee's application
for a permit or governmental approval or Sublessees construction or installation
of improvements or modification of the Premises, then Sublessee shall make the
same at its sole cost and expense, or (b) as a result of Sublessor's particular
use of
August 20,1997 4
<PAGE> 6
the Building or Sublessor's application for a permit or governmental approval or
Sublessor's construction or installation of improvements or modification of the
Building, then Sublessor shall make the same at its sole cost and expense, or
(c) for any reason other than as set forth in (a) or (b) above, then Sublessor
shall make the same pursuant to the terms of Section 13 of the Lease, and
Sublessee shall reimburse Sublessor for its Prorata Share of such costs.
16. Effectiveness of Lease. Sublessor, to its actual knowledge without
any investigation or inquiry, represents to Sublessee that as of the effective
date of this Sublease (i) the Lease attached hereto as EXHIBIT A is the entire
agreement between Lessor and Sublessor with respect to the Premises and the
Lease has not been amended or modified except as expressly set forth in this
Sublease, (ii) the Lease is in full force and effect, and (iii) neither Lessor
or Sublessor is in material breach of any term, covenant, condition or provision
of the Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Sublease as of
the date first set forth above.
SUBLESSOR: SUBLESSEE:
3Dfx Interactive, a California AG Associates,
corporation,
By:_____________________________ By:_____________________________
Gary Martin, CFO/VP Admin. Its:_____________________________
Dated: August 25, 199797 Dated: August 8/25, 1997
The undersigned, Lessor under the Lease attached as Exhibit "A", hereby
consents to the subletting of the premises described herein on the terms and
conditions contained in this Sublease. This consent shall apply only to this
Sublease and shall not be deemed to be a consent to any other sublease. By
consenting to this Sublease, Lessor shall not be deemed to have waived any of
its rights under the Lease as to the Tenant.
LESSOR:
Dated:________________________ Carr Realty Corporation
By:_____________________________
Its:_____________________________
August 20, 1997 5
<PAGE> 7
LEASE AGREEMENT
1. Parties. This Lease, dated for reference purposes only, August 7,
1996, ie made by and between South Bay/Fortran, a California limited
partnership, ("Landlord"), and 3Dfx interactive, a California corporation
("Tenant")
2. Premises. Landlord hereby leases to Tenant and Tenant hereby leases
from Landlord, upon the terms and conditions hereinafter set forth, those
certain premises (the "Premises") presently known, as of the date of this Lease,
as 4435 Fortran Court, situated in the City of San Jose, County of Santa Clara,
State of California, described as follows: for purposes of this Lease, the
rentable square footage area of the Building shall be deemed to be approximately
seventy-seven thousand eight hundred five (77,805) square feet (the "Building"),
as shown cross-hatched on the site plan (the "Site Plan') attached hereto as
Exhibit "A". The Building is located on a larger parcel "(the "Parcel")
containing other buildings (the "Buildings") as shown on the Site Plan, which
Parcel is described in Exhibit "B" attached hereto. In the event Landlord
subdivides the Parcel in the future into two (2) or more legal parcels, the term
"Parcel" shall thereafter refer to the legal parcel on which the Premises are
located. Landlord shall not be required to make any alterations, additions or
improvements to the Premises and the Premises shall be leased to Tenant in an
"as-is" condition, except Landlord shall complete, at Landlord's expense, minor,
previously planned, structural improvements and modif ications required by the
Americans with Disabilities Act (ADA) with regard to the existing Premises.
Landlord shall not be responsible to pay for the cost of any improvements
required to comply with ADA which is a result of any work of improvement to the
Premises initiated or completed by Tenant. If Landlord's Work is not completed
prior to Commencement Date, Tenant shall cooperate with Landlord and Landlord's
contractor in the performance of Landlord's Work. To the extent Landlord's work
interferes with Tenant I a use of the premises, the Monthly Installment of rent
shall be reduced during the period of such interference in proportion to the
square footage of the area of the Premises which is not usable by Tenant during
the performance of Landlord's Work.
3. Term. The term of this Lease ("Lease Term") shall be for ten (10)
years, commencing on the earlier of (i) May 1 1997 or (ii) the date of
termination of the existing lease between Landlord and Reply Corporation (the
"Commencement Date") , and ending ten (10) years thereafter, unless sooner
terminated pursuant to any provision hereof . Notwithstanding said scheduled
Commencement
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<PAGE> 8
Date, if for any reason Landlord cannot deliver possession of the Premises to
Tenant on said date, Landlord shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease or the obligations of
Tenant hereunder, but in such case Tenant shall not be obligated to pay rent
until possession of the Premises is tendered to Tenant and the commencement and
termination dates of this Lease shall be revised to conform to the date of
Landlord's delivery of possession.
4. Rent.
A. Time of Payment. Tenant shall pay to Landlord as rent for the
Premises the respective sums specified in Paragraphs 4.13 and 4.C below (the
"Monthly Installment") each month in advance on the first day of each calendar
month, without deduction or of offset prior notice or demand, commencing on the
Commencement Date and continuing through the term of this Lease, together with
such additional rents as are payable by Tenant to Landlord under the terms of
this Lease. The Monthly Installment for any period during the Lease Term which
period is less than one (1) full month shall be a prorata portion of the Monthly
Installment based upon a thirty (30) day month. .
B. Monthly Installment. The initial Monthly Installment of rent
payable each month during the f irst (1st) through the twenty-fourth (24th)
months of the Lease Term shall be the sum of Seventy Thousand Twenty-five and
no/100ths Dollars ($70,025.00) per month.
C. Rental Adjustments. The Monthly Installment of rent payable
each month shall increase during the Lease Term as follows:
(a) Commencing on the twenty-fifth (25th) month of the
Lease Term and continuing through the forty-eighth (48th) month Of the Lease
Term, the Monthly Installment of rent payable each month shall be Seventy-seven
Thousand Eight Hundred Five and no/100ths Dollars ($77,805.00).
(b) Commencing an the forty-ninth (49th) month of the Lease
Term and continuing through the seventy-second (72nd) month of the Lease Term,
the monthly Installment of rent payable each month shall be Eighty-five Thousand
Five Hundred Eighty-six and no/100ths Dollars ($85,586.00).
(c) Commencing on the seventy-third (73rd) month of the
Lease Term and continuing through the ninety-sixth (96th) month, the Monthly
Installment of rent payable each month shall be Ninety-three Thousand Three
Hundred Sixty-six and no/100ths Dollars ($93,366.00) .
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<PAGE> 9
(d) Commencing on the ninety-seventh month (97th) and
continuing through the one hundred and twentieth (120th) month, the Monthly
Installment of rent payable each month shall be one Hundred One Thousand One
Hundred Forty-seven and no/100ths Dollars ($101,147.00).
D. Late Charge. Tenant acknowledges that late payment by Tenant
to Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed on
Landlord by the terms of any mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or any other sum due from Tenant shall
not be received by Landlord within ten (10) days after such amount shall be due,
Tenant shall pay to Landlord, as additional rent, a late charge equal to five
percent (511) of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant.
E. Additional Rent. All taxes, insurance premiums, Common Area
Charges, late charges, costs and expenses which Tenant is required to pay
hereunder, together with all interest and penalties that may accrue thereon in
the event of Tenant's failure to pay such amounts, and all reasonable damages,
costs and attorneys' fees and expenses which Landlord may incur by reason of any
default of Tenant or failure on Tenant's part to comply with the terms of this
Lease, shall be deemed to be additional rent ("Additional Rent") and shall be
paid in addition to the Monthly Installment of rent, and, in the event of
nonpayment of the Monthly Installment of rent.
F. Place of Payment. Rent shall be payable in lawful money of the
United States of America to Landlord at 511 Division Street, Campbell CA, or to
such other person(s) or at such other place(s) as Landlord may designate in
writing.
G. Advance Payment. Concurrently with the execution of this
Lease, Tenant shall pay to Landlord the sum of Seventy Thousand Twenty-Five
Dollars ($70,025.00) to be applied to the Monthly Installment of rent first
accruing under this Lease.
5. Security Deposit. Tenant shall deposit the sum of Seventy Thousand
Twenty-Five Dollars ($70,025.00) (the "Security Deposit") upon execution of this
Lease, to secure the faithful performance by Tenant of each term, covenant and
condition of this Lease. on each date that the Monthly Installment of rent is
increased pursuant to Paragraph 4-C above, Tenant shall deposit with Landlord an
additional sum to increase the Security Deposit to an amount equal to the
Monthly Installment of rent then payable
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<PAGE> 10
under the Lease. If Tenant shall at any time fail to make any payment or fail to
keep or perform any term, covenant or condition on its part to be made or
performed or kept under this Lease, Landlord may, but shall not be obligated to
and without waiving or releasing Tenant from any obligation under this Lease,
use, apply or retain the whole or any part of the Security Deposit (A) to the
extent of any sum due to Landlord; (B) to make any required payment on Tenant's
behalf; or (C) to compensate Landlord for any loss, damages, attorneys, fees or
expense sustained by Landlord due to Tenant's default. In such event, Tenant
shall, within five (5) days of written demand by Landlord, remit to Landlord
sufficient funds to restore the Security Deposit to its original sum. No
interest shall accrue on the Security Deposit. Landlord shall not be required to
keep the Security Deposit separate from its general funds. Should Tenant comply
with all the terms, covenants, and conditions of this Lease and at the end of
the term of this Lease leave the Premises in the condition required by this
Lease, then said Security Deposit, less any sums owing to Landlord, shall be
returned to Tenant within thirty (30) days after the termination of this Lease
and vacancy of the Premises by Tenant.
6. Use of Premises. Tenant shall use the Premises only in conformance
with applicable governmental laws, regulations, rules and ordinances for the
purpose of general office, sales, manufacturing, assembly, distribution and
warehousing of electronics materials and for no other purpose. Tenant shall
indemnify, protect, defend, and hold Landlord harmless against any loss,
expense, damage, attorneys' fees or liability arising out of the failure of
Tenant to comply with any applicable law. Tenant shall not commit or suffer to
be committed, any waste upon the Premises, or any nuisance, or other acts or
things which may disturb the quiet enjoyment of any other tenant in the
buildings adjacent to the Premises, or allow any sale by auction upon the
Premises, or allow the Premises to be used for any unlawful purpose, or place
any loads upon the floor, walls or ceiling which endanger the structure, 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, except in trash containers placed
inside exterior enclosures designated for that purpose by Landlord. 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 proper. Tenant shall
strictly comply with the provisions of Paragraph 39 below.
7. Taxes and Assessments.
A. Tenant's Property. Tenant shall pay before delinquency any
and all taxes and assessments, license fees and public charges levied, assessed
or imposed upon or against Tenant's
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<PAGE> 11
fixtures, equipment, furnishings, furniture, appliances and personal property
installed or located on or within the Premises. Tenant shall petition the
applicable taxing authority to cause said fixtures, equipment, furnishings,
furniture, appliances and personal property to be assessed and billed separately
from the real property of Landlord. If any of Tenant's said personal property
shall be assessed with Landlord's real property, Tenant shall pay Landlord the
taxes attributable to Tenant within ten (10) days after receipt of a written
statement from Landlord setting forth the taxes applicable to Tenant's property.
B. Property Taxes. Tenant shall pay, as additional rent, its, Pro
Rata Share (as defined below) of all Property Taxes levied or assessed with
respect to the land comprising the Parcel and with respect to all buildings and
improvements located on the Parcel which become due or accrue during the term of
this Lease. Tenant shall pay such Property Taxes to Landlord within thirty (30)
days after receipt of billing. Provided that Landlord bills Tenant at least
thirty (30) days prior to the delinquency date of such Property Taxes, Tenant
shall pay such Property Taxes to Landlord at least ten (10) days prior to the
delinquency date, and if Tenant fails to do so, Tenant shall reimburse Landlord,
on demand, for all interest, late fees and penalties that the taxing authority
charges Landlord. In the event Landlord's mortgagee requires an impound for
Property Taxes, then on the first day of each month during the Lease Term,
Tenant shall pay Landlord one twelfth (1/12) of its annual share of such
Property Taxes. Tenant's liability hereunder shall be prorated to reflect the
Commencement and termination dates of this Lease. If Landlord elects to pay any
assessment imposed against the Premises or the Building in full (which
assessment could have been paid in installments) , the amount of any such.
assessment to be included in the calculation of Tenant's Pro Rata Share of
Property Taxes shall be limited to the installments of the principal and
interest which would have become due during the Lease Term had Landlord elected
to pay such assessment installments over the longest period available to
Landlord.
As used in this Lease, the term "Tenant's Pro Rata Share" shall mean a
fraction, expressed as a percentage, the numerator of which is the number of
square feet of floor space contained in the Premises and the denominator of
which is the number of square feet of floor space contained in all of the
Buildings located on the Parcel. As of the Commencement Date, Tenant's Pro Rata
Share is twenty-five and eighty-five hundredths percent (25.85%).
For the purpose of this Lease, "Property Taxes" means and includes all
taxes, assessments (including, but not limited to, assessments for public
improvements or benefits), taxes based on vehicles, utilizing parking areas,
taxes based or measured by the rent paid, payable or received under this Lease,
taxes on the value, use, or occupancy of the Premises, the Buildings and/or the
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Parcel, Environmental Surcharges, and all other governmental impositions and
charges of every kind and nature whatsoever, whether or not customary or within
the contemplation of the parties hereto and regardless of whether the same shall
be extraordinary or ordinary, general or special, unforeseen or foreseen, or
similar or dissimilar to any of the foregoing which, at any time during the
Lease Term, shall be applicable to the Premises, the Buildings and/or the Parcel
or assessed, levied or imposed upon the Premises, the Buildings and/or the
Parcel, or become due and payable and a lien or charge upon the Premises, the
Buildings and/or the Parcel, or any part thereof, under or by virtue of any
present or future laws, statutes, ordinances, regulations or other requirements
of any governmental authority whatsoever. The term "Environmental Surcharges"
shall mean and include any and all expenses, taxes, charges or penalties imposed
by the Federal Department of Energy, the 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. The term "Property Taxes" shall not include any federal, state or local
net income, estate, or inheritance tax imposed on Landlord.
C. Proposition 13 Limitation. If, during the first three (3)
years of the Lease Term, Landlord voluntarily sells or transfers ownership of
the Premises, and if such sale or transfer causes Property Taxes to be increased
to such an extent that Tenant's Pro Rata Share of Property Taxes would exceed
$1.20 per square foot of rentable area of the Premises per year, then in such
case, and only in such case, Tenant shall not be obligated to pay that portion
of Tenant's Pro Rata Share of Property Taxes which (i) exceeds $1.20 per square
foot of rentable area of the Premises per year, and (ii) is attributable to the
increase in Property Taxes caused by such sale or transfer; provided, however,
that the foregoing limitation on Tenant's obligation to pay Property Taxes shall
not apply to increases in Property Taxes resulting from (i) a transfer caused by
foreclosure (whether resulting from a judicial foreclosure, non-judicial
foreclosure or deed-in-lieu thereof) of a first mortgage or first deed of trust
encumbering the Premises or (ii) any sale or transfer occurring after the first
three (3) years of the Lease Term.
D. Other Taxes. Tenant shall, as additional rent, pay or
reimburse Landlord for any tax based upon, allocable to, or measured by the area
of the Premises or the Buildings or the Parcel; or by the rent paid, payable or
received under this Lease; any tax upon or with respect to the possession,
leasing, operation, any tax upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy of the
Premises or any portion thereof; any privilege tax, excise tax,
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business and occupation tax, gross receipts tax, sales and/or use tax, water
tax, sewer tax, employee tax, occupational license tax imposed upon Landlord or
Tenant with respect to the Premises; any tax upon this transaction or any
document to which Tenant is a party creating or transferring an interest or an
estate in the Premises.
8. Insurance.
A. Indemnity. Tenant agrees to indemnify, protect and defend
Landlord against and hold Landlord harmless from any and all claims, causes of
action, judgements, obligations or liabilities, and all reasonable expenses
incurred in investigating or resisting the same (including reasonable attorneys,
fees), on account of, or arising out of, the operation, maintenance, use or
occupancy of the Premises and all areas appurtenant thereto. This Lease is made
on the express understanding that Landlord shall not be liable for, or suffer
loss by reason of, injury to person or property, from whatever cause (except for
negligence or willful misconduct of Landlord or its Agents) , which in any way
may be connected with the operation, use or occupancy of the Premises
specifically including, without limitation, any liability for injury to the
person or property of Tenant, its agents, officers, employees, licensees and
invitees.
B. Liability Insurance. Tenant shall, at Tenant's expense, obtain
and keep in force during the term of this Lease a policy of comprehensive public
liability insurance insuring Landlord and Tenant against claims and liabilities
arising out of the operation, use, or occupancy of the Premises and all areas
appurtenant thereto, including parking areas. Such insurance shall be in an
amount of not less than Three Million Dollars ($3,000,000.00) for bodily injury
or death as a result of any one occurrence and Five Hundred Thousand Dollars
($500,000.00) for damage to property as a result of any one occurrence. The
insurance shall be with companies approved by Landlord, which approval Landlord
agrees not to withhold unreasonably. Tenant shall deliver to Landlord, prior to
possession, and at least thirty (30) days prior to the expiration thereof, a
certificate of insurance evidencing the existence of the policy required
hereunder and such certificate shall certify that the policy (1) names Landlord
as an additional insured, (2) shall not be cancelled or altered without thirty
(30) days prior written notice to Landlord, (3) insures performance of the
indemnity set forth in Paragraph 8.A above, (4) the coverage is primary and any
coverage by Landlord is in excess thereto and (5) contains a cross-liability
endorsement.
Landlord may maintain a policy or policies of comprehensive general
liability insurance insuring Landlord (and such others as are designated by
Landlord) , against liability for personal injury, bodily injury, death and
damage to property occurring or resulting
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from an occurrence in, on or about the Premises or the Common Area, with such
limits of coverage as Landlord may from time to time determine are reasonably
necessary for its protection. The cost of any such liability. insurance
maintained by Landlord shall be a Common Area Charge and Tenant shall pay, as
Additional Rent, Tenant's Pro Rata Share of such cost to Landlord as provided in
Paragraph 12 below.
C. Property Insurance. Landlord shall, as a Common Area Charge,
obtain and keep in force during the term of this Lease a policy or policies of
insurance covering loss or damage to the Premises and the Buildings, in the
amount of the full replacement value thereof, providing protection against those
perils included within the classification of "all risk" insurance, plus a policy
of rental income insurance in the amount of one hundred percent (100%) of twelve
(12) months rent (including, without limitation, sums payable as Additional
Rent), plus, at Landlord's option, flood insurance and earthquake insurance, and
any other coverages which may be required from time to time by Landlord's
mortgagee. Tenant shall have no interest in nor any right to the proceeds of any
insurance procured by Landlord on the Premises. The full cost of such insurance
procured and maintained by Landlord shall be a Common Area Charge and Tenant
shall pay, as Additional Rent, Tenant's Pro Rata Share of such cost to Landlord
pursuant to Paragraph 12 below. Tenant acknowledges that such insurance procured
by Landlord shall contain a deductible which reduces Tenant's cost for such
insurance and, in the event of loss or damage, Tenant shall be required to pay
to Landlord the amount of such deductible.
Notwithstanding the foregoing, Tenant shall not be required to pay that
portion of the annual cost of earthquake insurance which exceeds forty cents
($0.40) per $100-00 of insured value.
D. Tenant's Insurance. Tenant acknowledges that the insurance to
be maintained by Landlord on the Premises pursuant to Subparagraph C above will
not insure any of Tenant's property. Accordingly, Tenant, at Tenant's own
expense, shall maintain in full force and effect on all of its fixtures,
equipment, leasehold improvements and personal property in the Premises, a
policy of "All Risk' coverage insurance to the extent of at least ninety percent
(90%) of their insurable value.
E. Mutual Waiver of Subrogation. Tenant and Landlord hereby
mutually waive their respective rights of recovery against each other of any
loss of or damage to the property of either party, to the extent such loss or
damage is insured by 'any insurance policy required to be maintained by this
Lease or otherwise in force at the time of such loss or damage. Each party shall
obtain any special endorsements, if required by the insurer, whereby the insurer
waives its right of subrogation against the
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other party hereto. The provisions of this Subparagraph 8.E shall not apply in
those instances in which the waiver of subrogation would cause either party's
insurance coverage to be voided or otherwise made uncollectible; provided,
however, if either party's insurance carrier is not willing to waive its right
of subrogation or if either party's insurance carrier notifies such party that
such waiver of subrogation would cause such party's insurance coverage to be
voided or made uncollectible, such party shall notify the other party of such
fact, in which case, the other party shall not be required to obtain such waiver
of subrogation from its insurance carrier. Each party shall use its best efforts
to obtain such waiver of subrogation from its insurance carrier.
9. Utilities. Tenant shall pay for all water, gas, light, heat, power,
electricity, telephone, trash pick-up, sewer charges and all other services
supplied to or consumed on the Premises, and all taxes and surcharges thereon.
In addition, the cost of any utility services supplied to the Common Area or not
separately metered to the Premises shall be a Common Area Charge and Tenant
shall pay its share of such costs to Landlord as provided in Paragraph 12 below.
Landlord shall not take any action or knowingly consent to any action by a third
party which cuts-off or interrupts utility service to the Premises.
10. Repairs and Maintenance.
A. Landlord's Repairs. Subject to provisions of Paragraph 16,
Landlord shall (i) keep and maintain the exterior roof, structural elements and
exterior walls of the Building in good order and repair and (ii) repair any
defects in Landlord's Work (as defined in Paragraph 2 above) , including the
failure to perform Landlord's Work in compliance with applicable Laws in effect
at the time of such construction. Landlord shall not, however, be required to
maintain, repair or replace the interior surface of exterior walls, nor shall
Landlord be required to maintain, repair or replace windows, doors, skylights or
plate glass. Landlord shall have no obligation to make repairs under this
Subparagraph until a reasonable time after receipt of written notice from Tenant
of the need for such repairs. Tenant shall reimburse Landlord, as Additional
Rent, within thirty (30) days after receipt of billing, for the cost of such
repairs and maintenance which are the obligation of Landlord hereunder, provided
however, that Tenant shall not be required to reimburse Landlord for the (i)
cost of maintenance and repairs of the structural elements of the Building
unless such maintenance or repair is required because of the negligence or
willful misconduct of Tenant or its employees, agents or invitees; or (ii) any
amounts paid or payable by Landlord in connection with the repair of any defects
in Landlord's Work (as defined in Paragraph 2); or (iii) any cost for which
Landlord is reimbursed by any third party, including, without limitation, by
insurance or condemnation
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proceeds; or (iv) any amounts paid or payable by Landlord in connection with the
repairs or maintenance necessitated by (a) negligence or willful misconduct of
Landlord or its Agents; (b) Landlord's failure to perform any of the Landlord's
obligations under this Lease; or (c) the occurrence of any damage or destruction
or condemnation as provided in Paragraphs 16 and 17, respectively (except with
respect to payment by Tenant of Tenant's Pro Rata Share of any deductible) ; and
(v) costs pertaining to Hazardous Materials (as defined in Paragraph 39) which
are not the responsibility of Tenant under Paragraph 39 of this Lease. As used
herein, the term "structural elements of the Building" shall mean and be limited
to the foundation, footings, floor slab (but not flooring), structural walls,
and roof structure (but not roofing or roof membrane).
B. Tenant's Repairs. Except as expressly provided in Subparagraph
A above, Tenant shall, at its sole cost, keep and maintain the entire Premises
and every part thereof, including without limitation, the windows, window
frames, plate glass, glazing, skylights, truck doors, doors and all door
hardware, the walls and partitions, and the electrical, plumbing, lighting,
heating, ventilating and air conditioning systems and equipment in good order,
condition and repair. The term "repair' shall include replacements, restorations
and/or renewals when necessary as well as painting. Tenant's obligation shall
extend to all alterations, additions and improvements to the Premises, and all
fixtures and appurtenances therein and thereto. Tenant shall, at all times
during the Lease Term, have in effect a service contract for the maintenance of
the heating, ventilating and air conditioning ("HVAC") equipment with an HVAC
repair and maintenance contractor approved by Landlord. The HVAC service
contract shall provide for periodic inspection and servicing at least once every
three (3) months during the term hereof, and Tenant shall provide Landlord with
a copy of such contract and all periodic service reports. Tenant shall not be
responsible for any repairs or maintenance to the Premises necessitated by (i)
the negligence or willful misconduct of Landlord or its agents; (ii) the failure
of Landlord to perform any of Landlord's obligations under this Lease; or (iii)
the occurrence of any damage or destruction or condemnation as provided in
Paragraphs 16 and 17, respectively, except as otherwise provided in Paragraph 16
below. Should Tenant fail to make repairs required of Tenant hereunder within
thirty (30) days after receipt of written notice of the need thereof from
Landlord to Tenant, or if such repairs cannot be made within such thirty (30)
day period, then such additional time as may be necessary to make such repairs
provided Tenant has commenced such repairs within the thirty (30) day period and
is diligently pursuing the repairs to completion, Landlord, in addition to all
other remedies available hereunder or by law and without waiving any alternative
remedies, may, following written notice to Tenant, make the same, and in that
event, Tenant shall reimburse Landlord as Additional Rent for the reasonable
cost
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of such maintenance or repairs within fifteen (15) days after receipt of written
demand from Landlord.
Landlord shall have no maintenance or repair obligations whatsoever with
respect to the Premises except as expressly provided in Paragraphs 10.A, 10.C
and 11. Tenant hereby expressly waives the provisions of Subsection 1 of Section
1932 and Sections 1941 and 1942 of the Civil Code of California and all rights
to make repairs at the expense of Landlord as provided in Section 1942 of said
Civil Code. Landlord shall not be liable for any damages arising from any act or
neglect of any other tenant, if any, of the Buildings or the Parcel.
C. Replacement of Roof Membrane and/or HVAC Equipment.
Notwithstanding anything contained in Paragraph 10.A above to the contrary, if
the roof membrane of the Building requires replacement during the Lease Term,
then Landlord shall perform such replacement and Tenant shall pay to Landlord,
within thirty (30) days after receipt of billing, as Additional Rent, a fraction
of the cost of such replacement, which fraction shall have as its numerator the
number of calendar months then remaining in the Lease Term at the time of such
replacement and shall have as its denominator one hundred eighty (180) months.
Notwithstanding anything in Subparagraph 10.B to the contrary, if any HVAC
equipment requires replacement during the first year of the Lease Term, then
Landlord shall perform such replacement at its sole cost and expense. if any
HVAC equipment requires replacement after the first year of the Lease Term, then
Tenant shall perform such replacement at its sole cost and expense.
11. Common Area. Subject to the terms and conditions of this Lease and
such rules and regulations as Landlord may from time to time prescribe, Tenant
and Tenant's employees, invitees and customers shall, in common with other
occupants of the Parcel, and their respective employees, invitees and customers,
and others entitled to the use thereof, have the nonexclusive right to use the
access roads, parking areas and facilities provided and designated by Landlord
for the general use and convenience of the occupants of the Parcel, which areas
and facilities are referred to herein as "Common Area. This right shall
terminate upon the termination of this Lease. Landlord reserves the right from
time to time to make changes in the shape, size, location, amount and extent of
the Common Area provided that no area located outside the Parcel shall be
included within the Common Areas and provided that such changes do not adversely
affect Tenant's access to or use of the Premises. Landlord further reserves the
right to promulgate such reasonable rules and regulations relating to the use of
the Common Area, and any part or parts thereof, as Landlord may deem appropriate
for the best interest of the occupants of the Parcel. The rules and regulations
shall be binding upon Tenant upon delivery of a copy of them to Tenant, and
Tenant shall abide by them and cooperate in
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their observance. Such rules and regulations may be amended by Landlord from
time to time, with or without advance notice, and all amendments shall be
effective upon delivery of a copy of them to Tenant. Tenant shall have the
non-exclusive use of no more than three hundred (300) of the parking spaces in
the Common Area as designated from time to time by Landlord. Tenant shall not at
any time park or permit the parking of Tenant's trucks or other vehicles, or the
trucks or other vehicles of others, adjacent to loading areas so as to interfere
in any way with the use of such areas, nor shall Tenant at any time park or
permit the parking of Tenant's vehicles or trucks, or the vehicles or trucks of
Tenant's suppliers or others, in any portion of the Common Area not designated
by Landlord for such use by Tenant. Tenant shall not abandon any inoperative
vehicles or equipment on any portion of the Common Area. Tenant shall make no
alterations, improvements or additions to the Common Area.
Landlord shall operate, manage, insure, maintain and repair the Common
Area in good order, condition and repair. The manner in which the Common Area
shall be maintained and the expenditures for such maintenance shall be at the
reasonable business discretion of Landlord. The cost of such repair,
maintenance, operation, insurance and management, including without limitation,
maintenance and repair of landscaping, irrigation systems, paving, sidewalks,
fences, and lighting, shall be a Common Area Charge and Tenant shall pay to
Landlord its share of such costs as provided in Paragraph 12 below.
12. Common Area Charges. Tenant shall pay to Landlord, as Additional
Rent, within thirty (30) days after receipt of billing but not more often than
once each calendar month, an amount equal to its Pro Rata Share of the Common
Area Charges as defined in Paragraphs 8.B, 8.C, 9, 11 and 13 of this Lease.
Tenant acknowledges and agrees that the Common Area Charges shall include an
additional three percent (3%) of the actual expenditures in order to compensate
Landlord for accounting, management and processing services. Tenant shall have
the right to review Landlord's books and records in order to confirm that only
those charges which are permitted under this Lease are being passed through to
Tenant provided that Tenant completes such review within ninety (90) days after
receipt of a billing invoice from Landlord.
13. Alterations. Tenant shall not make, or suffer to be made, any
alterations, improvements or additions in, on, about or to the Premises or any
part thereof, without the prior written consent of Landlord and without a valid
building permit issued by the appropriate governmental authority; provided,
however, Tenant may make non-structural alterations to the interior of the
Premises costing less than Fifty Thousand Dollars ($50,000.00) without obtaining
the prior written consent of Landlord provided that such alterations do not
change the use of the Premises. As a condition
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to giving such consent, Landlord may require that Tenant agree to remove any
such alterations, improvements or additions at the termination of this Lease,
and to restore the Premises to their prior condition. Unless Landlord requires
that Tenant remove any such alterations, improvement or addition, any
alteration, addition or improvement to the Premises, except movable furniture
and trade fixtures not affixed to the Premises, shall become the property of
Landlord upon termination of the Lease and shall remain upon and be surrendered
with the Premises at the termination of this Lease. Without limiting the
generality of the foregoing, all heating, lighting, electrical (including all
wiring, conduit, outlets, drops, buss ducts, main and subpanels), air
conditioning, partitioning, drapery, and carpet installations made by Tenant
regardless of how affixed to the Premises, together with all other additions,
alterations and improvements that have become an integral part of the Building,
shall be and become the property of the Landlord upon termination of the Lease,
and shall not be deemed trade fixtures, and shall remain upon and be surrendered
with the Premises at the termination of this Lease.
If, during the Lease Term, any non-structural alteration, addition or
change of any sort to all or any portion of the Premises (other than the fire
sprinkler system) is required by law, regulation, ordinance or order of any
public agency, Tenant shall promptly make the same at its sole cost and expense.
If, during the Lease Term, any structural or fire sprinkler system alteration,
addition or change of any sort to all or any portion of the Premises (other than
the fire sprinkler system) is required by law, regulation, ordinance or order of
any public agency because of (i) Tenant's particular use or change of use of the
Premises, (ii) Tenant's application for a new permit or governmental approval,
or (iii) Tenant's construction or installation of leasehold improvements or
trade fixtures, Tenant shall promptly make the same at its sole cost and
expense. If, during the Lease Term, any structural or fire sprinkler system
alteration, addition or change of any sort to all or any portion of the Premises
is required by law, regulation, ordinance or order for any reason other than
those described in the immediately preceding sentence, Landlord shall promptly
make the same at its sole cost and expense. If, during the Lease Term, any
alteration, addition or change to the Common Area is required by law,
regulation, ordinance or order of any public agency, Landlord shall make the
same and the cost of such alteration, addition or change shall be a Common Area
Charge and Tenant shall pay its share of said cost to Landlord as provided in
Paragraph 12 above.
14. Acceptance of the Premises. By entry and taking possession of the
Premises pursuant to this Lease, Tenant accepts the Premises as being in good
and sanitary order, condition and repair and accepts the Premises in their
condition existing as of the date of such entry, and Tenant further accepts the
tenant
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improvements to be constructed by Landlord, if any, as being Completed in
accordance with the plans and specifications for such improvements, except for
punch list items. Tenant acknowledges that neither the Landlord nor Landlord's
agents has made any representation or warranty as to the suitability of the
Premises to the conduct of Tenant's business. Any agreements, warranties or
representations not expressly contained herein shall in no way bind either
Landlord or Tenant, and Landlord and Tenant expressly waive all claims for
damages by reason of any statement, representation, warranty, promise or
agreement, if any, not contained in this Lease. This Lease constitutes the
entire understanding between the parties hereto and no addition to, or
modification of, any term or provision of this Lease shall be effective until
set forth in a writing signed by both Landlord and Tenant.
15. Default.
A. Events of Default. A breach of this Lease shall exist if any
of the following events (hereinafter referred to as "Event of Default") shall
occur:
1. Default in the payment when due of any installment of
rent or other payment required to be made by Tenant hereunder, where such
default shall not have been cured within three (3) days after written notice of
such default is given to Tenant;
2. Tenant's failure to perform any other term, covenant or
condition contained in this Lease where such failure shall have continued for
thirty (30) days after written notice of such failure is given to Tenant;
provided, however, if such failure reasonably requires more than thirty (30)
days to cure, Tenant shall not be deemed in default if Tenant commences to cure
such failure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion;
3. Tenant's assignment of its assets for the benefit of its
creditors;
4. The sequestration of, attachment of, or execution on,
any substantial part of the property of Tenant or on any property essential to
the conduct of Tenant's business shall have occurred and Tenant shall have
failed to obtain a return or release of such property within thirty (30) days
thereafter, or prior to sale pursuant to such sequestration, attachment or levy,
whichever is earlier;
5. Tenant or any guarantor of Tenant's obligations
hereunder shall commence any case, proceeding or other action seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any law
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relating to bankruptcy, insolvency, reorganization or relief of debtors, or seek
appointment of a receiver, trustee, custodian, or other similar official for it
or for all or any substantial part of its property;
6. Tenant or any such guarantor shall take any corporate
action to authorize any of the actions set forth in Clause 5 above; or
7. Any case, proceeding or other action against Tenant or
any guarantor of Tenant's obligations hereunder shall be commenced seeking to
have an order for relief entered against it as debtor, or seeking
reorganization, arrangement, adjustment, liquidation, dissolution or composition
of it or its debts under any law relating to bankruptcy, insolvency,
reorganization or relief of debtors, or seeking appointment of a receiver,
trustee, custodian or other similar official for it or for all or any
substantial part of its property, and such case, proceeding or other action (i)
results in the entry of an order for relief against it which is not fully stayed
within seven (7) business days after the entry thereof or (ii) remains
undismissed for a period of forty-five (45) days.
B. Remedies. Upon any Event of Default, Landlord shall have the
following remedies, in addition to all other rights and remedies provided by
law, to which Landlord may resort cumulatively, or in the alternative:
1. Recovery of Rent. Landlord shall be entitled to keep
this Lease in full force and effect (whether or not Tenant shall have abandoned
the Premises) and to enforce all of its rights and remedies under this Lease,
including the right to recover rent and other sums as they become due, plus
interest at the Permitted Rate (as defined in Paragraph 33 below) from the due
date of each installment of rent or other sum until paid.
2. Termination. Landlord may terminate this Lease by
giving Tenant written notice of termination. On the giving of the notice all of
Tenant's rights in the Premises and the Building and Parcel shall terminate.
Upon the giving of the notice of termination, Tenant shall surrender and vacate
the Premises in the condition required by Paragraph 34, and Landlord may
re-enter and take possession of the Premises and all the remaining improvements
or property and eject Tenant or any of Tenant's subtenants, assignees or other
person or persons claiming any right under or through Tenant or eject some and
not others or eject none. This Lease may also be terminated by a judgement
specifically providing for termination. Any termination under this paragraph
shall not release Tenant from the payment of any sum then due Landlord or from
any claim for damages or rent previously accrued or then accruing against
Tenant. In no event shall any one or more of the
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following actions by Landlord constitute a termination of this Lease:
a. maintenance and preservation of the Premises;
b. efforts to relet the Premises;
c. appointment of a receiver in order to protect
Landlord's interest hereunder;
d. consent to any subletting of the Premises or
assignment of this Lease by Tenant, whether pursuant to provisions hereof
concerning subletting and assignment or otherwise; or
e. any other action by Landlord or Landlord's
agents intended to mitigate the adverse effects from any breach of this Lease by
Tenant.
3. Damages. In the event this Lease is terminated pursuant
to Subparagraph 15.B.2 above, or otherwise, Landlord shall be entitled to
damages in the following sums:
a. the worth at the time of award of the unpaid
rent which has been earned at the time of termination; plus
b. the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus
c. the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that Tenant proves could be reasonably
avoided; and
d. any other amount necessary to compensate
Landlord for all detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease, or which in the ordinary course of things
would be likely to result therefrom including, without limitation, the
following: (i) expenses for cleaning, repairing or restoring the Premises; (ii)
real estate broker's fees, advertising costs and other expenses of reletting the
Premises fairly allocable to the balance of the Lease Term; (iii) costs of
carrying the Premises such as taxes and insurance premiums thereon, utilities
and security precautions; (iv) expenses in retaking possession of the Premises;
and (v) attorneys, fees and court costs,
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e. The "worth at the time of award" of the
amounts referred to in Subparagraphs (a) and (b) of this Paragraph, is computed
by allowing interest at the Permitted Rate. The "worth at the time of award" of
the amounts referred to in Subparagraph (c) of this Paragraph is computed by
discounting such amount at the discount rate of the Federal Reserve Board of San
Francisco at the time of award plus one percent (1%). The term "rent" as used in
this Paragraph shall include all sums required to be paid by Tenant to Landlord
pursuant to the terms of this Lease.
C. Landlord's Default. In the event of failure by Landlord to
perform any of its obligation under this Lease, Tenant shall notify Landlord of
such failure. Landlord shall have thirty (30) days within which to cure such
failure or if such failure is Of such a nature that it cannot be reasonably
cured within said thirty (30) day period, then such additional time as may be
required to cure such failure provided Tenant has commenced to cure such failure
within the thirty (30) day period and diligently pursues such cure to
completion. If Landlord fails to cure or commence to cure, as the case may be,
such failure within the time set forth above, then Tenant, following written
notice from Tenant to Landlord, may, but shall not be obligated to, perform such
obligations. Landlord shall reimburse Tenant for all reasonable costs incurred
by Tenant pursuant to the previous sentence within fifteen (15) days following
written demand thereof by Landlord.
16. Destruction. In the event that any portion of the Premises are
destroyed or damaged by an uninsured peril, Landlord or Tenant may, upon written
notice to the other, given within thirty (30) days after the occurrence of such
damage or destruction, elect to terminate this Lease; provided, however, that
either party may, within thirty (30) days after receipt of such notice, elect to
make any required repairs and/or restoration at such party's sole cost and
expense, in which event this Lease shall remain in full force and effect, and
the party having made such election to restore or repair shall thereafter
diligently proceed with such repairs and/or restoration. In the event neither
party elects to terminate this Lease as provided in the foregoing sentence, then
Landlord shall be deemed to have elected to restore or repair the Premises at
Landlord's sole cost and expense, in which event this Lease shall remain in full
force and effect and Landlord shall thereafter diligently proceed with such
repairs and/or restoration. For purposes of this paragraph, the term "uninsured
peril" shall not include a peril which would have been covered by Landlord if
Landlord had carried the insurance required under the terms of this Lease.
In the event the Premises are damaged or destroyed from any insured
peril to the extent of fifty percent (5011) or more of the then replacement cost
of the Premises, Landlord may, upon written notice to Tenant, given within
thirty (30) days after the
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occurrence of such damage or destruction, elect to terminate this Lease. If
Landlord does not give such notice in writing within such period, Landlord shall
be deemed to have elected to rebuild or restore the Premises, in which event
Landlord shall, at its expense, promptly rebuild or restore the Premises to
their condition prior to the damage or destruction and Tenant shall pay to
Landlord upon commencement of reconstruction the amount of any deductible from
the 'insurance policy.
In the event the Premises are damaged or destroyed from any insured
peril to the extent of less than fifty percent (50%) of the then replacement
cost of the Premises, Landlord shall, at Landlord's expense, promptly rebuild or
restore the Premises to their condition prior to the damage or destruction and
Tenant shall pay to Landlord upon commencement of reconstruction the amount of
any deductible from the insurance po licy.
In the event that, pursuant to the foregoing provisions, Landlord is to
rebuild or restore the Premises, Landlord shall, within thirty (30) days after
the occurrence of such damage or destruction, provide Tenant with written notice
of the time required for such repair or restoration. If such period is longer
than two hundred one hundred eighty (180) days from the issuance of a building
permit, Tenant may, within thirty (30) days after receipt of Landlord's notice,
elect to terminate the Lease by giving written notice to Landlord of such
election, whereupon the Lease shall immediately terminate. If the repairs or
restoration are not completed within two hundred seventy (270) days after the
date of the damage or destruction, Tenant may elect to terminate this Lease by
giving written notice to Landlord of such election, whereupon the Lease shall
immediately terminate. The period of time for Landlord to complete the repair or
restoration shall be extended for delays caused by the fault or neglect of
Tenant or because of acts of God, acts of publication, labor disputes, strikes
fires, freight embargoes, rainy or stormy weather, inability to obtain
materials, supplies or fuels, acts of contractors or subcontractors, or delay of
contractors or subcontractors due to such causes, or other contingencies beyond
the control of Landlord. Landlord's obligation to repair or restore the Premises
shall not include restoration of Tenant's trade fixtures, equipment,
merchandise, or any improvements, alterations or additions made by Tenant to the
Premises.
Landlord and Tenant shall each have the right to terminate this Lease if
(a) the damage to the Premises occurs at any time during the last eighteen (18)
months of the Lease Term and (b) it is estimated that the necessary repairs will
take more than sixty (60) days to complete from the date of the damage.
Unless this Lease is terminated pursuant to the foregoing provisions,
this Lease shall remain in full force and effect;
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provided, however, that during any period of repairs or restoration, rent and
all other amounts to be paid by Tenant on account of the Premises and this Lease
shall be abated in proportion to the area of the Premises rendered not
reasonably suitable for the conduct of Tenant's business thereon. Tenant hereby
expressly waives the provisions of Section 1932, Subdivision 2 and Section 1933,
Subdivision 4 of the California Civil Code.
17. Condemnation.
A. Definition of Terms. For the purposes of this Lease, the term
(1) "Taking" means a taking of the Premises or damage to the Premises related to
the exercise of the power of eminent domain and includes a voluntary conveyance,
in lieu of court proceedings, to any agency, authority, public utility, person
or corporate entity empowered to condemn property; (2) "Total Taking" means the
taking of the entire Premises or so much of the Premises as to prevent or
substantially impair the use thereof by Tenant for the uses herein specified;
provided, however, in no event shall a Taking of less than ten percent (10%) of
the Premises be deemed a Total Taking; (3) "Partial Taking" means the taking of
only a portion of the Premises which does not constitute a Total Taking; (4)
"Date of Taking" means the date upon which the title to the Premises, or a
portion thereof, passes to and vests in the condemnor or the effective date of
any order for possession if issued prior to the date title vests in the
condemnor; and (5) "Award" means the amount of any award made, consideration
paid, or damages ordered as a result of a Taking.
B. Rights. The parties agree that in the event of a Taking all
rights between them or in and to an Award shall be as set forth herein and
Tenant shall have no right to any Award except as set forth herein.
C. Total Taking. In the event of a Total Taking during the term
hereof (1) the rights of Tenant under the Lease and the leasehold estate of
Tenant in and to the Premises shall cease and terminate as of the Date of
Taking; (2) Landlord shall refund to Tenant any prepaid rent and any unapplied
Security Deposit; (3) Tenant shall pay Landlord any rent or charges due Landlord
under the Lease, each prorated as of the Date of Taking; (4) Tenant shall
receive from Landlord those portions of the Award attributable to (i) trade
fixtures of Tenant, (ii) unamortized value of leasehold improvements made to the
Premises by Tenant (amortized on a straight line basis over the Lease Term), and
(iii) good will and moving expenses of Tenant; and (5) the remainder of the
Award shall be paid to and be the property of Landlord.
D. Partial Taking. In the event of a Partial Taking during the
term hereof (1) the rights of Tenant under the Lease and leasehold estate of
Tenant in and to the portion of the Premises
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taken shall cease and terminate as of the Date of Taking; (2) from and after the
Date of Taking the Monthly Installment of rent shall be an amount equal to the
product obtained by multiplying the Monthly Installment of rent immediately
prior to the Taking by a. fraction, the numerator of which is the number of
square feet contained in the Premises after the Taking and the denominator of
which is the number of square feet contained in the Premises prior to the
Taking; (3) Tenant's Pro Rata Share shall be recalculated as provided in
Paragraph 8 above; and (4) Tenant shall receive from the Award the portions of
the Award attributable to (i) trade fixtures of Tenant; (ii) unamortized value
of leasehold improvements made to the Premises by Tenant; and (iii) good will of
Tenant and (iv) the remainder of the Award shall be paid to and be the property
of Landlord.
18. Mechanics' Lien. Tenant shall (A) pay for all labor and, services
performed for, materials used by or furnished to, Tenant or any contractor
employed by Tenant with respect to the Premises; (B) indemnify, defend, protect
and hold Landlord and the Premises harmless and free from any liens claims,
liabilities, demands, encumbrances, or judgements created or suffered by reason
of any labor or services performed for, materials used by or furnished to,
Tenant or any contractor employed by Tenant with respect to the Premises; (C)
give notice to Landlord in writing five (5) days prior to commencement of any
construction in the Premises or delivery of materials to be used in such
construction; and (D) permit Landlord to post a notice of nonresponsibility in
accordance with the statutory requirements of California Civil Code Section 3094
or any amendment thereof. In the event Tenant is required to post an improvement
bond with a public agency in connection with the above, Tenant agrees to include
Landlord as an additional obligee.
19. Inspection of the Premises. Tenant shall permit Landlord and its
agents to enter the Premises at any reasonable time for the purpose of
inspecting the same, performing Landlord's maintenance and repair
responsibilities, posting a notice of non-responsibility for alterations,
additions or repairs and at any time within ninety (90) days prior to expiration
of this Lease, to place upon the Premises, ordinary "For Lease" or "For Sale"
signs. Except in the event of an emergency, Landlord agrees that prior to any
such entry onto the Premises, Landlord shall (a) give at least twenty-four (24)
hours notice, (b) be accompanied by an employee of Tenant at all times while on
the Premises provided that Tenant provides such employee on a reasonable basis,
(c) comply with Tenant's reasonable security procedures, and (d) not
unreasonably interfere with Tenant's use of the Premises.
20. Compliance with Laws. Subject to the provisions of Paragraph 12
above, Tenant shall comply with all of the requirements of all municipal,
county, state and federal
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authorities now in force, or which may hereafter be in force, pertaining to the
use and occupancy of the Premises, and shall faithfully observe all municipal,
county, state and federal law, statutes or ordinances now in force or which may
hereafter be in force. The judgement of any court of competent jurisdiction or
the admission of Tenant in any action or proceeding against Tenant, whether
Landlord be a party thereto or not, that Tenant has violated any such ordinance
or statute in the use and occupancy of the Premises shall be conclusive of the
fact that such violation by Tenant has occurred.
21. Subordination. The following provisions shall govern the
relationship of this Lease to any underlying lease, mortgage or deed of trust
which now or hereafter affects the Premises, the Building and/or the Parcel, or
Landlord's interest or estate therein (the "Project") and any renewal,
modification, consolidation, replacement, or extension thereof (a "Security
Instrument").
A. Priority. This Lease is subject and subordinate to Security
Instruments existing as of the Commencement Date. However, if any Lender so
requires, this Lease shall become prior and superior to any such Security
Instrument. Tenant agrees to promptly execute a Subordination, Non-Disturbance
and Attornment Agreement with Landlord, s current Lender, Comerica Bank-Calif
ornia, in the form attached hereto as Exhibit "E" (the "Comerica SNA").
B. Subsequent Security Instruments. At Landlord' s election, this
Lease shall become subject and subordinate to any Security Instrument created
after the Commencement Date provided that the Lender holding such Security
Instrument agrees that in the event of foreclosure of the Security Instrument in
question, such Lender shall recognize the tenancy of Tenant on the terms and
conditions contained in this Lease so long as Tenant is not in default under
this Lease. Notwithstanding such subordination, Tenant's right to quiet
possession of the Premises shall not be disturbed so long as Tenant is not in
default and performs all of its obligations under this Lease, unless this Lease
is otherwise terminated pursuant to its terms.
C. Documents. Tenant shall execute any reasonable document or
instrument required by Landlord or any Lender to make this Lease either prior or
subordinate to a Security Instrument, which may include such other matters as
the Lender customarily requires in connection with such agreements, including
provisions that the Lender, if it succeeds to the interest of Landlord under
this Lease, shall not be (i) liable for any act or omission of any prior
landlord (including Landlord) , (ii) subject to any offsets or defenses which
Tenant may have against any prior landlord (including Landlord) , (iii) bound by
any rent or Additional Rent paid more than one (1) month in advance of its date
due under this
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Lease unless the Lender receives it from Landlord, (iv) liable for any defaults
on the part of Landlord occurring prior to the time that the Lender takes
possession of the Premises in connection with the enforcement of its Security
Instrument, (v) liable for the return of any Security Deposit unless such
deposit has been delivered to Lender, or (vi) bound by any agreement or
modification of the Lease made without the prior written consent of Lender.
Tenant's failure to execute any such document or instrument within twenty (20)
days after written demand therefor shall constitute a default by Tenant.
Tenant's obligation to execute and deliver any subordination agreement to any
future Lender shall be conditioned upon such Lender agreeing that in the event
of foreclosure of the Security Instrument in question, such Lender shall
recognize the tenancy of Tenant on the terms and conditions contained in this
Lease so long as Tenant is not in default under this Lease. Landlord shall not
request Tenant to execute a subordination agreement more often than two times in
a twelve (12) month period. Tenant agrees that any proposed subordination
agreement which is substantially similar to the Comerica SNA shall be deemed a
reasonable document or instrument.
D. Tenant's Attornment. Tenant shall attorn (1) to any purchaser
of the Premises at any foreclosure sale or private sale conducted pursuant to
any Security Instrument encumbering the Project; (2) to grantee or transferee
designated in any deed given in lieu of foreclosure; or (3) to the lessor under
any underlying ground lease should such ground lease be terminated.
E. Lender. The term "Lender" shall mean (1) any beneficiary,
mortgagee, secured party, or other holder of any deed of trust, mortgage, or
other written security device or agreement affecting the Project; and (2) any
lessor under any underlying lease under which Landlord holds its interest in the
Project.
22. Holding Over. This Lease shall terminate without further notice at
the expiration of the Lease Term. Any holding over by Tenant after expiration
shall not constitute a renewal or extension or give Tenant any rights in or to
the Premises except as expressly provided in this Lease. Any holding over after
the expiration with the consent of Landlord shall be construed to be a tenancy
from month to month, at one hundred fifty percent (150%) of the monthly rent for
the last month of the Lease Term, and shall otherwise be on the terms and
conditions herein specified insofar as applicable.
23. Notices. Any notice required or desired to be given under this Lease
shall be in writing with copies directed as indicated below and shall be
personally served, sent by overnight delivery service or given by mail. Any
notice given personally or by overnight delivery service shall be deemed given
on the date of delivery. Any notice given by mail shall be deemed to have been
given when forty-eight (48) hours have elapsed from the time such
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notice was deposited in the United States mails, certified and postage prepaid,
addressed to the party to be served with a copy as indicated herein at the last
address given by that party to the other party under the provisions of this
Paragraph. At this date of execution of this Lease, the address of Landlord is:
511 Division Street
Campbell CA 95008
and-the address of Tenant is;
3Dfx Interactive
411 Clyde Avenue
Mountain View, CA 94043
Attn: Mr. Gary Martin, CFO/VP Admin.
After the Commencement Date, the address of Tenant shall be at the Premises.
Either party may, by notice given in accordance with this paragraph, specify a
different address for notice purposes.
24. Attorneys' Fees. In the event either party shall bring any action or
legal proceeding for damages for any alleged breach of any provision of this
Lease, to recover rent or possession of the Premises, to terminate this Lease,
or to enforce, protect or establish any term or covenant of this Lease or right
or remedy of either party, the prevailing party shall be entitled to recover as
a part of such action or proceeding, reasonable attorneys, fees and court
costs, including attorneys, fees and costs for appeal, as may be fixed by the
court or jury. The term "prevailing party" shall mean the party who received
substantially the relief requested, whether by settlement, dismissal, summary
judgement, judgement, or otherwise.
25. Nonassignment.
A. Landlord's Consent Required. Tenant's interest in this Lease
is not assignable, by operation of law or otherwise, nor shall Tenant have the
right to sublet the Premises, transfer any interest of Tenant therein or
permit any use of the Premises by another party, without the prior written
consent of Landlord to such assignment, subletting, transfer or use, which
consent Landlord agrees not to withhold unreasonably subject to the provisions
of Subparagraph C below. A consent to one assignment, subletting, occupancy or
use by another party shall not be deemed to be a consent to any subsequent
assignment, subletting, occupancy or use by another party. Any assignment or
subletting without such consent shall be void and shall, at the option of
Landlord, terminate this Lease.
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Landlord's waiver or consent to any assignment or subletting hereunder
shall not relieve Tenant from any obligation under this Lease unless the consent
shall so provide.
B. Transferee Information Required. If Tenant desires to assign
its interest in this Lease or sublet the Premises, or transfer-any interest of
Tenant therein, or permit the use of the Premises by another party (hereinafter
collectively referred to as a "Transfer") , Tenant shall give Landlord at least
ten (10) days prior written notice of the proposed Transfer and of the terms of
such proposed Transfer, including, but not limited to, the name and legal
composition of the proposed transferee, a financial statement of the proposed
transferee, the nature of the proposed transferee's business to be carried on in
the Premises, the payment to be made or other consideration to be given to
Tenant on account of the Transfer, and such other pertinent information as may
be requested by Landlord, all in sufficient detail to enable Landlord to
evaluate the proposed Transfer and the prospective transferee.
C. Landlord's Rights. It is the intent of the parties hereto that
this Lease shall confer upon Tenant only the right to use and occupy the
Premises, and to exercise such other rights as are conferred upon Tenant by this
Lease. The parties agree that this Lease is not intended to have a bonus value
nor to serve as a vehicle whereby Tenant may profit by a future Transfer of this
Lease or the right to use or occupy the Premises as a result of any favorable
terms contained herein, or future changes in the market for leased space. It is
the intent of the parties that any such bonus value that may attach to this
Lease shall be and remain the exclusive property of Landlord. Accordingly, in
the event Tenant seeks to Transfer its interest in this Lease or the Premises,
Landlord shall have the following options, which may be exercised at its sole
choice without limiting Landlord in the exercise of any other right or remedy
which Landlord may have by reason of such proposed Transfer:
(1) Except as otherwise set forth in Paragraph 25.D below,
in the event of a proposed assignment of this Lease or a proposed sublease of
the entire Premises for the remaining Lease Term, Landlord may elect to
terminate this Lease effective as of the proposed effective date of such
proposed assignment or sublease and release Tenant from any further liability
hereunder accruing after such termination date by giving Tenant written notice
of such termination within twenty (20) days after receipt by Landlord of
Tenant's notice of intent to assign or sublease as provided above. If Landlord
makes such election to terminate this Lease, Tenant shall surrender the
Premises, in accordance with Paragraph 34, on or before the effective
termination date; or
(2) Landlord may consent to the proposed Transfer on the
condition that Tenant agrees to pay to Landlord, as
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Additional Rent, fifty percent (50%) of any and all rents or other consideration
(including key money) received by Tenant from the transferee by reason of such
Transfer in excess of the rent payable by Tenant to Landlord under this Lease
(less any brokerage commissions, tenant improvement costs, and advertising
expenses incurred by Tenant in connection with the Transfer) . Tenant expressly
agrees that the foregoing is a reasonable condition for obtaining Landlord's
consent to any Transfer; or
(3) Landlord may reasonably withhold its consent to the
proposed Transfer.
D. Permitted Transfers Notwithstanding the foregoing, Tenant may,
without Landlord's prior written consent -and without Subparagraph B above being
applicable, assign its interest in the Lease or sublet the Premises or a portion
thereof to (i) Tech Farm; (ii) a subsidiary, affiliate, division !or corporation
which controls or is Controlled by or under common control with Tenant; (iii) a
successor corporation related to Tenant by merger, consolidation, non-bankruptcy
reorganization or government action; or (iv) a purchaser of substantially all of
the Tenant's assets; provided that, in each instance described above, (a) the
transferee (other than in the case of a sublease) assumes the obligations of the
Tenant under this Lease in a written instrument delivered to Landlord; (b) the
transferor tenant remains liable as a primary obligor for the obligations of
Tenant under this Lease; and provided, further, in the case of (iii) and (iv)
above, the tangible net worth (determined in accordance with generally accepted
accounting principles) of the transferee tenant is no less than Tenant's
tangible net worth immediately prior to the date of such Transfer.
26. Successors. The covenants and agreements contained in this Lease
shall inure to the benef it of and be binding on the parties hereto and on their
respective heirs, successors and assigns (to the extent the Lease is
assignable).
27. Mortgagee Protection. In the event of any default on the part of
'Landlord, Tenant will give notice by registered or certified mail to any
beneficiary of a deed of trust or mortgagee of a mortgage encumbering the
Premises, whose address shall have been furnished to Tenant, and shall offer
such beneficiary or mortgagee a reasonable opportunity to cure the default,
including time to obtain possession of the Premises by power of sale or judicial
foreclosure, if such should prove necessary to effect a cure.
28 Landlord Loan or Sale Tenant agrees promptly following request by
Landlord to (A) execute and deliver to Landlord any documents, including
estoppel certificates presented to Tenant by Landlord, (i) certifying that this
Lease is unmodified and in full
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force and effect (or, if modified, specifying such modification and certifying
that the Lease as so modified is in full force and effect) 'and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of Landlord hereunder or specifying such defaults, if any, that are
claimed, and (iii) evidencing the status of the Lease as may be required either
by a lender making a loan to Landlord to be secured by a deed of trust or
mortgage covering the Premises or a purchaser of the Premises from Landlord and
(B) to deliver to Landlord the financial statement of Tenant with an opinion of
a certified public accountant, including a balance sheet and profit and loss
statement, for the last completed fiscal year all prepared in accordance with
generally accepted accounting principles consistently applied. Landlord agrees
to sign a confidentiality agreement with respect to Tenant's financial
statements whereby none of the information contained in the statements can be
released to any person or entity without first obtaining Tenant's consent and
such person or entity signs a similar confidential agreement, provided, however,
Landlord can release such information to its lender or potential lender to any
respective purchaser of the Premises provided such person signs a similar
confidentiality agreement. If Tenant becomes a public company, the financial
statements filed with the SEC as part of a 10Q or 10K shall satisfy the
foregoing requirement for delivery of a financial statement. Tenant's failure to
deliver an estoppel certificate promptly following such request shall be an
Event of Default under this Lease. Landlord shall not request Tenant to execute
an estoppel certificate more often than twice in any twelve (12) month period.
29. Surrender of Lease Not Merger. The voluntary or other surrender of
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases or
subtenants, or operate as an assignment to Landlord of any or all such subleases
or subtenants.
30. Waiver. The waiver by Landlord or Tenant of any breach of any term,
covenant or condition herein contained shall not be deemed to be a waiver of any
preceding or succeeding breach of the same or any other covenant or condition
herein contained.
31. General.
A. Captions. The captions and paragraph headings used in this
Lease are for the purposes of convenience only. They shall not be construed to
limit or extend the meaning of any part of this Lease, or be used to interpret
specific sections. The word (s) enclosed in quotation marks shall be construed
as defined terms for purposes of this Lease. As used in this Lease, the
masculine,
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feminine and neuter and the singular or plural number shall each be deemed to
include the other whenever the context so requires.
B. Definition of Landlord.The term "Landlord" as used in this
Lease,so far as the covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner at the time in
question of the fee title of the Premises, and in the event of any transfer or
transfers of the title of such fee, the Landlord herein named (and in case of
any subsequent transfers or conveyances, the then grantor)shall after the date
of such transfer or conveyance be freed and relieved of all liability with
respect to performance of any covenants or obligations on the part of Landlord
contained in this Lease,thereafter to be performed; provided that (i)any funds
in thehands of Landlord or the then grantor at the time of such transfer,in
which Tenant has an interest, shall be turned over to the grantee, and (ii) the
grantee assumes in writing the obligations of Landlord under this Lease to be
performed after the date of the transfer or conveyance.It is intended that the
covenants and obligations contained in this Lease on the part of Landlord shall,
subject as aforesaid, be binding upon each Landlord,its heirs,personal
representatives, successors and assigns only during its respective period of
ownership.
C. Time of Essence. Time is of the essence for the performance of
each term, covenant and condition of this Lease.
D. Severability. In case any one or more of the provisions
contained herein, except for the payment of rent, shall for any reason be held
to be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Lease, but this Lease shall be construed as if such invalid, illegal or
unenforceable provision had not been contained herein. This Lease shall be
construed and enforced in accordance with the laws of the State of California.
E. Joint and Several Liability. If Tenant is more than one person
or entity, each such person or entity shall be jointly and severally liable for
the obligations of Tenant hereunder.
F. Law. The term "law" shall mean any judicial decision, statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other requirement of any government agency or authority having jurisdiction over
the parties to this Lease or the Premises or both, in effect at the Commencement
Date of this Lease or any time during the Lease Term, including, without
limitation, any regulation, order, or policy of any quasi-official entity or
body (e.g., board of fire examiners, public utility or special district).
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G . Agent. As used herein the term "Agent" shall mean, with
respect to either Landlord or Tenant, its respective agents, employees,
contractors (and their subcontractors) , and invitees (and in the case of
Tenant, its subtenants).
32. Sign. Tenant shall not place or permit to be placed any sign or
decoration on the Parcel or the exterior of the Building without the prior
written consent of Landlord. T enant, upon written notice by Landlord, shall
immediately remove any sign or decoration that Tenant has placed or permitted to
be placed on the land or the exterior of the Building without the prior written
consent of Landlord, and if Tenant fails to so remove such sign or decoration
within five (5) days after Landlord's written notice, Landlord may enter upon
the Premises and remove said sign or decoration and Tenant agrees to pay
Landlord, as additional rent upon demand, the cost of such removal. At the
termination of this Lease, Tenant shall remove any sign which it has placed on
the Parcel or Building and shall repair any damage caused by the installation or
removal of such sign. Notwithstanding the foregoing, Tenant may.- at its sole
cost and expense, install its sign on the monument located on the Parcel in
front of the building provided Tenant obtains all necessary governmental permits
and complies with all governmental ordinances.
33. Interest on Past Due Obligations. Any Monthly Installment of rent or
any other sum due from Tenant under this Lease which is received by Landlord
after the date the same is due shall bear interest from said due date until
paid, at an annual rate equal to the lesser of (the "Permitted Rate") : (1) ten
percent (10%); or (2) five percent (5%) plus the rate established by the Federal
Reserve Bank of San Francisco, as of the twenty-fifth (25th) day of the month
immediately preceding the due date, on advances to member banks under Section 13
and 13 (a) of the Federal Reserve Act, as now in effect or hereafter from time
to time amended. Payment of such interest shall not excuse or cure any default
by Tenant. In addition, Tenant shall pay all costs and attorneys, fees incurred
by Landlord in collection of such amounts.
34. Surrender of the Premises. On the last day of the term hereof, or on
the sooner termination of this Lease, Tenant shall surrender the Premises to
Landlord in their condition existing as of the Commencement Date of this Lease,
ordinary wear and tear, fire or other casualty, and damage from the acts of God
excepted, with the air conditioning and heating equipment serviced and repaired
by a reputable and licensed service firm. Tenant shall remove all of Tenant's
personal property and trade fixtures from the Premises, and all property not so
removed shall be deemed abandoned by Tenant. Tenant, at its sole cost, shall
repair any damage to the Premises caused by the removal of Tenant's personal
property, machinery and equipment, which repair shall include, without
limitation, the patching and filling of holes and repair of
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structural damage. If the Premises are not so surrendered at the termination of
this Lease, Tenant shall indemnify, defend, protect. and hold Landlord harmless
from and against loss or liability resulting from delay by Tenant in so
surrendering the Premises including without limitation, any claims made by any
succeeding tenant or losses to Landlord due to lost opportunities to lease to
succeeding tenants.
35. Authority. The undersigned parties hereby warrant that they have
proper authority and are empowered to execute this Lease' on behalf of Landlord
and Tenant, respectively.
36. Public Record. This Lease is made subject to all matters of public
record affecting title to the property of which the Premises are a part.
37. Brokers. Landlord and Tenant each represent and warrant to the other
party that it has solely dealt with Richard B. Flynn and Grubb & Ellis
Commercial Real Estate respecting this transaction. Landlord shall pay a real
estate commission to Grubb & Ellis pursuant to the terms of a separate
agreement. Each party agrees to indemnify and hold the other harmless from and
against any brokerage commission or fee, obligation claim, damage (including
attorneys, fees) paid or incurred respecting any broker claim (other than Grubb
& Ellis) claiming through such party or with which/whom such party has dealt. It
is hereby acknowledged that one or more of Landlord's partners may be real
estate brokers.
38. Limitation on Landlord's Liability. . Tenant, for itself and its
successors and assigns (to the extent this Lease is assignable), hereby agrees
that in the event of any actual, or alleged, breach or default by Landlord under
this Lease that:
A) If, as a consequence of a default by Landlord under this
Lease, Tenant recovers a money judgment against Landlord, such judgment shall be
satisfied only with the proceeds of sale received upon execution of such
judgment and levied thereon against the right, title and interest of Landlord in
the Parcel and/or the Buildings, and out of rent or other income from such
property, and out of any insurance proceeds, and out of cash proceeds received
by Landlord from the prior sale or other disposition of all or any part of
Landlord's right, title or interest in the Parcel and/or the Buildings and no
partner or officer of any partner of Landlord shall be liable for any
deficiency.
B) No partner or officer of any partner of Landlord shall be sued
or named as a party in a suit or action (except as may be necessary to secure
jurisdiction of the partnership);
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C) No service of process shall be made against any partner of
Landlord (except as may be necessary to secure jurisdiction of the partnership);
D) No partner of Landlord shall be required to answer or
otherwise plead to any service of process;
E) No judgment will be taken against any partner of Landlord;
F) Any judgment taken against any partner of Landlord maybe
vacated and set aside at any time nunc pro tunc;
G) No writ of execution will ever be levied against the assets of
any partner of Landlord;
H) The covenants and agreements of Tenant set forth in this
Section 38 shall be enforceable by Landlord and any partner of Landlord.
39. Hazardous Material.
A. Definitions. As used herein, the term "Hazardous Material"
shall mean any substance: W the presence of which requires investigation or
remediation under any federal, state or local statutes, regulation, ordinance,
order, action, policy or common law; (ii) which is or becomes defined "hazardous
waste," "hazardous substance," pollutant or contaminant under any federal, state
or local statute, regulation, rule or ordinance or amendments thereto including,
without limitation, the Comprehensive Environmental Response, Compensation and
Liability Act (42 U.S.C. Section 9601 et seq.) and/or the Resource Conservation
and Recovery Act (42 U.S.C. Section 6901 et seq.) ; (iii) which is toxic,
explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is or becomes regulated by any
governmental authority, agency, department, commission, board, agency, or
instrumentality of the United States, the State of California or any political
subdivision thereof; (iv) the presence of which on the Premises causes or
threatens to cause a nuisance upon the Premises or to adjacent properties or
poses or threatens to pose a hazard to the health or saf ety of persons on or
about the Premises; (v) the presence of which on adjacent -properties could
constitute a trespass to Landlord or Tenant; (vi) without limitation which
contains gasoline, diesel fuel, or other petroleum hydrocarbons; (vii) without
limitation which contains polychlorinated biphenyls (PCBs) , asbestos or urea
formaldehyde foam insulation; or (viii) without limitation radon gas.
B. Landlord's Indemnity. Landlord shall indemnify, defend,
protect and hold Tenant harmless from and against all liabilities, claims,
penalties, fines, response costs and other
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expenses (including, but limited to, reasonable attorneys, fees and consultants'
fees and costs) arising out of, resulting from, or caused by any Hazardous
Material used, generated, discharged, transported to or from, stored or disposed
of by Landlord or its Agents in, on, under, over, through or about the Premises
and/or the surrounding real property.
C. Permitted Use. Subject to the compliance by Tenant with the
provisions of Subparagraphs D, E, F, G, I, J and K below, Tenant shall be
permitted to use and store on the Premises those Hazardous Materials listed in
Exhibit "C" attached hereto in the quantities attached set forth in Exhibit "C".
Tenant shall also be permitted to use and store on the Premises standard office
supplies in such quantities used in the normal course of general office use
without complying with the provisions of Subparagraph D below.
D. Hazardous Materials Management Plan. Prior to Tenant using,
handling, transporting or storing any Hazardous Material at or about the
Premises (including, without limitation, those listed in Exhibit "C") , Tenant
shall submit to Landlord a Hazardous Materials Management Plan ("HMMP") for
Landlord's review and approval, which approval shall not be unreasonably
withheld. The HMMP shall describe: (i) the quantities of each material to be
used, (ii) the purpose for which each material is to be used, (iii) the method
of storage of each material, (iv) the method of transporting each material to
and from the Premises and within the Premises, (v) the methods Tenant will
employ to monitor the use of the material and to detect any leaks or potential
hazards, and (vi) any other information any department of any governmental
entity (city, state or federal) requires prior to the issuance of any required
permit for the Premises or during Tenant's occupancy of the Premises. Landlord
may, but shall have no obligation to review and approve the foregoing
information and HMO, and such review and approval or failure to review and
approve shall not act as an estoppel or otherwise waive Landlord's rights under
this Lease or relieve Tenant of its obligations under this Lease. If Landlord
determines in good faith by inspection of the Premises or review of the HMMP
that the methods in use or described by Tenant do not meet standard industry
practices to prevent or eliminate the existence of environmental hazards, then
Tenant shall not use, handle, transport, or store such Hazardous Mat erials at
or about the Premises unless and until such methods are upgraded to standard
industry practices and added to an approved HMMP. Once approved by Landlord,
Tenant shall strictly comply with the HMMP and shall not change its use,
operations or procedures with respect to Hazardous Materials without submitting
an amended HMMP for Landlord's review and approval as provided above.
E. Use Restriction. Except as specifically allowed in
Subparagraph C above, Tenant shall not cause or permit any Hazardous Material to
be used, stored, generated, discharged,
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transported to or f rom, or disposed of in or about the Premises, or any other
land. or improvements in the vicinity of the Premises. Without limiting the
generality of the foregoing, Tenant, at its sole cost, shall comply with all
Laws relating to the storage, use, generation, transport, discharge and disposal
by Tenant or its Agents of any Hazardous Material. If the presence of any
Hazardous Material on the Premises caused or permitted by Tenant or its Agents
results in contamination of the Premises or any soil, air, ground or surface
waters under, through, over, on, in or about the Premises, Tenant, at its
expense, shall promptly take all actions necessary to return the Premises and/or
the surrounding real property to the' condition existing prior to the appearance
of such Hazardous Material.
F. Tenant Indemnity. Tenant shall defend, protect, hold harmless
and indemnify Landlord and its Agents and Lenders with respect to all actions,
claims, losses (including, diminution in value of the Premises) , fines,
penalties, fees, (including, but not limited to, reasonable 'attorneys' and
consultants, fees and costs) costs, damages, liabilities, remediation costs,
investigation costs, response costs and other expenses arising out of, resulting
from, or caused by any Hazardous Material used, generated discharged,
transported to or from, stored, or disposed of by Tenant or its Agents in, on,
under, over, through or about the Premises and/or the surrounding real property.
Tenant shall not suffer any lien to be recorded against the Premises as a
consequence for the disposal of any Hazardous Material on the Premises by Tenant
or its Agents, including any so called state, federal or local "super fund" lien
related to the "clean up" of any Hazardous Material in, over, on, under through,
or about the Premises.
G. Compliance Tenant shall immediately notify Landlord of any
inquiry, test, investigation, enforcement proceeding by or against Tenant or the
Premises concerning any Hazardous Material. Subject to compliance with
applicable Laws, any remediation plan prepared by or on behalf of Tenant must be
submitted to Landlord prior to conducting any work pursuant to such plan and
prior to submittal to any applicable government authority and shall be subject
to Landlord's consent. Tenant acknowledges that Landlord, as the owner of the
Property, at its election, shall have the sole right to negotiate, defend,
approve and appeal any action taken or order issued with regard to any Hazardous
Material by any applicable governmental authority.
H. Assignment and Subletting. It shall not be unreasonable for
Landlord to withhold its consent to any proposed assignment or subletting if (i)
the proposed assignee's or subtenant's anticipated use of the Premises involves
the storage, generation, discharge, transport, use or disposal of any Hazardous
Material not permitted under Subparagraph C above; (ii) if the
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proposed assignee or subtenant has been required by any prior landlord, lender,
or governmental authority to "clean up" or remediate any Hazardous Material and
has failed to promptly do so; (iii) if the proposed assignee or subtenant is
subject to investigation or enforcement order or proceeding by any governmental
authority in connection with the use, generation, discharge, transport, disposal
or storage of any material amount of Hazardous Material; provided that (ii) and
(iii) will not apply in the case of a Fortune 500 Company.
I. Surrender. Upon the expiration or earlier termination of. the
Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the
Premises that Tenant or its Agents introduced to the Premises. If Tenant fails
to so surrender the Premises, Tenant shall indemnify, protect, defend and hold
Landlord harmless from and against all damages resulting from Tenant's failure
to surrender the Premises as required by this Paragraph, including, without
limitation, any actions, claims, losses, liabilities, fees (including, but not
limited to, reasonable attorneys I f ees and consultants' f ees and costs) , f
ines, costs, penalties, or damages in connection with the condition of the
Premises including, without limitation, damages occasioned by the inability to
relet the Premises or a reduction in the fair market and/or rental value of the
Premises by reason of the existence of any Hazardous Materials in, on, over,
under, through or around the Premises as the direct result of the acts or
omissions of Tenant or its Agents.
J. Right to Appoint Consultant. Landlord shall have the right to
appoint a consultant to conduct an investigation to determine whether any
Hazardous Material is being used, generated, discharged, transported to or from,
stored or disposed of in, on, over, through, or about the Premises, in
compliance with the approved HMMP and all applicable Laws. If Tenant has
violated any Law or covenant in this Lease regarding the use, storage or
disposal of Hazardous Materials on or about the Premises, Tenant shall reimburse
Landlord for the cost of such investigation. Tenant, at its expense, shall
comply with all reasonable recommendations of the consultant required to conform
Tenant's use, storage or disposal of Hazardous Materials to the requirements of
applicable Law or to fulfill the obligations of Tenant hereunder.
K. Holding Over. If any action of any kind is required to be
taken by any governmental authority to clean-up, remove, remediate or monitor
Hazardous Material (the presence of which is the result of the acts or omissions
of Tenant or its Agents) and such action is not completed prior to the
expiration or earlier termination of the Lease, Tenant shall be deemed to have
impermissibly held over until such time as such required action is completed,
and Landlord shall be entitled to all damages directly or indirectly incurred in
connection with such holding over,
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including without limitation, damages occasioned by the inability to re-let the
Premises or a reduction of the fair market and/or rental value of the Premises.
L. Existing Environmental Reports. Tenant hereby acknowledges
that it has received, read and reviewed the reports and test results described
in Exhibit "D" attached hereto and made a part hereof (the "Existing
Environmental Reports").
M. Provisions Survive Termination. The provisions of this
Paragraph 39 shall survive the expiration or termination of this Lease.
N. Controlling Provisions. The provisions of this Paragraph 39
are intended to govern the rights and liabilities of the Landlord and Tenant
hereunder respecting Hazardous Materials to the exclusion of any other
provisions in this Lease that might otherwise be deemed applicable. The
provisions of this Paragraph 39 shall be controlling with respect to any
provisions in this Lease that are inconsistent with this Paragraph 39.
40. Quiet Enjoyment. Landlord covenants that Tenant upon performing the
terms, conditions and covenants of this Lease shall have the peaceful, quiet,
possession, use and enjoyment of the Premises without interference on the part
of Landlord or any party claiming by, through, or under Landlord and Landlord
shall defend Tenant in such peaceful and quiet possession, use and enjoyment of
the Premises against any such claims.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
dates set forth below.
LANDLORD: TENANT:
SOUTH BAY/FORTRAN, 3Dfx INTERACTIVE,
a California limited a California corporation
partnership
SBC&D CO., INC., BY:________________________
a California corporation Title:_____________________
BY:_____________________ Dated:_____________________
Title:__________________
Dated:__________________
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EXHIBIT "B"
LEGAL DESCRIPTION:
All that real property situate in the City of San Jose, County of Santa Clara.
State of California, described as follows:
Beginning at the Southwesterly corner of that certain 31.74 acre tract of land
described in the deed from The First National Bank of San Jose. a corporation.
to F. W. Zanker and Curtner Zanker, dated May 5. 1939, recorded May 8, 1939 in
Book 934 Official Records, page 16, Santa Clara County Records, in the Northerly
line Alviso-Milpitas Road, thence from said point of beginning N. 89 deg. 35' E.
630.30 feet to the Southeasterly corner thereof; -thence along the Easterly line
of said 31.74 acre tract For the three following courses and distances: N. 1
deg. 13' E. 768.90 feet, N. 0 deg. 57' E. 597.96 feet and N. 0 deg. 31' E.
149.97 feet to the Southeasterly corner of that certain 9.316 acre tract of land
described in the deed from F. W. Zanker, et al , to B. S. Brazil . a single man,
dated October 25, 1943, recorded November 16, 1943 in Book 1176 Official
Records, page 21, Santa Clara County Records; thence S. 89 deg. 35' W. along the
Southerly line of said 9.316 acre tract 651.78 feet to the Southwesterly corner
thereof in the Westerly line of said 31.74 acre tract; thence S. 0 deg. 08' W.
along said last mentioned line 1512.88 feet- to the point of beginning.
Excepting therefrom that portion thereof conveyed to 'he City of San Jose, a
municipal corporation, recorded September 2. 1985 in Book J828. pace 1719
Official Records, described as follows:
Beginning at the Southeasterly corner of that certain 31.74 acre tract of land+
described in the deed from The First National Bank OF San Jose, a corporation,
to F. W. Zanker and Curtner Zanker, dated May 5. 1939, recorded May 6, 1939 in
Book 934 Official Records, page 16, Santa Clara County Records, said point being
an the Northerly line of Alviso-Milpitas Road, thence leaving said point of
beginning along the Easterly line of said 31.74 acre parcel N. I deg. 13' E.
30.00 feet to the true point of beginning of the parcel herein being described;
thence leaving said true point of beginning and said Easterly line along the
following courses and distances; From a tangent bearing of N. as deg. 47' 00" W.
along a curve to the right with a radius of 50.00 feet through a central angle
of 126 deg. 52' 12" for an arc length of 110.71 feet to a point on reverse
curvature; from a tangent bearing of N. 38 deg. 05' 12" E. along a curve to the
left with a radius of 50.00 feet. through a central angle of 36 deg. 52' 12" For
an arc length of 32.18 feet; N. I deg. 13' 00" E. 361.13 feet; N. 0 deg. 57' 00'
E. 597.93 feet; N. 0 deg. 31' 52" E. 16.69 feet; along a tangent curve to the
left with a radius of 40.00 Feet, through a central angle of 90 deg. 56' 58" for
an arc length of 63.50 feet to a point on a line parallel with and distant 90.00
Feet Southerly. measured at right angles from the Southerly line of that certain
9.316 acre parcel of land described in the deed from F. W. Zanker. et al. to B.
S. Brazil I . recorded November 16, 1943 in Book 1176 of Official Records, at
page 21, Santa Clara County Records; thence along said parallel line. S. 89 deg.
34' 54' W. 579.99 Feet to a point on the Westerly line of said 31.74 acre parcel
of land; thence leaving said parallel line along said Westerly line. N. 0 deg.
06' 10' E. 90.00 feet to the Southwesterly comer of the hereinabove described
9.316 acre parcel; thence leaving said Westerly line along the Southerly line of
said 9.316 acre parcel. N. 89 deg. 34' 54' E. 651.24 feet to the Southeasterly
corner thereof. said corner lying in said Easterly line of the hereinabove
<PAGE> 42
EXHIBIT "B"
described 31.74 acre parcel ; thence along said Easterly line the following
course and distances: S. 0 deg. 31' 52" W. 149.98 Feet; s. 0 deg. 57' 00" W.
598.11 feet and S. I deg. 13' 00" W. 598.11 feet and S. 1 deg. 13' 00" W.
471.20 feet to the true point of beginning.
ALSO EXCEPTING THEREFROM all that portion conveyed to the State of California by
Grant Deed recorded August 31, 1994 in Book N 579, Page 2028, Official Records,
described as follows:
Being a portion of that certain parcel of land described in the Deed Fran, Ray
H. Collishaw and Earlyn R. Collishaw, husband and wife, to William L. Morocco, a
single man, recorded May 4, 1982 in Book G 762 of Official Records at Page 218,
Santa Clara County Records.
Beginning at the southeast corner of said parcel conveyed to Marocco; thence
from said Point of Beginning, along the southerly line of said parcel conveyed
to Morocco N. 690 01' 16" W. 625.45 feet to the southwest corner of said parcel
conveyed to Marocco; thence along the westerly line of said parcel conveyed to
Marccco N. 1' 13' 13" E. 227.77 feet; thence leaving said westerly line, From a
tangent bearing of S. 67* 46' 42" E., along a curve to the right with a radius
of 275.00 feet, through a central angle of 180 08' 37" far an arc length of
87.08 feet; thence S. 49* 38' 05" E. , 103-64 feet ; thence along a tangent
curve to the left with a radius of 275.00 feet. through a central angle of 34*
57' 21" for an arc length of 167.78 Feet; thence S. 84* 35' 26" E. 318.98 feet
to a point in the easterly line of said parcel conveyed to Marocco; thence along
said easterly line S. 2* 20' 03" W., 31.97 feet to the Point of Beginning.
ARE No. 15-30-9 & 9.1
<PAGE> 43
EXHIBIT"C"
HAZARDOUS MATERIALS MANAGEMENT PLAN ("HMMP")
(To be Provided by Tenant prior to Occupancy)
<PAGE> 44
EXHIBIT"D"
1. Property at 4405 - 4445 Forum Court, San Jose, CA (Project
No. 929368).
2. SECOR International Incorporated report dated July 10,
1995: Phase I Environmental Site Assessment Report - 4405,
4415, 4425, 4435 and 4445 Fortran Drive, San Jose, CA (Job
No. 70076-001-01).
3. SECOR International Incorporated report dated July 24,
1995: Technical Report Soil Sampling and Grab Groundwater
Sampling - 4405-4445 Fortran Drive, San Jose, CA
4. ProTech Consulting and Engineering Asbestos Survey and
Evaluation report dated October 25, 1995, Report
#AA95-559, conducted at 4415-4445 Fortran Drive, San Jose,
CA.
5. Clayton Environmental Consultants' report dated January 8,
1996, Site Visit and File Review for 4405 and 4413 Fortran
Drive, San Jose, CA. (Project No. 63877.00).
<PAGE> 1
EXHIBIT 11.01
COMPUTATION OF EARNINGS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------
1997 1996 1995
------- ------ ------
<S> <C> <C> <C>
Weighted average common shares
outstanding during the period 5,981 5,883 4,385
Common share equivalents 0 257 385
------- ------ ------
Total 5,981 6,140 4,770
======= ====== ======
Net Income ($4,688) $2,743 $9,753
Interest on convertible debentures -- -- $35
------- ------ ------
Adjusted net income ($4,688) $2,743 $9,788
======= ====== ======
Earnings per share ($0.78) $0.45 $2.05
======= ====== ======
</TABLE>
<PAGE> 1
EXHIBIT 23.02
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the incorporation by reference in Registration Statements No.
33-94716 and 333-02360 of AG Associates, Inc. on Form S-8 of our reports dated
November 4, 1997, included in the Annual Report on Form 10-K of AG Associates,
Inc. for the year ended September 30, 1997.
DELOITTE & TOUCHE LLP
San Jose, California
December 26, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 2,485
<SECURITIES> 1,672
<RECEIVABLES> 14,318
<ALLOWANCES> 903
<INVENTORY> 11,676
<CURRENT-ASSETS> 34,017
<PP&E> 15,385
<DEPRECIATION> 6,892
<TOTAL-ASSETS> 42,947
<CURRENT-LIABILITIES> 11,150
<BONDS> 0
0
0
<COMMON> 36,139
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 42,947
<SALES> 49,604
<TOTAL-REVENUES> 49,604
<CGS> 32,697
<TOTAL-COSTS> 32,697
<OTHER-EXPENSES> 23,576
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 71
<INCOME-PRETAX> (6,237)
<INCOME-TAX> (1,549)
<INCOME-CONTINUING> (4,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,688)
<EPS-PRIMARY> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
