-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G25isxCY80US3pFDmzTnyMhJognaaZ3j40ER0r1TXuWxCv4ffg1g8zrm0ZZfHve4 A/8XKcgBkkNtXJ5exDE/zA== /in/edgar/work/20000703/0000929624-00-000917/0000929624-00-000917.txt : 20000920 0000929624-00-000917.hdr.sgml : 20000920 ACCESSION NUMBER: 0000929624-00-000917 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARTEST CORP CENTRAL INDEX KEY: 0001116467 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 931226054 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-40744 FILM NUMBER: 667060 BUSINESS ADDRESS: STREET 1: 678 ALMANOR AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 BUSINESS PHONE: 4087318778 MAIL ADDRESS: STREET 1: 678 ALMANOR AVENUE CITY: SUNNYVALE STATE: CA ZIP: 94086 S-1 1 0001.txt ARTEST CORPORATION - FORM S-1 As filed with the Securities and Exchange Commission on July 3, 2000 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM S-1 UNDER THE SECURITIES ACT OF 1933 ------------------- ARTEST CORPORATION (Exact name of registrant as specified in its charter) California 3674 93-1226054 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
678 Almanor Avenue Sunnyvale, California 94086 (408) 731-8778 (Address, including zip code, and telephone number, including area code, of the registrant's principal executive offices) ------------------- Jen Kao President and Chief Executive Officer Artest Corporation 678 Almanor Avenue Sunnyvale, California 94086 (408) 731-8778 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------- Copies to: Donald J. Bouey, Esq Christopher L. Kaufman, Esq. L. Christopher Vejnoska, Esq. Bradley S. Fenner, Esq. Elizabeth H. Lefever, Esq. Michael R. Fassler, Esq. Christina Chiaramonte, Esq. Latham & Watkins Lora D. Blum, Esq. 135 Commonwealth Drive Brobeck, Phleger & Harrison LLP Menlo Park, California 94025 One Market (650) 328-4600 Spear Street Tower San Francisco, California 94105 (415) 442-0900
------------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement. ------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ------------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Proposed Maximum Aggregate Amount of Title of Each Class Offering Registration of Securities to be Registered Price(1) Fee - ------------------------------------------------------------------------------- Common Stock, no par value per share............ $50,000,000 $13,200 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o). ------------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information contained in this prospectus is not complete and may be + +changed. We may not sell these securities until the registration statement + +filed with the Securities and Exchange Commission is effective. This + +prospectus is not an offer to sell securities, and we are not soliciting + +offers to buy these securities, in any state where the offer or sale is not + +permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JULY 3, 2000 [LOGO] Artest Corporation Shares Common Stock Artest Corporation is offering shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We intend to apply for quotation of our common stock on the Nasdaq National Market under the symbol "ARTE." We anticipate that the initial offering price will be between $ and $ per share. -------------- Investing in our common stock involves risks. See "Risk Factors" beginning on page 9. --------------
Per Share Total ------ ----- Public Offering Price............................................. $ $ Underwriting Discounts and Commissions............................ $ $ Proceeds to Artest Corporation.................................... $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Artest Corporation has granted the underwriters a 30-day option to purchase up to an additional shares of its common stock to cover over- allotments. The underwriters expect to deliver the shares of common stock to purchasers on , 2000. Robertson Stephens CIBC World Markets Thomas Weisel Partners LLC The date of this Prospectus is , 2000 [Edgar description of artwork] Inside Front Cover Graphic that depicts the process of our test services with accompanying descriptive text. Inside Back Cover Pictures that depict our staff conducting our test services with accompanying descriptive text. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. In this prospectus, the "Company," "Artest," "we," "us," and "our" refer to Artest Corporation. Until , 2000 (the 25th day after the date of this prospectus), all dealers that effect transactions in our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. --------------------- TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 4 Risk Factors............................................................. 9 Cautionary Note on Forward-Looking Statements............................ 21 Use of Proceeds.......................................................... 22 Dividend Policy.......................................................... 22 Capitalization........................................................... 23 Dilution................................................................. 24 Selected Financial Data.................................................. 25 Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 27 Business................................................................. 35 Management............................................................... 47 Certain Transactions and Relationships with Related Parties.............. 57 Principal Stockholders................................................... 59 Description of Capital Stock............................................. 61 Shares Available for Future Sale......................................... 64 United States Tax Consequences to Non-United States Holders of Common Stock.................................................................. 66 Underwriting............................................................. 69 Legal Matters............................................................ 72 Experts.................................................................. 72 Where You Can Find Additional Information................................ 72 Index to Financial Statements............................................ F-1
--------------------- Our trademarks, service marks and trade names include Artest(TM), IP Test(TM), Test IP(TM) and our logos. This prospectus contains other trademarks, service marks and trade names owned by other companies. 3 PROSPECTUS SUMMARY The following summary highlights information which we present more fully elsewhere in this prospectus. You should read the entire prospectus carefully. This prospectus contains forward-looking statements that describe risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors described under the heading "Risk Factors" and elsewhere in this prospectus. Our Business We are a leading independent provider of comprehensive semiconductor test services, focusing on complex mixed-signal, radio frequency, or RF, and high- performance digital integrated circuits, or ICs, primarily in the communications and networking industries. We provide our customers with a flexible full service solution to meet their test needs. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. Our services include software test program and hardware development, prototype verification, or debugging, characterization, or performance evaluation, volume production wafer sort and volume production final test. Historically, semiconductor manufacturers performed their own IC test and assembly and would rely on independent test houses to handle overflow volume. As ICs and their test requirements have grown in complexity, test equipment has become more expensive and experienced engineering resources have become more scarce. As a result, semiconductor manufacturers are increasingly outsourcing test services to independent providers who have the expertise, equipment and engineers to satisfy their time-to-market and time-to-volume demands. We believe this trend will continue, and will grow, in light of increased engineering complexity, the need to allocate capital efficiently, the growth of fabless semiconductor companies, which are companies that do not own manufacturing facilities, and the overall growth of the semiconductor industry. According to the Prismark Semiconductor and Packaging Report, First Quarter 2000, the total worldwide assembly and functional test services market is expected to grow from $24.6 billion in 1999 to $54.6 billion in 2004, a CAGR of 22.1%. The size of the outsourced worldwide IC packaging and functional test services market is expected to grow from $8.1 billion in 1999 to approximately $21.3 billion in 2004, a compound annual growth rate, or CAGR, of 27.3%. We believe the growth of the overall outsourced test services market will outpace the growth of the worldwide assembly and test market. The testing of an IC is a complex process that requires increasingly sophisticated engineering, software, production expertise and test equipment. ICs are tested to verify that they operate in compliance with their applicable specifications, including frequency and timing over temperature and voltage ranges. These tests require the development of software programs that are customized to the IC and the test equipment, as well as printed circuit boards that provide an interface between the IC and the test equipment, or probe cards or load boards. Our test services combine our internally developed software test programs and test hardware with industry standard automated test equipment, or ATE, to provide our customers with advanced test solutions on a cost-effective basis. In addition, we have created a library of proprietary and reusable test modules, or Test IP. Our experienced test engineers use our Test IP to facilitate the rapid development of high quality test programs and the reduction of test times. Since 1997, we have provided test services to integrated device manufacturers, or IDMs, as well as fabless companies and emerging growth companies. Our top five customers during the five months ended May 31, 2000 were GlobeSpan, Inc., Micro Linear Corporation, MMC Networks, Inc., Philips Semiconductors, Inc. and Vitesse Semiconductor Corporation. Over this period these customers accounted for 84% of our revenues. 4 Our goal is to be the leading supplier of a comprehensive selection of advanced test services primarily for the communications and networking industries. Key aspects of our strategy to accomplish this goal include: . targeting selected customers in the mixed-signal, RF and high- performance digital IC markets; . continuing to develop our Test IP library; . pursuing acquisitions of IC test operations; . increasing our penetration of existing customers and establishing relationships with new customers; and . expanding our geographic presence and scope of activities. Artest Corporation was incorporated in California in November 1996. We will reincorporate in Delaware prior to the closing of this offering. Our Address Our principal executive offices are located at 678 Almanor Avenue, Sunnyvale, California 94086 and our telephone number is (408) 731-8778. 5 The Offering Common stock offered by Artest................ shares Common stock outstanding after this offering.. shares Use of proceeds............................... For repayment of approximately $5.4 million of existing indebtedness, with the remaining proceeds to be used for capital expenditures, working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........ ARTE
The number of shares of our common stock outstanding after this offering is based on the number of shares outstanding as of March 31, 2000, and includes the conversion of all outstanding shares of our preferred stock into common stock effective on completion of this offering, and excludes: . 2,862,500 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2000 at a weighted average exercise price of $0.45 per share; . 1,171,000 shares of common stock issuable upon exercise of stock options granted since March 31, 2000 at a weighted average exercise price of $8.00 per share, 715,000 of which became fully vested and immediately exercisable on June 30, 2000; and . 1,131,500 shares of common stock reserved for issuance under our stock option plans as of March 31, 2000. For additional information regarding these shares and options, see "Capitalization," "Management--Benefit Plans," "Description of Capital Stock" and Note 6 of Notes to Financial Statements. -------------------- Except as set forth in our financial statements, the notes to our financial statements or as otherwise specified in this prospectus, all information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; . assumes an initial public offering price of $ per share, the midpoint of the range shown on the cover of this prospectus; . reflects the conversion of all of our outstanding preferred stock into our common stock upon the completion of this offering; and . reflects our reincorporation in Delaware prior to the closing of this offering. 6 Summary Financial Data The summary financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical financial statements and the related notes included elsewhere in this prospectus. The summary statement of operations data for the years ended December 31, 1997, 1998 and 1999 are derived from our audited financial statements included in this prospectus. The summary balance sheet data as of March 31, 2000 and the summary statement of operations data for the three months ended March 31, 1999 and 2000 are derived from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on a basis consistent with the audited financial statements appearing elsewhere in this prospectus and, in the opinion of management, include all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of such data. Operating results for the three months ended March 31, 2000 are not necessarily indicative of results we will experience for a full year. The historical results of operations are not necessarily indicative of results to be expected for any subsequent period.
Three Months Year Ended December Ended 31, March 31, ---------------------- ------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ (in thousands, except share data) Statements of Operations Data Revenues.................................. $1,042 $3,413 $7,994 $1,724 $2,616 Cost of revenues.......................... 724 2,573 3,648 687 1,220 ------ ------ ------ ------ ------ Gross profit.............................. 318 840 4,346 1,037 1,396 Operating expenses: Selling, general and administrative..... 694 1,352 1,621 289 614 Research and development................ -- -- -- -- -- Amortization of stock-based compensation.......................... -- -- 219 -- 223 ------ ------ ------ ------ ------ Total operating expenses............. 694 1,352 1,840 289 837 ------ ------ ------ ------ ------ Income (loss) from operations............. (376) (512) 2,506 748 559 Other income (expense), net............... 761 629 354 79 65 ------ ------ ------ ------ ------ Income before provision for income taxes.. 385 117 2,860 827 624 Provision for income taxes................ 169 70 1,230 347 337 ------ ------ ------ ------ ------ Net income................................ $ 216 $ 47 $1,630 $ 480 $ 287 ====== ====== ====== ====== ====== Net income per share: Basic................................... $ 0.04 $ 0.01 $ 0.31 $ 0.09 $ 0.05 ====== ====== ====== ====== ====== Diluted................................. $ 0.01 $ 0.00 $ 0.07 $ 0.02 $ 0.01 ====== ====== ====== ====== ====== Shares used for net income per share: Basic................................... 5,240 5,240 5,241 5,240 5,246 ====== ====== ====== ====== ====== Diluted................................. 15,740 21,055 21,927 21,055 22,012 ====== ====== ====== ====== ====== Other Data EBITDA(1)................................. $ 570 $1,534 $4,859 $1,271 $1,279 Depreciation.............................. $ 175 $1,075 $1,674 $ 380 $ 549 Capital expenditures...................... $5,441 $1,942 $3,816 $ 180 $ 833
- -------- (1) EBITDA is defined as income before income tax, interest and depreciation. We present EBITDA because we believe EBITDA is a widely accepted indicator of an entity's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income or income from operations, as an indicator of our operating performance or other combined operations or cash flow data prepared in accordance with U.S. GAAP, or as an alternative to cash flows as a measure of liquidity. Our computation of EBITDA may differ from similarly titled computations of other companies. 7
As of March 31, 2000 ----------------------------- Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands) Balance Sheet Data Cash and cash equivalents......................... $10,797 $10,797 $ Working capital................................... 11,609 11,609 Total assets...................................... 24,219 24,219 Long-term debt, net of current portion............ 3,900 3,900 Convertible preferred stock....................... 14,000 -- Retained earnings................................. 2,180 2,180 Total stockholders' equity........................ 16,676 16,676
The pro forma balance sheet data gives effect to the automatic conversion of all 14 million shares of our Series A convertible preferred stock into shares of our common stock upon the closing of this offering. The pro forma as adjusted balance sheet data, further gives effect to our receipt of the estimated net proceeds from the sale of shares of common stock in this offering at an initial assumed public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, as if this offering had been completed on March 31, 2000. The unaudited pro forma as adjusted balance sheet data also includes the non-cash compensation expense of $ associated with stock options that will become exercisable as of June 30, 2000. The pro forma and pro forma as adjusted financial data do not necessarily represent what our financial position would have been or project our financial position for any future period or date. 8 RISK FACTORS You should carefully consider the risks described below in analyzing an investment in our common stock. If any of the events described below occurs, our business, results of operations and financial condition would likely suffer, the trading price of our common stock could fall and you could lose all or part of the money you paid for our common stock. This prospectus contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those identified below as well as those discussed elsewhere in this prospectus. Risks Related to our Business We depend on a small number of customers for a substantial portion of our revenues and the loss of one or more of our significant customers could reduce our profitability. Our largest customer, Philips' predecessor, VLSI Technology, Inc., accounted for approximately 60% of our revenues in the three months ended March 31, 2000, 60% in 1999, 43% in 1998 and 82% in 1997. Our top three customers accounted for approximately 74% of our revenues in the three months ended March 31, 2000, 85% in 1999, 83% in 1998 and 95% in 1997. In 1999, our three largest customers were MMC, Philips and Vitesse. In the three months ended March 31, 2000, our three largest customers were GlobeSpan, MMC and Philips. We anticipate that for the foreseeable future we will continue to be primarily dependent on a small number of customers for most of our revenues, with Micro Linear expected to be our largest customer for 2000. Our ability to retain customers and to add new customers is important to our ongoing success. The loss of one or more of our significant customers, for any reason, or reduced orders from any of our significant customers, without significant replacement customers or orders, could have a material adverse effect on our business, results of operations and financial condition. Most of our customers buy our services on a purchase order basis and are not contractually obligated to us on a long-term basis, which could cause our results of operations to vary and harm our business. We primarily sell our test services on a purchase order basis. This means that the majority of our customers are not obligated, pursuant to any long-term contractual commitment or otherwise, to purchase any minimum amount of our test services or to provide us with binding orders for any future period. We are highly sensitive to variability in demand for our test services by our customers and it is difficult for us to forecast the demand for our services and our revenues for any future period. For example, we make test equipment and personnel expenditures in anticipation of increased future sales, and our results of operations may be less than we expect if we make capital expenditures without a corresponding increase in revenues. Additionally, because most of our expenses, particularly equipment depreciation, employee compensation and rent, are fixed, a delay or a cancellation of a significant order by any of our customers could cause our quarter-to-quarter and year-to- year results of operations to vary significantly. Further, we may not be able to capture all potential revenue in a given period if our customers' demand for quick-turnaround services exceeds our capacity during that period. We expect that future revenues in any quarter will continue to be substantially dependent on orders placed within that quarter even if we are able to increase the percentage of our services sold on a long-term contract basis. Therefore, we do not believe that period-to-period comparisons of our results of operations are necessarily meaningful and they should not be relied upon as an indication of future performance. We may be unable to obtain test equipment or replacement parts when we require them, which could cause our results of operations to vary and harm our business. Our operations and expansion plans are highly dependent upon our ability to obtain a significant amount of new test equipment and replacement parts for our test equipment from a limited number of suppliers who are located principally in the United States, Europe and Japan. The market for capital equipment used in 9 semiconductor testing is characterized by periods of intense demand, limited supply and long delivery cycles. From time to time, increased demand for some of this equipment causes lead times to extend beyond those normally met by the equipment vendors. In general, particular ICs can only be tested by a limited number of specially configured testers. Customers may specify the tester on which their ICs may be tested and if we are unable to obtain these testers or replacement parts for these testers, we could lose those customers' business. Additionally, if we are unable to obtain certain equipment, such as handlers and wafer probers, or replacement parts, in a timely manner or if the installation of such equipment or parts is disrupted, we may be unable to fulfill our customers' orders which would negatively impact our business, results of operations and financial condition. Generally, we have no binding supply agreements with our equipment suppliers and we acquire our equipment on a purchase order basis, which exposes us to substantial risks of being unable to obtain the equipment we want, when we want it and at a price we consider reasonable. For example, increased demand for the test equipment required in our business may prevent us from obtaining the test equipment we need and may cause an increase in the price of such equipment, which could have a material adverse effect on our business, results of operations and financial condition. We may lose the opportunity for new business if our customers are acquired or develop new products that are incompatible with our testers. If any of our customers is acquired by an entity or develops a new product that causes it to change its testers to ones that we do not own or have access to, we could lose that customer's new business. For example, since our inception, we have been testing large volumes of ICs for VLSI. However, in 1999, Philips acquired VLSI and is requiring that many of its new ICs be tested on different testers. We own or operate some of the testers that Philips prefers, but such testers may not be completely compatible with Philips' future tester requirements. We anticipate that as the products we test for VLSI reach the end of their life cycle, we will no longer be receiving new purchase orders for them. If many of our other customers change their tester preferences to those that we do not own or operate, our ability to increase our revenues could be materially and adversely affected. Our success depends on retaining our current key personnel. We do not carry key person life insurance on our key personnel and none of our employees, including Jen Kao, our President and Chief Executive Officer, is bound by an employment agreement. Our future performance depends on the continued service of our key personnel, including our senior management and in particular, Mr. Kao. We are highly dependent upon the sales efforts of Mr. Kao and any loss of his services could adversely impact our ability to maintain and increase our customer base. The loss of Mr. Kao's services, or one or more of our other key personnel, could seriously harm our business, results of operations and financial condition. We may not be able to attract, hire, train and retain sufficient engineering and other skilled technical personnel that we need to maintain and grow our business. In order to maintain our competitive advantage and grow our business, we will need to attract, hire, train and retain sufficient engineering and other skilled technical personnel in the areas of test engineering, test development and product engineering services. We believe that competition for qualified engineering and technical personnel in these areas will continue to be intense. We are actively searching for qualified engineers who are in short supply, and we will need to significantly increase our technical staff to support the growth of our business. In addition, new employees frequently require training before they achieve desired levels of productivity and such training time may adversely affect our productivity. If we fail to attract, hire, train and retain sufficient engineering and other skilled technical personnel or if our competitors successfully recruit our engineering and technical employees, our business, results of operations and financial condition will be harmed. 10 We may not be able to develop or access leading technology which may affect our ability to compete effectively, which could harm our business. The semiconductor test market is characterized by complex technology and rapid technological change. We must be able to offer our customers test services capable of testing ICs that use advanced technology. If we fail to develop advanced test services or, where necessary, to buy those developed by others in a timely manner, our business could be adversely affected. For example, we could lose existing customers or their new business, and we could fail to attract new customers demanding technologically advanced test services. Furthermore, technological advances often lead to rapid and significant price declines on earlier generation products, and may adversely affect demand for test services on earlier generation products, which could harm our business. Advances in technology also could affect gross margins on our test services for ICs included in earlier generation products that must be sold for lower prices, meaning that customers are more sensitive to test prices. Rapid technological change also affects the equipment used to test our customers' new, more sophisticated ICs. If we incorrectly anticipate the technological developments in the IC industry and obtain the wrong test equipment or fail to understand market requirements for test equipment, we will be less competitive and our asset utilization will decrease. In order to remain competitive, we must be able to quickly upgrade or migrate our test equipment to respond to changing technological requirements. If we fail to respond to such changing technical requirements, our business, results of operations and financial condition may be adversely affected. Our profitability is affected by capacity utilization rates. As a result of the capital intensive nature of our business, our operations are characterized by high fixed costs. Consequently, if we insufficiently utilize our capacity of installed equipment our profitability could be materially and adversely affected. Therefore, our ability to maintain or increase our profitability will continue to be dependent, in large part, upon our ability to maintain high capacity utilization rates. Capacity utilization rates may be affected by a number of factors and circumstances, including: . installation of new equipment in anticipation of future business; . overall industry conditions; . the cyclical and seasonal nature of the semiconductor industry and fluctuations in customer orders; . operating efficiencies; . mechanical failure or malfunction of our test equipment; . disruption of our operations due to expansion of operations or relocation of equipment; or . fire or other natural disasters. For example, during the first two quarters of 1998, our capacity utilization rates were adversely impacted by a decrease in demand for our test services resulting from a downturn in the overall semiconductor industry. Our capacity utilization rates may be materially adversely impacted by future downturns in the semiconductor industry, declines in industries that purchase semiconductors or other factors. Any inability on our part to maintain or increase capacity utilization rates could have a material adverse effect on our business, results of operations and financial condition. A decrease in the average selling price for communications and networking equipment may lead to price pressures. A significant percentage of our revenues is derived from customers who provide ICs used in communications and networking equipment. Any decline in the average selling price of communications and networking equipment places significant pressure on the prices of the components that are used in this 11 equipment. If the average selling prices of ICs in communications and networking equipment decreases, resulting pricing pressure on services provided by us could increase, which may reduce our revenues. This may significantly reduce our gross margin which would have an adverse effect on our business, results of operations and financial condition. Our services have lengthy sales and test implementation cycles, which could adversely affect our business. Sales of our test services often require us to engage in a lengthy sales effort followed by a lengthy test implementation cycle, and any delays in these periods or delays in customer procurement could substantially harm our results of operations and financial condition. Our sales efforts may have to include significant education of prospective customers regarding the use and benefits of our services. A customer's decision to purchase our test and engineering services is discretionary, may involve a significant commitment of their resources and is influenced by its design cycles. As a result, the sales cycle for our services varies and could range from one month to six months for purchase order test services and from three months to in excess of one year for one-year or multi-year contractual commitments. In addition, prior to our commencing test services for a customer, the customer must complete its own test implementation cycle. This cycle, which begins with the prototype phase and concludes with the production phase, can range from one to three months. Any delay in these phases may harm our business, results of operations and financial condition. We expect to make significant expenditures in the future and therefore may require additional financing. To grow our business, maintain our competitive technical position and meet the needs of new customers, we intend to increase our test capacity by purchasing additional advanced test equipment. Purchasing advanced test equipment and employing new employees to operate this equipment will require substantial expenditures. These expenditures will likely be made in advance of increased sales. We cannot assure you that our revenues will increase after these expenditures. Our failure to increase our revenues after these expenditures could have a material adverse effect on our business, results of operations and financial condition. We expect the net proceeds from this offering, combined with our cash flow from operations and our bank facility, will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that we may need to obtain additional debt or equity financing to fund our capital expenditures. Additional equity financing may result in dilution to the holders of our common stock. If additional debt financing is required, such financing may: . increase our vulnerability to adverse general economic and industry conditions; . limit our ability to pursue our growth plan; . limit our flexibility in planning for, or reacting to, changes in our business and our industry; . require us to dedicate a substantial portion of our cash flow from operations to payments on our debt; and . further limit our ability to pay dividends or require us to seek consents for the payment of dividends. If we are not able to obtain additional debt or equity financing on acceptable terms, if and when needed, we may not be able to fund our expenditures, develop or enhance our services, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements. 12 We have made acquisitions, and may engage in future acquisitions, that may adversely impact our results of operations, dilute our stockholders or cause us to incur debt or assume contingent liabilities. In October 1999, we acquired the San Diego mixed-signal test equipment of Fairchild Semiconductor Corporation and in April 2000, we acquired the mixed- signal and RF test equipment of Micro Linear. As part of our business strategy, we may make additional investments in or purchase complementary companies, services, technologies or a customer's turnkey test operations that we believe would be advantageous to the development of our business. We could have difficulty in assimilating the purchased operations and hired personnel into our company. In addition, we may not be able to retain the key personnel or optimize our use of the services and technology of the purchased company or operations. These or other difficulties could disrupt our ongoing business, divert our management and employees, increase our expenses and result in a failure to realize the expected benefits of these acquisitions. Furthermore, we may issue equity securities to pay for any future purchases, investments or acquisitions, which could be dilutive to our existing stockholders. We may also incur debt, which may contain covenants that could restrict our growth strategy, assume contingent liabilities, incur amortization expenses related to intangible assets or incur write-offs in connection with acquisitions, any of which could harm our business and results of operations. If we do not integrate these or future acquisitions effectively with our operations, we could fail to achieve the benefits we expected and our business, results of operations and financial condition may be harmed. We may not be successful in maintaining or establishing long-term contractual agreements or other long-term relationships with customers, which could affect our revenues and our future business opportunities. In connection with our purchase of assets from Fairchild and Micro Linear, we entered into written agreements requiring us to provide each company set services at capped prices for three-year terms. These agreements also provide that we may perform additional services for these parties at their request. These agreements are non-exclusive and these parties are free to enter into similar or more favorable agreements with our competitors. Each of these agreements may be terminated at the will of either party at the end of the initial three-year term. We may not be able to sell services in addition to those required under the agreements and, at the expiration of these agreements, we may not be able to offer competitive test services in order for the relationships to expand and be extended. Any failure to expand or maintain our relationships with Fairchild and Micro Linear will adversely affect the percentage of our revenues we receive from long-term contracts as opposed to purchase orders which would harm our business, results of operations and financial condition. Additionally, as part of our business strategy, we intend to enter into additional agreements similar to those with Fairchild and Micro Linear. If we fail to enter into new long-term relationships, we may not gain access to opportunities that are important for the expansion of our business, including the ability to joint market or collaborate or cooperate with these companies. This may have a material adverse effect on our business, results of operations and financial condition. We may be unable to implement our business strategy because of liabilities that could decrease our cash reserve. As part of our Micro Linear agreement, we are responsible for packaging ICs after volume production wafer sort. We currently subcontract this packaging function to a third-party assembly house and must pay that third party the full fee for its packaging services even if we are not paid by Micro Linear. If Micro Linear does not pay us for these charges for any reason, our cash reserves would be reduced and we may be delayed in implementing or unable to implement our business strategy. In addition, we may enter into agreements under which we subcontract packaging or assembly services for other customers. If we are not paid as expected for our services, our cash reserves would be reduced and we may be delayed in implementing or unable to implement our business strategy. 13 We may be unable to manage our expansion effectively which could harm our business. We intend to increase the scope of our operations domestically and internationally and to increase our headcount substantially. We had a total of 10 employees at December 31, 1997, 21 employees at December 31, 1998, 34 employees at December 31, 1999 and 108 employees at May 31, 2000. In addition, we plan to continue to hire a significant number of employees this year. This growth has placed, and our anticipated growth in the future will continue to place, a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force. If we are unable to effectively manage our anticipated future growth, we may not be able to implement our business strategy which could harm our business. We may not be able to attract, hire, train and retain sufficient sales personnel to support our direct sales approach. Selling our services requires a sophisticated, direct sales approach targeted at the senior management of our prospective customers in the semiconductor industry. To date, we have relied heavily upon, and we will continue to rely upon, our senior management team to sell our services. Our ability to achieve significant revenue growth in the future will largely depend on our success in attracting, hiring, training and retaining sufficient additional direct sales personnel and their ability to establish relationships with new customers and maintain relationships with our existing customers. If we are unsuccessful in hiring sufficient direct sales personnel or if the personnel are unable to establish relationships with new customers and maintain relationships with our existing customers, our business, results of operations and financial condition may be adversely affected. We will face additional operational and financial risks if we expand into international operations. If we expand our business to include international operations, we will face a number of additional challenges associated with conducting business overseas. If we fail to effectively meet these challenges, our potential market share and revenues could be reduced. For example: . we may have logistical difficulty managing and administering a globally dispersed business; . our operating results may be negatively affected by fluctuations in exchange rates; . we may encounter greater difficulty in collecting accounts receivable resulting in longer collection periods and bad debt expense; . we may not be able to repatriate the earnings of our foreign operations; . we will have to comply with a wide variety of foreign laws and regulatory environments with which we are not familiar; . we may not be able to adequately protect our trademark and other intellectual property overseas due to the uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property; . our operating results could be negatively affected by seasonal reductions in business activity in other parts of the world; . the financial performance of our international operations could be significantly reduced by the multiple and possibly overlapping tax structures; and . we may forfeit some foreign assets and lose some of our investments made developing and marketing our international operations due to the economic or political instability in some international markets. We expect that we may experience these challenges and the risks discussed above, any one of which could have a material adverse effect on our business, results of operations and financial condition. 14 Problems associated with our customers' international business operations could affect our ability to sell our services. Many of our customers sell their products outside of North America and manufacture their products in the Far East, particularly in Taiwan. Our customers are subject to risks of economic and political instability in the countries where they manufacture and sell their products, including the risk of conflict between Taiwan and the People's Republic of China. If this instability affects any of our customers, it could also materially and adversely affect our business, particularly if this instability impacts the sales of products manufactured by our customers. A substantial decrease in the demand for our customers' products due to international economic instability could have a material adverse effect on our business, results of operations and financial condition. Decreases in demand for, or sale of, our customers' products, likely would lead to decreases in the number of products containing ICs being manufactured, which in turn would result in a decline in the demand for our test services. Other factors associated with foreign commerce that could affect our customers' operations and revenues include the following: . changes in tax laws, tariff, freight rates and other trade barriers; . foreign exchange rate fluctuations; . timing and availability of export licenses; and . inadequate protection of intellectual property rights in some countries. If these risks affect any of our customers, these risks could also materially and adversely affect our business and results of operations. The testing process is complex and therefore prone to "bugs," operator error and test equipment malfunction. IC testing is a complex process involving sophisticated computer software and test equipment. We develop software test programs which we use to test our customers' ICs. We also develop conversion software programs which enable us to test ICs on different types of testers. Similar to most software programs, these software programs are complex and may contain programming errors or "bugs." The testing process also is subject to operator error by our employees who operate our test equipment and related software. In addition, the test equipment may malfunction. Any significant defect or bug in our test or conversion software, operator error or malfunction in our test equipment could: . reduce our production quality; . increase our costs; . divert our resources; . damage or destroy our customer relationships; or . materially harm our business, results of operations and financial condition. Our proprietary technology is important to our ability to succeed in our business but may be difficult to protect. Our ability to compete successfully and achieve future growth in revenues will depend, in part, on our ability to protect our proprietary technology and the proprietary technology of our customers entrusted to us. We seek to protect our proprietary technology and know-how through the use of non-disclosure agreements and by limiting access to and distribution of proprietary information. We have no patents or copyrights for our proprietary techniques, and we rely primarily on trade secret protection in the form of non-disclosure and proprietary rights assignment agreements with our key employees and non- disclosure agreements with our customers. Our competitors may develop, patent, copyright or gain access to similar intellectual property, including know-how and technology. In addition, our non-disclosure agreements may not be adequate to protect our proprietary technology or that of our customers. Additionally, as part of our growth strategy we intend to 15 enter into international markets, and the laws of foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. Any inability to protect our proprietary technology or that of our customers could have a material adverse effect on our business, results of operations and financial condition. We may be subject to intellectual property rights disputes. Our ability to compete successfully will depend, in part, on our ability to operate without infringing the intellectual property rights of others. As the number and coverage of patents, copyrights and other intellectual property rights in our industry increases, we believe that companies in our industry may face more frequent patent infringement claims. Although there are no pending or threatened intellectual property lawsuits against us, we may face litigation or patent infringement claims in the future. In the event that any valid claim is made against us, we could be required to: . stop using and selling certain services or processes; . pay substantial damages; . develop non-infringing technologies; or . attempt to acquire licenses to use the infringed technology. Additionally, litigation may be necessary to protect our technology against patent infringement claims and determine the validity and scope of the proprietary rights of our competitors. Intellectual property law is uncertain and evolving and we may not be successful in litigating to protect our technology or determining the proprietary rights of others. Intellectual property litigation could result in substantial costs and diversion of management and other resources. If any infringement claim is asserted against us, we may be required to seek to obtain a license of the other party's intellectual property rights and a license may not be available to us on reasonable terms or at all. Should any of the disputes described above occur, our business, results of operations and financial condition could be materially and adversely affected. Conflicts of interest among our customers may affect our customer base. The semiconductor industry is highly competitive and many of our customers directly compete with each other. There is a risk that we may alienate a customer by working too closely or extensively with one or more of its competitors. If we are forced to limit our service relationship with any large customer or otherwise decrease or refocus our customer base to prevent the alienation of one or more customers, our ability to attract and maintain customers will be affected and our business, results of operations and financial condition could be materially and adversely affected. We need a controlled room environment for our operations. Our testing operations take place in areas where temperature and humidity are strictly controlled. If we are unable to control our testing environment for any reason including power outages, our test equipment may become nonfunctional or may malfunction. If we experience prolonged interruption in our operations due to problems related to the test room environment, this could have a material adverse effect on our business, results of operations and financial condition. Fire, earthquake or other calamity at one of our facilities or at one of our customers' sites could adversely affect our business. We conduct our testing operations at a limited number of facilities and some of these facilities are located on or near fault lines. Additionally, some of our customers' and their suppliers' sites are similarly located. Any damage caused by earthquakes may adversely affect our financial condition as our insurance policies do not cover losses due to earthquakes. A fire, earthquake or other calamity, resulting in significant damage at any of our facilities would have, and at any of our significant customers' or its suppliers' sites could have, a material 16 adverse effect on our business, results of operations and financial condition. While we maintain insurance policies covering certain losses, including losses due to fire, these policies are limited in coverage and they may not sufficiently cover all of these potential losses. Risks Related to the Semiconductor Test Industry The semiconductor industry is seasonal and cyclical and subject to significant downturns which could adversely affect our results of operations. Our semiconductor test business is directly related to the market conditions in the semiconductor industry. The semiconductor industry is seasonal and cyclical and, at various times, has experienced significant downturns because of production overcapacity and reduced unit demand. For example, the volume of our test services decreased during the first two quarters of 1998 compared to the last quarter of 1997 because of reduced industry-wide demand and seasonality. One result of this reduction was that our IDM customers increased the volume of services they performed internally, which further decreased the demand for our services. Our business depends in significant part on the test requirements of semiconductor companies for independent outsourced test program development and test services. The market for semiconductors is characterized by: . rapid technological change; . evolving industry standards; . intense competition; and . fluctuations in end-user demand. Any future downturn in the semiconductor industry is likely to adversely affect our business, results of operations and financial condition. We may not be able to compete successfully in our industry. The semiconductor test service industry is very competitive and diverse and requires us to be capable of testing increasingly complex semiconductors as quickly as our competitors. The industry is comprised of both large multi- national companies and smaller independent test-houses. We believe that we face substantial competition from the internal capabilities of many of our current and potential IDM customers and from large assembly houses which offer production test services. These competitors include Amkor Technologies, Inc., ASE Test Limited, ASAT, Ltd., ChipPAC Inc., Siliconware Precision Industries Company, Ltd., and ST Assembly Test Services Ltd. These companies offer services in the United States, overseas or both. We also face competition from smaller independent test-houses such as Multitest Design and Test, Inc. and Viko Test Lab, which do not provide as wide an array of services. Many of our competitors and potential competitors have significantly longer operating histories, larger installed bases of test equipment, greater name recognition and significantly greater technical, financial, manufacturing, marketing and other resources than we do. In addition, a number of these competitors have long established relationships with our customers and potential customers. We believe it is likely that additional competitors will enter the market for most, if not all, of the services which we will offer. In addition, many IDMs have greater financial and other resources than we do and may rely on internal sources for test and assembly services due to: . their desire to realize higher utilization of their own existing test capacity; . their unwillingness to disclose proprietary technology; . the guaranteed availability of their own test capacity; and . their possession of more advanced test technologies. 17 Historically, we have been dependent on outsourcing of test services by IDMs. Our IDM customers continually evaluate our services against their own in- house test and assembly services. As a result, at any time, IDMs may decide to shift some or all of their outsourced test and management of assembly services to internally sourced capacity. Any such shift or a slowdown in this trend to outsource is likely to adversely affect our business, results of operations and financial condition. Furthermore, we cannot assure you that we will be able to compete successfully in the future against our existing or potential competitors or that our business, results of operations and financial condition will not be adversely affected by increased competition. We may be unable to grow our business if the markets in which our customers sell their products shrink or do not grow. Our success depends in large part on the continued growth of various markets that use semiconductors, particularly the communications and networking equipment industries. Any decline in the demand for semiconductors in any of the following markets could materially harm our business: . communications; . networking; . high-performance computing; . video and audio; or . graphics and imaging. Slower growth in any of the other markets in which semiconductors are sold may also materially harm our business. Many of these markets are characterized by rapid technological change and intense competition. As a result, semiconductors sold by our customers may face severe price competition, become obsolete over a short time period or fail to gain market acceptance. Any of these occurrences could materially harm our business by decreasing the demand for our test services. Risks Related to this Offering Our common stock has never been publicly traded, and a trading market may not develop for our stock. Prior to this offering, there has not been a public market for our common stock. A trading market may not develop for our common stock. The initial price of our common stock in this offering will be determined by negotiations between representatives of the underwriters and us and may not be indicative of prices that will prevail in the future. As a result, the trading price of our common stock may decline and you might lose all or a part of your investment. The market price of our common stock may be volatile. The market price of our common stock is likely to be highly volatile in the future. Our common stock price may fluctuate significantly in response to factors such as: . quarterly variations in our operating results; . announcements of technological innovations; . changes in earnings estimates by analysts or our failure to meet such earnings estimates; . loss or addition of one or more significant customers; . announcements by us regarding significant acquisitions; . changes in our customer relationships or capital expenditure commitments; . additions or departures of key personnel; 18 . future sales or issuances of our common stock or other securities; and . changes in federal, state or foreign regulations affecting the semiconductor industry. In addition, the stock markets in general, and the stocks of technology companies in particular, have experienced extreme price and volume fluctuations recently. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may have a material adverse effect on the market price of our common stock, regardless of our actual operating performance, and you might lose all or a part of your investment. Future sales of securities by us or our existing shareholders may adversely affect the price of our common stock. Sales of substantial numbers of shares of our common stock in the public market following this public offering could adversely affect the market price of our shares. There will be shares of common stock outstanding immediately following this public offering. In addition, as of March 31, 2000, we had granted options under our employee stock option plans for the purchase of a total of 2,862,500 shares of common stock. If these options are exercised and the shares of common stock are fully paid for, such shares would be freely tradable. In connection with this offering, each of our directors, executive officers, and substantially all of our security holders have agreed not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock or thereafter acquired, without the prior written consent of FleetBoston Robertson Stephens Inc., subject to certain exceptions, for a period of 180 days from the date of this prospectus. Purchasers of common stock in this offering will suffer immediate and substantial dilution. The initial public offering price is substantially higher than the book value per share of our common stock. As a result, you will experience immediate and substantial dilution in the pro forma net tangible book value per share of our common stock. This dilution will occur because our earlier investors paid substantially less than the initial public offering price in this offering when they purchased their shares of common stock. You will experience additional dilution upon exercise of outstanding stock options. We have not declared cash dividends on our common stock and we have no intention of and are restricted from issuing such cash dividends in the foreseeable future. We have not declared or paid cash dividends on our common stock and we anticipate that any future earnings will be retained for investment in our business. Any payment of cash dividends in the future will be at the discretion of our board of directors and will depend upon, among other things, our earnings, financial condition, capital requirements, outstanding debt and contractual restrictions. In addition, current agreements with our lender prohibit the payment of cash dividends by us without receiving our lender's prior consent, and future agreements we may enter into with lenders may contain similar restrictions. Our management has significant influence over stockholder decisions. Our officers and directors will control the vote of approximately 79.1% of the outstanding shares of common stock prior to the exercise of any outstanding options. As a result, they may be able to significantly influence all matters requiring approval by our stockholders, including the election of directors. 19 Our management has discretion as to the use of the net proceeds from this offering. Our management has broad discretion as to the use of the net proceeds that we will receive from this offering. Our management may not apply these funds effectively, and the net proceeds from this offering may not be invested to yield a favorable return. As a result, you might lose all or a part of your investment. Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a takeover. Our certificate of incorporation and bylaws and Delaware law contain provisions that might enable our management to resist a takeover. These provisions might discourage, delay or prevent a change in the control of Artest or a change in our management. Our certificate of incorporation also provides that our board of directors may, without further action by our stockholders, issue shares of preferred stock in one or more series and establish the rights, preferences, privileges and restrictions of this preferred stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that such holders will receive dividend payments and payments upon liquidation. While we have no present intention to issue shares of preferred stock, such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third-party to acquire a majority of our outstanding voting stock. In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibits us from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. The application of Section 203 may have the effect of deterring hostile takeovers or delaying or preventing changes in control or in our management, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. 20 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of the federal securities laws, which involve risks and uncertainties. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, beliefs and assumptions. We use words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates," "may," "will," "could," "should," "would," "continue," "pro forma," and variations of these words and similar expressions to identify forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include those described in "Risk Factors" and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements, which reflect our management's view only as of the date of this prospectus. 21 USE OF PROCEEDS The net proceeds to us from the sale of the shares of common stock offered hereby are estimated to be approximately $ assuming an initial public offering price of $ per share, the midpoint of the range shown on the cover of the prospectus, and deduction of the underwriting discounts and commissions and estimated offering expenses payable by us. We currently estimate that we will use the net proceeds from this offering as follows: . approximately $5.4 million to repay existing indebtedness at May 31, 2000, including accrued interest; . between approximately $14 million and $20 million on capital expenditures for existing facilities and equipment over the next 12 months; and . the remainder for working capital and general corporate purposes. The repayment of existing indebtedness includes two credit facilities we have established with California Bank and Trust, formerly Sumitomo Bank of California. The first line of credit was established in November 1997 as a non- revolving $6.5 million equipment line of credit. The interest rate on this line of credit ranges between 7.10% to 7.30%. All borrowings against this equipment line of credit mature within five years. The second loan agreement was entered into in August 1999 and provides us with a $2.0 million secured equipment line of credit. All borrowings against this line bear an interest rate equal to the effective prime rate, which was 8.75% at March 31, 2000, and mature within five years. In addition to the purposes listed above, we also may use a portion of the net proceeds to acquire or make investments in additional businesses, products and technologies or establish joint ventures or strategic partnerships that we believe will complement our current and future business. Some of these acquisitions or investments could be material. We are not currently engaged in any negotiations, commitments or agreements with respect to any acquisitions or investments. We will retain broad discretion in allocating the net proceeds of the offering. As a result, the above estimates are subject to change at our management's discretion. Pending such uses, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities. See "Risk Factors--Our management has discretion as to the use of the net proceeds from this offering." DIVIDEND POLICY We have never declared or paid dividends on our capital stock and do not anticipate declaring or paying cash dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our earnings, financial condition, capital requirements, outstanding debt and contractual restrictions. In addition, current agreements with our lender prohibit the payment of cash dividends by us without receiving our lender's prior consent. 22 CAPITALIZATION The following table summarizes our cash and cash equivalents and our capitalization as of March 31, 2000: . on an actual basis; . on a pro forma basis to reflect the conversion of all our outstanding Series A convertible preferred stock into 14 million shares of common stock upon the closing of this offering; and . on a pro forma as adjusted basis giving effect to the conversion of all of our outstanding Series A convertible preferred stock into 14 million shares of common stock upon the closing of this offering and the issuance and sale of shares of common stock at an assumed initial public offering price of $ per share, less estimated underwriting discounts and offering expenses payable by us. The number of shares outstanding as of March 31, 2000 excludes: . 2,862,500 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2000 at a weighted average exercise price of $0.45 per share; . 1,171,000 shares of common stock issuable upon exercise of stock options granted since March 31, 2000 at a weighted average exercise price of $8.00 per share, 715,000 of which became fully vested and immediately exercisable on June 30, 2000; and . 1,131,500 shares of common stock reserved for issuance under our stock option plans as of March 31, 2000. This table should be read with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our financial statements and the accompanying notes appearing elsewhere in this prospectus.
March 31, 2000 ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- (in thousands, except share data) Cash and cash equivalents....................... $10,797 $10,797 $ ======= ======= ==== Long-term debt obligations, net of current portion....................................... $ 3,900 $ 3,900 $ ------- ------- ---- Stockholders' equity: Preferred stock; no par value; 14,000,000 shares authorized, issued and outstanding, actual; 14,000,000 shares authorized and no shares issued and outstanding, pro forma and pro forma as adjusted................... 14,000 -- -- Common stock, no par value; 24,000,000 shares authorized, 5,246,000 shares issued and outstanding, actual; 24,000,000 shares authorized, 19,246,000 shares issued and outstanding, pro forma; shares issued and outstanding, pro forma as adjusted...... 1,740 15,740 Deferred stock compensation................... (1,244) (1,244) Retained earnings............................. 2,180 2,180 ------- ------- ---- Total stockholders' equity................. 16,676 16,676 ------- ------- ---- Total capitalization..................... $20,576 $20,576 $ ======= ======= ====
23 DILUTION If you invest in our common stock, your investment will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of March 31, 2000, was approximately $16.0 million, or $0.83 per share of common stock. Pro forma net tangible book value per share represents total tangible assets less total liabilities, divided by the number of shares of common stock outstanding after giving effect to the conversion of all of our outstanding Series A convertible preferred stock into shares of our common stock. After giving effect to the issuance and sale of shares of our common stock in this offering at an assumed initial public offering price of $ per share, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2000, would have been $ , or $ per share. This represents an immediate increase in pro forma as adjusted net tangible book value of $ per share to existing stockholders and an immediate dilution in pro forma as adjusted net tangible book value of $ per share to new investors purchasing shares of common stock in this offering. The following table illustrates this dilution: Assumed initial public offering price per share.................... $ Pro forma net tangible book value per share as of March 31, 2000........................................................... $0.83 Increase per share attributable to new investors................. ----- Pro forma as adjusted net tangible book value per share after the offering......................................................... ---- Dilution per share to new investors................................ $ ====
The following table summarizes, as of March 31, 2000, on a pro forma as adjusted basis, the total number of shares of common stock outstanding and the total consideration paid to us and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $ per share before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders.. 19,246,000 % $14,053,600 % $0.73 New investors.......... ---------- ----- ----------- ----- Totals............... 100.0% $ 100.0% ========== ===== =========== =====
The above computations are based on the number of shares of common stock outstanding as of March 31, 2000 and exclude: . 2,862,500 shares of common stock issuable upon exercise of stock options outstanding as of March 31, 2000 at a weighted average exercise price of $0.45 per share; . 1,171,000 shares of common stock issuable upon exercise of stock options granted since March 31, 2000 at a weighted average exercise price of $8.00 per share, 715,000 of which became fully vested and immediately exercisable on June 30, 2000; and . 1,131,500 shares of common stock reserved for issuance under our stock option plans as of March 31, 2000. If the underwriters' over allotment option is exercised in full, the number of shares of common stock held by new investors will increase to shares, or % of the total number of shares of common stock outstanding after this offering. To the extent that any of these options are exercised, there could be further dilution to new investors. For additional information regarding these shares, see "Capitalization," "Management--Benefit Plans," "Description of Capital Stock" and Note 6 of Notes to Financial Statements. 24 SELECTED FINANCIAL DATA You should read the selected financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our historical financial statements and related notes included elsewhere in this prospectus. The selected statement of operations data for the years ended December 31, 1997, 1998 and 1999 and the selected balance sheet data as of December 31, 1998 and 1999 are derived from our audited financial statements included in this prospectus. The selected balance sheet data as of December 31, 1997 are derived from our audited financial statements not included in this prospectus. The selected balance sheet data as of March 31, 2000 and the selected statement of operations data for the three months ended March 31, 1999 and 2000 are derived from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on a basis consistent with the audited financial statements appearing elsewhere in this prospectus and, in the opinion of management, include all adjustments consisting only of normal recurring adjustments necessary for a fair presentation of such data. Operating results for the three months ended March 31, 2000 are not necessarily indicative of results we will experience for a full year. The historical results of operations are not necessarily indicative of results to be expected for any subsequent period.
Three Months Year Ended December 31, Ended March 31, ------------------------- --------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- (in thousands, except per share data) STATEMENTS OF OPERATIONS Revenues............................. $ 1,042 $ 3,413 $ 7,994 $ 1,724 $ 2,616 Cost of revenues..................... 724 2,573 3,648 687 1,220 ------- ------- ------- ------- ------- Gross profit......................... 318 840 4,346 1,037 1,396 Operating expenses: Selling, general and administrative................... 694 1,352 1,621 289 614 Research and development........... -- -- -- -- -- Amortization of stock-based compensation..................... -- -- 219 -- 223 ------- ------- ------- ------- ------- Total operating expenses........ 694 1,352 1,840 289 837 ------- ------- ------- ------- ------- Income (loss) from operations........ (376) (512) 2,506 748 559 Other income and (expense), net:..... 761 629 354 79 65 ------- ------- ------- ------- ------- Income before provision for income taxes.............................. 385 117 2,860 827 624 ------- ------- ------- ------- ------- Provision for income taxes........... 169 70 1,230 347 337 ------- ------- ------- ------- ------- Net income........................... $ 216 $ 47 $ 1,630 $ 480 $ 287 ======= ======= ======= ======= ======= Net income per share-- Basic.............................. $ 0.04 $ 0.01 $ 0.31 $ 0.09 $ 0.05 ======= ======= ======= ======= ======= Diluted............................ $ 0.01 $ 0.00 $ 0.07 $ 0.02 $ 0.01 ======= ======= ======= ======= ======= Shares used for net income per share-- Basic.............................. 5,240 5,240 5,241 5,240 5,246 ======= ======= ======= ======= ======= Diluted............................ 15,740 21,055 21,927 21,055 22,012 ======= ======= ======= ======= =======
25
December 31, March 31, ----------------------- ---------- 1997 1998 1999 2000 ------- ------- ------- ---------- (in thousands) Balance Sheet Data Cash and cash equivalents................... $ 8,897 $ 8,422 $11,626 $10,797 Working capital............................. 10,195 12,002 11,323 11,609 Total assets................................ 19,434 20,500 24,477 24,219 Long-term debt, net of current portion...... 1,257 3,984 3,825 3,900 Convertible preferred stock................. 14,000 14,000 14,000 14,000 Retained earnings........................... 216 263 1,893 2,180 Total shareholders' equity.................. 14,269 14,316 16,166 16,676
26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our financial statements and the related notes included elsewhere in this prospectus. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as statements of our plans, objectives, intentions, estimates and projections about our industry. Our actual results may differ materially from those predicted in such forward- looking statements. Factors that could cause or contribute to such differences include but are not limited to those discussed in "Risk Factors" and elsewhere in this prospectus. Overview We are a leading independent provider of comprehensive semiconductor test services. We focus on complex mixed-signal, RF and high-performance digital ICs, primarily in the communications and networking industries. We provide our customers with a flexible, full service solution to their test needs. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. Our services include software test program and hardware development, prototype verification, characterization, volume production wafer sort and volume production final test. We were founded in November 1996 as a test services company, opened our facility in Sunnyvale, California in May 1997, and began operations in September 1997. We have increased our capacity and revenue through two key strategies: . equipment purchases and sales efforts with existing and new customers; and . long-term customer relationships through which we purchase test equipment and hire personnel. The acquisition of customer facilities provides a cost-effective way to add engineering capabilities, capacity and revenue growth, while entering into a long-term relationship with the customer. In October 1999, we expanded our capabilities and capacity by opening a facility in San Diego, California by purchasing the San Diego mixed-signal test equipment from Fairchild and hiring of some of its employees. In May 2000, we opened an additional facility in San Jose, California, approximately doubling our capacity at the time, by purchasing the mixed-signal and RF test equipment of Micro Linear and hiring of some of its employees. We entered into three-year services agreements with both Fairchild and Micro Linear. The agreements provide for the delivery of test and engineering services over the terms of the contracts if we maintain service, quality and price levels that are competitive in the industry. We primarily sell our test services on a purchase order basis. Most of our expenses, particularly equipment depreciation, employee compensation and rent, are fixed. Therefore, a delay in a purchase by a customer or a cancellation of a significant purchase order by any of our large customers could cause our quarter-to-quarter and year-to-year results to vary significantly. We recognize revenues when our services are completed and no significant obligations remain. Our sales are subject to seasonality, with the largest portion of quarterly sales tied to IC purchasing patterns, which usually are lowest in the first quarter and highest in the fourth quarter of the calendar year. The sales cycle for our services typically ranges from one month to six months for purchase order test services and from three months to in excess of one year for one-year or multi-year contractual commitments and includes a qualification period during which our customers evaluate and audit our test procedures. Due to the length of these sales cycles, we often order or invest in test equipment in advance of generating revenue from these investments. Accordingly, if sales of our services do not occur when we expect, we may be unable to adjust our purchases of equipment on a timely basis, and expenses may increase relative to revenues. 27 Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers. Our top three customers accounted for approximately 74% of our revenues in the three months ended March 31, 2000, 85% in 1999, 83% in 1998 and 95% in 1997. Our largest customer accounted for approximately 60% of our revenues in the three months ended March 31, 2000, 60% in 1999, 43% in 1998 and 82% in 1997. In the five months ended May 31, 2000, our five largest customers, GlobeSpan, Micro Linear, MMC, Philips and Vitesse in the aggregate represented approximately 84% of our revenues, with Philips representing 48% of our revenues. As we implement our strategy of increasing the penetration of existing customers and pursuing acquisitions of IC test operations, we believe our customer concentration will change and we will be less dependent upon any single customer. All of our revenues to date have been denominated in United States dollars and have substantially come from U.S.-based customers. Results of Operations The following table presents selected financial data for the periods indicated as percentages of our revenues.
Year Ended Three Months December 31, Ended March 31, ------------------- ---------------- 1997 1998 1999 1999 2000 ----- ----- ----- ------- ------- Revenues................................ 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........................ 69.5 75.4 45.6 39.8 46.6 ----- ----- ----- ------- ------- Gross profit............................ 30.5 24.6 54.4 60.2 53.4 ----- ----- ----- ------- ------- Operating expenses: Selling, general and administrative... 66.6 39.6 20.3 16.8 23.5 Research and development.............. -- -- -- -- -- Amortization of stock-based compensation........................ -- -- 2.7 -- 8.5 ----- ----- ----- ------- ------- Total operating expenses........... 66.6 39.6 23.0 16.8 32.0 ----- ----- ----- ------- ------- Income (loss) from operations........... (36.1) (15.0) 31.4 43.4 21.4 Other income and (expense), net......... 73.0 18.4 4.4 4.6 2.5 ----- ----- ----- ------- ------- Income before provision for income taxes................................. 36.9 3.4 35.8 48.0 23.9 Provision for income taxes.............. 16.2 2.1 15.4 20.1 12.9 ----- ----- ----- ------- ------- Net income.............................. 20.7% 1.3% 20.4% 27.9% 11.0% ===== ===== ===== ======= =======
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 2000 Revenues. Our revenues consist of test services, including prototype verification, characterization, volume production wafer sort, volume production final test and rental of our IC test equipment. To date, our revenues have also included test software and hardware development that was often billed to customers in the form of non-recurring engineering, or NRE, charges. These charges represented approximately 2% of our revenues in the first quarter of 2000 and 1% of our revenues in the first quarter of 1999. Revenues in the first quarter of 2000 were $2.6 million, an increase of $892,000, or 51.7%, over the first quarter of 1999. This increase in revenues primarily relates to our increased test capacity and improved tester capacity utilization, which enabled us to better meet our customers' increased demand for our test services. In the first quarter of 2000 we had additional test floor space and five additional testers compared to the first quarter of 1999. In 2000, we expect to generate revenues from assembly support services in connection with our operating agreement with Micro Linear. Pursuant to this agreement, we plan to outsource these assembly support services to independent assembly subcontractors. Assembly support services have significantly lower gross margins than our test services and accordingly, our gross margins may decrease. However, providing assembly services requires little capital investment and we expect to substantially offset this decrease in our gross margins by utilizing the additional capacity available from the test equipment we acquired from Micro Linear. 28 Cost of Revenues and Gross Profit. Cost of revenues includes test equipment depreciation, employee compensation and facility rent. The purchase price of our principal test equipment, IC testers, ranges between $500,000 and $2.0 million per tester. The depreciation expense on testers in any quarter has not in the past and may not in the future result in a corresponding revenue increase in that quarter, which may cause our gross profit to vary. We currently have 40 testers and plan to purchase between nine and 13 additional testers by the end of 2000. To date, we have performed software and hardware development that was often billed to customers in the form of NRE charges. These charges were not capitalized or expensed as research and development expenses, but instead were included in cost of revenues. We expect that cost of revenues will increase if we are required to expand our workforce or facilities to meet commitments under any purchase orders or other agreements with new or existing customers. Cost of revenues in the first quarter of 2000 was $1.2 million, or 46.6% of revenues, an increase of $533,000, or 77.6%, over the first quarter of 1999. Cost of revenues in the first quarter of 1999 was $687,000, or 39.8% of revenues. This increase was primarily due to increased employee headcount and salary expenses totalling $209,000 and increased depreciation on new test equipment of $139,000, each associated with the expansion of our operations to meet current and anticipated demand. As of May 31, 2000, headcount included in cost of revenues increased to 99 as a result of the acquisition of assets from Micro Linear. Gross margins declined from 60.2% in the first quarter of 1999 to 53.4% in the first quarter of 2000 because we invested in our infrastructure to support future revenue growth. Many of our expenses, particularly test equipment depreciation, employee compensation and rent, are fixed and will continue to increase as we expand our operations. Thus, a failure to increase our revenues or a decrease in our revenues as a result of a delay in a purchase by a customer or a cancellation of a significant purchase order by any of our customers could cause our quarter-to-quarter and year-to-year gross profit to vary significantly in the future as they have in the past. Selling, General and Administrative. Selling, general and administrative expenses consist primarily of salaries and related costs, general allocated facilities costs, promotion costs and professional fees, including legal and accounting fees. We expect that selling, general and administrative costs will increase in the future as we hire additional personnel, expand our operations and incur additional costs related to the growth of our operations and the costs associated with being a public company. Selling, general and administrative expenses in the first quarter of 2000 were $614,000, or 23.5% of revenues, an increase of $325,000, or 112.5%, over the first quarter of 1999. As a percent of total revenues, selling, general and administrative expenses increased from 16.8% in the first quarter of 1999 to 23.5% in the first quarter of 2000. The increase in selling, general and administrative expenses was primarily due to increased employee headcount and related costs of $144,000 due to an increase in payroll, an increase in rent expense of $44,000 and an increase in depreciation expense of $28,000, each associated with expanding our operations to meet current and anticipated demand. Headcount included in selling, general and administrative expenses increased from three at March 31, 1999 to six at March 31, 2000. Research and Development. Our research and development activities have consisted primarily of software and hardware development that has been billed to our customers in the form of NRE charges. Our NRE activities have been included in cost of revenues. However, in the future we expect to incur research and development expenses to further develop reusable technologies such as our Test IP and other capabilities. We expect research and development expenses to represent between 3.0% and 5.0% of our revenues in 2000. Amortization of Stock-based Compensation. Amortization of stock-based compensation is the difference between the deemed fair value of our common stock at the date of grant of options and the exercise price of those options. Such amount, net of amortization, is presented as a reduction of stockholders' equity and amortized over the vesting period of the applicable option. 29 Amortization of stock-based compensation expense was $223,000, or 8.5% of revenues, in the first quarter of 2000, primarily due to the grant of stock options to newly hired employees. We did not have amortization of stock-based compensation expense in the first quarter of 1999. There was no amortization of stock-based compensation in the first quarter of 1999 because we granted all options at the deemed fair value of our common stock. Other Income (Expense), Net. Other income, net in the first quarter of 2000 was $65,000, a decrease of $14,000, or 17.7%, over the first quarter of 1999. The decrease in other income was primarily attributable to increased interest expense of $42,000 resulting from increased bank borrowings to finance our purchase of testers in order to meet rising demand for test services. Provision for Income Taxes. Our provision for income taxes was $337,000 in the first quarter of 2000, a decrease of $10,000, or 2.9%, over the first quarter of 1999. Our effective tax rate increased from 42.0% in the first quarter of 1999 to 54.0% in the first quarter of 2000. The increase in our effective tax rate relates to permanent non-deductible expenses related to amortization of incentive stock option based compensation. Years Ended December 31, 1999, 1998 and 1997 Revenues. Revenues in 1999 were $8.0 million, an increase of $4.6 million, or 134.2%, over 1998. Revenues in 1998 were $3.4 million, an increase of $2.4 million, or 227.5%, over 1997. The increase in revenues in 1999 was primarily due to an increase in our capacity, higher utilization rates and higher customer sales. Additionally, the average revenue generated per customer increased from $180,000 in 1998 to $363,000 in 1999. The increase in revenues in 1998 over 1997 reflects a full year of revenues in 1998 as compared to four months of revenues in 1997, the year we started our operations. Cost of Revenues and Gross Profit. Cost of revenues in 1999 was $3.6 million, or 45.6% of revenues, an increase of $1.1 million, or 41.8%, over 1998. Cost of revenues in 1998 was $2.6 million, or 75.4% of revenues, an increase of $1.8 million, or 255.4%, over 1997. The 1999 increase was primarily due to higher depreciation expenses that resulted from placing into service additional test equipment and costs associated with increased capacity and the corresponding labor costs. Depreciation expenses increased from $1.0 million in 1998 to $1.7 million in 1999 which offset the increase in 1999. In 1998 we paid $135,000 in employee bonuses; however, we did not pay employee bonuses in 1999. Our board of directors, at its discretion, may decide to award employee bonuses in 2000 and in subsequent years. Employee compensation and related costs associated with testing operations increased due to the increase in headcount from 18 employees at December 31, 1998 to 29 employees at December 31, 1999. Gross margins increased from 24.6% in 1998 to 54.4% in 1999. The increase in gross margins was attributable primarily to improved utilization of test equipment and operating personnel. The 1998 increase over 1997 was primarily due to the fact that we operated for four months in 1997 compared to a full year in 1998. We increased our headcount from 7 in 1997 to 18 in 1998. Depreciation expense increased from $177,000 in 1997 to $1.0 million in 1998 as a result of the acquisition of additional test equipment. Gross margins decreased from 30.5% in 1997 to 24.6% in 1998. The decrease in gross margins was attributable primarily to higher fixed costs related to test equipment depreciation and employee compensation. Selling, General and Administrative. Selling, general and administrative expenses in 1999 were $1.6 million, or 20.3% of revenues, an increase of $269,000, or 20.0%, over 1998. Selling, general and administrative expenses in 1998 were $1.4 million, or 39.6% of revenues, an increase of $658,000, or 94.8%, over 1997. The 1999 increase in selling, general and administrative expenses primarily relates to expansion of our work force and administrative facilities to meet demand for our services. Total headcount in selling, general and administrative increased from three at December 31, 1998 to five at December 31, 1999. Payroll and related employee benefits increased by $203,000, from $464,000 in 1998 to $667,000 in 1999. Further, rent expense increased by $116,000, from $50,000 in 1998 to $166,000 in 1999, as a result of expanding our administrative activities. The 1998 increase was mainly due to the fact that we operated for only four months during 1997 as compared to a full year in 1998. 30 Research and Development. Our research and development activities have primarily consisted of software and hardware development that has been billed to our customers in the form of NRE charges. Our NRE activities have been included in cost of revenues. Amortization of Stock-based Compensation. Amortization of stock-based compensation increased from zero in 1998 to $219,000 in 1999 due primarily to the grant of stock options to 14 newly hired employees. There was no amortization of stock-based compensation in 1997 because we granted all options at the deemed fair value of our common stock. Other Income (Expense), Net. Other income, net in 1999 was $354,000, a decrease of $275,000, or 43.7%, over 1998. Other income, net in 1998 was $629,000, a decrease of $132,000, or 17.3%, over 1997. The 1999 decrease is primarily due to a gain of $438,000 on the sale of short-term investments recognized in 1998. The sale of our short-term investments in 1998 related to equity securities in mutual funds. We sold our mutual fund investments in September 1998 and replaced them with short-term commercial paper and money market accounts. The 1998 decrease in comparison to 1997 is primarily due to an increase in interest expense from additional bank borrowings. Provision for Income Taxes. Provision for income taxes in 1999 was $1.2 million, compared to $70,000 in 1998 and $169,000 in 1997. The increase in provision for income taxes in 1999 relates to an increase in our pretax income from $117,000 in 1998 to $2.9 million in 1999. Our effective tax rate decreased from 59.8% in 1998 to 43.0% in 1999. Our effective tax rate increased from 43.9% in 1997 to 59.8% in 1998. Our effective tax rate in 1998 was higher than the federal and state statutory rate primarily as a result of permanent non- deductible expenses related to interest payments. Quarterly Results of Operations The following table sets forth our historical unaudited quarterly information for our most recent nine quarters, both in absolute dollars and as a percentage of total revenue for each quarter. This quarterly information has been prepared on a basis consistent with our audited financial statements and we believe, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the information shown. Our quarterly operating results have fluctuated and may continue to fluctuate significantly as a result of a variety of factors and operating results for any quarter are not necessarily indicative of results for any future quarter or for a full fiscal year.
Three Months Ended -------------------------------------------------------------------------------- Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, 1998 1998 1998 1998 1999 1999 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- -------- -------- (in thousands) Statement of Operations: Revenues................ $ 272 $834 $ 919 $1,388 $1,724 $2,025 $2,162 $2,083 $2,616 Cost of revenues........ 357 586 717 913 688 810 973 1,177 1,220 ----- ---- ----- ------ ------ ------ ------ ------ ------ Gross profit............ (85) 248 202 475 1,036 1,215 1,189 906 1,396 ----- ---- ----- ------ ------ ------ ------ ------ ------ Operating expenses: Selling, general and administrative....... 289 323 324 416 289 379 413 540 614 Research and development.......... -- -- -- -- -- -- -- -- -- Amortization of stock- based compensation... -- -- -- -- -- -- 71 148 223 ----- ---- ----- ------ ------ ------ ------ ------ ------ Total operating expenses............ 289 323 324 416 289 379 484 688 837 ----- ---- ----- ------ ------ ------ ------ ------ ------ Income (loss) from operations............. (374) (75) (122) 59 747 836 705 218 559 Other income (expense), net.................... 133 99 347 50 80 60 64 150 65 ----- ---- ----- ------ ------ ------ ------ ------ ------ Income (loss) before income taxes........... (241) 24 225 109 827 896 769 368 624 Provision for income taxes (benefit)........ (144) 14 135 65 347 376 348 158 337 ----- ---- ----- ------ ------ ------ ------ ------ ------ Net income (loss)....... $ (97) $ 10 $ 90 $ 44 $ 480 $ 520 $ 421 $ 210 $ 287 ===== ==== ===== ====== ====== ====== ====== ====== ======
31
Three Months Ended --------------------------------------------------------------------------------- Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, 1998 1998 1998 1998 1999 1999 1999 1999 2000 -------- -------- -------- -------- -------- -------- -------- -------- -------- (percentage of total revenues) As a Percentage of Revenues: Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........ 131.3 70.3 78.0 65.8 39.9 40.0 45.0 56.5 46.6 ------ ----- ----- ----- ----- ----- ----- ----- ----- Gross profit............ (31.3) 29.7 22.0 34.2 60.1 60.0 55.0 43.5 53.4 ------ ----- ----- ----- ----- ----- ----- ----- ----- Operating expenses: Selling, general and administrative...... 106.3 38.7 35.3 30.0 16.8 18.7 19.1 25.9 23.5 Research and development......... -- -- -- -- -- -- -- -- -- Amortization of stock-based compensation........ -- -- -- -- -- -- 3.3 7.1 8.5 ------ ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses......... 106.3 38.7 35.3 30.0 16.8 18.7 22.4 33.0 32.0 ------ ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) from operations............ (137.6) (9.0) (13.3) 4.2 43.3 41.3 32.6 10.5 21.4 Other income (expense), net................... 48.9 11.9 37.8 3.6 4.6 3.0 3.0 7.2 2.5 ------ ----- ----- ----- ----- ----- ----- ----- ----- Income (loss) before provision for income taxes................. (88.7) 2.9 24.6 7.8 47.9 44.3 35.6 17.7 23.9 Provision for income taxes (benefit)....... (52.9) 1.7 14.7 4.7 20.1 18.6 16.1 7.6 12.9 ------ ----- ----- ----- ----- ----- ----- ----- ----- Net income (loss)....... (35.8)% 1.2% 9.9% 3.1% 27.8% 25.7% 19.5% 10.1% 11.0% ====== ===== ===== ===== ===== ===== ===== ===== =====
Our revenues generally increased in each quarter of 1998 and 1999 other than the last quarter of 1999, primarily as a result of increased customer demand for our test services from existing and new customers. During the quarters ended June 30, 1999, September 30, 1999 and December 31, 1999, revenues remained relatively consistent, and actually decreased in the last quarter of 1999 as a result of test capacity limitations. However, in the first quarter of 2000, we increased our test capacity by adding floor space and additional testers compared to the last quarter of 1999, allowing us to increase the volume of our test services and our revenues. Gross margins have fluctuated from quarter-to-quarter as a result of increased fixed costs associated with the expansion of our operations and increases in our headcount. Gross profit decreased in each of the last three quarters of 1999 because revenues remained relatively flat while we increased fixed costs related to headcount and facility expansions to meet anticipated demand for our test services. Further, in the last quarter of 1999, we performed and completed additional NRE projects which typically have lower gross margins than our test services. We expect this trend of fluctuating gross margins to continue as we intend to further expand our operations. Liquidity and Capital Resources Our annual need for funds has generally increased reflecting the expanding scope and level of our test service activities. Since our inception, we have financed our operations primarily through the sale of $14.0 million of our Series A convertible preferred stock, cash flows from operating activities, bank borrowings and customer equipment financings. In the first quarter of 2000, cash used in operating activities of $263,000 primarily related to a decrease in income tax payable of $1.1 million, offset by net income of $287,000 and depreciation of $549,000. Cash used in investing activities of $833,000 primarily related to capital expenditures. Cash provided by financing activities of $267,000 primarily related to net bank borrowings for purchases of testers. Total cash and cash equivalents at March 31, 2000 was $10.8 million. In 1999, cash provided by operating activities of $4.4 million primarily consisted of net income of $1.6 million, depreciation of $1.7 million, an increase in income tax payable of $1.2 million and an increase in accounts payable of $1.1 million. Cash used in investing activities of $1.4 million primarily related to capital 32 expenditures of $3.8 million offset by a reduction in restricted cash of $2.3 million. Cash provided by financing activities of $199,000 primarily related to net bank borrowings. The total cash and cash equivalents at the end of 1999 was $11.6 million. In 1998, cash used in operating activities of $2.7 million primarily related to a decrease in accounts payable of $2.9 million, an increase in accounts receivable of $518,000 and a realized gain on sale of short-term investments of $438,000, offset by depreciation of $1.1 million, an increase in accrued liabilities of $250,000 and net income of $47,000. Cash used in investing activities of $1.6 million related to purchases of property and equipment of $1.9 million, increase in restricted cash of $4.5 million, offset by proceeds from sale of short-term investments of $4.8 million. Cash provided by financing activities of $3.7 million related to net borrowings on our bank facilities to fund test equipment purchases. In 1997, cash provided by operating activities of $2.8 million primarily related to an increase in accounts payable of $3.1 million, net income of $216,000, increase in accrued liabilities of $280,000, offset by an increase in accounts receivable of $693,000 and a realized gain on sale of short-term investments of $366,000. Cash used in investing activities related to purchases of property and equipment of $5.4 million and purchases of short-term investments of $4.0 million. Cash provided by financing activities of $15.6 million related to proceeds from our issuance of Series A convertible preferred stock of $14.0 million and net borrowings of $1.6 million on our bank facility to fund purchases of test equipment. On April 28, 2000, we issued an unsecured promissory note in the amount of approximately $5.0 million to purchase mixed-signal and RF test equipment from Micro Linear. The promissory note bears interest at a per annum rate of 6.00% due monthly with equal monthly principal installments of approximately $165,000 beginning November 15, 2000. The note is due and payable in full in April 2003. In November 1997, we established a secured equipment line of credit with California Bank and Trust, formerly Sumitomo Bank of California, for $6.5 million. Borrowings under this arrangement bear interest between 7.10% and 7.30%. This line is secured by liens on our equipment and was secured by $4.5 million in deposits at December 31, 1998 and $2.25 million in deposits at December 31, 1999 and March 31, 2000. Pursuant to this arrangement, each advance matures in five years and is limited to 100% of the invoice amount plus tax, license and freight. No additional advances are available on this credit line. As of May 31, 2000, $3.5 million was outstanding under this arrangement. In August 1999, we established an additional secured equipment line of credit with California Bank and Trust for $2.0 million. Each advance under this agreement bears interest at the effective prime rate, matures within five years, and is limited to 90% of the cash value of the equipment securing the loan. No further advances will be available after August 31, 2000. This equipment line of credit is secured by liens on our equipment. As of May 31, 2000, $1.9 million was outstanding under this agreement. We believe that the net proceeds from the sale of the common stock in this offering, together with funds generated from operations and our bank facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months. Thereafter, we may find it necessary to obtain additional equity or debt financing. In the event additional financing is required, we may not be able to raise it on acceptable terms or at all. The sale of additional equity or debt securities may result in additional dilution to our stockholders. See "Risk Factors--We expect to incur significant capital expenditures in the future and therefore may require additional financing." Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 33 No. 133, as recently amended, is effective for fiscal years beginning after June 15, 2000. Management believes the adoption of SFAS No. 133 will not have a material effect on our financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The adoption of SAB 101 has not had a significant impact on our results of operations and financial position. In March 2000, the FASB issued Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). This interpretation clarifies the definition of employee for purposes of applying Accounting Practice Board Opinion No. 25, Accounting for Stock Issued to Employees, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combinations. This interpretation is effective July 1, 2000, but certain conclusions in this interpretation cover specific events that occur after either December 15, 1998, or January 12, 2000. We believe that FIN 44 will not have a material effect on our financial position or results of operations. Qualitative and Quantitative Disclosures about Market Risk To date, we have operated exclusively in the United States and all sales to date have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations. Even when we manage a customer's outsourced IC assembly operation in Asia, the fees have been paid in U.S. dollars. Because of this, our revenues and profits have not been impacted directly by changes in foreign exchange rates. However, our future revenues may be impacted indirectly by changes in foreign exchange rates if our customers use foreign currency to purchase U.S. dollars to pay for our services. In addition, we may be involved with customers and suppliers from overseas and the fees may not be based in U.S. dollars. Such revenues and costs will then be impacted by changes in foreign exchange rates. Our exposure to market risk is confined to our cash and cash equivalents. We maintain an investment portfolio of depository accounts and investment grade short-term commercial paper. The securities in our investment portfolio are not leveraged, are classified as cash equivalents and are, due to their very short- term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that an increase in market rates would have any negative impact on the realized value of our investment portfolio. 34 BUSINESS Overview We are a leading independent provider of comprehensive semiconductor test services. We focus on complex mixed-signal, RF and high-performance digital ICs, primarily in the communications and networking industries. We provide our customers with a flexible, full service solution for their testing needs. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. Our services include software test program and hardware development, prototype verification, characterization, volume production wafer sort and volume production final test. Each IC design requires a specific software test program customized to the product, which can take up to four months to develop. As the time, expense and expertise involved in this development process grows, manufacturers are increasingly looking to outsource their test needs. However, most independent providers of test services only offer production test services using the customers' internally developed test programs. In contrast, our range of customer services includes customized, high quality test software programs that can reduce overall test times. Our test services combine our internally developed software test programs and test hardware to provide our customers with advanced test solutions on a cost-effective basis. We have created a library of proprietary and reusable test modules, or Test IP, which we generated during and used in the development of test programs for over 60 devices. Our experienced test engineers use our Test IP to facilitate the rapid development of high quality test programs and the reduction of test times. This can accelerate our customers' new product time-to-market and time-to-volume while simultaneously lowering their production costs. We provide test services to IDMs, as well as fabless semiconductor companies and emerging growth companies. Our top five customers during the five months ended May 31, 2000 were GlobeSpan, Micro Linear, MMC, Philips and Vitesse. Over this period these customers accounted for 84% of our revenues. We were founded in November 1996 and commenced operations in September 1997, and have facilities located in California, in Sunnyvale, San Jose and San Diego. We have strategically placed our facilities close to concentrations of semiconductor companies in order to allow close collaboration between our customers' development engineers and our test engineers throughout all stages of new product development and production. This allows our engineers to directly interact and communicate with our customers during critical times of the product cycle, such as prototype verification and production. Industry Background Growth in the Semiconductor Industry ICs are critical components used in an increasingly wide variety of electronic applications including communications, internet infrastructure, networking, computers, consumer electronic devices and automotive and industrial systems. The Semiconductor Industry Association, or SIA, estimates that revenues for the semiconductor industry will grow from $149 billion in 1999 to approximately $312 billion in 2003, a CAGR of 20.3%. According to Dataquest, a principal factor driving the growth in ICs is increased sales of communications and network ICs used in applications such as digital subscriber lines, or DSL, cellular phones, television set-top-boxes, broadband communications, cable modems, electronic commerce hardware and network appliances and other wireless devices. 35 Overview of our Semiconductor Test and Packaging Process The process of testing and packaging a semiconductor can be visualized as follows: [GRAPHIC THAT DEPICTS THE PROCESS OF OUR TEST SERVICES WITH ACCOMPANYING DESCRIPTIVE TEXT] The Semiconductor Testing Process ICs are manufactured on high-purity silicon discs called wafers. The wafers are processed through a complex series of photographic etch, or removal, and high temperature cycles to form a number of individual ICs, or die, on each wafer. The testing of an IC is a complex process that requires increasingly sophisticated engineering, software, production expertise and test equipment. ICs are tested on ATE to verify that they operate in compliance with their applicable specifications, including frequency and timing over temperature and voltage ranges. These tests require the development of software programs that are customized to the IC and the test equipment, as well as probe cards and load boards that provide an interface between the IC and the test equipment. This test process can be divided into the three functional areas described below: Prototype Test. Initially, wafers and packaged ICs are tested to evaluate design specification compliance. If compliant, a statistically significant sample is selected for characterization tests to determine whether the prototype is ready for volume production. If initially noncompliant, additional tests are performed to attempt to debug the prototype and determine the origin of the devices' failure. Wafer Sort. Next, each die on a completed wafer is tested for electrical performance. Nonfunctioning die are identified and subsequently discarded before good die are assembled in plastic or ceramic packages. Final Test. Finally, the now-packaged ICs are tested again to confirm that they operate and are suitable for shipment to customers or end users. Increasing Test Complexity and Cost Historically, semiconductor manufacturers performed their own test and assembly and would rely on independent providers to handle overflow volume. Advances in IC technology such as increased functionality, integration of analog and digital circuitry and a higher number of electrical contacts, or pin counts, on a single IC have given rise to testing requirements and the deployment of more complex test equipment. This increasing IC complexity has increased the cost of developing and maintaining advanced test resources including the time and cost to develop test software, and the cost of engineering resources and capital equipment. As a result, semiconductor manufacturers have begun to outsource their sophisticated test needs to full service test providers. 36 Increased IC complexity has given rise to sophisticated test software programs and new generations of advanced test equipment. This also has increased dramatically the cost of developing and maintaining the advanced test resources required to effectively introduce a new product to market. Faster new product introductions have made it increasingly difficult for semiconductor companies to maintain adequate internal capacity utilization levels necessary for cost effective IC testing. More rapid obsolescence of expensive test equipment further adds to the increasing cost of maintaining effective test capabilities. For example, equipment used to test mixed-signal devices can become obsolete for the most advanced ICs in as little as two years. We expect the cost of test software and equipment to continue to increase as product development cycles shorten, new products and applications proliferate, pin counts increase and die sizes shrink. Rising Demand for Outsourced Test Today, semiconductor manufacturers increasingly are outsourcing test to independent providers who have the expertise, equipment and engineers to satisfy the time-to-market and time-to-volume demands of the industry, allowing them to focus internal resources on their core competencies. According to the Prismark Semiconductor and Packaging Report, First Quarter 2000, the total worldwide assembly and functional test services market is expected to grow from $24.6 billion in 1999 to $54.6 billion in 2004, a CAGR of 22.1%. The size of the outsourced worldwide IC packaging and functional test services market is expected to grow from $8.1 billion in 1999 to approximately $21.3 billion in 2004, a CAGR of 27.3%. We believe that the growth of the overall outsourced test services market will outpace the growth of the worldwide assembly and test market in light of the following factors: . Increased Engineering Complexity. As ICs have become more complex, test program development and hardware platforms now require more sophisticated engineering resources. Each device requires a customized, product-specific test program, which can take up to four months to develop, and a sophisticated probe card or load board. Typical load boards have increased from simple six-layer boards to sixteen-layer boards. To keep pace with IC complexity, software test programs must be developed by engineers experienced in the test field. We believe that IDMs and fabless companies will prefer to outsource an increasing percentage of their test services rather than directly incur the costs of employing the additional experienced test engineers that otherwise would be required. . Efficient Use of Capital. The complex test process requires substantial investment in specialized test equipment and facilities, the cost of which has increased substantially over the past several years as the devices they test have become more sophisticated. Shorter product life cycles for high-performance ICs further discourage customers and competitors from investing in expensive test equipment that cannot be fully used. Conversely, having multiple customers, with differing levels of technical requirements, allows independent test companies to use their test equipment 24 hours per day, seven days a week and to extend the productive life of their equipment. We believe that semiconductor companies are turning to the outsourcing of test services to optimize their limited resources, reduce capital expenditures and control research and development costs. . Time-to-Market and Time-to-Volume Pressures. To meet the demands of the increasingly competitive semiconductor market, and to respond to decreasing product life spans, semiconductor companies are seeking to shorten their time-to-market and time-to-volume. We believe that independent test companies that offer comprehensive test solutions, test equipment, engineering capabilities and test expertise can accelerate their customers' new product development and time-to-market and time-to-volume. 37 The Artest Solution We provide comprehensive engineering and production test services to the semiconductor industry for mixed-signal, RF and high-performance digital ICs. We have the engineering, software and hardware experience to provide our customers with a flexible, full service solution to their test needs. Our solution addresses each stage of our customers' product lifecycle from new product development through high volume production. Our development engineering staff, with an average of over 19 years of engineering and operations experience, has a comprehensive understanding of device test requirements, including digital technology, analog technology, test equipment, test languages and test hardware. We also have created a library of our Test IP which we generated during and used in the development of test programs for over 60 devices. We use our Test IP library as valuable building blocks to develop new solutions for our customers. Our engineering experience and our software library allow us to accelerate test development times and increase our own test capacity and utilization. We have strategically placed our facilities close to concentrations of semiconductor companies in order to allow close collaboration between our customers' development engineers and our test engineers throughout all stages of new product development and production. Our engineers' proximity to our customers allows them to directly interact and communicate during critical times of the product cycle such as prototype debug and production. Two case studies demonstrate how we use our comprehensive test engineering services and experience to assist our customers. Case Study No. 1 Customer Micro Linear Corporation Customer Challenge Micro Linear faced increasing cost pressure associated with delivering its analog and mixed-signal products. Although Micro Linear had outsourced its assembly operations overseas, it was seeking an outsourcing company to provide complex test services locally, including direct access to ATE and test engineers who would collaborate directly with Micro Linear engineers, to support new product development and production. Artest Solution We now are providing all of Micro Linear's test services within its facilities in San Jose, California. We purchased the mixed-signal and RF test equipment from Micro Linear and entered into a three-year agreement under which we are providing Micro Linear production test services and equipment access for their new product development. By using our experience in mixed-signal device testing, engineering and manufacturing, we were able to reduce their total test costs by 40%. In addition, we now are providing management services for Micro Linear's outsourced assembly operations. Our agreement allows Micro Linear to focus its resources on the development of new products, and helps us build a closer relationship with this key customer. Case Study No. 2 Customer Philips Semiconductors, Inc. Customer Challenge Philips' predecessor, VLSI Technology, Inc., had developed an advanced, mixed-signal cellular phone chip. The product required complex testing and would have involved the devotion of significant Philips resources and delayed the product's time-to-volume if test services were conducted in-house.
38 Artest Solution Our engineering team worked closely with Philips' test engineers to quickly develop test software to support the high volume production requirements. As Philips' production increased, we optimized the test program which reduced the test time from 8 seconds to 4.5 seconds, a time reduction of 44%, and as a result, significantly reduced Philips' production costs.
Strategy Our goal is to be the leading provider of a comprehensive selection of advanced test services for mixed-signal, RF and high-performance digital ICs, primarily in the communications and networking segments of the semiconductor industry. The principal components of our strategy to achieve this objective are set forth below. Target Selected Customers in Mixed-Signal, RF and High-Performance Digital IC Markets. We intend to strengthen our position as a leading provider of test services for mixed-signal, RF and high-performance digital ICs in the communications and networking sectors. Our engineering and software expertise will enable us to continually expand our test services in these two high-growth areas driven by rapid product introduction and shorter product life cycles. We believe that our offering of services, including test software and hardware development and prototype and production test services, are well-suited to the product introduction and time-to-volume needs of IC companies. We also believe that by focusing our testing services on these fast-growing markets, we will be able to take advantage of the growing demand for testing expertise and the evolving trend towards outsourcing. Continue to Develop our Test IP Library. We plan to expand our Test IP library to include test modules for emerging standards such as analog to digital converter, digital to analog converter, universal serial bus, a standard for attaching external equipment to personal computers, and firewire, a standard for high capacity communication. This will allow us to more effectively generate test programs for our customers. Pursue Acquisitions of IC Test Operations. We believe that, like Micro Linear, a number of potential customers ultimately may decide to outsource their entire test operation. We believe that we can profitably purchase their equipment and hire their test employees and then use these resources as part of long-term test arrangements with these customers. This strategy also will provide us with additional test capacity for other customers. Increase Penetration of Existing Customers and Establish Relationships with New Customers. Independent test services companies provide only a relatively small percentage of most IC manufacturers' overall testing needs. For example, our major customers typically outsource to us less than 10% of their overall test functions. We believe that as we continue to demonstrate our expertise to these manufacturers, they will outsource a greater proportion of their testing needs to us. Expand our Geographic Presence and Scope of Activities. We intend to open a limited number of facilities in domestic and international locations near concentrations of existing and potential customers. Our close proximity to our customers' design facilities has in the past and we anticipate will permit us in the future to work closely with them starting with the early stage of product development. In order to complement our core test capabilities and enable us to offer a comprehensive range of test and assembly services, our expansion plans may also include the acquisition of packaging operations. Services We offer a comprehensive array of technologically advanced test and engineering services to address the needs of our customers and their end customers. We work closely with our customers to bring their products to market quickly and cost-effectively while providing ongoing test data for yield enhancement and cost reduction. 39 There are two major device life-cycle phases: prototype and production. We work closely with our customers to offer test services during both phases. In addition, we offer our customers a turnkey solution which includes wafer sort, selection and management of assembly subcontractors, final test and drop shipment services, all of which can reduce our customers' manufacturing costs and their time-to-market and time-to-volume. The following is a summary of the services we offer throughout the IC development to volume production process. Prototype Phase The initial stage of IC design, development and testing is the prototype phase, during which we provide the following services: Software Test Program and Hardware Development. To properly test the functionality and performance of our customers' ICs for prototype verification and characterization, our engineering staff develops software test programs for each particular product. In conjunction with this test program development, we also design and provide the probe card and load board. Prototype Assembly. Based on our customers' requirements and the device specifications, our engineers will assist customers with the selection of their package and assembly vendor. Our engineers help our customers select the optimal package for their product in terms of package type and cavity size by evaluating the electrical, thermal, mechanical and material application characteristics of their product. We also provide expedited domestic and overseas assembly management services. By working closely with specialized packaging firms, we can provide tested prototypes to our customers in two days. Prototype Verification. We test wafers and packaged prototype devices to verify basic functionality and compliance with the device specifications. In the event that the IC does not meet published specifications, we work closely with our customers' development engineers to quickly provide device test data feedback to help identify and isolate failures. This is a critical step in enabling our customers to achieve their development schedule and production time-to-market requirements. Prototype Characterization. We offer extensive test services to determine if there are any IC design or manufacturing weaknesses. This often includes developing an enhanced test program to measure functionality, frequency and timing over temperature and voltage ranges. Reliability Qualification. We provide engineering services to evaluate the IC's life span. This process often includes long and short-term high temperature stress, electrostatic discharge, susceptibility to damage during power up and package integrity tests. Production Phase The second stage of IC design, development and testing is the production phase, during which we provide the following services: Software Test Program and Hardware Development. To properly test the functionality and performance of our customers' ICs for wafer sort and final test, our engineering staff develops software test programs for each particular product. In conjunction with the test program development, we also design and provide the probe card and load board. Wafer Sort. Following wafer fabrication and prior to packaging, we electrically test the wafers to determine which ICs or die on the wafers meet the device specifications. Assembly Management. For some customers, we offer to select their independent assembly suppliers and manage the outsourcing of their assembly operations. We negotiate the price, assist in package selection, manage the inventory and manage the relationship with these independent assembly suppliers. 40 Final Test. After ICs are packaged, we electrically test each IC to verify that it conforms to the device specifications. Other Tests and Support. After final test, we can lead scan, or verify pin position on the IC package. Prior to shipment we can bake, or heat, and dry pack, or place in protective shipping bags, packaged ICs. Additionally, we either drop-ship the ICs to the end-user or return them to our customers. We also help our customers plan their production and track their inventory. Test Optimization. As the IC moves into high production volume, we provide test engineering services to optimize test programs and reduce test time and, therefore, the customer's cost. In addition, we provide our customers device and test yield data and work closely with them to increase yield, which also reduces costs. In addition, we rent the use of our IC test equipment to some of our customers in order to maximize our capacity utilization rates. Customers, Long-Term Customer Relationships and Market Customers. We provide test services to a growing number of customers consisting primarily of IDMs, fabless companies and emerging growth companies. Our largest customers accounted for a significant portion of our revenues in the first quarter of 2000 and in 1999, 1998 and 1997. During the first quarter of 2000, Philips represented 60% of our revenues and Fairchild, GlobeSpan, MMC and Vitesse each ranging between 6% and 8% of our revenues. In 1999, our three largest customers, MMC, Philips and Vitesse in the aggregate represented 85% of our revenues, with Philips representing 60%, Vitesse representing 15% and MMC representing 10%. In 1998 Philips represented 43%, Vitesse represented 27% and MMC represented 13% of our revenues. In 1997 Philips represented 82% of our revenues. We anticipate that Fairchild, GlobeSpan, Micro Linear, MMC, Philips and Vitesse will account for a high percentage of our revenues for the near future, with Micro Linear expected to be our largest customer for 2000. We expect that we will continue to be dependent upon a relatively limited number of customers for a significant portion of our revenue in future periods. Our customers generally place their purchase orders one to three months in advance, which is typical for the test industry. As a result, we usually operate with no significant backlog. Moreover, all of our customers operate in the cyclical semiconductor industry and may vary order levels significantly from period to period. Our customers over the twelve months ended May 31, 2000 were: Acoustic Technologies, MMC Networks, Inc. Schlumberger Inc. MediaQ, Inc. Technologies, Inc. Alantro Communications, Micro Linear Corporation Sensory, Inc. Inc. NetLogic Microsystems, Sigma Designs, Inc. Arizona Microtek, Inc. Inc. Siliconware Precision ATI Technologies, Inc. Oak Technology, Inc. Industry Company, Ltd. AverLogic Technologies, Philips Semiconductors, Synaptics, Inc. Inc. Inc. Trident Microsystems, C-Cube Microsystems, Inc. PLX Technology, Inc. Inc. Fairchild Semiconductor Radisys Corporation TriQuint Semicondutor, International, Inc. RealChip, Inc. Inc. Fujitsu Computer Packaging Sage, Inc. Tropian, Inc. Technologies, Inc. Vitesse Semiconductor GlobeSpan, Inc. Corporation Integrated Telecom ZiLOG, Inc. Express, Inc. Long-Term Customer Relationships. An important element of our business strategy is to increase our customer base by expanding our services to include a broader range of test and related services. We intend to achieve this result by creating long-term 41 relationships with potential customers. To facilitate some of these long-term relationships, we may enter into arrangements similar to the Micro Linear and Fairchild agreements, in which we purchase some or all of their test equipment and hire their test engineers and operators. Such arrangements will also provide us with additional test capacity for other customers. We have entered into long-term relationships with three of our customers: Fairchild, Micro Linear and MMC. Fairchild. In September 1999, we entered into a test equipment purchase and engineering test services agreement with Fairchild, under which we purchased their San Diego mixed-signal test equipment and agreed to pay Fairchild a monthly user fee until June 30, 2000 for the rental of its facilities. After June 30, 2000, we are relocating, at our cost, to a new facility in San Diego, California to accommodate Fairchild's test and engineering needs. We also agreed to offer employment to certain Fairchild employees, assume severance payment obligations and pay them a retention fee which shall be covered by Fairchild. For an initial three-year term, Fairchild has agreed to use our production test and shipping services for certain existing products and to give us a favored testing service status for any new mixed-signal products it develops. Fairchild also agreed to use these services for the term of the agreement for a capped price as long as we maintain competitive costs, service and quality. Under the agreement, Fairchild is obligated to pay us minimum annual user fees for use of our testers. The agreement provides for automatic renewals for one-year terms unless a party gives written notice to the contrary. Micro Linear. In April 2000, we entered into a test equipment purchase agreement with Micro Linear under which we purchased the mixed-signal and RF test equipment from Micro Linear and assumed liabilities under certain contracts of Micro Linear. We also entered into an operating agreement that requires us to employ certain Micro Linear employees and assume severance payment obligations which are funded by Micro Linear. For an initial three-year term, Micro Linear has agreed to use us as its primary subcontractor to perform wafer sort, final test, assembly management and shipping services for certain existing products for a capped price as long as we maintain competitive costs, service and quality. Under the agreement, Micro Linear is obligated to pay us minimum annual user fees for use of certain testers. The operating agreement provides for automatic renewals for one-year terms unless a party gives written notice to the contrary. MMC. In May 1999, we entered into a one-year equipment rental agreement with MMC. The agreement is renewable upon consent of both parties and the final volume requirements for this year's renewal period are currently being finalized. Under the agreement, MMC is required to purchase a minimum hourly volume of tester time from us unless we are able to sell their unused tester time. Market. The following table sets forth for the periods indicated the percentage of our revenue derived from the testing of ICs used in communications, which includes both telecommunications and data communications, and other applications:
Year Ended December 31, Quarter Ended --------------------------- March 31, 1997 1998 1999 2000 ------- ------- ------- ------------- (Percentage of total revenue) Communications..................... 73% 51% 74% 61% Networking......................... -- 5 13 22 Computing.......................... 9 11 7 6 Video.............................. 11 28 3 11 Application specific IC............ 1 1 1 -- Other.............................. 6 4 2 -- --- --- --- --- Total............................ 100% 100% 100% 100% === === === ===
42 Sales, Marketing and Customer Service We target potential customers who are industry leaders in communications and networking which require mixed-signal, RF or high-performance digital testing and present significant volume growth opportunities. In addition, we target new fabless and emerging growth companies participating in these and other fast-growing market segments. We market our services through our senior management and through direct sales personnel located in Sunnyvale and San Diego, California and Phoenix, Arizona. Our sales team is supported by technical managers, and consists of sales and engineering representatives knowledgeable about our capabilities and our customers' needs for testing mixed-signal, RF and high-performance digital products. Typically, our sales cycle goes through the following stages: initial contact with a customer; discussion of the customer's technical requirements, production volume and schedule forecast; discussion of our capabilities and advantages; engineering discussions, development of our proposal and price quotes to the customer and issuance of a purchase order by the customer. Our marketing strategy focuses on developing close working relationships with our customers early in the product development phase and throughout the lifecycle of their product. Our objective is to have our customers consider us an integral part of their businesses. We place a strong emphasis on providing quality test services to our customers, which we believe is a significant component in our customers' selection process. We also believe our customers value the breadth and the flexibility of the test services we provide. In addition, we are committed to finding solutions for our customers' problems, which has been a significant factor in our ability to attract and retain customers. Intellectual Property and Research and Development Intellectual Property. Our operational success will depend in part on our ability to develop and protect our intellectual property. We have developed test programs for over 60 devices for high-end applications such as DSL, modem, television set-top-box and networking products. We also are working with IC design intellectual property providers, wafer foundries and computer aided design tool providers to fully integrate the test program generation process into the design flow. We have created a library of Test IP generated and subsequently used during the development of test programs for more than 60 devices. We also are continuing to expand this Test IP library, which provides valuable building blocks which enable rapid test program generation, cross-platform program conversion and optimization of test programs. We protect our Test IP and software generation methodologies through non-disclosure and proprietary rights assignment agreements with our employees and non-disclosure agreements with our customers. In addition to our Test IP and test methodologies, we possess hardware engineering experience that provides high quality, cost-effective test hardware interfaces between the tester and supporting equipment such as wafer probers and packaged IC handlers. Major cost reductions can be achieved by implementing a multi-site test scheme, in which more than one device is tested simultaneously, and a "ping-pong" test scheme, in which idle tester time is minimized. Research and Development. In the past, most of our research and development was in the form of customer-financed non-recurring engineering charges. We expect to incur research and development expenses in the future to further develop our Test IP. Our research and development efforts also will include our continuing development of interface hardware to provide for high-frequency testing by minimizing electrical noise. We believe that our research and development program will be an integral component of our business strategy in the future. 43 As of May 31, 2000, we employed 12 engineers who dedicate more than 50% of their time to our research and development activities. In addition, our management and operational personnel are also involved in research and development activities. Equipment, Quality Control and Quality Standard Certification Equipment. We work closely with our major equipment suppliers to ensure that equipment is delivered on time and such equipment meets our stringent performance specifications. In some cases, we obtain our equipment through sole or limited source suppliers. We have formed equipment evaluation teams, consisting of engineering and operations employees, to manage and procure equipment that meets our customers' current and future needs. These teams conduct a regular review of future technology roadmaps, equipment capacity and cost performance targets. These activities provide a basis for us to determine our ongoing equipment needs. With the exception of a few key suppliers that provide us with reserved equipment delivery slots and price discount structures, we have no binding supply agreements with any of our suppliers. A reserved equipment delivery slot is one which allows us to obtain an accelerated delivery of the equipment over and above the delivery schedule previously committed by the supplier. Typically, price discounts are offered for volume purchases. Test equipment is one of the most critical components of the testing process. We believe the highly specialized equipment we use is among the most advanced for production test of mixed-signal, RF and high-end digital semiconductors. We generally seek to obtain testers from different vendors with similar functionality and the ability to test a variety of different semiconductors. In general, particular semiconductors can be tested on only a limited number of specially configured testers. As part of the qualification process, customers may specify the equipment on which their semiconductors may be tested. We purchase test equipment from major international manufacturers, which are primarily located in the United States, Europe and Asia, including Agilent Technologies, Inc., Credence Systems Corporation, Eagle Test Systems, Inc., LTX Corporation, Schlumberger Technologies, Inc., Teradyne Inc. and TMT, Inc., a division of Credence Systems. We operate approximately 40 testers, including 36 for mixed- signal/analog/RF testing and four for digital testing. Also, in situations where a customer has specified test equipment that is not widely applicable to other products that we test, we have required the customer to provide the equipment to us on a consignment basis. Two of the 40 testers we operate are on consignment. In addition to test equipment, we maintain a variety of other types of equipment, such as automated wafer probers and handlers, scanners and workstations for use in software development. Quality Control. Customers require that our facilities and procedures undergo a stringent vendor qualification process. This qualification process typically takes from one to two weeks, but can take longer depending on the requirements of the customer. The initial phase of test qualification is a process known as correlation. During correlation, which typically takes two to three days, the customer provides us with sample semiconductors to be tested. Our engineers work with customers to resolve any correlation issues that may arise. Our engineers and technicians are responsible for monitoring our test and manufacturing processes to ensure they meet our quality standards. 44 Quality Standard Certification. Our test operations in Sunnyvale, California and San Jose, California are ISO 9002 certified. We plan to obtain ISO 9002 certification for our San Diego, California facility later this year. This standard is issued and certified by the International Standards Organization, and sets forth what is required to ensure production of quality products and services. The ISO certification process involves periodically subjecting production processes and quality management systems to stringent third-party review and verification. ISO certification is required for sales of products to certain customers that look to an ISO certification as a threshold indication of our quality control standards. Competition We believe that the independent semiconductor test service industry is fragmented and in an early stage of development. Traditionally, IDMs performed test development and production test services for their products internally. The trend towards outsourcing and the recent success of the fabless companies have altered this traditional business model. We believe that the principal competitive factors in our markets are state-of-the-art test and engineering capabilities, technical competence, software development, flexibility of services offered, quality, price, customer service and support, maturity of sales and services relationships, cycle time, location and available capacity. We believe that we face competition from the internal capabilities of many of our current and potential IDM customers and from large assembly houses which offer production test services that compete with our services. Our largest competitors include Amkor, ASE Test, ASAT, ChipPAC, Siliconware and ST Assembly Test. These companies offer services in the United States, overseas or both. We also face competition from smaller independent, test-houses such as Multitest and Viko, which do not provide as wide an array of services. We believe that we have a competitive advantage because of our engineering breadth, test generation methodologies and Test IP. Our competitors' ability to provide the full set of engineering services, such as test, product characterization, reliability and assembly to support product development from the prototype stage through the production stage varies greatly. The majority of our competitors sell little more than just production test using the customer's own test software programs. Accordingly, we believe that there are currently no competitors that provide the full range of services that we offer for mixed-signal, RF and high-performance digital ICs. Many of our competitors and potential customers have significantly longer operating histories, larger installed bases of test equipment, greater name recognition and significantly greater technical, financial, manufacturing and marketing resources than we do. In addition, a number of these competitors have long established relationships with our customers and potential customers. We believe it is likely that additional competitors will enter the market for most, if not all, of the services which we offer. See "Risk Factors--We may not be able to compete successfully in our industry." Employees As of May 31, 2000, we had 108 employees, with 59 in general operations, 40 in engineering, including research and development, and nine in sales, administration and finance. Our key employees are subject to non-disclosure and proprietary rights assignment agreements. We have not entered into collective bargaining agreements with any of our employees. We have not experienced any strikes or work stoppages by our employees and believe that our relationship with our employees is good. Facilities Our testing operations are conducted in facilities located in San Jose, Sunnyvale and San Diego, California. These facilities have a total floor space of 38,380 square feet and typically operate 24 hours per day in two or three shifts, seven days per week. 45 We lease a 17,240 square-foot facility in Sunnyvale, California, a 17,140 square-foot facility in San Jose, California and a 4,000 square-foot facility in San Diego, California. Our current lease on the San Diego facility expires on June 30, 2000; however, we have entered into a new lease for a 12,618 square-foot facility in San Diego. This new lease commences June 30, 2000 and expires June 30, 2005. Our lease for the Sunnyvale facility expires February 28, 2002, and our lease for the San Jose facility expires April 30, 2003. We believe that we have adequate facilities to accommodate our needs for at least the next 12 months. Litigation We believe that we are not a party to any legal proceedings which would, individually or in the aggregate, have a material adverse effect on our business, financial condition or results of operations. Environmental Matters and Compliance Our test operations do not generate significant pollutants. Our operations are subject to regulatory requirements and potential liabilities arising under California laws and regulations governing, among other things, air, emissions, waste water discharge, waste storage, treatment and disposal, and remediation of releases of hazardous materials. We believe that we are in compliance with all applicable environmental laws and regulations. Expenditures on environmental compliance currently represent an insignificant portion of our operating expenses. 46 MANAGEMENT The following table sets forth information regarding our executive officers, directors and key employees as of June 15, 2000:
Name Age Position ---- --- ------------------------------------------- Jen Kao................................. 51 President, Chief Executive Officer and Director Suheil Samaan........................... 50 Senior Vice President, Operations S.C. "Sam" Lee, Ph.D. .................. 53 Senior Vice President, Engineering and Technology Keith Imai.............................. 45 Vice President, Sales and Marketing Steven Liaw............................. 44 Vice President, Technology Hector Santana.......................... 29 Vice President, Finance Alan "Lanny" Ross(1)(2)................. 65 Chairman of the Board and Director Jim Fiebiger, Ph.D.(1)(2)............... 58 Vice Chairman of the Board and Director Terry Gou .............................. 49 Director Bough Lin(1)(2)......................... 48 Director Satoshi Nagata.......................... 53 Director
- -------- (1)Member of the audit committee (2)Member of the compensation committee Jen Kao founded Artest and has served as our President and a member of our Board of Directors since November 1996 and also as our Chief Executive Officer since March 1997. From May 1988 until February 1997, he served as a director and vice president of VLSI Technology, Inc., now Philips Semiconductors, Inc., a semiconductor manufacturing company. Mr. Kao holds an M.S. in electrical engineering from Stanford University and a B.S. in electrical engineering from National Chiao Tung University in Taiwan. Suheil Samaan has served as our Senior Vice President, Operations since August 1998. From March 1997 until July 1998, Mr. Samaan was vice president of worldwide assembly and test operations of VLSI, now Philips. From May 1995 until March 1997, he was director of subcontract assembly and test for VLSI. From September 1988 until May 1995, he served as a manager at VLSI. Mr. Samaan holds an M.S. in physics from San Jose State University. S.C. "Sam" Lee, Ph.D., has served as our Senior Vice President, Engineering and Technology since April 2000. From January 1998 until March 2000, he was senior vice president, analog and mixed signal products at Fairchild Semiconductor International, Inc., a semiconductor manufacturing company. Prior to that, Dr. Lee was president of the semiconductor division at Raytheon Company from April 1994 until December 1997. Dr. Lee received his Ph.D. and M.S. degrees from Ohio State University in electrical engineering and his B.S. in electrophysics from National Chiao Tung University in Taiwan. Keith Imai served as our Director of Sales and Marketing from October 1997 until he was promoted to his present position of Vice President, Sales and Marketing in April 2000. From June 1988 until October 1997, Mr. Imai served as a marketing manager and engineering section head for the Advanced Computing Division at VLSI, now Philips. Mr. Imai received his B.S. in electrical engineering and computer science from the University of California at Berkeley. Steven Liaw has served as our Vice President, Technology since March 1997. From November 1986 until April 1996, he served as an engineering manager at VLSI, now Philips. Mr. Liaw received his B.Sc. in electrical engineering from Bolton Institute of Technology in the United Kingdom. 47 Hector Santana joined Artest as our Corporate Controller in May 2000, and has served as our Vice President, Finance since June 2000. From July 1994 until May 2000, Mr. Santana was employed by Arthur Andersen LLP, an accounting firm. From September 1998 to May 2000, Mr. Santana served as Arthur Andersen's audit manager for Artest. Mr. Santana holds a B.S. in accounting from Santa Clara University. Alan "Lanny" Ross has served as Chairman of our Board of Directors since March 1997. From February 1996 until September 1999, he served as Chairman of WSMC (Taiwan), a semiconductor manufacturing company. Mr. Ross also served as chairman of the Semiconductor Industry Association in 1994. From 1988 until 1996, he was president of Rockwell International Telecommunications, currently Conexant Systems Incorporated, an IC manufacturing and communications company. He currently serves on the board of directors of Broadcom Corporation, a public company. Mr. Ross holds a B.S. in industrial management from San Diego State University. Jim Fiebiger, Ph.D., has served as Vice Chairman of our Board of Directors since December 1999. He has also served as CEO and chairman of Lovoltech Inc., a private semiconductor company, since December 1999 and as vice chairman of GateField Corporation, a fabless semiconductor company, since February 1999. From June 1996 until February 1999, Dr. Fiebiger was president and chief executive officer of GateField. From December 1987 to September 1993, he was president and chief operating officer of VLSI, now Philips. From October 1993 until June 1996, he was managing director and chairman of Thunderbird Technology, a semiconductor technology licensing company. Dr. Fiebiger is a director of Mentor Graphics and QLogic, which are both public companies. Dr. Fiebiger received his Ph.D. and M.S. degrees in solid state electronics and B.S. in electrical engineering from the University of California at Berkeley. Terry Gou has served as a director on our Board of Directors since March 1997. From January 1995 until the present, Mr. Gou has served as the chairman and chief executive officer of Hon Hai Precision Industry Co. Ltd., a public manufacturing company in Taiwan. He received his B.S. in shipping management from China College of Marine Technology and Commerce. Bough Lin has served as a director on our Board of Directors since March 1997. Since April 1998, Mr. Lin has served as the chairman of Siliconware Group, a semiconductor assembly and test company. He served as vice chairman of Siliconware Group from January 1994 until March 1998. He is the chief executive officer of Siliconware Precision Industries Co., Ltd. Taiwan, a public company in Taiwan. He received his B.S. in physical electronics from National Chiao Tung University in Taiwan. Satoshi Nagata served as a director on our Board of Directors from March 1997 until July 1998 and from April 2000 through the present. Since April 1998, Mr. Nagata has served as president and chief executive officer of Mitsui High- tec (USA) Inc., a subsidiary of Mitsui High-tec, Inc., a public IC assembly and leadframe company in Japan. Mr. Nagata served as senior managing director of Mitsui from April 1994 until April 1997 and executive vice president from April 1997 until April 1998. Mr. Nagata has also served as president of Mitsui Asia H/Q Pte, Ltd. since January 1997 and president of MHT America Holdings, Inc. since September 1997. He received his B.L. in law from Tokyo University and M.S. from Stanford University. Board of Directors We currently have six directors. Following our reincorporation as a Delaware corporation, our board of directors will consist of six directors divided into three classes, with each class serving for a term of three years. At each annual meeting of stockholders, directors will be elected by the holders of common stock to succeed the directors whose terms are expiring. Messrs. Nagata and Gou will be Class I directors whose terms will expire in 2000; Messrs. Lin and Ross will be Class II directors whose terms will expire in 2001; and Messrs. Fiebiger and Kao will be Class III directors whose terms will expire in 2002. This classification of the board of directors may delay or prevent a change in control of our company or in our management. For more information, see "Description of Capital Stock--Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware General Corporation Law." 48 Board Committees Audit Committee. We have established an audit committee composed of independent directors that reviews and supervises our financial controls, including the selection of our independent public accountants, reviews our books and accounts, meets with our officers regarding our financial controls, acts upon recommendations of our independent public accountants and takes further actions as the audit committee deems necessary to complete an audit of our financial statements, as well as other matters that may come before it or as directed by the board of directors. The audit committee currently consists of three directors: Messrs. Ross, Fiebiger and Lin. Compensation Committee. We have also established a compensation committee that reviews and approves the compensation and benefits for our executive officers, administers our stock option plans and performs other duties as may from time to time be determined by the board of directors. The compensation committee currently consists of three directors: Messrs. Ross, Fiebiger and Lin. Director Compensation Currently, directors who are not our employees have received options to purchase an aggregate of 400,000 shares of common stock. Directors also receive reimbursement of out-of-pocket travel expenses for attendance at meetings of our board of directors. Under the 2000 Stock Incentive Plan, non-employee directors will receive automatic option grants upon becoming directors and on the date of each annual meeting of stockholders. The 2000 Stock Incentive Plan also contains a director fee option grant program. Should this program be activated in the future, each non-employee board member will have the opportunity to apply all or a portion of any annual retainer fee otherwise payable in cash to the acquisition of an option with an exercise price below the then fair market value. Non-employee directors will also be eligible to receive discretionary option grants and direct stock issuances under the 2000 Stock Incentive Plan. See "Management-- Benefit Plans." In June 2000, we granted an option to purchase 50,000 shares of common stock at an exercise price of $8.00 per share, which became fully vested and immediately exercisable on June 30, 2000, to each of Alan "Lanny" Ross, Terry Gou, Bough Lin and Satoshi Nagata. In addition, we granted an option to purchase 200,000 shares of common stock at an exercise price of $8.00 per share, which became fully vested and immediately exercisable on June 30, 2000, to Jim Fiebiger. Compensation Committee Interlocks and Insider Participation None of our directors who perform the functions of a compensation committee, other than Mr. Jen Kao, our President and Chief Executive Officer, is an employee of or ever was an employee of Artest. Messrs. Lin, Nagata and Gou, who serve on our Board of Directors, are affiliated with three of our significant stockholders. See "Certain Transactions and Relationships with Related Parties." None of our executive officers serves on the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board or our compensation committee. Executive Officers Our executive officers are appointed by and serve at the discretion of our board of directors. There are no family relationships among any of our directors, officers or key employees. 49 Executive Compensation Summary Compensation Table The following tables set forth information concerning compensation in 1999 of our chief executive officer and our four other most highly compensated executives who earned an annualized salary of more than $100,000 for that year, as well as our other executive officers. Summary Compensation Table
Annual Long-Term Compensation(1) Compensation -------------------- ------------ Fiscal Securities Name and Principal Year Salary Bonus Other Underlying All Other Position Ended ($) ($) ($) Options (#) Compensation - ------------------ ------ -------- ----- ----- ----------- ------------ Jen Kao .................. 1999 $169,200 -- -- -- $33,887(2) President and Chief Executive Officer Suheil Samaan............. 1999 160,500 -- -- -- -- Senior Vice President, Operations Steven Liaw .............. 1999 132,500 -- -- -- -- Vice President, Technology Keith Imai ............... 1999 122,500 -- -- -- -- Vice President, Sales and Marketing John Bugarin ............. 1999 122,000 -- -- -- -- Director, Engineering S.C. "Sam" Lee............ 1999 -- -- -- -- -- Senior Vice President, Engineering and Technology Hector Santana............ 1999 -- -- -- -- -- Vice President, Finance
- -------- (1) Excludes other compensation in the form of perquisites and other personal benefits that constitute the lesser of $50,000 or 10% of the total annual salary or bonus in 1999. (2) Includes $15,887 for automobile allowance and $18,000 for premiums paid on a cash surrender value life insurance policy. In April 2000, Dr. S.C. "Sam" Lee joined Artest as our Senior Vice President, Engineering and Technology. Dr. Lee's annualized salary for 2000 is $150,000. In May 2000, Hector Santana joined Artest as our Corporate Controller and was appointed as our Vice President, Finance in June 2000. Mr. Santana's annualized salary for 2000 is $130,000. Option Grants in Fiscal 1999 and through June 30, 2000 We did not grant any stock options to our chief executive officer, our four other most highly compensated executive officers or our other executive officers in fiscal 1999. In 1999, we granted options to purchase an aggregate of 328,000 shares to employees under our 1998 Stock Option Plan at an exercise price equal to the fair market value of our common stock on the date of grant, as determined in good faith by our board of directors. In May 2000, we granted an option to purchase 100,000 shares of common stock to Hector Santana, our Vice President of Finance, at a weighted average exercise price of $8.00 per share. Since March 31, 2000, we have granted options representing 1,171,00 shares, of which 715,000 shares became exercisable on June 30, 2000, at a weighted average exercise price of $8.00 per share. Of those shares, we granted an option to purchase 20,000 shares to Keith Imai, our Vice President, Sales and Marketing. 50 Aggregated Option Exercises in 1999 and Fiscal Year End Option Values The following table sets forth information with respect to option exercises in 1999 and the value of options at December 31, 1999 for our chief executive officer and our four other most highly compensated executive officers. The value of unexercised "in-the-money" options at December 31, 1999 is calculated on the basis of the assumed initial public offering price of $ per share. Table of Aggregated Option Exercises During 1999 and Option Values at December 31, 1999
Number of Shares of Common Stock Underlying Unexercised Value of Unexercised Common Options and Warrants at In-the-Money Options at Stock Value December 31, 1999 December 31, 1999 Acquired on Realized ------------------------- ------------------------- Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- -------- ----------- ------------- ----------- ------------- Jen Kao................. -- -- 400,000 600,000 Suheil Samaan........... -- -- 60,000 240,000 Steven Liaw............. -- -- 96,000 144,000 Keith Imai.............. -- -- 40,000 60,000 John Bugarin............ -- -- 24,000 96,000
Benefit Plans 2000 Stock Incentive Plan Introduction. Our 2000 stock incentive plan is intended to serve as the successor program to replace our 1998 stock option plan. The 2000 plan will be adopted by our board of directors prior to the completion of this offering and is expected to be approved by our stockholders prior to the commencement of this offering. If approved, the 2000 plan will become effective when the underwriting agreement for this offering is signed. At that time, all outstanding options under our 1998 plan will be transferred to the 2000 plan, and no further option grants will be made under the prior 1998 plan. The transferred options will continue to be governed by their existing terms, unless our compensation committee decides to extend one or more features of the 2000 plan to those options. Except as otherwise noted below, the transferred options have substantially the same terms as will be in effect for grants made under the discretionary option grant program of our 2000 plan. Share Reserve. shares of our common stock have been authorized for issuance under the 2000 plan. This share reserve consists of the number of shares we estimate will be carried over from the 1998 plan plus an additional increase of shares. The share reserve under our 2000 plan will automatically increase on the first trading day in January each calendar year from 2001 through 2005, by an amount equal to 3% of the total number of shares of our common stock outstanding on the last trading day of December in the prior year, but in no event will this annual increase exceed a number equal to % of total shares outstanding after this offering or shares. In addition, no participant in our 2000 plan may be granted stock options or direct stock issuances for more than 1,000,000 shares of common stock per calendar year. Programs. Our 2000 plan has five separate programs: . the discretionary option grant program, under which eligible employees may be granted options to purchase shares of our common stock at an exercise price not less than the fair market value of those shares on the grant date; . the stock issuance program, under which eligible individuals may be issued shares of our common stock directly through the purchase of such shares at a price not less than their fair market value at the time of issuance or as a bonus tied to the attainment of performance milestones or upon the completion of a specified period of service; 51 . the salary investment option grant program, under which our executive officers and other highly compensated employees may be given the opportunity to apply a portion of their base salary to the acquisition of special below market stock option grants; . the automatic option grant program, under which option grants will automatically be made at periodic intervals to eligible non-employee board members to purchase shares of common stock at an exercise price equal to the fair market value of those shares on the grant date; and . the director fee option grant program, under which our non-employee board members may be given the opportunity to apply a portion of any retainer fee otherwise payable to them in cash for the year to the acquisition of special below-market option grants. Eligibility. The individuals eligible to participate in our 2000 plan include our officers and other employees, our board members and any consultants that we hire. Administration. The discretionary option grant and stock issuance programs will be administered by our compensation committee. This committee will determine which eligible individuals are to receive option grants or stock issuances under those programs, the time or times when the grants or issuances are to be made, the number of shares subject to each grant or issuance, the status of any granted option as either an incentive stock option or a nonstatutory stock option under the federal tax laws, the vesting schedule to be in effect for the option grant or stock issuance and the maximum term for which any granted option is to remain outstanding. The compensation committee will also have the authority to select the executive officers and other highly compensated employees who may participate in the salary investment option grant program if that program is put into effect for one or more calendar years. Plan Features. Our 2000 plan will include the features described below. . The exercise price for any options granted under the plan may be paid in cash or in shares of our common stock valued at fair market value on the exercise date. The option may also be exercised through a same- day sale program without any cash outlay by the optionee. In addition, the plan administrator may provide financial assistance to one or more optionees in the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise price and any associated withholding taxes incurred in connection with such exercise or purchase. . The compensation committee will have the authority to cancel outstanding options under the discretionary option grant program, including any transferred options from our 1998 plan, in return for the grant of new options for the same or a different number of option shares with an exercise price per share based upon the fair market value of our common stock on the new grant date. . Stock appreciation rights may be issued under the discretionary option grant program. These rights will provide the holders with the election to surrender their outstanding options for a payment from us equal to the fair market value of the shares subject to the surrendered options less the exercise price payable for those shares. We may make the payment in cash or in shares of our common stock. None of the options under our 1998 plan have any stock appreciation rights. Change in Control. The 2000 plan will include the change in control provisions that may result in the accelerated vesting of outstanding option grants and stock issuances described below. . If we are acquired by merger or asset sale, each outstanding option under the discretionary option grant program that is not to be assumed by the successor corporation will immediately become exercisable for all the option shares, and all outstanding unvested shares will immediately vest, except to the extent our repurchase rights with respect to those shares are to be assigned to the successor corporation. 52 . The compensation committee will have complete discretion to grant one or more options that will become exercisable for all the option shares if those options are assumed in the acquisition but the optionee's service with us or the acquiring entity is subsequently terminated. The vesting of any outstanding shares under our 2000 plan may be accelerated upon similar terms and conditions. . The compensation committee will also have the authority to grant options which will immediately vest in the event we are acquired, whether or not those options are assumed by the successor corporation. . The compensation committee may grant options and structure repurchase rights so that the shares subject to those options or repurchase rights will vest in connection with a successful tender offer for more than fifty percent of our outstanding voting stock or a change in the majority of our board through one or more contested elections. Such accelerated vesting may occur either at the time of such transaction or upon the subsequent termination of the individual's service. . The options currently outstanding under our 1998 plan will immediately vest if we are acquired by a merger or asset sale and the acquiring company does not assume those options. Certain of those options, however, contain an additional vesting acceleration feature that will result in the immediate vesting of all or part of those options upon an involuntary termination of the optionee's employment within 18 months following an acquisition in which those options are assumed. Salary Investment Option Grant Program. If the compensation committee decides to put this program into effect for one or more calendar years, each of our executive officers and other highly compensated employees may elect to reduce his or her base salary for the calendar year by an amount not less than $10,000 nor more than $50,000. Each selected individual who makes such an election will automatically be granted, on the first trading day in January of the calendar year for which his or her salary reduction is to be in effect, an option to purchase that number of shares of common stock determined by dividing the salary reduction amount by two-thirds of the fair market value per share of our common stock on the grant date. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the amount by which the optionee's salary is reduced under the program. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the salary reduction is to be in effect. Automatic Option Grant Program. Each individual who first becomes a non- employee board member at any time after the effective date of this offering will receive an option grant for 20,000 shares of common stock on the date such individual joins the board. In addition, on the date of each annual stockholders' meeting held after the effective date of this offering, each non- employee board member who is to continue to serve as a non-employee board member, including each of our current non-employee board members, will automatically be granted an option to purchase 10,000 shares of common stock, provided such individual has served on the board for at least six months. Each automatic grant will have an exercise price per share equal to the fair market value per share of our common stock on the grant date and will have a term of 10 years, subject to earlier termination following the optionee's cessation of board service. The option will be immediately exercisable for all of the option shares; however, we may repurchase, at the exercise price paid per share, any shares purchased under the option that are not vested at the time of the optionee's cessation of board service. The shares subject to each initial 20,000-share automatic option grant will vest in a series of four successive annual installments upon the optionee's completion of each year of board service over the four-year period measured from the grant date. The shares subject to each annual 10,000-share automatic option grant will vest upon the optionee's completion of one year of service on our board of directors measured from the grant date. However, the shares will immediately vest in full upon certain changes in control or ownership or upon the optionee's death or disability while a board member. 53 Director Fee Option Grant Program. If this program is put into effect in the future, then each non-employee board member may elect to apply all or a portion of any cash retainer fee for the year to the acquisition of a below- market option grant. The option grant will automatically be made on the first trading day in January in the year for which the retainer fee would otherwise be payable in cash. The option will have an exercise price per share equal to one-third of the fair market value of the option shares on the grant date, and the number of shares subject to the option will be determined by dividing the amount of the retainer fee applied to the program by two-thirds of the fair market value per share of our common stock on the grant date. As a result, the option will be structured so that the fair market value of the option shares on the grant date less the exercise price payable for those shares will be equal to the portion of the retainer fee applied to that option. The option will become exercisable in a series of 12 equal monthly installments over the calendar year for which the retainer fee election is in effect. However, the option will become immediately exercisable for all the option shares upon the death or disability of the optionee while serving as a board member. Additional Program Features. Our 2000 plan will also have the features described below: . Outstanding options under the salary investment, automatic option grant and director fee option grant programs will immediately vest if we are acquired by a merger or asset sale or if there is a successful tender offer for more than 50% of our outstanding voting stock or a change in the majority of our board through one or more contested elections. . Limited stock appreciation rights will automatically be included as part of each grant made under the salary investment option grant program and the automatic and director fee option grant programs, and these rights may also be granted to one or more officers as part of their option grants under the discretionary option grant program. Options with this feature may be surrendered to us upon the successful completion of a hostile tender offer for more than 50% of our outstanding voting stock. In return for the surrendered option, the optionee will be entitled to a cash distribution from us in an amount per surrendered option share based upon the highest price per share of our common stock paid in that tender offer. . The board of directors may amend or modify the 2000 plan at any time, subject to any required stockholder approval. The 2000 plan will terminate no later than , 2010. Employee Stock Purchase Plan Our employee stock purchase plan will be adopted by the board prior to the completion of this offering, and is expected to be approved by the stockholders prior to the consummation of this offering. If approved, the plan will become effective immediately upon the signing of the underwriting agreement for this offering. The plan is designed to allow our eligible employees and the eligible employees of any of our future participating subsidiaries to purchase shares of common stock, at semi-annual intervals, with their accumulated payroll deductions. We have shares of our common stock that will initially be reserved for issuance under the plan. The reserve will automatically increase on the first trading day in January of each calendar year, beginning in calendar year 2001, by an amount equal to one percent of the total number of shares of our common stock outstanding on the last trading day of the immediately preceding first fiscal quarter. In no event will any annual reserve increase exceed shares. The plan will have a series of successive overlapping offering periods, with a new offering period beginning on the first business day of May and November each year. Each offering period will continue for a period of 24 months, unless otherwise determined by our compensation committee. However, the initial offering period will start on the date the underwriting agreement for this offering is signed and will end on the last business day of April 2002. The next offering period will start on the first business day of November 2000 and end on the last business day of October 2002. 54 Employees scheduled to work more than 20 hours per week for more than five calendar months per year may participate in the plan and may join an offering period on the start date of that period. Employees may participate in only one offering period at any time. A participant may contribute up to 15% of his or her cash earnings through payroll deductions, and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date. Semi-annual purchase dates will occur on the last business day of April and October each year, with the first purchase to occur on the last business day of October 2000. The purchase price per share on each semi-annual purchase date will be equal to 85% of the fair market value per share on the start date of the offering period or, if lower, 85% of the fair market value per share on the semi-annual purchase date. However, a participant may not purchase more than 2,500 shares on any purchase date, and not more than 125,000 shares may be purchased in total by all participants on any purchase date. Our compensation committee will have the authority to change these limitations for any subsequent offering period. If the fair market value per share of our common stock on any purchase date is less than the fair market value per share on the start date of the 24-month offering period, then that offering period will automatically terminate, and all participants in the terminated offering period will automatically be transferred to the new offering period commencing immediately thereafter. Should we be acquired by merger or sale of substantially all of our assets or more than 50% of our voting securities, then all outstanding purchase rights will automatically be exercised immediately prior to the effective date of the acquisition. The purchase price in effect for each participant will be equal to 85% of the market value per share on the start date of the offering period in which the participant is enrolled at the time the acquisition occurs or, if lower, 85% of the fair market value per share immediately prior to the acquisition. The following provisions will also be in effect under the plan: . the plan will terminate no later than the last business day of April 2010; and . the board of directors may at any time amend, suspend or discontinue the plan; however, some amendments may require stockholder approval. 401(k) Plan In 1997, we adopted a 401(k) plan covering our full-time employees. The 401(k) plan is intended to qualify under Section 401(k) of the Internal Revenue Code so that contributions to the 401(k) plan by employees or by us, and the investment earnings thereon, are not taxable to the employees until withdrawn from the 401(k) plan, and so that we can deduct our contributions, if any, when made. Pursuant to the 401(k) plan, employees may elect to reduce their current compensation by up to the lesser of 15% of their annual pre-tax gross compensation or the statutorily prescribed annual limit of $10,500 in 2000, and to have the amount of the reduction contributed to the 401(k) plan. Our 401(k) plan permits us, but does not require us, to make additional matching contributions on behalf of certain plan participants. Employment Contracts, Termination of Employment Arrangement and Change in Control Agreements We have no employment contracts, termination of employment arrangements or change in control agreements with any of our executive officers at this time. 55 Limitation of Liability and Indemnification Our certificate of incorporation eliminates to the maximum extent allowed by the Delaware General Corporation Law, our directors' personal liability to us or our stockholders for monetary damages for breaches of fiduciary duties. Our certificate of incorporation does not, however, eliminate or limit the personal liability of a director for the following: . any breach of the director's duty of loyalty to us or our stockholders; . acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. Our bylaws provide that we shall indemnify our directors and executive officers to the fullest extent permitted under the Delaware General Corporation Law and may indemnify our other officers, employees and other agents as set forth in the Delaware General Corporation Law. In addition, we have entered into an indemnification agreement with each of our directors and executive officers. The indemnification agreements contain provisions that require us, among other things, to indemnify our directors and executive officers against liabilities, other than liabilities arising from intentional or knowing and culpable violations of law, that may arise by reason of their status or service as directors or executive officers of Artest or other entities to which they provide service at our request and to advance expenses they may incur as a result of any proceeding against them as to which they could be indemnified. We believe that these bylaw provisions and indemnification agreements are necessary to attract and retain qualified directors and officers. Prior to the consummation of this offering, we intend to obtain an insurance policy covering directors and officers for claims they may otherwise be required to pay or for which we are required to indemnify them. At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification. 56 CERTAIN TRANSACTIONS AND RELATIONSHIPS WITH RELATED PARTIES Since 1997, there have been no transactions or series of transactions to which we were or are a party in which the amount involved exceeded or exceeds $60,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons has or will have a direct or indirect material interest, other than the transactions described below. Sales of Securities In March 1997, we issued and sold an aggregate of 14 million shares of our Series A convertible preferred stock for an aggregate purchase price of $14,000,000, or $1.00 per share, to various investors, including six million shares to Siliconware Investment Company, Ltd. Bough Lin, one of our current directors, is chairman of Siliconware Group. Siliconware Investment Company, Ltd. is a fully-owned subsidiary of Siliconware Group. Siliconware was also one of our customers in 1998 and 1999. We received purchase orders representing approximately $63,000 from Siliconware in 1998 and approximately $144,000 in 1999. Mitsui High-tec (USA), Inc., formerly International Leadframe Corporation, purchased two million shares of our Series A convertible preferred stock. Satoshi Nagata, one of our current directors, is the president and chief executive officer of Mitsui High-tec. Creative Group Ltd. purchased two million shares of our Series A convertible preferred stock. Creative Group Limited is an investment organization for Hon Hai Precision Co., Ltd. Terry Gou, one of our current directors, is chairman and chief executive officer of Hon Hai. Samuel D.F. Lee purchased one million shares of our Series A convertible preferred stock as part of an investment arrangement with several individuals, including Jennie K. Hanabusa, Tom Kao and Randy Kao. In April 2000, Mr. Lee transferred 100,000 shares of Series A convertible preferred stock to Ms. Hanabusa, 100,000 shares of Series A convertible preferred stock to Mr. Tom Kao and 100,000 shares of Series A convertible preferred stock to Mr. Randy Kao. Ms. Hanabusa is the sister of Jen Kao, our president and chief executive officer, and Messrs. Tom and Randy Kao are Mr. Jen Kao's brothers. Fairchild Transaction In September 1999, we entered into an equipment purchase and engineering test services agreement with Fairchild. Pursuant to that agreement, we purchased test equipment for $865,000 and, until June 30, 2000, are obligated to pay $5,840 per month as a user fee for the rental of facilities. Dr. S.C. "Sam" Lee, currently our Senior Vice President, Engineering and Technology, served as a senior vice president of Fairchild at the time we entered into the agreement. Agreements with Officers and Directors We have granted options and issued common stock to our executive officers and directors. See "Management--Board of Directors--Director Compensation" and "Principal Stockholders." We have entered into an indemnification agreement with each of our executive officers and directors. See "Management--Limitation of Liability and Indemnification." We have entered non-disclosure proprietary rights assignment agreements with our key employees. 57 We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been otherwise obtained from unaffiliated third parties. All future transactions, including loans, if any, between Artest and our officers, directors and principal stockholders and their affiliates and any transactions between Artest and any entity with which our officers, directors or five percent stockholders are affiliated will be approved by a majority of the board of directors, including a majority of the independent and disinterested outside directors of the board of directors and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 58 PRINCIPAL STOCKHOLDERS The table below sets forth information regarding the beneficial ownership of our common stock as of May 31, 2000, by the following individuals or groups: . each person or entity who is known by us to own beneficially more than 5% of our outstanding common stock; . each of our named executive officers; . each of our directors; and . all directors and executive officers as a group. Each stockholder's percentage ownership in the following table is based on 19,259,567 shares of common stock outstanding as of May 31, 2000, as adjusted to assume the conversion of all 14 million outstanding shares of our Series A convertible preferred stock into our common stock on a one-for-one basis. For purposes of calculating each stockholder's percentage ownership, any shares of common stock as to which the stockholder has sole or shared voting power and any options or warrants exercisable within 60 days after May 31, 2000 held by a stockholder listed in the table below are treated as outstanding shares. Unless otherwise indicated, the principal address of each of the stockholders below is c/o Artest Corporation, 678 Almanor Avenue, Sunnyvale, California 94086. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table below have sole voting and investment power with respect to all shares of common stock held by them. Unless otherwise indicated, we have assumed each share of our Series A convertible preferred stock converts into one share of our common stock. 59
Shares Beneficially Shares Beneficially Owned Prior to the Owned After the Offering Offering --------------------- --------------------- Name and Address Number Percent(1) Number Percent(1) - ---------------- ---------- ---------- ---------- ---------- Siliconware Investment Company, Ltd............................ 6,000,000 31.2% 6,000,000 Fl. 9, No. 105 Tun Hwa S. Road, Sec. 2. Taipei 106, Taiwan ROC Creative Group Limited........... 2,000,000 10.4 2,000,000 c/o Hon Hai Precision Industries Co., Ltd. No. 2 Tzu Yu Street, Tu-cheng City, Taipei Hsien 236, Taiwan Mitsui High-tec (USA), Inc., formerly International Leadframe Corporation.................... 2,000,000 10.4 2,000,000 2001 Gateway Place, Suite 201 East Tower San Jose, California 95110 Silicon Foundries................ 1,000,000 5.2 1,000,000 4F, No. 12, Huang-Hua E. 1st Street Hsin Chu, Taiwan Jen Kao(2)....................... 5,733,333 29.8 5,733,333 Suheil Samaan.................... 115,000 * 115,000 S.C. "Sam" Lee................... -- * -- Steven Liaw...................... 160,000 * 160,000 Keith Imai....................... 73,333 * 73,333 Hector Santana................... -- * -- Alan "Lanny" Ross................ 277,500 1.4 277,500 Jim Fiebiger..................... 200,000 * 200,000 Terry Gou(3)..................... 2,050,000 10.6 2,050,000 Bough Lin(4)..................... 6,050,000 31.4 6,050,000 Satoshi Nagata(5)................ 2,050,000 10.6 2,050,000 Directors and Executive Officers as a Group (11 persons)........ 16,709,166 86.8 16,709,166
- -------- * Less than one percent of the outstanding shares of our common stock. (1) Represents beneficial ownership. (2) Includes 5,000,000 shares of our common stock owned by the Jen Kao and Chia-Yin Kao Revocable Trust, dated August 13, 1998, for which Mr. Kao is a trustee. (3) Includes 2,000,000 shares owned by Creative Group Limited, which is an investment organization for Hon Hai Precision Industry Co., Ltd. Mr. Gou is chairman and chief executive officer of Hon Hai Precision Industry Co., Ltd. (4) Includes 6,000,000 shares owned by Siliconware Investment Company, Ltd., a fully-owned subsidiary of Siliconware Group. Mr. Lin is chairman of Siliconware Group. (5) Includes 2,000,000 shares owned by Mitsui High-tec (USA), formerly International Leadframe Corporation. Mr. Nagata is president and chief executive officer of Mitsui High-tec (USA). 60 DESCRIPTION OF CAPITAL STOCK General At the closing of this offering, we will be authorized to issue shares of common stock, par value, and shares of undesignated preferred stock, par value, after giving effect to the amendment of our certificate of incorporation to delete references to the existing preferred stock following conversion of that stock. The following description of capital stock gives effect to our restated certificate of incorporation to be filed prior to the closing of this offering. Immediately following the completion of this offering and assuming no exercise of the underwriters' over-allotment option, an aggregate of shares of common stock will be issued and outstanding, and no shares of preferred stock will be issued and outstanding. The following description of our capital stock is subject to and qualified by our restated certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus forms a part, and by the provisions of applicable Delaware law. Common Stock The holders of our common stock are entitled to one vote per share on all matters to be voted upon by our stockholders. Subject to preferences that may be applicable to any outstanding preferred stock that may come into existence, the holders of common stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by our board of directors out of funds legally available for dividends. See "Dividend Policy." In the event of our liquidation, dissolution or winding up, the holders of our common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. Our common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to our common stock. All outstanding shares of our common stock are fully paid and nonassessable, and the shares of common stock to be outstanding upon completion of this offering will be fully paid and nonassessable. Preferred Stock Our board of directors is authorized to issue from time to time, without stockholder authorization, in one or more designated series, any or all of our authorized but unissued shares of preferred stock with any dividend, redemption, conversion and exchange provisions as may be provided in the particular series. Any series of preferred stock may possess voting, dividend, liquidation and redemption rights superior to those of the common stock. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that we may issue in the future. Our issuance of a new series of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult to remove our board of directors and making it more difficult for a third-party to acquire, or discourage a third-party from acquiring, a majority of our outstanding voting stock. We have no present plans to issue any shares of or designate any series of preferred stock. Registration Rights Pursuant to a stock purchase agreement we entered into with holders of 14,000,000 shares of our Series A convertible preferred stock, the holders of these shares are entitled to registration rights. The registration rights provide that if we propose to register any securities under the Securities Act, they are entitled to notice of the registration and are entitled to include shares of their common stock in such registration. This right is subject to conditions and limitations, including the right of the underwriters in an offering to limit the number of shares included in the registration. We are required to use our best efforts to effect this registration, subject to conditions and limitations. Each holder of our Series A convertible preferred stock has waived its registration rights with respect to this offering. 61 Compliance with California Law We are currently subject to Section 2115 of the California General Corporation Law. Section 2115 provides that, regardless of a company's legal domicile, certain provisions of California corporate law will apply to that company if more than 50% of its outstanding voting securities are held of record by persons having addresses in California and the majority of the company's operations occur in California. For example, while we are subject to Section 2115, stockholders may cumulate votes in electing directors. This means that each stockholder may vote the number of votes equal to the number of candidates multiplied by the number of votes to which the stockholder's shares are normally entitled in favor of one candidate. This potentially allows minority stockholders to elect some members of our board of directors. When we are no longer subject to Section 2115, cumulative voting will not be allowed and a holder of 50% or more of our voting stock will be able to control the election of all directors. In addition to this difference, Section 2115 has the following additional effects: . enables removal of directors with or without cause with majority stockholder approval; . places limitations on the distribution of dividends; . extends additional rights to dissenting stockholders in any reorganization, including a merger, sale of assets or exchange of shares; and . provides for information rights and required filings in the event we effect a sale of assets or complete a merger. We anticipate that our common stock will be qualified for trading as a national market security on the Nasdaq National Market and that we will have at least 800 stockholders of record by the record date for our 2001 annual meeting of stockholders. If these two conditions occur, then we will not be subject to Section 2115 as of the record date for our 2001 annual meeting of stockholders. Antitakeover Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware General Corporation Law Our restated certificate of incorporation authorizes our board of directors to establish one or more series of undesignated preferred stock, the terms of which can be determined by our board at the time of issuance. See "--Preferred Stock." Our restated certificate of incorporation also provides that all stockholder action must be effected at a duly called meeting of stockholders and not by written consent. In addition, our restated certificate of incorporation and bylaws do not permit our stockholders to call a special meeting of stockholders. Only our Chief Executive Officer, President, Chairman of the Board or a majority of the board of directors are permitted to call a special meeting of stockholders. Our restated certificate of incorporation also provides that the board of directors is divided into three classes, with each director assigned to a class with a term of three years, and that the number of directors may only be determined by the board of directors. Our bylaws require that stockholders give advance notice to our secretary of any nominations for director or other business to be brought by stockholders at any stockholders' meeting, and that the chairman of the board has the authority to adjourn any meeting called by the stockholders. Our bylaws also require a supermajority vote of members of the board of directors and stockholders to amend certain bylaw provisions. These provisions of our restated certificate of incorporation and our bylaws could discourage potential acquisition proposals and could delay or prevent a change in control of Artest. These provisions also may have the effect of preventing changes in the management of Artest. See "Risk Factors-- Our certificate of incorporation and bylaws and Delaware law contain provisions that could discourage a takeover." We are subject to Section 203 of the Delaware General Corporation Law, which could discourage a takeover. In general, Section 203 prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: . prior to that date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; 62 . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by: (i) persons who are directors and also officers; and (ii) employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . on or subsequent to that date, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines "business combination" to include the following: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; . subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by any of these entities or persons. Transfer Agent and Registrar Our transfer agent and registrar for our common stock is Equiserve. Its telephone number is (781) 575-2294. 63 SHARES AVAILABLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock, and we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could impair our future ability to raise capital through the sale of our equity securities. Upon the completion of this offering we will have shares of common stock outstanding, including the issuance of shares of common stock in this offering and excluding: . 2,862,500 shares of common stock issuable upon the exercise of stock options outstanding at March 31, 2000, at a weighted average exercise price of $0.45 per share; . 1,171,000 shares of common stock issuable upon exercise of stock options granted since March 31, 2000 at a weighted average exercise price of $8.00 per share, 715,000 of which became fully vested and immediately exercisable on June 30, 2000; and . 1,131,500 shares of common stock reserved for issuance under our stock option plans at March 31, 2000. Of the outstanding shares, all of the shares sold in this offering will be freely tradable, except that any shares held by our "affiliates," as that term is defined in Rule 144 promulgated under the Securities Act, may only be sold in compliance with the limitations described below. The remaining shares of common stock will be deemed "restricted securities" as defined under Rule 144. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which rules are summarized below. Subject to the lock-up agreements described below and the provisions of Rules 144, 144(k) and 701, additional shares will be available for sale in the public market as follows:
Number of Shares Date ------ ----------------------------------------------------------------------- after the date of this prospectus, freely tradable shares sold in this offering and shares saleable under Rule 144(k) that are not subject to the 180-day lock-up; after 180 days from the date of this prospectus, the 180-day lock-up is released and these shares are saleable under Rule 144 (subject, in some cases, to volume limitations) or Rule 144(k); after 180 days from the date of this prospectus, the 180-day lock-up is released and these shares are saleable under Rule 701 (subject to repurchase by us); and after 180 days from the date of this prospectus, restricted securities that are held for less than one year and are not yet saleable under Rule 144.
Rule 144 In general, under Rule 144 as currently in effect, a person, or group of persons whose shares are required to be aggregated, including any of our affiliates, who has beneficially owned shares for at least one year, including the holding period of any prior owner who is not an affiliate, is entitled to sell within any three-month period commencing 90 days after the date of this prospectus, a number of shares that does not exceed the greater of one percent of the then-outstanding shares of our common stock, which will be approximately shares immediately after this offering, or the average weekly trading volume in our common stock during the four calendar weeks preceding the date on which notice of such sale is filed, subject to certain restrictions. In addition, a person who is not deemed to have been an affiliate at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an affiliate, would be entitled to sell these shares 64 under Rule 144(k) without regard to the requirements described above. To the extent that shares were acquired from one of our affiliates, a person's holding period for the purpose of effecting a sale under Rule 144 would commence on the date of transfer from the affiliate. Stock Options At March 31, 2000, options to purchase a total of 2,862,500 shares of common stock were outstanding, and pursuant to those options, 1,240,483 shares were exercisable. We intend to file a Form S-8 registration statement under the Securities Act to register all shares of common stock issuable under our option plans. Accordingly, shares of common stock underlying these options will be eligible for sale in the public markets, subject to vesting restrictions or the lock-up agreements described below. See "Management--Benefit Plans." Lock-up Agreements Each of our executive officers and directors and substantially all of our securityholders have agreed, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. This restriction terminates after the close of trading of the shares on the 180th day of (and including) the day the shares commenced trading on the Nasdaq National Market. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives and any of our shareholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of FleetBoston Robertson Stephens Inc., subject to certain exceptions, consent to the disposition of any shares held by shareholders subject to lock-up agreements prior to the expiration of the lock- up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, and the issuance of options under existing stock option and incentive plans provided that those options do not vest prior to the expiration of the lock-up period. Registration Rights Following this offering, under specified circumstances and subject to customary conditions, holders of approximately 14,000,000 shares of our outstanding common stock, received through the conversion of our Series A convertible preferred stock, will have demand registration rights with respect to their shares of common stock, subject to the 180-day lock-up arrangement described above, to require us to register their shares of common stock under the Securities Act, and rights to participate in any future registrations of securities. If the holders of these registrable securities request that we register their shares, and if the registration is effected, these shares will become freely tradable without restriction under the Securities Act. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See "Description of Capital Stock-- Registration Rights." 65 UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS OF COMMON STOCK The following is a general discussion of the material United States federal income and estate tax consequences of the ownership and disposition of the common stock applicable to Non-United States Holders of our common stock. For the purpose of this discussion, a Non-United States Holder is any holder that for U.S. federal income tax purposes is not a U.S. person. This discussion does not address all aspects of U.S. federal income and estate taxation that may be relevant in light of a Non-United States Holder's particular facts and circumstances, such as being a U.S. expatriate, and does not address any tax consequences arising under the laws of any state, local or non-U.S. taxing jurisdiction. Furthermore, the following discussion is based on current provisions of the Internal Revenue Code of 1986, as amended, and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect. We have not and will not seek a ruling from the Internal Revenue Service with respect to the U.S. federal income and estate tax consequences described below, and as a result, there can be no assurance that the Internal Revenue Service will not disagree with or challenge any of the conclusions set forth in this discussion. For purposes of this discussion, the term U.S. person means: . a citizen or resident of the United States; . a corporation, partnership or other entity created or organized in the United States or under the laws of the United States or any political subdivision thereof; . an estate whose income is included in gross income for U.S. federal income tax purposes regardless of its source; or . a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust. Dividends If we pay a dividend, any dividend paid to a Non-United States Holder of common stock generally will be subject to U.S. withholding tax either at a rate of 30% of the gross amount of the dividend or such lower rate as may be specified by an applicable tax treaty. Dividends received by a Non-United States Holder that are effectively connected with a U.S. trade or business conducted by the Non-United States Holder are exempt from such withholding tax. However, those effectively connected dividends, net of certain deductions and credits, are taxed at the same graduated rates applicable to U.S. persons. Dividends received by a corporate Non-United States Holder that are effectively connected with a U.S. trade or business of the corporate Non-United States Holder may also be subject to a branch profits tax at a rate of 30% or such lower rate as may be specified by an applicable tax treaty. A Non-United States Holder of common stock that is eligible for a reduced rate of withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts currently withheld by filing an appropriate claim for refund with the Internal Revenue Service. Gain on Disposition of Common Stock A Non-United States Holder generally will not be subject to U.S. federal income tax on any gain realized upon the sale or other disposition of his or her common stock unless: . the gain is effectively connected with a U.S. trade or business of the Non-United States Holder (which gain, in the case of a corporate Non- United States Holder, must also be taken into account for branch profits tax purposes); . the Non-United States Holder is an individual who holds his or her common stock as a capital asset (generally, an asset held for investment purposes) and who is present in the United States for a period or periods aggregating 183 days or more during the calendar year in which the sale or disposition occurs and certain other conditions are met; or 66 . Artest is or has been a "United States real property holding corporation" for U.S. federal income tax purposes at any time within the shorter of the five-year period preceding the disposition or the holder's holding period for its common stock. Artest has determined that it is not and does not believe that it will become a "United States real property holding corporation" for U.S. federal income tax purposes. Backup Withholding and Information Reporting Generally, we must report annually to the Internal Revenue Service the amount of dividends paid, the name and address of the recipient, and the amount, if any, of tax withheld with respect to the dividend. A similar report is sent to the holder. Pursuant to tax treaties or other agreements, the Internal Revenue Service may make its reports available to tax authorities in the recipient's country of resident. Dividends paid to a Non-United States Holder at an address within the U.S. may be subject to backup withholding at a rate of 31% if the Non-United States Holder fails to establish that it is entitled to an exemption or to provide a correct taxpayer identification number and other information to the payer. Backup withholding will generally not apply to dividends paid to Non-United States Holders at an address outside the U.S. on or prior to December 31, 2000 unless the payer has knowledge that the payee is a United States person. Under recently finalized Treasury Regulations regarding withholding and information reporting, payment of dividends to Non-United States Holders at an address outside the U.S. after December 31, 2000 may be subject to backup withholding at a rate of 31% unless such Non-United States Holder satisfies various certification requirements. Under current Treasury Regulations, the payment of the proceeds of the disposition of common stock to or through the U.S. office of a broker is subject to information reporting and backup withholding at a rate of 31% unless the holder certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption. Generally, the payment of the proceeds of the disposition by a Non-United States Holder of common stock outside the U.S. to or through a foreign office of a broker will not be subject to backup withholding but will be subject to information reporting requirements if the broker is: . a U.S. person; . a "controlled foreign corporation" for U.S. federal income tax purposes; or . a foreign person 50% or more of whose gross income for certain periods is from the conduct of a U.S. trade or business; unless the broker has documentary evidence in its files of the Non-United States Holders' non-U.S. status and certain other conditions are met, or the holder otherwise establishes an exemption. Neither backup withholding nor information reporting generally will apply to a payment of the proceeds of a disposition of common stock by or through a foreign office of a foreign broker not subject to the preceding sentence. In general, the recently promulgated final Treasury Regulations, described above, do not significantly alter the substantive withholding and information reporting requirements but would alter the procedures for claiming benefits of an income tax treaty and change the certification procedures relating to the receipt by intermediaries of payments on behalf of the beneficial owner of shares of common stock. Non-United States Holders should consult their tax advisors regarding the effect, if any, of those final Treasury Regulations on an investment in the common stock. Those final Treasury Regulations are generally effective for payments made after December 31, 2000. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained, provided that the required information is furnished to the Internal Revenue Service. 67 Estate Tax An individual Non-United States Holder who owns common stock at the time of his or her death or had made certain lifetime transfers of an interest in common stock will be required to include the value of that common stock in such holder's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. The foregoing discussion is only a summary of the principal federal income and estate tax consequences of the ownership, sale or other disposition of common stock by Non-United States Holders. Investors are urged to consult their own tax advisors with respect to the income tax consequences of the ownership and disposition of common stock, including the application and effect of the laws of any state, local, foreign or other taxing jurisdiction. 68 UNDERWRITING The underwriters named below, acting through their representatives, FleetBoston Robertson Stephens Inc., CIBC World Markets Corp. and Thomas Weisel Partners LLC have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock set forth below opposite their respective names. The underwriters are committed to purchase and pay for all shares if any are purchased.
Number of Underwriter Shares ----------- ------ FleetBoston Robertson Stephens Inc. ................................. CIBC World Markets Corp. ............................................ Thomas Weisel Partners LLC........................................... ---- Total.............................................................. ====
The representatives have advised us that the underwriters propose to offer the shares of common stock to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession of not in excess of per share, of which may be reallowed to other dealers. After this offering, the public offering price, concession and allowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. Prior to this offering, there has been no public market for the common stock. Consequently, the public offering price for the common stock offered by this prospectus has been determined through negotiations among the representatives and us. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. The underwriters have advised us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. As of June 16, 2000, Thomas Weisel Partners has been named as a lead or co-manager on 164 filed public offerings of equity securities, of which 120 have been completed, and has acted as a syndicate member in an additional 95 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to its contractual relationship with us pursuant to the underwriting agreement entered into in connection with this offering. Over-Allotment Option We have granted to the underwriters an option, exercisable during the 30- day period after the date of this prospectus, to purchase up to additional shares of common stock to cover over-allotments, if any, at the public offering price less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of the additional shares of common stock, the underwriters have severally agreed, subject to certain conditions, to purchase approximately the same percentage thereof as the number of shares to be purchased by each of them bears to the total number of shares of common stock offered in this offering. If purchased, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered hereby are being sold. We will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters to the extent the over-allotment option is exercised. The underwriters may exercise the over-allotment option only to cover over-allotment made in connection with the sale of the shares of common stock offered in this offering. 69 The following table summarizes the compensation that we will pay to the underwriters:
Total ------------------- Without With Per Over- Over- Share allotment allotment ----- --------- --------- Underwriting discounts and commissions paid by us............................................ $ $ $
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $ . Indemnity The underwriting agreement contains covenants of indemnity among the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements Each of our directors, executive officers, stockholders and optionholders has agreed, subject to specified exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock or any options or warrants to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or thereafter acquired directly by those holders or with respect to which they have the power of disposition, without the prior written consent of FleetBoston Robertson Stephens Inc. This restriction terminates after the close of trading of the shares on the 180th day of (and including) the day the shares commenced trading on the Nasdaq National Market. However, FleetBoston Robertson Stephens Inc. may, in its sole discretion and at any time or from time to time before the termination of the 180-day period, without notice, release all or any portion of the securities subject to lock-up agreements. There are no existing agreements between the representatives and any of our shareholders who have executed a lock-up agreement providing consent to the sale of shares prior to the expiration of the lock-up period. In addition, we have agreed that during the lock-up period we will not, without the prior written consent of FleetBoston Robertson Stephens Inc., subject to certain exceptions, consent to the disposition of any shares held by shareholders subject to lock-up agreements prior to the expiration of the lock- up period, or issue, sell, contract to sell, or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than our sale of shares in this offering, and the issuance of options under existing stock option and incentive plans provided that those options do not vest prior to the expiration of the lock-up period. See "Shares Available for Future Sale." Listing We will file an application seeking approval for quotation on The Nasdaq National Market under the symbol "ARTE." No Prior Public Market Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock offered hereby was determined through negotiations between us and the representatives. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. 70 Stabilization The representatives have advised us that, pursuant to Regulation M under the Securities Act, some persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the shares of common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of shares of common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or purchase of common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by such underwriter or syndicate member. The representatives have advised us that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Directed Share Program At our request, certain of the underwriters have reserved up to 5% of the shares of common stock, the directed shares, for sale at the initial public offering price to persons who are directors, officers or employees of Artest, or who are otherwise associated with us and our affiliates, and who have advised us of their desire to purchase such shares. The number of shares of common stock available for sale to the general public will be reduced to the extent of sales of the directed shares to any of the persons for whom they have been reserved. Any shares not so purchased will be offered by the underwriters on the same basis as all other shares of common stock offered hereby. We have agreed to indemnify those certain underwriters against certain liabilities and expenses, including liabilities under the Securities Act, in connection with the sales of the directed shares. 71 LEGAL MATTERS The validity of the common stock offered will be passed upon for us by Brobeck, Phleger & Harrison LLP, San Francisco, California. Legal matters relating to the sale of common stock in this offering will be passed on for the underwriters by Latham & Watkins, Menlo Park, California. EXPERTS The audited financial statements and schedule included in this prospectus and elsewhere in the registration statement to the extent and for the periods indicated in these reports have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission, Washington, D.C. 20549, under the Securities Act a registration statement on Form S-1 including the exhibits, schedules and amendments to the registration statement relating to the shares of common stock to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and its exhibits and schedules. For further information with respect to us and the shares we are offering pursuant to this prospectus, you should refer to the registration statement and its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete, and you should refer to the copy of that contract or other document filed as an exhibit to the registration statement. You may read or obtain a copy of the registration statement at the commission's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the public reference room by calling the commission at 1-800-SEC-0330. The commission maintains a web site that contains reports, proxy information statements and other information regarding registrants that file electronically with the commission. The address of this website is http://www.sec.gov. We intend to furnish holders of our common stock with annual reports containing, among other information, audited financial statements certified by an independent public accounting firm and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. We intend to furnish other reports as we may determine or as may be required by law. 72 ARTEST CORPORATION INDEX TO FINANCIAL STATEMENTS Report of Independent Public Accountants.................................... F-2 Balance Sheets.............................................................. F-3 Statements of Operations.................................................... F-4 Statements of Shareholders' Equity.......................................... F-5 Statements of Cash Flows.................................................... F-6 Notes to Financial Statements............................................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Artest Corporation: We have audited the accompanying balance sheets of Artest Corporation (a California corporation) as of December 31, 1999 and 1998 and the related statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Artest Corporation as of December 31, 1999 and 1998 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. San Jose, California March 31, 2000 (except for the matters discussed in Note 9, as to which the date is June 15, 2000) F-2 ARTEST CORPORATION BALANCE SHEETS (In thousands, except share data)
March 31, 2000 December 31, Pro Forma --------------- March 31, Shareholders' 1998 1999 2000 Equity ------- ------- --------- -------------- (unaudited) ASSETS Current Assets: Cash and cash equivalents.......... $ 8,422 $11,626 $10,797 Restricted cash.................... 4,500 2,250 2,250 Accounts receivable, net of allowance of $10, $60 and $60, respectively..................... 1,211 1,700 1,997 Prepaid expense.................... -- 67 42 Deferred income tax asset-- current.......................... 69 166 166 ------- ------- ------- Total current assets............ 14,202 15,809 15,252 Property and Equipment, net.......... 6,132 8,220 8,505 Deferred Income Tax Asset and Other Assets............................. 166 448 462 ------- ------- ------- $20,500 $24,477 $24,219 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Notes payable--current portion..... $ 1,328 $ 1,684 $ 1,876 Accounts payable................... 129 1,259 1,349 Accrued liabilities................ 530 156 134 Income tax payable................. 213 1,387 284 ------- ------- ------- Total current liabilities....... 2,200 4,486 3,643 Notes payable--long-term portion..... 3,984 3,825 3,900 ------- ------- ------- Total liabilities............... 6,184 8,311 7,543 ------- ------- ------- Commitments and Contingencies (Note 4) Shareholders' Equity: Series A convertible preferred stock, no par value--14,000,000 shares authorized, issued and outstanding...................... 14,000 14,000 14,000 $ -- Common stock, no par value: 24,000,000 and 24,000,000 authorized at December 31, 1999 and pro forma, respectively; 5,240,000, 5,246,000, and 5,246,000 shares outstanding at December 31, 1998, December 31, 1999, and March 31, 2000, respectively, and 19,246,000 shares outstanding pro forma............ 53 1,740 1,740 15,740 Deferred stock-based compensation..................... -- (1,467) (1,244) (1,244) Retained earnings.................. 263 1,893 2,180 2,180 ------- ------- ------- ------- Total shareholders' equity...... 14,316 16,166 16,676 $16,676 ------- ------- ------- ======= $20,500 $24,477 $24,219 ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-3 ARTEST CORPORATION STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Year Ended December Ended 31, March 31, ---------------------- -------------- 1997 1998 1999 1999 2000 ------ ------ ------ ------ ------ (unaudited) Revenues............................... $1,042 $3,413 $7,994 $1,724 $2,616 Cost of revenues....................... 724 2,573 3,648 687 1,220 ------ ------ ------ ------ ------ Gross profit...................... 318 840 4,346 1,037 1,396 ------ ------ ------ ------ ------ Operating expenses: Selling, general and administrative ................................... 694 1,352 1,621 289 614 Amortization of stock-based compensation(1).................... -- -- 219 -- 223 ------ ------ ------ ------ ------ Total operating expenses.......... 694 1,352 1,840 289 837 ------ ------ ------ ------ ------ Income (loss) from operations.......... (376) (512) 2,506 748 559 Other Income (Expense): Interest income...................... 405 533 592 143 171 Realized gain from sale of investments and dividend income.... 366 438 -- -- -- Realized gain from sale of equipment.......................... -- -- 87 -- -- Interest expense..................... (10) (342) (325) (64) (106) ------ ------ ------ ------ ------ Total other income (expense)...... 761 629 354 79 65 ------ ------ ------ ------ ------ Income before provision for income taxes........................... 385 117 2,860 827 624 Provision for income taxes............. 169 70 1,230 347 337 ------ ------ ------ ------ ------ Net income............................. $ 216 $ 47 $1,630 $ 480 $ 287 ====== ====== ====== ====== ====== Net income per share: Basic................................ $0.041 $0.009 $0.311 $0.092 $0.055 ====== ====== ====== ====== ====== Diluted.............................. $0.014 $0.002 $0.074 $0.023 $0.013 ====== ====== ====== ====== ====== Shares used for net income per share: Basic................................ 5,240 5,240 5,241 5,240 5,246 ====== ====== ====== ====== ====== Diluted.............................. 15,740 21,055 21,927 21,055 22,012 ====== ====== ====== ====== ======
- -------- (1) For the year ended December 31, 1999, amortization of deferred stock-based compensation includes $100 related to cost of revenues, and $119 related to selling, general and administrative expense. For the three months ended March 31, 2000, amortization of deferred stock-based compensation includes $158 related to cost of revenues and $65 related to selling, general and administrative expense. The accompanying notes are an integral part of these financial statements. F-4 ARTEST CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except share data)
Series A Convertible Preferred Stock Common Stock Deferred ------------------ ---------------- Stock-Based Retained Shares Amount Shares Amount Compensation Earnings Total ---------- ------- --------- ------ ------------ -------- ------- Issuance of common stock................ -- $ -- 5,240,000 $ 53 $ -- $ -- $ 53 Issuance of Series A convertible preferred stock................ 14,000,000 14,000 -- -- -- -- 14,000 Net income............ -- -- -- -- -- 216 216 ---------- ------- --------- ------ ------- ------ ------- Balance, December 31, 1997.................. 14,000,000 14,000 5,240,000 53 -- 216 14,269 Net income............ -- -- -- -- -- 47 47 ---------- ------- --------- ------ ------- ------ ------- Balance, December 31, 1998.................. 14,000,000 14,000 5,240,000 53 -- 263 14,316 Exercise of stock options............. -- -- 6,000 1 -- -- 1 Deferred stock-based compensation........ -- -- -- 1,686 (1,686) -- -- Amortization of deferred stock-based compensation........ -- -- -- -- 219 -- 219 Net income............ -- -- -- -- -- 1,630 1,630 ---------- ------- --------- ------ ------- ------ ------- Balance, December 31, 1999.................. 14,000,000 14,000 5,246,000 1,740 (1,467) 1,893 16,166 Amortization of deferred stock-based compensation........ -- -- -- -- 223 -- 223 Net income............ -- -- -- -- -- 287 287 ---------- ------- --------- ------ ------- ------ ------- Balance, March 31, 2000.................. 14,000,000 $14,000 5,246,000 $1,740 $(1,244) $2,180 $16,676 ========== ======= ========= ====== ======= ====== =======
The accompanying notes are an integral part of these financial statements. F-5 ARTEST CORPORATION STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended Year Ended December 31, March 31, ------------------------- --------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------ ------- (unaudited) Cash flows from operating activities: Net income........................ $ 216 $ 47 $ 1,630 $ 480 $ 287 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation.................... 175 1,075 1,674 380 549 Amortization of deferred stock- based compensation............ -- -- 219 -- 223 Realized gain from sale of investments and dividend income........................ (366) (438) -- -- -- Realized gain from sale of equipment..................... -- -- (87) -- -- Changes in assets and liabilities: Accounts receivable........... (693) (518) (489) 77 (297) Prepaid expense............... -- -- (67) -- 25 Deferred tax asset and other assets...................... (78) (157) (379) (61) (15) Accounts payable.............. 3,062 (2,932) 1,130 (3) 90 Accrued liabilities........... 280 250 (374) (391) (22) Income tax payable............ 233 (19) 1,174 104 (1,103) ------- ------- ------- ------ ------- Net cash provided by (used in) operating activities... 2,829 (2,692) 4,431 586 (263) ------- ------- ------- ------ ------- Cash flows from investing activities: Purchases of property and equipment....................... (5,441) (1,942) (3,816) (180) (833) Proceeds from sale of equipment... -- -- 140 -- -- Purchases of available-for-sale short-term investments.......... (4,000) -- -- -- -- Proceeds from sale of available- for-sale short-term investments..................... -- 4,804 -- -- -- Restricted cash due to financing of equipment.................... -- (4,500) 2,250 -- -- ------- ------- ------- ------ ------- Net cash used in investing activities................. (9,441) (1,638) (1,426) (180) (833) ------- ------- ------- ------ ------- Cash flows from financing activities: Proceeds from issuance of notes payable......................... 1,704 5,087 1,649 -- 688 Payments on notes payable......... (114) (1,366) (1,451) (332) (421) Proceeds from issuance of common stock........................... 53 -- 1 -- -- Proceeds from issuance of Series A convertible preferred stock..... 14,000 -- -- -- -- ------- ------- ------- ------ ------- Net cash provided by (used in) financing activities... 15,643 3,721 199 (332) 267 ------- ------- ------- ------ ------- Net increase (decrease) in cash and cash equivalents................. 9,031 (609) 3,204 74 (829) Cash and cash equivalents, beginning of period.............. -- 9,031 8,422 8,422 11,626 ------- ------- ------- ------ ------- Cash and cash equivalents, end of period........................... $ 9,031 $ 8,422 $11,626 $8,496 $10,797 ======= ======= ======= ====== ======= Supplemental disclosure of cash flow information: Cash paid for interest............ $ 10 $ 314 $ 325 $ 64 $ 106 ======= ======= ======= ====== ======= Cash paid for income taxes........ $ -- $ 253 $ 315 $ -- $ 1,440 ======= ======= ======= ====== =======
The accompanying notes are an integral part of these financial statements. F-6 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS As of December 31, 1999 and 1998 (Information for the three months ended March 31, 1999 and 2000 is unaudited) (In thousands except share data and per share data) 1. Organization and Operations of the Company Artest Corporation ("the Company") was incorporated in California on November 18, 1996. The Company is an independent provider of comprehensive semiconductor test services with an emphasis on complex mixed signal, RF and high performance digital semiconductors primarily in the communications and networking industries. The Company provides its customers with a flexible full service solution for their test needs and their services include software test program development, prototype testing and debugging, charterization, verification, wafer sort and final test. The Company sells its services primarily to semiconductor companies located in the United States. The Company is subject to a number of business risks including, but not limited to, dependence on key individuals, key customers, competition from larger companies and the need for the continued successful development, marketing and selling of its engineering and manufacturing test services. 2. Summary of Significant Accounting Policies Use of Estimates in Preparation of Financial Statements 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 and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Unaudited Interim Financial Statements The unaudited interim financial statements for the three months ended March 31, 1999 and 2000 have been prepared on the same basis as the audited financial statements and, in the opinion of management, reflect all normal recurring adjustments necessary to present fairly the financial information set forth therein, in accordance with generally accepted accounting principles. Results for the three months ended March 31, 2000 are not necessarily indicative of results in future periods. Cash and Cash Equivalents The Company considers all highly liquid debt instruments or money market- type funds with an original maturity of three months or less to be cash equivalents. F-7 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) Property and Equipment Property and equipment are stated at cost. Depreciation for all property and equipment is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years. Leasehold improvements are depreciated over the shorter of their useful lives or the term of the lease. As of December 31, 1998 and 1999, and March 31, 2000, property and equipment consisted of the following:
December 31, ---------------- March 31, 1998 1999 2000 ------- ------- --------- Computers and software........................... $ 199 $ 262 $ 277 Leasehold improvements........................... 627 633 633 Furniture and fixtures........................... 45 436 438 Machinery and equipment.......................... 6,513 9,815 10,632 ------- ------- ------- 7,384 11,146 11,980 Less: accumulated depreciation................... (1,252) (2,926) (3,475) ------- ------- ------- $ 6,132 $ 8,220 $ 8,505 ======= ======= =======
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets. Accrued Liabilities As of December 31, 1998 and 1999, and March 31, 2000, accrued liabilities consisted of the following:
December 31, --------- March 31, 1998 1999 2000 ---- ---- --------- Payroll and related employee benefits.................... $455 $149 $132 Other.................................................... 75 7 2 ---- ---- ---- $530 $156 $134 ==== ==== ====
Revenue Recognition The Company recognizes revenues on engineering and manufacturing testing services when the services are completed and there are no significant obligations remaining. The Company's revenues have also included test software and hardware development that is billed in the form of non-recurring engineering charges for time and materials incurred. To date, revenues from non-recurring engineering charges have not been significant. The following table summarizes the percentage of revenues represented by significant customers:
Three Months Year Ended Ended December 31, March 31, -------------- -------------- 1997 1998 1999 1999 2000 ---- ---- ---- ------ ------ Customer A..................................... 82% 43% 60% 59% 60% Customer B..................................... -- 27% -- -- -- Customer C..................................... -- 13% 15% 18% 6% Customer D..................................... -- -- 10% 13% 8%
F-8 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) Concentrations of Credit Risk and Significant Customers Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of accounts receivable. The Company generally does not require collateral on accounts receivable, as the majority of the Company's customers are large, well established companies. During the years ended December 31, 1997, 1998 and 1999, and three months ended March 31, 2000, the Company provided $0, $10, $50 and $0, respectively, to its allowance for doubtful accounts. The Company did not have any write-offs of uncollectible amounts during 1997, 1998 and 1999, and three months ended March 31, 2000. As of March 31, 2000, approximately 51.7% of gross accounts receivable was concentrated with two customers. As of December 31, 1999, approximately 55.5% of gross accounts receivable was concentrated with two customers. As of December 31, 1998, approximately 71.1% of gross accounts receivable was concentrated with two customers. Stock-Based Compensation In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). This accounting standard permits the use of either a fair value based method or the method defined in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB Opinion 25), to account for stock-based compensation arrangements. Companies that elect to employ the valuation method provided in APB Opinion 25 are required to disclose the pro forma net income that would have resulted from the use of the fair value based method. The Company has elected to determine the value of stock-based compensation arrangements under the provisions of APB Opinion 25 and, accordingly, the pro forma disclosures required under SFAS No. 123 have been included in Note 6. Computation of Per Share Amounts Basic net income per common share and diluted net income per common share are presented in conformity with SFAS No. 128, "Earnings Per Share" (SFAS No. 128) for all periods presented. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of the initial public offering must be included in the calculation of basic and diluted net income per common share as if such stock had been outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration. In accordance with SFAS No. 128, basic net income per common share has been calculated using the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share has been calculated assuming the conversion of the convertible preferred stock and outstanding stock options. For the year ended December 31, 1997, the Company has excluded 1,000,000 outstanding stock options from the calculation of diluted net income per common share because such securities are anti-dilutive for the period. F-9 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) The following table presents the calculation of basic and diluted net income per share:
Three Months Year Ended December 31, Ended March 31, ----------------------- --------------- 1997 1998 1999 1999 2000 ------- ------- ------- ------- ------- Net Income............................ $ 216 $ 47 $ 1,630 $ 480 $ 287 ======= ======= ======= ======= ======= Basic: Weighted average shares used in computing basic net income per share............................. 5,240 5,240 5,241 5,240 5,246 ======= ======= ======= ======= ======= Basic net income per share.......... $ 0.041 $ 0.009 $ 0.311 $ 0.092 $ 0.055 ======= ======= ======= ======= ======= Diluted: Weighted average shares used above.. 5,240 5,240 5,241 5,240 5,246 Weighted average dilutive convertible preferred stock....... 10,500 14,000 14,000 14,000 14,000 Weighted average dilutive stock options........................... -- 1,815 2,686 1,815 2,766 ------- ------- ------- ------- ------- Weighted average shares used in computing diluted net income per share............................. 15,740 21,055 21,927 21,055 22,012 ======= ======= ======= ======= ======= Diluted net income per share........ $ 0.014 $ 0.002 $ 0.074 $ 0.023 $ 0.013 ======= ======= ======= ======= =======
Comprehensive Income In fiscal 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and displaying comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. Such items may include foreign currency translation adjustments and unrealized gains/losses from investing and hedging activities. Comprehensive income is the same as net income for all periods presented in the accompanying consolidated financial statements. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133, as recently amended, is effective for fiscal years beginning after June 15, 2000. Management believes the adoption of SFAS No. 133 will not have a material effect on the Company's financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. Management believes the adoption of SAB 101 will not have a significant impact on the Company's consolidated results of operations and financial position in fiscal 2000. F-10 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) In March 2000, the FASB issued Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of APB Opinion No. 25" (FIN No. 44). FIN No. 44 addresses the application of APB No. 25 to clarify, among other issues: (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 is effective July 1, 2000, but certain conclusions cover specific events that occur after either December 15, 1998 or January 12, 2000. To the extent FIN 44 covers events occurring during the period after December 15, 1998 or January 12, 2000, but before the effective date of July 1, 2000, the effects of applying the interpretation will be recognized on a prospective basis from July 1, 2000. The Company does not expect that FIN 44 will have a material effect on its financial position or results of operations. 3. Notes Payable In November 1997, the Company entered into an equipment note payable agreement with a bank under which it can borrow up to $6,500. Interest on outstanding advances under the credit arrangement range between 7.10% and 7.30%. The credit arrangement expired for additional advances in November 1998. In August 1999, the Company entered into another secured equipment note payable agreement under which it can borrow up to $2,000. Interest on advances under this credit arrangement accrues at the bank's prime lending rate (8.75% at March 31, 2000). The credit arrangement expires for additional advances in August 2000. At December 31, 1998 and 1999, and March 31, 2000, total borrowings outstanding under the above credit arrangements were $5,312, $5,509 and $5,776, respectively. At December 31, 1998 and 1999, and March 31, 2000, the $6,500 equipment note payable agreement was secured by $4,500, $2,250 and $2,250 cash and cash equivalents, respectively, and by the Company's equipment. The cash and cash equivalent amounts which secures the note payable are reflected as restricted cash in the accompanying financial statements. The Company is required to satisfy certain financial covenants which were all met at December 31, 1999 and March 31, 2000. Future maturities of principal on the note payable agreement as of March 31, 2000 were as follows (for the 12 months ended March 31): 2001............................................................... $1,876 2002............................................................... 1,876 2003............................................................... 1,409 2004............................................................... 368 2005 and thereafter................................................ 247 ------ $5,776 ======
4. Commitments and Contingencies The Company leases its facilities under operating lease agreements expiring through February 2002. Rent expense for the the years ended December 31, 1997, 1998 and 1999, and three months ended March 31, 2000 was $113, $179, $305, and $103, respectively. Future minimum lease payments as of March 31, 2000 were as follows (for the 12 months ended March 31): 2001................................................................ $364 2002................................................................ 350 ---- Total............................................................. $714 ====
F-11 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) 5. Shareholders' Equity On March 28, 1997, the Company issued 14,000,000 shares of Series A convertible preferred stock under the Series A convertible preferred stock Purchase Agreement at one dollar per share. The rights with respect to Series A convertible preferred stock are as follows: Dividends a. Preference. The holders of outstanding Series A convertible preferred stock are entitled to receive, when and as declared by the Board of Directors, out of any assets at the time legally available, dividends in cash at the rate of $0.08 per share per annum before any dividend is paid on Common Stock. The right to such dividends on shares of Series A convertible preferred stock is non-cumulative. Such dividend is payable when and as the Board of Directors may from time to time determine. b. Non-Cash Dividends. In the event the Company declares a distribution payable in securities of other persons, evidences of indebtedness issued by this corporation or other assets (excluding cash dividends) or options or rights to purchase any such securities or evidences of indebtedness, then, in each such case the holders of the Series A convertible preferred stock are entitled to a proportionate share of any such distribution as though the holders of the Series A convertible preferred stock were the holders of the number of shares of Common Stock of the corporation into which their respective shares of Series A convertible preferred stock are convertible. Liquidation Preference In the event of any liquidation, dissolution or winding up of the Company, either voluntary or, involuntary, the holders of the Series A convertible preferred stock are entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of the Common Stock, the amount of one dollar per share. If upon the occurrence of such event the assets and funds distributed among the holders of the Series A convertible preferred stock are insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the Company legally available for distribution are distributed ratably among the holders of the Series A convertible preferred stock. Conversion Each share of Series A convertible preferred stock is convertible at the option of the holder into one share of Common Stock. Each share of Series A convertible preferred stock will automatically convert into common stock on a one-for-one basis upon the closing of an initial public offering ("IPO"). Voting Each holder of shares of the Series A convertible preferred stock is entitled to the number of votes equal to the number of shares of Common Stock into which such shares of Series A convertible preferred stock could be converted and has voting rights and powers equal to the voting rights and powers of the Common Stock. Unaudited Pro Forma Shareholders' Equity In June 2000, the Company's Board of Directors authorized the filing of a registration statement with the Securities and Exchange Commission to register shares of its Common Stock in connection with a proposed IPO. If the IPO is consummated under the terms presently anticipated, all of the currently outstanding shares of F-12 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) Series A convertible preferred stock as of March 31, 2000 will be converted into 14,000,000 shares of common stock upon the closing of the IPO. The effect of the Series A convertible preferred stock conversion has been reflected as unaudited pro forma shareholders' equity in the accompanying balance sheet as of March 31, 2000. Common Stock At March 31, 2000, the Company had reserved the following shares of authorized but unissued shares of common stock for future issuance: Conversion of Series A convertible preferred stock outstanding............................................... 14,000,000 Stock option plan........................................... 3,994,000 ---------- 17,994,000 ==========
401(k) Plan Substantially, all of the Company's employees are eligible to participate in the Artest 401(k) Plan. Employer matching contributions for the years ended December 31, 1998, and 1999, and three months ended March 31, 2000, were $1, $67, and $26, respectively. 6. Stock Option Plan In 1998, the Company adopted the 1998 Stock Option Plan (the "Plan") and, in accordance with the Plan, authorized the issuance of 4,000,000 shares of common stock. Under the Plan, the Board of Directors may grant incentive and nonqualified stock options to employees, directors, and consultants of the Company. The exercise price per share for an incentive stock option cannot be less than the fair market value, as determined by the Board of Directors, on the date of the grant. The exercise price per share for nonqualified stock options cannot be less than the fair market value, as determined by the Board of Directors, on the date of grant. Options generally vest over a four-year period and generally expire ten years after the date of grant. Option activity under the Plan was as follows:
Outstanding Options Weighted Average ------------------- ---------------- Balance at December 31, 1996........... -- -- Granted.............................. 1,785,000 $0.10 Exercised............................ -- -- Cancellations........................ (5,000) 0.10 --------- ----- Balance at December 31, 1997........... 1,780,000 0.10 Granted.............................. 685,000 0.20 Exercised............................ -- -- Cancellations........................ -- -- --------- ----- Balance at December 31, 1998........... 2,465,000 0.13 Granted.............................. 328,000 0.50 Exercised............................ (6,000) 0.20 Cancellations........................ (24,000) 0.20 --------- ----- Balance at December 31, 1999........... 2,763,000 0.17 Granted.............................. 99,500 8.00 Exercised............................ -- -- Cancellations........................ -- -- --------- ----- Balance at March 31, 2000.............. 2,862,500 $0.45 ========= =====
F-13 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) The following table summarizes additional information with respect to stock options outstanding as of March 31, 2000:
Options Outstanding Options Exercisable ------------------------------------------- -------------------------- Weighted Average Weighted Average Weighted Average Range of Exercise Prices Number Remaining Years Exercise Price Number Exercise Price ------------------------ --------- ---------------- ---------------- --------- ---------------- $0.10-0.11.............. 1,780,000 7.07 $0.11 1,029,333 $0.11 0.20................... 655,000 8.14 0.20 210,083 0.20 0.50................... 328,000 9.52 0.50 1,067 0.50 8.00................... 99,500 9.83 8.00 -- -- --------- --------- 2,862,500 7.69 $0.45 1,240,483 $0.15 ========= =========
The Company accounts for these Plans under APB Opinion No. 25 under which compensation expense has been recognized as the grant price was less than the deemed fair market value at date of grant. Had compensation expense for stock options granted to employees been determined based on the fair value of the related options at the grant dates, consistent with SFAS No. 123, the Company's net income and net income per share would have decreased by the pro forma amounts indicated below:
Three Months Year Ended December Ended March 31, 31, -------------------- ------------- Net Income 1997 1998 1999 1999 2000 ---------- ------ ------ ------ ------ ------ Net income as reported................... $ 216 $ 47 $1,630 $ 480 $ 287 Net income pro forma..................... 207 33 1,185 476 153 As Reported: Basic net income per share............. $0.041 $0.009 $0.311 $0.092 $0.055 Diluted net income per share........... 0.014 0.002 0.074 0.023 0.013 Pro Forma: Basic net income per share............. $0.040 $0.006 $0.226 $0.091 $0.029 Diluted net income per share........... 0.013 0.002 0.054 0.023 0.007
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in fiscal 1999 and for three months ended March 31, 2000: risk-free interest rate range of 4.64 %-6.15 %; expected dividend yield of zero percent; expected lives of four years. Because the Company is a privately held company, it has omitted expected volatility in determining a value of its options. Stock-based Compensation In connection with the grant of certain stock options to employees during the year ended December 31, 1999, the Company recorded deferred stock-based compensation of approximately $1,686, representing the difference between the deemed value of the common stock for accounting purposes and the option exercise price at the date of the option grant. Such amount is presented as a reduction of stockholders' equity and will be amortized over the vesting period of the applicable options in a manner consistent with Financial Standards Board Interpretation No. 28, "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans." Approximately $219 and $223 was expensed during the year ended December 31, 1999 and three months ended March 31, 2000 and is included in amortization of deferred stock-based compensation in the accompanying statement of operations. The amortization expense relates to options granted to employees in all operations' expense categories. F-14 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) Compensation expense is decreased in the period of forfeiture for any accrued but unvested compensation arising from the early termination of an option holder's services. 7. Income Tax The Company accounts for income taxes pursuant to Statement of Financial Accounting Standards No. 109 (SFAS No. 109, "Accounting for Income Taxes"). The provision for income taxes consisted of the following:
Three Months Year Ended Ended December 31, March 31, ------------------- ---------- 1997 1998 1999 1999 2000 ---- ----- ------ ---- ---- Current: Federal................................... $184 $ 178 $1,263 $313 $391 State..................................... 48 49 216 54 68 Deferred: Federal................................... (50) (134) (219) (16) (89) State..................................... (13) (23) (30) (4) (33) ---- ----- ------ ---- ---- Income tax provision................... $169 $ 70 $1,230 $347 $337 ==== ===== ====== ==== ====
The components of the net deferred income tax asset are as follows:
December 31, ------------- March 31, 1998 1999 2000 ------ ------ --------- Depreciation and asset basis differences............ $ 152 $ 304 $304 Reserves and accruals not currently deductible for tax purposes...................................... 69 166 166 ------ ------ ---- Deferred income tax asset......................... $ 221 $ 470 $470 ====== ====== ====
The Company has been profitable for each of the three years ended December 31, 1999. As a result, management believes it is more likely than not that the Company will generate sufficient taxable income in the future to realize the deferred income tax assets. Accordingly, the Company has not recognized a valuation allowance at December 31, 1998 and 1999, and at March 31, 2000. However, given the dynamic nature of the semiconductor engineering and manufacturing test services industry, management can provide no assurance as to the realization of deferred income tax assets. The provision for income taxes differs from the amount computed by applying the federal statutory rate to the Company's income before provision for income taxes as follows:
Three Months Year Ended Ended December 31, March 31, ---------------- --------- 1997 1998 1999 1999 2000 ---- ---- ------ ---- ---- Tax provision at statutory rate............... $135 $41 $1,001 $290 $218 Non-deductible amortization of deferred stock- based compensation.......................... -- 90 -- 91 State tax expense, net of federal benefit..... 22 7 166 48 36 Other, net.................................... 12 22 (27) 9 (9) ---- --- ------ ---- ---- Provision for income taxes.................... $169 $70 $1,230 $347 $337 ==== === ====== ==== ====
F-15 ARTEST CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands except share data and per share data) 8. Segment Reporting Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or chief decision making group, in deciding how to allocate resources and in assessing performance. The Chief Executive Officer is the Company's chief decision maker. Because the business is completely focused on one industry segment, engineering and manufacturing test services to semiconductor companies, management believes the Company has one reportable segment. All of the revenues and profits are generated through the engineering and manufacturing test services for this one segment. 9. Subsequent Events Stock Options The Company issued 1,171,000 of common stock options from April 1, 2000 to June 15, 2000 at the exercise price of $8.00 per share. Equipment Purchase On April 28, 2000 the Company entered into a purchase agreement with Micro Linear Corporation ("Micro Linear") under which it purchased certain assets from Micro Linear relating to its test operations for a value of $5,956 of which $1,000 was paid in cash with the remaining balance settled with the issuance of a promissory note. The promissory note bears interest at a per annum rate of 6.00% due monthly. Equal monthly principal payments of $165 are due beginning November 15, 2000. The note is due and payable in full on April 15, 2003. The Company also entered into an operating agreement with Micro Linear that requires the Company to employ certain Micro Linear employees and assume certain obligations to make retention payments to these employees. These retention payments will be funded by Micro Linear and disbursed by the Company to the employees. Micro Linear has committed to use the Company as its primary subcontractor to perform final test, sort, assembly management, and shipping turn key services for its existing products for a period of three years. This commitment requires the Company to meet certain quality, service and price standards. F-16 [Back Page] LOGO PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the costs and expenses, other than the underwriting discounts payable by us in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fee and the Nasdaq National Market listing fee. SEC Registration Fee.................................................. $ NASD Filing Fee....................................................... Nasdaq National Market Listing Fee.................................... * Printing and Engraving Expenses....................................... * Legal Fees and Expenses............................................... * Accounting Fees and Expenses.......................................... * Blue Sky Fees and Expenses............................................ * Transfer Agent Fees................................................... * Miscellaneous......................................................... * ----- Total............................................................... $ * =====
- -------- *To be filed by amendment Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers in terms sufficiently broad to permit the indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Our bylaws provide for mandatory indemnification of our directors and officers and permissible indemnification of employees and other agents to the maximum extent permitted by the Delaware General Corporation Law. Our certificate of incorporation provides that, subject to Delaware law, our directors will not be personally liable for monetary damages for breach of the directors' fiduciary duty as directors to Artest Corporation and its stockholders. This provision in the certificate of incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the company or our stockholders for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. We have entered into indemnification agreements with our officers and directors, a form of which will be filed with the Securities and Exchange Commission as an exhibit to our registration statement on Form S-1 (No. 333- ). The indemnification agreements provide our officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. Reference is also made to Section of the underwriting agreement contained in exhibit 1.1 hereto, indemnifying our officers and directors against certain liabilities, and section 1.11 of the Third Amended and Restated Registration Rights Agreement contained in exhibit 4.2 hereto, indemnifying the parties thereto, including controlling stockholders, against liabilities. II-1 Item 15. Recent Sales of Unregistered Securities During the past three years, the registrant has issued unregistered securities to a limited number of persons as described below: Common Stock (1) In March 1997, we sold 5,000,000 shares of our common stock at a price of $0.01 per share to Jen Kao, our President and Chief Executive Officer for a purchase price of $50,000. (2) In March 1997, we sold 240,000 shares of our common stock at a price of $0.01 per share to Alan Ross, Chairman of our Board of Directors for a purchase price of $2,400. (3) In March 1997, we sold 14,000,000 shares of our Series A convertible preferred stock at a price of $1.00 per share to a group of eight investors for an aggregate purchase price of $14,000,000. Stock Options (1) From 1997 through June 2000, we granted stock options to acquire an aggregate of 4,031,167 shares of our common stock at prices ranging from $0.10 to $8.00 per share to employees, consultants and directors pursuant to our 1998 Stock Plan. (2) From 1997 through June 2000, we issued an aggregate of 19,567 shares of our common stock to employees, consultants and directors pursuant to the exercise of stock options granted under the 1998 Stock Plan for an aggregate consideration of $2,746.70. None of the foregoing transactions involved any underwriters, underwriting discounts or commissions, or any public offering, and we believe that each transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated thereunder or Rule 701 pursuant to compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients in each transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to share certificates and instruments issued in these transactions. All recipients had adequate access, through their relationships with us, to information about us. Item 16. Exhibits and Financial Statement Schedules The exhibits listed in the exhibit Index are filed as part of this registration statement. (a) Exhibits
Exhibit Number Description of Document ------- ----------------------- 1.1* Form of Underwriting Agreement. 3.1* Amended and Restated Certificate of Incorporation, to be effective upon consummation of this offering. 3.2* Amended and Restated Bylaws, to be effective upon consummation of this offering. 4.1* Form of registrant's Specimen Common Stock Certificate. 5.1* Opinion of Brobeck, Phleger & Harrison LLP, counsel for the registrant, with respect to the common stock being registered. 10.1** Agreement for Purchase and Sale of Assets between Registrant and Micro Linear Corporation, dated April 28, 2000.
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Exhibit Number Description of Document ------- ----------------------- 10.2** Equipment Purchase and Engineering Test Services Agreement between Registrant and Fairchild Semiconductor International, Inc., dated September 30, 1999. 10.3** Credence DUO Tester Rental Agreement between Registrant and MMC Networks, Inc., dated May 5, 1999. 10.4 Lease for Registrant's headquarters located at 678 Almanor Avenue, Sunnyvale, CA 94086. 10.5 Lease for Registrant's facilities located at 2050 and 2092 Concourse Drive, San Jose CA 95131, included as part of Exhibit 10.1. 10.6* Lease for Registrant's facilities located at 6696 Mesa Ridge, Suite A, San Diego, CA 92121 10.7 Promissory Note payable to Micro Linear Corporation, included as part of Exhibit 10.1. 10.8 Operating Agreement between Registrant and Micro Linear Corporation, included as part of Exhibit 10.1. 10.9* Registrant's 2000 Stock Incentive Plan. 10.10* Registrant's 2000 Employee Stock Purchase Plan. 10.11* Form of registrant's Directors' and Officers' Indemnification Agreement. 23.1 Consent of Arthur Andersen LLP, Independent Public Accountants. 23.2* Consent of Brobeck, Phleger & Harrison LLP (contained in their opinion filed as Exhibit 5.1). 24.1 Power of Attorney. Reference is made to Page II-5. 27.1* Financial Data Schedule. (In EDGAR format only)
- -------- *To be filed by amendment **Confidential Treatment Requested (b) Financial Statement Schedule Item 17. Undertakings We hereby undertake to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, indemnification agreements entered into between the company and our officers and directors, the underwriting agreement, or otherwise, we have been advised that in the opinion of the commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by any of our directors, officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this registration statement in reliance upon Rule 430A and II-3 contained in a form of Prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on this 3rd day of July, 2000. /s/ Jen Kao By: ________________________________ Jen Kao President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Jen Kao and Keith Imai and each one of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to sign any registration statement for the same offering covered by this registration statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post- effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that each of said attorneys-in-fact and agents or any of them, or his or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, each of the undersigned has executed this power of attorney as of the date indicated. Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the persons whose signatures appear below, which persons have signed such registration statement in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Jen Kao President and Chief Executive July 3, 2000 ________________________________________ Officer (Principal Executive Jen Kao Officer) /s/ Hector Santana Vice President, Finance July 3, 2000 ________________________________________ (Principal Financial Officer Hector Santana and Principal Accounting Officer) /s/ Alan Ross Director July 3, 2000 ________________________________________ Alan Ross /s/ Jim Fiebiger Director July 3, 2000 ________________________________________ Jim Fiebiger
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Signature Title Date --------- ----- ---- /s/ Terry Gou Director July 3, 2000 ________________________________________ Terry Gou /s/ Bough Lin Director July 3, 2000 ________________________________________ Bough Lin /s/ Satoshi Nagata Director July 3, 2000 ________________________________________ Satoshi Nagata
II-6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Board of Directors and Shareholders of Artest Corporation: We have audited, in accordance with generally accepted auditing standards, the financial statements of Artest Corporation included in this Registration Statement and have issued our report thereon dated March 31, 2000 (except for the matters discussed in Note 9, as to which the date is June 15, 2000). Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying schedule is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements as a whole. /s/ Arthur Andersen LLP San Jose, California March 31, 2000 S-1 ARTEST CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Column A Column B Column C Column D Column E - ----------------------------------- ---------- ---------- ---------- --------- Balance at Charged to Balance Beginning Costs and at End Description of Period Expenses Deductions of Period - ----------------------------------- ---------- ---------- ---------- --------- Year Ended December 31, 1997 Allowance for doubtful accounts.... $ -- $ -- $ -- $ -- Year Ended December 31, 1998 Allowance for doubtful accounts.... $ -- $ 10 $ -- $ 10 Year Ended December 31, 1999 Allowance for doubtful accounts.... $ 10 $ 50 $ -- $ 60 Three Months Ended March 31, 2000 Allowance for doubtful accounts (unaudited)...................... $ 60 $ -- $ -- $ 60
S-2 EX-10.1 2 0002.txt AGRMT FOR PURCHASE AND SALE OF ASSETS EXHIBIT 10.1 AGREEMENT FOR PURCHASE AND SALE OF ASSETS BY AND BETWEEN MICRO LINEAR CORPORATION AND ARTEST CORPORATION This AGREEMENT FOR PURCHASE AND SALE OF ASSETS (the "Agreement") is made --------- and entered into as of April 28, 2000 by and between Micro Linear Corporation, a Delaware corporation (the "Seller"), and Artest Corporation, a California ------ corporation (the "Buyer"). ----- RECITALS -------- A. Seller is engaged in the business of designing, developing and marketing, analog and mixed signal integrated circuits. B. Buyer is engaged in the business of testing integrated circuits. C. Buyer desires to purchase at the Closing (as hereinafter defined) certain specified assets of Seller and to assume certain specified liabilities of Seller, all in accordance with the terms and conditions contained herein. D. Buyer desires to lease certain property of Seller. E. Seller desires to engage Buyer to test certain integrated circuits of Seller. NOW, THEREFORE, in consideration of the representations, warranties and agreements herein contained, the parties hereto agree as follows: SECTION 1 --------- 1. DEFINITIONS. Capitalized terms in this Agreement shall have the ----------- meanings stated in this Section I or defined elsewhere in this Agreement. A reference to a particular Exhibit is to an Exhibit to this Agreement, each of which is incorporated into and made a part of this Agreement by that reference. A reference to a particular Section is to a Section of this Agreement. "Assets" is defined in Section 2.1. ------ "Assumed Contracts" is defined in Section 3.2. ----------------- "Assumed Liabilities" is defined in Section 3.2. ------------------- "Claims" means any and all suits, demands, actions, fines, penalties, ------ claims, enforcement actions, Liens, Liabilities, damages, deficiencies, injunctions, attorneys' fees, experts' fees, costs and expenses imposed, threatened, paid or incurred at any time, whether foreseeable or unforeseeable, conditional or unconditional. "Closing" and "Closing Date" are defined in Section 4.1. ------- ------------ * Confidential Treatment Requested "Compensation" means all base straight time gross earnings, commissions, ------------ overtime, shift premium, incentive compensation, incentive payments, bonuses, health insurance benefits, payroll taxes and other withholdings. and other compensation related amounts paid or accrued with respect to any Employee. "Disclosure Schedule" is defined in Section 5. 1. ------------------- "Employees" means those individuals identified in the Operating Agreement --------- who are employed by Seller on the date hereof and who are to become employed by Buyer at the Closing. "Governmental Body" means any foreign, federal, state, local or other ----------------- governmental authority, agency or regulatory body. "Intellectual Property" means trademarks (including service marks), --------------------- copyrights and applications therefor, trade names, patents and applications therefor, and software. "Lease Agreement" is defined in Section 4.2(e). --------------- "Liabilities" means any and all liabilities (including strict liability), ----------- claims, judgments, demands, actions, causes of action, damages, losses, expenses, penalties, fines, obligations, encumbrances, liens, costs, and expenses of investigation or defense of any claims of whatever kind or nature, whether absolute, contingent, accrued or otherwise, matured or unmatured, foreseeable or unforeseeable. "Liens" means mortgages, deeds of trust, pledges, taxes, security ----- interests, liens, leases, licenses, escrow arrangements. liabilities, encumbrances, costs, charges and claims of any nature whatsoever, direct or indirect, whether accrued, absolute, contingent or otherwise (including, without limitation, any agreement to give any of the foregoing). "Operating Agreement" is defined in Section 4.2(d). ------------------- "Person" means any individual, corporation, partnership, limited ------ liability company, joint venture, association, joint-stock company, trust, unincorporated organization or governmental body. "Purchase Price" is defined in Section 3.1. -------------- "Returns" is defined in Section 5.1(d). ------- "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means any --- ----- ------- federal, state, local or foreign income, gross receipts, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any Governmental Body. * Confidential Treatment Requested Page 2 SECTION 2 --------- 2. SALE OF ASSETS. -------------- 2.1 Assets to be Purchased at the Closing. Subject to the terms and ------------------------------------- conditions of this Agreement. Seller agrees to sell. transfer, convey, assign and deliver to Buyer on the Closing Date (as defined herein), and Buyer agrees to buy and acquire, all right, title and interest of Seller in and to the following assets and properties of Seller as provided herein (collectively, the "Assets"): ------ (a) The testing equipment, machinery, tooling, computer hardware, software, intellectual property necessary to the performance by the Assets of their intended functions or purposes and other tangible personal property of Seller specifically listed in Schedule 2.1 (a) hereto; ---------------- (b) Copies of all manufacturing and technical documentation (including any documentation set forth in magnetic, machine-readable form) and any other appropriate documentation associated with the above assets and related thereto or used by Seller in the conduct of the business related thereto. SECTION 3 --------- 3. CONSIDERATION. In consideration for the transfer of the Assets, ------------- Buyer agrees to make the following payments and assume the following liabilities: 3.1 Purchase Price. The aggregate purchase price (the "Purchase -------------- -------- Price") to be paid by Buyer to Seller hereunder shall be [*]. [*] of the - ----- Purchase Price shall be paid on the Closing Date by wire transfer to an account designated by Seller, with the balance of the Purchase Price to be evidenced by a Promissory Note substantially in the form attached hereto as Exhibit A (the --------- "Promissory Note") and to be paid in such amounts and at such times as are set --------------- forth in such note. 3.2 Assumed Liabilities. On the Closing Date, Buyer shall assume and ------------------- agree thereafter to pay, perform and discharge Seller's obligations under the contracts to which Seller is a party and which are specifically listed on Schedule 3.2 hereto (collectively, the "Assumed Contracts") and no others, but - ------------ ----------------- excluding any such obligations or liabilities based on failure by Seller to perform its obligations under the Assumed Contracts prior to the Closing Date (the "Assumed Liabilities"). Except for the Assumed Liabilities, Buyer shall not ------------------- assume, directly or indirectly, or have any responsibility for any Liability of Seller, and Seller shall retain all Liabilities arising from the operation of the Assets and the related business prior to the Closing Date, other than the Assumed Liabilities. Without limiting the foregoing, Buyer shall not directly or indirectly, assume or have any responsibility for any liability for any Compensation or other Liabilities related to the employment of the Employees by Seller prior to the Closing Date. 3.3 The buyer will be solely responsible for obtaining any required software licenses as a result of the transfer of the assets as per this agreement. * Confidential Treatment Requested Page 3 SECTION 4 --------- 4. CLOSING. ------- 4.1 Closing Date. The closing of the transactions contemplated by ------------ this Agreement (the "Closing") shall occur at the offices of Wilson Sonsini ------- Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California, on April 28, 2000, or at such other date, time and place upon which Seller and Buyer shall mutually agree (the "Closing Date"). ------------ 4.2 Conditions to Obligation of Buyer. The obligation of Buyer to --------------------------------- close hereunder is subject to the following conditions: (a) Subject to changes that are not in the aggregate materially adverse in the reasonable judgment of Buyer, the representations and warranties made by Seller in this Agreement shall be true and correct on and as of the Closing Date with the same effect as if made on and as of the Closing Date, and Seller shall have performed and complied with all agreements, covenants and conditions on its part required to be performed or complied with on or prior to the Closing Date. (b) A duly authorized officer of Seller shall deliver to Buyer, at the Closing, a certificate certifying as to the matters set forth in Section 4.2(a) hereof and that there has been no adverse change with respect to the Assets or the Assumed Liabilities since the date hereof. (c) No legal action or proceeding shall be pending or threatened (i) by any Governmental Body seeking to restrain, prohibit, invalidate or otherwise affect the consummation of the transactions contemplated hereby or (ii) which is reasonably likely to have a material adverse effect on the Assets or the use of the Assets by Buyer. (d) Buyer and Seller shall have entered into an operating agreement regarding TMT RFX test systems, production test services, off-shore assembly and test services and personnel matters in substantially the form attached hereto as Exhibit B (the "Operating Agreement"). --------- ------------------- (e) Buyer and Seller shall have entered into a lease agreement with respect to certain space at 2092 Concourse Drive, San Jose, California in substantially the form attached hereto as Exhibit C (the "Lease Agreement"). --------- --------------- (f) Seller shall have delivered to Buyer all bills of sale, endorsements, assignments and other instruments as Buyer shall reasonably request or as necessary or appropriate to sell, convey, assign, transfer and deliver to Buyer title to all the Assets. (g) Buyer shall have satisfactorily completed its due diligence with regard to the Assets to be carried out pursuant to Section 6.5. 4.3 Conditions of Obligation of Seller. The obligation of Seller to close ---------------------------------- hereunder is subject to the following conditions: * Confidential Treatment Requested Page 4 (a) Subject to changes that are not in the aggregate materially adverse in the reasonable judgment of Seller, the representations and warranties made by Buyer in this Agreement shall be true and correct on and as of the Closing Date with the same effect as if made on and as of the Closing Date, and Buyer shall have performed and complied with all agreements, covenants and conditions on its part required to be performed or complied with on or prior to the Closing Date. (b) A duly authorized officer of Buyer shall deliver to Seller, at the Closing, a certificate certifying as to the matters set forth in Section 4.3(a) hereof and that there has been no material adverse change with respect to the ability of Buyer to perform its obligations under the Operating Agreement since the date hereof. (c) No legal action or proceeding shall be pending or threatened (i) by any Governmental Body seeking to restrain, prohibit, invalidate or otherwise affect the consummation of the transactions contemplated hereby or (ii) which is reasonably likely to have a material adverse effect on the ability of Buyer to perform its obligations under the Operating Agreement. (d) Buyer and Seller shall have entered into the Operating Agreement. (e) Buyer and Seller shall have entered into the Lease Agreement. (f) Seller shall have satisfactorily completed its due diligence with regard to the business and financial condition of Buyer to be carried out pursuant to Section 6.5. SECTION 5 --------- 5. REPRESENTATIONS AND WARRANTIES. ------------------------------ 5.1 Representations and Warranties of Seller. Except as set forth in ---------------------------------------- the Seller's Disclosure Schedule attached hereto as Exhibit D, Seller represents --------- and warrants to Buyer as of the date of this Agreement and as of the Closing Date as follows: (a) Organization, Standing and Qualification. Seller is a ---------------------------------------- corporation duly organized, validly existing and in good standing under the laws of Delaware. Seller has all requisite corporate power and authority and is entitled to carry on its business as it is now being conducted, and to own, lease or operate the properties owned, leased and operated by it in the places where such business is now conducted. Seller is qualified to do business as a foreign corporation in the State of California. (b) Execution, Delivery and Performance. Seller has full ----------------------------------- corporate power and authority to enter into this Agreement and to carry out the transactions contemplated hereby, and all corporate and other proceedings required to be taken to authorize the execution, delivery and performance of this Agreement have been taken. This Agreement has been duly executed and delivered by and constitutes the valid and binding obligation of Seller and is enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium, and similar laws affecting creditors' rights generally and to * Confidential Treatment Requested Page 5 equitable principles limiting the availability of the remedy of specific performance or other equitable relief). (c) Good Title to Assets. Seller has good and marketable title -------------------- to the Assets, and none of the Assets is subject to any Lien. Other than the representations expressly set forth in this Agreement, Seller makes no other representations or warranties with respect to the Assets, their condition or their fitness for any particular purpose. (d) Taxes. ----- (i) To the extent a failure to do so could adversely impact the Assets or Buyer's use of the Assets, (a) Seller has timely filed within the time period for filing or any extension granted with respect thereto, all federal, state, local and foreign Tax returns, reports and estimates ("Returns") ------- which it is required to file relating or pertaining to any and all Taxes attributable to or levied upon the Assets and (b) paid any and all Taxes it is required to pay in connection with the taxable periods to which such Returns relate. There are no Liens on the Assets relating or pertaining to Taxes. (ii) To the extent relevant to the Assets, Seller shall retain and provide Buyer with all records or other information that may be relevant to the preparation of any Returns, or the conduct of any audit or examination, or other Tax proceeding by a Governmental Body or otherwise. (e) Claims and Litigation. No Claim, legal action, suit, --------------------- arbitration, governmental investigation or other legal, regulatory or administrative proceeding is pending against Seller related to the Assets, nor to the best of Seller's knowledge is there any threat thereof against or relating to the Assets or the transactions contemplated by this Agreement. (f) Suppliers. The Disclosure Schedule contains a correct list --------- of all of the current suppliers of supplies, equipment, spare parts or similar goods necessary for the use or operation of the Assets. (g) Assumed Contracts. Seller has provided to Buyer copies of ----------------- each of the Assumed Contracts. Except as otherwise indicated in the Disclosure Schedule, (a) to Seller's best knowledge each of the other parties to the Assumed Contracts has performed all the obligations required to be performed by it to date thereunder, (b) Seller does not know of the intention of any party to terminate any such Assumed Contract, and (c) each Assumed Contract is valid, binding and enforceable in accordance with its terms and is in full force and effect. (h) Employees. There are no suits, actions or administrative, --------- arbitration or other proceedings pending or threatened against Seller or affecting Seller or its business concerning any Employee. (i) Brokers or Finders. Seller is not obligated, directly or ------------------ indirectly, to any person for brokerage or finders' fees, agents' commissions or any similar charges in connection with this Agreement or the transactions contemplated hereby. * Confidential Treatment Requested Page 6 (j) Board Approval. The Board of Directors of Seller has -------------- unanimously approved this Agreement and the transactions contemplated hereby. 5.2 Representations and Warranties of Buyer. Buyer represents and --------------------------------------- warrants to Seller as of the date of this Agreement and as of the Closing Date as follows: (a) Organization, Standing, and Qualification. Buyer is a ----------------------------------------- corporation duly organized, validly existing and in good standing under the laws of the State of California. Buyer has all requisite corporate power and authority and is entitled to carry on its business as now conducted, and to own, lease or operate its properties in the places where its business is now conducted. Buyer is qualified to do business in all foreign jurisdictions in which it is required to be so qualified, except where the failure to be so qualified would not have a material adverse effect on the business or assets of Buyer. (b) Execution, Delivery and Performance. Buyer has full ----------------------------------- corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby, and all corporate and other proceedings required to be taken to authorize the execution, delivery and performance of this Agreement have been taken. This Agreement has been duly executed and delivered by and constitutes the valid and binding obligation of Buyer and is enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, moratorium and similar laws affecting creditors' rights generally and to equitable principles limiting the availability of the remedy of specific performance or other equitable relief). (c) Claims and Litigation. No Claim, legal action, suit, --------------------- arbitration, governmental investigation or other legal, regulatory or administrative proceeding is pending against Buyer that is reasonably likely to have a material adverse effect on the ability of Buyer to perform its obligations under the Operating Agreement, nor, to the best of Buyer's knowledge, is there any threat thereof. (d) Taxes. To the extent a failure to do so could adversely ----- impact the ability of Buyer to perform its obligations under the Operating Agreement, (a) Buyer has timely filed within the time period for filing or any extension granted with respect thereto, all Returns which it is required to file and (b) paid any and all Taxes it is required to pay in connection with the taxable periods to which such Returns relate. (e) Compliance with Laws and Regulations, Permits. Buyer is in --------------------------------------------- compliance with all statutes, laws, rules and regulations with respect to or affecting its ability to perform its obligations under the Operating Agreement. Buyer holds and has at all times held all licenses, permits and authorizations pursuant to the laws and regulations of any Governmental Body, the absence of which would have a material adverse effect on the ability of Buyer to perform its obligations under the Operating Agreement. Buyer does not know of any material violation of any of the foregoing licenses, permits and authorizations and Buyer has not received notice from any Governmental Body of any such violation or the intention of such Governmental Body to investigate the existence of any such violation. There is no fact known to Buyer or any of its management which adversely affects, or could reasonably be expected to adversely affect * Confidential Treatment Requested Page 7 the ability of Buyer to perform its obligations under the Operating Agreement or the ability of Buyer to carry out the transactions contemplated by this Agreement. (f) Intellectual Property. Buyer owns or possesses licenses or --------------------- other legally enforceable rights to all Intellectual Property necessary to conduct Buyer's business as presently conducted and to perform all of Buyer's obligations contemplated by the Operating Agreement. Buyer is not infringing upon, or otherwise violating the rights of any third party with respect to any Intellectual Property. For the Intellectual Property which Buyer uses, but does not own, Buyer is licensed to use such Intellectual Property and is not in breach of, or default under, any license agreement. (g) Brokers or Finders. Buyer is not obligated, directly or ------------------ indirectly, to any person for brokerage or finders' fees, agents' commissions or any similar charges in connection with this Agreement or the transactions contemplated hereby. (h) Board Approval. The Board of Directors of Buyer has -------------- unanimously approved this Agreement and the transactions contemplated hereby. SECTION 6 --------- 6. ADDITIONAL AGREEMENTS. --------------------- 6.1 Transfer Taxes. In connection with the transactions contemplated -------------- hereunder, Buyer shall pay all sales, use, transfer and other similar taxes, if any, which may be or become due and payable as a result hereof. 6.2 Conduct of Business by Seller Prior to Closing Date. During the --------------------------------------------------- period from the date of this Agreement up to the Closing Date, Seller shall: (a) use the Assets in the usual, regular and ordinary course and in substantially the same manner as heretofore used; (b) preserve and maintain the Assets in their condition as of the date hereof (subject to use in the ordinary course of business); (c) perform all obligations required to be performed by it under all of the Assumed Contracts; and (d) not mortgage, pledge or subject to Lien any of the Assets or sell or transfer, or enter into any agreement to sell or transfer, any of the Assets. 6.3 Conduct of Business by Buyer Prior to Closing Date. During the -------------------------------------------------- period from the date of this Agreement up to the Closing Date, Buyer shall: (a) conduct its business in the ordinary course consistent with past practices; and * Confidential Treatment Requested Page 8 (b) give prompt notice to Seller of any material adverse change to its business, financial condition or ability to perform the obligations contemplated by the Operating Agreement. 6.4 Discharge of Liabilities. From and after the date hereof, Buyer ------------------------ shall discharge when due all of the Assumed Liabilities. 6.5 Access to Information. Between the date of this Agreement and the --------------------- Closing Date, (i) Seller shall give Buyer and its authorized representatives reasonable access during normal working hours to Seller's facilities and properties relating to the Assets, and its books and records relating to the Assets, shall permit Buyer to make inspections thereof, and shall furnish Buyer with such information with respect to the Assets as Buyer may from time to time reasonably request, and (ii) Buyer shall give Seller and its authorized representatives reasonable access during normal working hours to Buyer's facilities and properties, and its books and records, shall permit Seller to make inspections thereof, and shall furnish Seller with such information with respect to Buyer's business and financial condition as Buyer may from time to time reasonably request. Each party acknowledges that such disclosure shall be subject to the [Confidentiality Agreement] between the parties dated __________, 1999. 6.6 Public Disclosure. Seller and Buyer shall consult with each other ----------------- before issuing any press release or otherwise making any public statement or making any other public (or non-confidential) disclosure regarding the terms of this Agreement and the transactions contemplated hereby, and neither shall issue any such press release or make any such statement or disclosure without the prior approval of the other (which approval shall not be unreasonably withheld), except that Seller may make such disclosures as are required by the Securities and Exchange Commission or the Nasdaq National Market. 6.7 Consents. Promptly after the date hereof, Seller and Buyer shall -------- consult with each other regarding the actions which are required to be taken to cause the Assumed Contracts to be transferred to Buyer on the Closing Date. Subject to such consultations, Seller shall promptly apply for or otherwise seek, and use reasonable commercial efforts to obtain, all consents and approvals required to be obtained by it for the consummation of the transactions contemplated hereby and shall use reasonable commercial efforts to obtain all necessary consents, waivers and approvals under any of the Assumed Contracts in connection with the transaction for the assignment thereof or otherwise. The buyer will be solely responsible for obtaining any software licenses associated with the transfer of the test equipment identified. SECTION 7 --------- 7. TERMINATION. ----------- 7.1 Agreement Termination. This Agreement may be terminated at any --------------------- time on or prior to or at the Closing Date: (a) by Buyer or Seller if there has been a material misrepresentation, breach of warranty, or breach of covenant by the other in any of its representations, warranties or covenants set forth herein; (b) by Buyer if the conditions stated in Section 4.2 have not been satisfied by the Closing * Confidential Treatment Requested Page 9 Date other than as a result of inaction by Buyer; (c) by Seller if the conditions stated in Section 4.3 have not been satisfied by the Closing Date other than as a result of inaction by Seller; or (d) by mutual written agreement of Buyer and Seller. If the Closing Date does not occur by April 28, 2000, this Agreement shall terminate effective as of 5:00 p.m. (California time) on such date, unless such date is extended by mutual written agreement of the parties hereto, in which case this Agreement shall terminate on the date and at the time selected by the parties for such extension. 7.2 Effect of Termination. If this Agreement shall be terminated as --------------------- provided in Section 7.1, all obligations of the parties hereunder shall terminate without liability of any party to any other party, except that in the event of termination by reason of Section 7.1(a), the breaching party shall be liable for the reasonable expenses (including the reasonable attorneys' fees and expenses of counsel and court costs) of the other party in connection herewith and in the event of a willful breach the breaching party shall be liable for the damages of the other party resulting from such breach. SECTION 8 --------- 8. MISCELLANEOUS. ------------- 8.1 Absence of Third Party Beneficiary Right. No provisions of this ---------------------------------------- Agreement are intended, nor will be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, stockholder, partner or employee of any party hereto or any other person or entity and all provisions hereof will be personal solely between the parties to this Agreement. 8.2 Further Assurances. Each party agrees to cooperate with the other ------------------ party and to execute such further instruments, documents and agreements and to give such further written assurances from and after the date hereof as may be reasonably requested to evidence and reflect the transaction described herein. 8.3 Changes, Waivers, Etc. Neither this Agreement nor any provision --------------------- hereof may be amended, changed, waived, discharged or terminated orally, except by a statement in writing which references this Agreement and is signed by the party against whom enforcement of the amendment, change, waiver, discharge or termination is sought. 8.4 Expiry of Representations and Warranties. The representations and ---------------------------------------- warranties contained in this Agreement shall expire on the Closing Date. 8.5 Payment of Fees and Expenses. Each of the parties hereto shall ---------------------------- pay its own respective fees and expenses incurred in connection herewith. 8.6 Notices. All notices, requests, consents and other communications ------- required or permitted hereunder shall be in writing and shall be delivered, sent by telecopy, or mailed first-class postage prepaid, registered or certified mail, * Confidential Treatment Requested Page 10 If to Buyer: Artest Corporation 678 Almanor Avenue Sunnyvale, CA 94085 Attention: Jen Kao, President Telephone: (408) 731-8778 Telecopy: (408) 731-8770 If to Seller: Micro Linear Corporation 2092 Concourse Drive San Jose, CA 95131 Attention: David Gellatly Telephone: (408) 298-8400 Telecopy: (408) 288-9910 with a copy to: Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, CA 94304-1050 Attention: J. Robert Suffoletta Telephone: (650) 493-9300 Telecopy: (650) 493-6811 Such notices and other communications shall for all purposes of this Agreement be treated as being effective or having been given if delivered personally or by telecopy on the date of delivery, or, if sent by mail, five (5) days thereafter. 8.7 Entire Agreement. This Agreement, including the schedules and ---------------- exhibits which are incorporated into and made an internal part of this Agreement by reference, sets forth the entire understanding of the parties and supersedes all prior agreements of the parties with respect to the subject matter hereof 8.8 Satisfaction of Conditions. Each party will use reasonable -------------------------- commercial efforts to cause all conditions to its obligations hereunder to be timely satisfied and to perform and fulfill all obligations on its part to be performed and fulfilled under this Agreement to the end that the transactions contemplated hereby shall be effected substantially in accordance with the terms of this Agreement as soon as practicable. 8.9 Bulk Transfer Laws. The parties hereby waive compliance with any ------------------ applicable bulk transfer laws, including, but not limited to, the bulk transfer provisions of the Uniform Commercial Code of any state, or any similar statute, with respect to the transactions contemplated hereby. 8.10 Attorneys' Fees. If any litigation or arbitration is commenced --------------- between the parties hereto or their representatives concerning any provision of this Agreement or the rights and duties of any person or entity hereunder, solely as between the parties hereto or their successors, the party or parties prevailing in such proceeding (including any arbitration) will be entitled to the reasonable attorneys' fees and expenses of counsel and court costs and other out-of-pocket expenses incurred by reason of such litigation or arbitration. * Confidential Treatment Requested Page 11 8.11 Headings, References to Agreement. The headings of the sections --------------------------------- of this Agreement have been inserted for convenience of reference only and do not constitute a part of this Agreement. References herein to "this Agreement" shall include all schedules and exhibits hereto. 8.12 Choice of Law; Interpretation. It is the intention of the parties ----------------------------- that the laws of the State of California shall govern the validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties. 8.13 Arbitration. Any and all disputes, controversies or claims ----------- whether of law or fact and of any nature whatsoever arising from or respecting this Agreement shall be decided by binding arbitration in accordance with the Commercial Arbitration Rules then in effect of the American Arbitration Association (the "Arbitration Rules"). Unless otherwise agreed to in writing the ----------------- arbitration shall be held in San Jose, California. The arbitrators shall be selected as follows: In the event the parties agree on one arbitrator, the arbitration shall be conducted by such arbitrator. In the event the parties do not so agree, Seller and Buyer shall each designate one arbitrator within thirty (30) days following receipt of a notice from the other party of such party's election to submit an unresolved matter to arbitration. Such designated arbitrators shall mutually agree upon and shall designate a third arbitrator; provided, however, that failing such agreement within twenty (20) days after the end of the thirty (30) day notice period, the third arbitrator shall be appointed in accordance with the Arbitration Rules. At the request of either party, the arbitration proceedings will be confidential; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrator(s) and the American Arbitration Association as confidential records. The arbitrators shall have the authority to enter an appropriate protective order to enforce such confidentiality. The arbitrators, who shall act by majority vote, shall be able to decree any and all relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The final decision of the majority of the arbitrators, which shall be delivered in writing, shall constitute a conclusive determination of the matter in question, shall be binding upon the parties hereto and shall not be contested by either of them. The decree or judgment of an award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Reasonable notice of the time and place of arbitration shall be given to all persons as shall be required by law, in which case such persons or their authorized representatives shall have the right to attend and/or participate in all the arbitration hearings in such manner as the law shall require. 8.14 Severability. To the extent any provision of this Agreement shall ------------ be invalid or unenforceable, it shall be considered deleted from this Agreement and the remaining provisions of this Agreement shall be unaffected and shall continue in full force and effect. 8.15 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. * Confidential Treatment Requested Page 12 8.16 Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.17 Advice of Legal Counsel. Each party acknowledges and represents ----------------------- that, in executing this Agreement, it has had the opportunity to seek advice as to its legal rights from legal counsel and that the person signing on its behalf has read and understood all of the terms and provisions of this Agreement. Further, each party has reviewed this Agreement, which may not be construed against any party by reason of its preparation or word processing. [Remainder of Page Intentionally Left Blank] * Confidential Treatment Requested Page 13 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly executed and delivered as of date and year first above written. MICRO LINEAR CORPORATION ARTEST CORPORATION By: /s/ David L. Gellatly By: /s/ Jen Kao ----------------------------- ---------------------------- David L. Gellatly Jen Kao President and Chief President and Chief Executive Officer Executive Officer [Signature Page to Agreement for Purchase and Sale of Assets] Exhibit A --------- PROMISSORY NOTE [*] April 28, 2000 For value received, the undersigned Artest Corporation, a California corporation ("Borrower"), irrevocably and unconditionally promises to pay to the -------- order of Micro Linear Corporation, a Delaware corporation ("Lender"), at such ------ place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal amount of [*] (the "Loan"). ---- This note ("Note") is issued pursuant to an Agreement for Purchase and Sale ---- of Assets by and between Borrower and Lender dated as of April 28, 2000 (the "Purchase Agreement"). ------------------ Borrower shall pay interest on the aggregate unpaid principal advanced hereunder at the per annum rate of six percent (6%), which shall accrue on the basis of actual days elapsed and a year of 360 days ("Interest"). Interest -------- hereunder shall be due and payable on the 15th calendar day of each month until all principal advanced hereunder shall have been paid in full by Borrower. The principal amount of the Loan shall be due and payable in equal monthly installments of [*] beginning on November 15, 2000. All of the principal amount of the Loan and all other indebtedness of Borrower accrued under this Note shall be due and payable in full on April 15, 2003. The principal amount of the Loan is prepayable by Borrower at any time without penalty. Borrower promises to pay Lender all costs and expenses of collection of this Note and to pay all reasonable attorney's fees incurred in such collection, or in any judicial or other legal proceeding to collect this Note or in appeal thereof (collectively, "Expenses"), within ten (10) days after its receipt of -------- Lender's invoice therefor. If Borrower fails to fully pay when due any principal amount of the Loan, accrued unpaid Interest or Expenses when due pursuant to this Note, Borrower shall, in addition to the interest determined in accordance with the foregoing paragraph, pay default interest at the per annum rate of twelve and one-half percent (12.5%) or such lesser rate as would equal the maximum rate under applicable usury law, which shall accrue on the basis of actual days elapsed and a year of 360 days ("Default Interest"), on all such over-due and unpaid ---------------- principal, Interest and Expenses for a period from the date on which such failure occurred through the date on which such failure is cured, both inclusive. Borrower understands and irrevocably agrees that time is of the essence as to all obligations of Borrower hereunder and that no delay by Lender in exercising any power or right hereunder shall operate as a waiver of any power or right. Borrower irrevocably waives the right to direct the application of any and all payments at any time hereafter received by Lender from or on behalf of Borrower, and Borrower irrevocably agrees that Lender shall have the continuing exclusive right to apply any and all such payments * Confidential Treatment Requested Page 1 against the then due and owing obligations of Borrower as Lender may deem advisable. In the absence of a specific determination by Lender with respect thereto and except as otherwise provided herein, all payments shall be applied in the following order: (a) then due and payable fees and expenses, (b) then due and payable Default Interest payments, (c) then due and payable Interest payments, and (d) then due and payable principal payments. This Note shall be governed by, and construed in accordance with, the laws of the State of California. "Borrower" ARTEST CORPORATION By: /s/ Jen Kao ------------------------- Jen Kao President and CEO * Confidential Treatment Requested Page 2 Exhibit B --------- OPERATING AGREEMENT 04/28/2000 DEFINITIONS The definitions set forth below shall apply wherever they appear in this Agreement and all exhibits hereto. "Confidential Information" shall mean any information written or otherwise disclosed in any medium by one party to the other under this Agreement which is marked or otherwise designated as "Confidential" or is clearly by its nature confidential. Confidential Information shall include, but is not limited to, confidential information of subcontractors and suppliers to either party. "Production Test Services" shall mean those services Artest agrees to perform for MLIN pursuant to this contract including, but not limited to providing MLIN employees access to the TEST, and providing MLIN with sort, assembly, final test and shipping for MLIN products listed in Exhibit E. "Retention Amount" shall mean an amount of money to be paid over time by MLIN to Artest, which agrees to pay such amounts to the TEST Personnel in order to assure the retention of necessary TEST Personnel. The Retention Amount shall be equal to the sum of MLIN's current identified program (Exhibit F) for each of the TEST Personnel as specified in Exhibit G (for a total of [*]). Any part of the Retention Amount, which has not been paid to the TEST Personnel at the end of twelve (12) months following the effective date of this Agreement, shall be returned to MLIN. "TEST" shall mean the backend test equipment of MLIN test operations which is listed in Section 2.1a. "TEST Facilities" shall mean the current location of TEST. "TEST Personnel" shall mean the operators, techs, QA&R and test personnel listed in Exhibit G, who are currently employed by MLIN and are part of the transfer. PERSONNEL Artest agrees to hire the supervisors, operators, test maintenance, quality and shipping/receiving personnel listed in Exhibit G who are currently employed by --------- MLIN to maintain continuity and knowledge of MLIN products. The TEST Personnel shall become employees of Artest and shall be the sole responsibility of Artest. Artest will continue to provide MLIN with subcontracting services for production test and shipping in the same manner as is currently done by MLIN for a minimum of three (3) years following the closing of the transaction. All of the Artest personnel assigned to MLIN work projects will be allowed to co-mingle with MLIN personnel at the MLIN facility located at 2092 Concourse Drive, San Jose, California. All payments due to Micro * Confidential Treatment Requested Linear employees to be hired by Artest as a result of the termination of employment from Micro Linear are the sole responsibility of Micro Linear. MLIN and Artest agree to the following retention program to assure continuity or those personnel to be hired by Artest from MLIN. MLIN will pay the retention amount as three (3) retainer payments to Artest during the twelve (12) months following the effective date of the agreement in four (4) month intervals in the following manner: 4 months (30%), 8 months (30%), 12 months (40%). Arrest agrees to pay these retention payments received from MLIN to the listed personnel based on mutually agreed retention policies. Artest will refund to MLIN any retention amounts not paid to former MLIN employees at the end of the twelve (12) month period. Any additional retention amounts paid to these or other employees will be the sole responsibility of Artest. The Retention Amount shall be intended to meet any severance obligation of MLIN to the TEST Personnel and they shall be notified of this fact. Any transferred employee who is laid off during the 12-month time period will receive the retention payment entitled through the end of the applicable 4-month segment. (i.e. if an employee is laid off after 6 months, they will receive the 30% retention payment due through the 8-month time segment). The retention payments to Artest shall be paid on the following dates: 1st payment: September 1, 2000 2nd payment: January 2, 2001 3rd payment: May 1, 2001 PRODUCTION TEST SERVICES Production Test Services. MLIN will agree to use Artest as its primary subcontractor to perform sort, final test and shipping responsibilities for MLIN products listed in Exhibit E for a period of at least three (3) years following the closing of the transaction, provided that Arrest can maintain the costs, service and quality for test and shipping at or below the costs listed in Exhibit E. The parties agree to meet from time to time during the course of the - --------- term of this agreement to discuss the services and quality for the testing provided by Arrest to MLIN under this agreement. If MLIN determines that Arrest's services are in any way non-competitive, then MLIN shall give Artest written notice of such inadequacy and Artest shall have reasonable time to correct the deficiency. If Artest shall fail to correct then MLIN can upon written notice obtain services from another source. Artest will agree to implement productivity enhancements, which will reduce test costs to MLIN by [*] per year. MLIN will agree to endeavor to use Artest as its primary subcontractor for sort, final test and shipping and will grant to Artest first right of refusal for any new products MLIN develops, provided Artest's costs are competitive and Artest supports the tester platform required. Micro Linear agrees to subcontract to Artest production sort and/or final test volume shown in Exhibit E equal to a minimum of [*] of revenue to Artest. Micro --------- Linear also agrees, although it cannot guarantee volume levels or product mix, to subcontract to Arrest in the subsequent two (2) years all or most of its production sort and/or test volume with Arrest having the right of first refusal for all products, provided that Arrest costs and quality are competitive. (This ensures that * Confidential Treatment Requested Artest has the right to the maximum amount of MLIN revenue, at whatever business level MLIN can achieve during the subsequent 2 years). In the event that Artest is unable for any reason (other than force majeur) to provide testing services to Micro Linear at the Leased Premises or other locations as contemplated hereby (within the cost guidelines agreed to and represented in Exhibit E), then Micro Linear shall be granted such access to the --------- Test Equipment at mutually agreeable rates not in excess of prevailing market rates to enable Micro Linear to have such testing services performed in a timely manner. Access to Teradyne, Sentry, LTX and TMT Equipment. Artest will agree to provide access to its testing operations at the Leased Premises for MLIN product and test engineers for test development and yield enhancement during the daytime shift. Artest acknowledges that MLIN requires up to the hrs/month of the test systems listed in this table: [*] Artest agrees to give MLIN the right to use these machines and the required support hardware software up to these limits during the daytime shift in any given month. MLIN will notify Artest when it doesn't need the time and will release any unused machine time to Artest for its use. Conversely, Artest will notify MLIN if it doesn't need the machine time beyond the minimum time listed above and release to MLIN the right to use the machines beyond the agreed to hours. For the use of the machines as listed above and required handler/prober support machines, MLIN will agree to pay Artest user fees of [*] per year payable in equal monthly installments, beginning on the date of the execution of this agreement. The user fee shall be payable on or before the third day of each month. Artest and MLIN will agree to cooperate to transfer to Artest any MLIN "right to use" license on the above systems at the most reasonable allowed cost. Artest and MLIN will identify the cost for such a transfer, if applicable, prior to the signing of the Definitive Agreement and subject to Artest approval of such terms. Artest and MLIN shall use their reasonable best efforts to minimize the cost of this transfer but any costs associated with the transfer of the license shall be born by Artest alone and MLIN shall have no obligation to assure the transfer. TMT RFX Test System. Artest will agree to provide additional capacity for TMT RFX system for production testing for certain products MLIN has developed and plans on developing, in the future. Artest will purchase sufficient TMT RFX test systems and related interface hardware, satisfactory to MLIN, to be located at the Leased Premises or another local site or Artest will make arrangements with other external test subcontractors to acquire TMT RFX test systems and ensure sufficient access as to meet the needs for MLIN production test. MLIN will negotiate with TMT to allow Artest access to MLIN's favorable price and scheduling if beneficial. MLIN will commit to [*] of production testing per month per tester for a minimum of 1 year. If MLIN has a need for access to the additional TMT RFX test systems for product and test engineers for test development and yield enhancement beyond the amount identified above, then Artest will provide capacity for engineering during the daytime shift. MLIN will identify the hours per month required for this additional machine time and Artest agrees to give MLIN the * Confidential Treatment Requested right to use the TMT RFX additional machines up to these limits during the daytime shift in any given month. MLIN will agreed to notify Artest when it doesn't need the minimum guaranteed time and will release any unused machine time to Artest for its use. Conversely, Artest will notify MLIN if it doesn't need the TMT RFX machines beyond the minimum time listed above and release to MLIN the right to use the machines beyond the agreed to hours. For the use of the additional TMT RFX test systems as listed above, MLIN agrees to pay Artest user fee's of [*] per tester for 8hrs/day daytime access to the system, if and as required for 1 year. Relocation of TEST. Upon the expiration of the term of the sublease, Artest may choose to relocate TEST at its own cost to a new facility that allows full access by MLIN product and test engineering personnel. Notwithstanding the foregoing, if Artest should consider such a move, Artest shall ensure the continuous operation of TEST during the relocation with uninterrupted access by MLIN employees. The new TEST Facilities shall be of the same quality and close proximity to MLIN's product and test engineering personnel as are the current TEST Facilities. Artest and MLIN shall use their best efforts to jointly seek new space to allow for a coordinated move to the new facilities. All facility items purchased by Artest will remain the property of Artest after the expiration of the current lease and not part of Facility left behind for landlord. Assembly Support/Off-shore Test Capability. MLIN will transfer the responsibility for assembly and off-shore test to Artest. In this capacity, Artest will endeavor to establish relationships with key assembly subcontractors for the purpose of securing both capacity and favorable pricing for MLIN products. MLIN estimates that the assembly business opportunity for fiscal year 2000 will be approximately [*]. Artest may consider establishing off-shore sort and/or test capability with selected subcontractors on certain products agreed to by MLIN. MLIN will pay to Artest a management fee of [*] of the assembly revenue for this transfer of responsibility. Term of Services Contract. Unless otherwise specified, the term of the Production Test Services part of the Agreement shall be for a minimum of three (3) years from the date of the execution of this Agreement. Termination and Renewal. At least 90 but not more than 180 days before the expiration of this Agreement, the parties shall notify each other in writing whether the Agreement will terminate if the parties do not provide such notification, the Agreement will automatically renew for a period of one year at prices to be agreed upon. Thereafter, the agreement will automatically renew each year until the parties provide written notice of its termination. Termination for Cause. If either party materially breaches a provision and fails to cure such breach within the thirty (30) days after receiving written notice from the other party, such other party shall have the right at its option to terminate the Production Test Services portion of this Agreement. Upon termination of the Production Test Services portion of this Agreement for cause, the parties shall pay to each other any fees or rents due at the time of the termination. Bankruptcy. Should either party: (i) become insolvent, (ii) make an assignment for the benefit of creditors; (iii) file or have filed against it a petition in bankruptcy or reorganization; (iv) have * Confidential Treatment Requested a receiver, manager, administrator, or administrative receiver appointed; or (v) institute any proceedings for liquidation or winding up; then the other party may, in addition to other rights and remedies it may have, terminate this Agreement immediately by written notice. Property Upon Termination. Upon expiration or termination of this Agreement, both parties will deliver to the other all property of the other party that they may have in their possession or control. Acquisition of MLIN. In the event that MLIN is sold to or acquired by a third party, the terms and conditions of this agreement shall be binding. Acquisition of Artest. In the event that Artest is sold to or acquired by a third party, the terms and conditions of this agreement shall be binding. MISCELLANEOUS Invoices. Unless otherwise provided in this Agreement, Artest and MLIN shall invoice each other for fees for any Production Test Services provided pursuant to this agreement. All invoices shall be due and payable when invoiced, and shall be deemed overdue if they remain unpaid thirty (30) days after they become payable. Overdue amounts shall accrue interest at the rate of two (2) percent per month, or at the highest legal interest rate, if less. Payments. All payments referred to in this agreement are net 30 days. Confidential Information. During the term of this Agreement and subsequent thereto, the receiving party will keep all Confidential Information of the other party in confidence and will not, without prior written consent of the disclosing party, publish, disclose or otherwise make available, directly or indirectly, any item of Confidential Information to any person other than those of the receiving party's employees, agents or contractors who need to know the same in the performance of their duties for the receiving party. Publicity. The parties agree that they shall not make any disclosure, by means of the issuance of any reports, statements or releases or otherwise, pertaining to the contents of this Agreement or the transactions contemplated hereby, except that MLIN shall be permitted to make such disclosures as may be required by federal and state securities laws or the rules and regulations of the Nasdaq National Market. Dispute Resolution. The parties shall attempt in good faith to resolve any dispute arising out of this Agreement, including but not limited to any dispute regarding the interpretation of or performance under said Agreement, promptly by negotiations. If these negotiations should fail, the parties shall resolve any dispute by submitting it to binding arbitration in San Jose, California under the rules of the American Arbitration. Notwithstanding the foregoing, either party shall have the right to seek preliminary injunctive relief at any time. The prevailing party shall have all reasonable legal fees reimbursed. Governing Law. This Agreement shall be governed in all respects by the laws of the United States of America and the State of California. The parties agree that the United Nations * Confidential Treatment Requested Convention on Contracts for the International Sale of goods is specifically excluded from application to this Agreement. Notices. Any notices required or permitted hereunder will be given to the appropriate party at the address specified below or at such other address as the party may specify in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or, if sent by certified or registered mail, three (3) days after the date of mailing. As to: Micro Linear Corporation: David Gellatly Micro Linear Corporation 2092 Concourse Dr. San Jose, CA 95131 Artest Corporation: Jen Kao Artest Corporation 678 Almanor Ave. Sunnyvale, CA 94085 Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original, and all of which shall together constitute one and the same Agreement. Complete Understanding and Modification. This Agreement and the Exhibits attached hereto constitute the full and complete understanding and agreement of the parties relating to the subject matter hereof and supersedes all prior understandings and agreements relating to such subject matter. Any waiver, modification, or amendment of any provision of this Agreement shall be effective only if in writing and signed by each of the parties hereto. Waiver. The failure of either party to insist upon strict compliance with any of the terms, covenants or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant or condition, nor shall any waiver or relinquishment of any right or power at any one time be deemed a waiver or relinquishment of that right or power for all or any other time. Force Majeure. The parties shall not be liable for any delay or failure to perform, in whole or in part, caused by the occurrence of any contingency beyond its reasonable control, including but not limited to: war, sabotage, insurrection, rebellion, riot or other act of civil disobedience, act of public enemy, failure or delay in transportation, act of any government or any agency or subdivision thereof, judicial action, labor disputes, shortages of materials, fire, accident, explosion, epidemic, quarantine restrictions, storm, flood or earthquake. In Witness Whereof, the duly authorized representative of the parties has executed this Agreement as of the effective Date. * Confidential Treatment Requested MICRO LINEAR CORPORATION ARTEST CORPORATION Signed: /s/ David L. Gellatly Signed: /s/ Jen Kao Printed Name: David Gellatly Printed Name: Jen Kao Title: President & CEO Title: President & CEO Date: 4/28/00 Date: 04-28-2000 * Confidential Treatment Requested Exhibit E to Operating Agreement [*] * Confidential Treatment Requested Exhibit F to Operating Agreement [*] * Confidential Treatment Requested Exhibit G to Operating Agreement [*] * Confidential Treatment Requested Schedule to Section 3.2 of Operating Agreement [*] * Confidential Treatment Requested Key Points of Understanding 04/27/2000 --------------------------- Offices. Two enclosed offices are to be made available in the NW side of Bldg 1. MLIN and Artest may consider replacing these with other offices in the rear of the building at a later date. Signage. MLIN and Artest will agree upon a location for Artest signage and implement. Artest will pay for this cost. Telephones. Establish phone lines with Pac Bell for Artest use. Artest will be billed directly. Review over next 90 days to determine any better alternate solutions. Email. Establish email access for Artest employees over the existing ML internet connection. Specific PCs will be set up to accomplish this. ML MIS will assist Artest employees to set this up and provide instruction. Review over the next 90 days to determine any better alternate solutions. Shipping/Receiving. Artest will maintain the shipping/receiving area in Bldg 2. They will provide all shipping materials and receiving services for MLIN and Artest. Stores. Artest will maintain `stores' in support of the production test services in Bldg 2. MLIN will assume responsibility for their stores within 60 days from the signing of the agreements. Mail Delivery. Artest will support all internal mail delivery for a maximum of 60 days, whereupon, MLIN will assume responsibility for all MLIN mail. Smocks. Artest will assume all responsibility for smocks used by all personnel in Bldg 1. They will bill MLIN separately for engineering and other MLIN support personnel requirements. Badges. MLIN will provide badges with the Artest logo. Artest will reimburse MLIN for all badges. Network. MLIN will provide access to the required databases within the ML internal network for all manufacturing needs. Over the next 90 days, these needs will be reviewed and any changes to the network access will be determined at that time. Artest will continue to sent the test data to the network in the same manner with no changes, unless mutually agreed upon. Contracts. Artest will be introduced to all MLIN subcontractors/major suppliers. They will negotiate with the said subcontractors/suppliers to assume responsibility for current contracts and/or future needs. Artest may choose to renegotiate these contracts to enable improvements in pricing and service, where possible and beneficial to MLIN. MLIN Long Range Demand Forecast. MLIN will provide a 3 moth forecast for factory demand during the last week of each financial quarter. MLIN will also provide a 6 month outlook for capacity planning, each month, to cover any significant changes in forecast demand, to enable Artest to adjust their capability to respond. * Confidential Treatment Requested MLIN Weekly Demand Forecast. MLIN will provide a weekly demand for sort & test and a daily demand for assembly. Performance to demand will be reviewed weekly. Daily Production Meeting. Artest and MLIN will discuss all production and engineering issues and test equipment availability at a meeting held daily at 8 a.m. Samples Meeting. Artest and MLIN will review sample demand, production performance, and MSD (delivery to manufacturing schedule date) performance every Wednesday at 9:30 a.m. Engineering Requirements. MLIN will provide an engineering time demand forecast once a month. This will be updated daily at the 8:00 a.m. production meeting to reflect real time needs and changes. Production documentation. All production documentation requirements and procedures are to remain the same unless and until requested changes are mutually agreed upon. Samples. Samples testing for engineering characterization, QA&R reliability and customer returns, Customer Service, etc. will be charged to MLIN based on insertions/cpu time and index time for each product. Rescreens. All rescreens of material which are required as a result of test program and/or hardware changes will be charged as normal production. Bake and Pack. Artest will have responsibility for all supplies and equipment and charge MLIN at the rate of [*]. Lead Scan. Lead scan is part of the cost of insuring quality of MLIN products. There will be no charge for SOIC parts going into tape & reel. The cost for all other devices will be [*]. Tape & Reel. Artest will have responsibility for all supplies and equipment and charge MLIN at the rate shown in the attached table. [*] Performance to Schedule. All issues or updates regarding Artest performance to schedule for any MLIN products should be communicated to the MLIN Production Control Supervisor as quickly as possible. Load Boards/Probe Cards/Interface Hardware. MLIN will provide the initial set of hardware for production at [*]. Additional sets of hardware needed for capacity will be supplied by MLIN and charged at [*]. All additional sets of hardware will have to be agreed upon by both parties before work can begin. All repair and modifications of hardware will be provided by Artest at [*]. If limited MLIN engineering support is needed to repair the hardware, MLIN will support this effort at [*]. If the repair or modification is substantial or excessive, [*]. Freight Charges. [*]. * Confidential Treatment Requested Backlap. [*]. Remarking. [*]. Invoicing. [*]. Payments. All payments referred to in this agreement are net 30 days. [*]. It is expected that there will be cost improvements in subsequent years that will be reflected in the product cost to Micro Linear. Table of sort/test costs/sec be tester platform. [*] * Confidential Treatment Requested EXHIBIT C STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, May 01, 2000 is made by and between Micro Linear Corporation, a Delaware corporation, ("Lessor") and Artest Corporation, a California corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 (a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 2050 and 2092 Concourse Drive, located in the City of San Jose, County of Santa Clara, State of California, with zip code 95131, as outlined on Exhibit A attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): Two, one-story buildings located next door to one another, each consisting of approximately 47,000 square feet. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2 (b) Parking: 18.23% of the unreserved vehicle parking spaces ("Unreserved Parking Spaces") located in the Industrial Center. (Also see Paragraph 2.6.) 1.3 Term: 3 years and 0 months ("Original Term") commencing See Addendum ("Commencement Date") and ending on the day before the 3rd Anniversary of the Commencement Date ("Expiration Date"). (Also see Paragraph-3). 1.4 Early Possession: N/A ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $ 25,024 per month ("Base Rent"), payable on the 1st day of each month commencing on the Commencement Date (Also see Paragraph 4.) [ ] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum ___, attached hereto. 1.6 (a) Base Rent Paid Upon Execution: $ N/A as Base Rent for the period N/A. 1.6 (b) Lessee's Share of Common Area Operating Expenses: N/A percent ( .%) ("Lessee's Share") as determined by [ ] prorata square footage of the Promises as compared to the total square footage of the Building or [ ] other criteria as described in Addendum _____. 1.7 Security Deposit: $ N/A ("Security Deposit"). (Also see Paragraph 5.) 1.8 Permitted Use: Semiconductor testing and manufacturing in the same manner and using the same equipment as Lessor immediately prior to the Commencement Date ("Permitted Use") (Also see Paragraph 6.) 1.9 Insuring Party: Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10 Addenda and Exhibits: Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 7 and Exhibits A, all of which constitute a part of this Lease. 2. Premises, Parking and Common Areas. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 [deleted] 2.3 [deleted] 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by Lessor to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Promises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. Initials:________ ________ 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non- compliance of the Premises with said warranties. 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full- size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease provide the parking facilities required by Applicable Law. 2.7 Common Areas-Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general now exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas-Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas-Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas-Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. Initials:_______ _______ -2- 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and ail other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 [deleted] 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. It Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the tuft amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, it any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or permit the use of the Promises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) [deleted] 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Promises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a Initials:________ ________ -3- timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be tiled with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any govern-mental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance, including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Promises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the Inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's Initials:_______ _______ -4- use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Promises in good order, condition and repair, shall exercise and perform good maintenance practices, Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Promises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) [deleted] (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (it located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all pans thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease other than Utility installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations and/or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non- structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the root or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall he deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon: and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at of for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. It Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested item claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender, and Restoration. Initials:________ ________ -5- (a) Ownership. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the properly of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease. become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility installations be removed by (he expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and fear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 [deleted] 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and properly damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises arid all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, bill shall include coverage for liability assumed under this Lease as an "Insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Properly Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies, in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof it, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8 4. If the coverage is available arid commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender or included in the Base Premium), including coverage for any additional costs resulting from debris removal and reasonable amounts of cove-rage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, arid inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price index for Ali Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues Initials:_______ _______ -6- from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income. Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the properly insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be In companies duly licensed to transact business in the state where the Promises are located, and maintaining during the policy term a "General Policyholders Rating" of at least A-, VIII or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby, 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The fore-going shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, tire sprinklers, wires, appliances, plumb-ing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations. the repair cost of which damage or destruction is less than fifty percent Initials:________ ________ -7- (50%) of the then Replacement Cost (as defined in Paragraph 9.1 (d)) of the Promises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Promises. 9.2 Premises Partial Damage--Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available. Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Promises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and it Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed. Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Promises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs it made by either Party. 9.3 Partial Damage--Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day Initials:________ ________ -8- prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent. Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges. if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue. Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a (late not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. It a Hazardous Substance Condition occurs. unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substances Condition. If required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) it file estimated cost to investigate and remediate such condition exceeds twelve (12) limes the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor s desire to terminate this Lease as of the date sixty (60), days following the date of such notice. In the event Lessor elects to give such notice of Lessor s intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to Day for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to, waive (12) times the then monthly Base Rent or $100.000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee, if, such event this Lease shall continue in full force and effect. and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice, of termination. 9.8 Term I nation-Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease 9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10 2.1a), applicable to the Industrial Center. 10.2 Real Property Tax Definitions. (a) As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof. Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" stall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. Initials:_______ _______ -9- (b) As used herein, the term "Base Real Property Taxes" shall be the amount of Real Property Taxes, which are assessed against the Premises. Building or Common Areas in the calendar year during which the Lease is executed. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees of by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed. Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from life real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. [deleted] 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent which may be withheld in Lessor's sole and absolute discretion. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five per-cent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may withhold its consent in its sole discretion "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If lessor elects to treat such unconsented to assignment or subletting as a non-curable Broach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall he increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. Initials:_______ _______ -10- 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Pont and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any-one else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security hold by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit Increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment schedule of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists In the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. Initials:_______ _______ -11- (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessors prior written consent which may be withheld in Lessor's sole discretion. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that it the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure with-in said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days: or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. It Lessee fails to perform any affirmative duly or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice). Lessor may at its option (but Initials:________ _______ -12- without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. It any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand. and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) 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 the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lesser may reserve the right to recover all or any part thereof in a separate suit to for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of !leases for unlawful detainer shall also constitute, the applicable notice for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both in unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitation. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment or a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the, Promises. 13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be doomed conditioned upon Lessee's hill and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no, further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor 10 111CM 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 upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) M Such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive Initials:________ _______ -13- installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall. at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease it performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. It more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor. whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation, matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such not severance damages required to complete such repair. 15. [deleted] 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid. the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges. not received by Lessor within ten (10) days follow-ing the date on which it was due, shall bear interest from the date due at the prime rate charged by [he largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or other Agreements. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Initials: ____ ____ -14- 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mail-ing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or it no delivery date is shown, the postmark thereon. If sent by regular mail. the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term. covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to. or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording. purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires owner- ship of the Promises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (it) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from Initials: ____ ____ -15- the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorneys' Fees. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder. the Prevailing Party (as here- after defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Promises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Promises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof. which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided. however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of. or response to. a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance. shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may. as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act. assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists. nor shall such consent be doomed a waiver of any then existing Default of Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reason-able with reference to the particular matter for which consent is being given. Initials: ____ ____ -16- 37. Guarantor. 37.1 Form of Guaranty. It there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association. and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses. upon reason-able request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease. including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf. (b) current financial statements of Guarantor as may from time to time be requested by Lessor. (c) a Tenancy Statement. or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Promises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease. Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Lease. the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor: (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor: (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises. or the right of first offer to purchase the Promises. or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor. or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Promises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee am not assignable, either as a pan of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether of not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility race-ways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 42. [deleted] 43. Performance Under Protest. It at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that Initials: ____ ____ -17- there was no legal obligation on the pan of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. It Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or hand written provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional Insurance company or pension plan Lender In connection with the obtaining of normal financing or refinancing of the property of which the Promises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity Is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, Initials: ____ ____ -18- LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR YOUR ATTORNEYS REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT. OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: ______________________________________________________ Executed at: ______________________________________________ on: _______________________________________________________________ on: _______________________________________________________ By LESSOR: By LESSEE: MICRO LINEAR CORPORATION ARTEST CORPORATION, a Delaware corporation a California corporation Name Printed: _____________________________________________________ Name Printed: _____________________________________________ Title: ____________________________________________________________ Title: ____________________________________________________ By: _______________________________________________________________ By: _______________________________________________________ Name Printed: _____________________________________________________ Name Printed: _____________________________________________ Title: ____________________________________________________________ Title: ____________________________________________________ Address: __________________________________________________________ Address: __________________________________________________ ___________________________________________________________________ ___________________________________________________________ Telephone: ( ) _______________________________________________ Telephone: ( ) _______________________________________
NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. Initials: ____ ____ -19- FIRST ADDENDUM TO STANDARD INDUSTRIAL/ COMMERCIAL MULTI-TENANT LEASE - GROSS THIS FIRST ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE (this "Addendum") is made by and between Micro Linear Corporation, a Delaware corporation ("Lessor") and Artest Corporation, a California corporation ("Lessee"), to be a part of that certain lease (the "Lease") of even date herewith between Lessor and Lessee concerning premises located at 2050 and 2092 Concourse Drive, San Jose, California (the "Premises"). Lessor and Lessee agree that, notwithstanding anything to the contrary in the Lease, the Lease is hereby modified and supplemented as set forth below. 1. Term. The Lease shall commence (the "Commencement Date") on the date ---- of the "Closing" of that certain Agreement for Purchase and Sale of Assets by and between Lessor and Lessee dated as of the date hereof. 2. Common Areas. The Common Areas shall be limited to the lobby, ------------ restrooms, lunch rooms and hallways leading directly between the foregoing and the Premises in each Building, as well as the parking areas and exterior sidewalks of the Industrial Center. 3. Hazardous Materials. Lessee shall not use, store or bring onto the ------------------- Premises or the Industrial Center any Hazardous Materials other than those of a type and in quantities used in the Premises by Lessor immediately before the Commencement Date. 4. Utilities. Lessor shall provide to the Premises electricity, water, --------- heating, ventilating and air conditioning and garbage disposal services at the levels provided to the Premises immediately prior to the Commencement Date. In addition, Lessor shall provide, at Lessee's cost, telephone service to the Premises at the level provided to the Premises immediately prior to the Commencement Date. Lessee shall pay any invoices for such telephone services within ten (10) days of receipt thereof. If such telephone service is not separately metered or billed to the Premises, Lessee shall pay to Lessor a reasonable portion to be determined by Lessor of any jointly metered or billed within ten (10) days of Lessee's receipt of an invoice therefor from Lessor. If, in Lessor's reasonable determination, Lessee uses any utilities or services (other than telephone services) in excess of levels used immediately before the Commencement Date, Lessor shall have the right to charge Lessee with the cost of any excess usage as reasonably calculated by Lessor, and Lessee shall pay such charges within ten (10) days of receipt of an invoice therefor. Lessor shall not be liable for the interruption of any such services or utilities for causes beyond Lessor's reasonable control. 5. Annual Negotiations. On or about each anniversary of the Commencement ------------------- Date, the parties shall meet upon the request of either party to discuss the possibility of increasing or decreasing the size of the Premises. In the event that the parties agree to change the size of the Premises, the Base Rent, Lessee's Share and Lessee's percentage of parking spaces shall be equitably adjusted based on any adjustment to the size of the Premises. 6. Lessor's Termination Right. In the event that (a) the agreement -------------------------- between Lessor or Lessee with respect to Lessee's performance of production, test and shipping functions for Lessor terminates for any reason, or (b) Lessee for any reason ceases carrying out such functions in the Premises, Lessor shall have the right at any time thereafter to terminate this Lease by delivering at least thirty (30) days prior written notice hereof to Lessee. 7. Effect of Addendum. All terms with initial capital letters used herein ------------------ as defined terms shall have the meanings ascribed to them in the Lease unless specifically defined herein. In the event of any inconsistency between this Addendum and the Lease, the terms of this Addendum shall prevail. LESSOR: LESSEE: MICRO LINEAR CORPORATION, ARTEST CORPORATION, a Delaware corporation a California corporation By: /s/ David L. Gellatly By: /s/ Jen Kao -------------------------------- ------------------------------ Name: David L. Gellatly Name: Jen Kao ------------------------------ ---------------------------- Its: President and CEO Its: President and CEO ------------------------------- ----------------------------- Initials: ____ ____ EXHIBIT A1 - Floor plan [FLOOR PLAN] EXHIBIT A2 - Floor plan [FLOOR PLAN] Addendum to Sub-lease: At the termination of the sub-lease Artest will remove all of Artest's assets and return that portion of the building which Artest has occupied to MLIN in an "As is" condition. Exhibit D [*] * Confidential Treatment Requested EX-10.2 3 0003.txt EQUIPMENT PURCHASE & ENGINEERING TEST AGREEMENT EXHIBIT 10.2 EQUIPMENT PURCHASE AND ENGINEERING TEST SERVICES AGREEMENT This EQUIPMENT PURCHASE AND ENGINEERING TEST SERVICES AGREEMENT (the "Agreement") is entered into on this 29th day of September, 1999 by and among Fairchild Semiconductor Corporation ("Fairchild") and Artest Corporation ("Artest"). I. RECITALS Whereas, Fairchild is in the business of designing, manufacturing and marketing high performance semiconductors for multiple end market uses; and Whereas, Artest is, among other things, in the business of performing test services for semiconductors; and Whereas, Artest desires to purchase from Fairchild backend test equipment used by the Fairchild Mixed Signal Business Unit ("MBU") (such equipment collectively referred to as "TEST") and to provide engineering services and production testing of products for MBU; and Whereas, Fairchild desires to subcontract to Artest all or a significant portion of the MBU backend production test and shipping functions it currently performs for itself, providing Artest can do so at competitive prices for this service; Now, Therefore, Fairchild and Artest hereto agree as follows: II. DEFINITIONS 1. The definitions set forth below shall apply wherever they appear in this Agreement and all exhibits hereto. 1.1 "Confidential Information" shall mean any information written or otherwise disclosed in any medium by one party to the other under this Agreement which is marked or otherwise designated as "Confidential" or is clearly by its nature confidential. Confidential Information shall include, but is not limited to, confidential information of subcontractors and suppliers to either party. 1.2 "Engineering Test Services" shall mean those services Artest agrees to perform for Fairchild pursuant to this contract including, but not limited to providing Fairchild employees access to the TEST, and providing Fairchild with final test and shipping for Fairchild products listed in the Old 26MM Table of Exhibit 3. 1.3 "Retention Amount" shall mean an amount of money to be paid over time by Fairchild to Artest, which agrees to pay such amounts to the TEST Personnel in order to assure the retention of necessary TEST Personnel. The Retention Amount shall be * Confidential Treatment Requested equal to the sum of Fairchild's current identified severance program for each of the TEST Personnel as specified in Exhibit 2 (for a total of [*]). Any part of the Retention Amount, which has not been paid to the TEST Personnel at the end of twelve (12) months following the effective date of this Agreement, shall be returned to Fairchild. 1.4 "TEST" shall mean the backend test equipment of the Fairchild Mixed Signal Business Unit which is listed in Exhibit 1. 1.5 "TEST Facilities" shall mean the current location of TEST until June of 2000. After June of 2000, the location of the TEST Facilities shall be moved to another facility agreed upon by Fairchild and Artest. 1.6 "TEST Personnel" shall mean the operators and test personnel listed in Exhibit 2, Table I who are currently employed by Fairchild and work with the TEST equipment. III. EQUIPMENT PURCHASE, FACILITIES AND PERSONNEL 2. Sale of TEST Equipment. Artest shall purchase from Fairchild, in accordance with and subject to the terms, covenants and conditions hereinafter set forth, the TEST equipment. 2.1 Purchase Price. Upon execution of the Agreement, Artest shall pay to Fairchild for TEST the sum of [*] in cash or readily available funds, which price the parties agree is fair and reasonable. The purchase price shall be paid on the date of the execution of this Agreement. At receipt of payment, Fairchild will deliver good title of equipment free of all liens and security interest and documentation that identifies that testers are in working condition and meeting manufacturers specifications. 2.2 Finality of Sale. The sale of the TEST equipment shall be final upon execution of this Agreement regardless of whether the Engineering Test Services portion of the Agreement is terminated for cause or otherwise. 2.3 No Warranties; Limited Liability. ARTEST PURCHASES THE TEST EQUIPMENT FROM FAIRCHILD IN ITS PRESENT CONDITION, AS IS AND WITH ALL FAULTS. ARTEST ACKNOWLEDGES THAT IT HAS HAD THE OPPORTUNITY TO INSPECT THE TEST EQUIPMENT AS FULLY AS IT DESIRES. THE PARTIES ACKNOWLEDGE THAT FAIRCHILD MAKES NO WARRANTY, EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO THE TEST EQUIPMENT, AND THERE IS EXPRESSLY EXCLUDED ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. FAIRCHILD SHALL HAVE NO LIABILITY UNDER THIS AGREEMENT FOR ANY DAMAGES SUFFERED BY ARTEST OR ANY THIRD PARTY INCLUDING BUT NOT LIMITED TO DAMAGES FOR PERSONAL * Confidential Treatment Requested INJURIES OR LOSS OF PROFITS, OR CONSEQUENTIAL, EXEMPLARY OR INCIDENTAL DAMAGES. 3. Facilities Usage. Artest will take over the facilities of TEST and maintain TEST at the current Fairchild location for the benefit of Fairchild (the "TEST Facilities") and pay Fairchild a user fee for the space at the full service rate listed in Exhibit 2, Table 2. Artest agrees to comply in all respects with any requirements imposed on Fairchild under its Master Lease with Naoto Ohtsuki. Fairchild will notify Naoto Ohtsuki of Artest's usage of the TEST facilities. 3.1 User Fee. As specified in Exhibit 2, Table 2, the user fee for the TEST Facilities shall be [*] which rate the parties agree is fair and reasonable. The user fee shall be payable on or before the third day of each month. 3.2 Default. Artest shall be in default of its obligations under the Facilities Usage portion of this Agreement if it fails to pay the monthly user fee as specified in Exhibit 2, Table 2 when due, or takes any other action inconsistent with Fairchild's Master Lease, and such failure is not cured within three business days after Artest's receipt of written notice. In the event of Artest's default, Fairchild shall have the following rights and remedies, in addition to all other rights and remedies provided by law: (1) Fairchild may keep the Facilities Usage portion of this Agreement in effect and recover unpaid rents, (2) Fairchild may release the TEST Facilities to another tenant, (3) Fairchild may terminate the Facilities Usage portion of this Agreement by written notice to Artest. 3.3 Utilities. Fairchild will provide phone system access and separate billing of phone usage. Artest will pay all charges for Artest's phone usage while at the current Fairchild facilities. All other utilities and building maintenance services are included in the full service rate listed in Exhibit 2, Table 2. 3.4 Length of Usage. Artest will sublease from Fairchild the space described in Exhibit 2, Table 2, from the date of the execution of this Agreement until June 30, 2000. 3.5 Relocation of TEST. Upon the expiration of the term of the sublease, but in no event later than June 30, 2000, Artest shall relocate TEST at its own cost to a new facility that allows full access by Fairchild product and test engineering personnel. Notwithstanding the foregoing, Artest shall ensure the continuous operation of TEST during the relocation with uninterrupted access by Fairchild employees. The TEST Facilities after June of 2000 shall be of the same quality and proximity to Fairchild's product and test engineering personnel as are the current TEST Facilities. Artest and Fairchild shall use their best efforts to jointly seek new space to allow for a coordinated move to the new facilities. All facility items purchased by Artest will remain the property of Artest after the expiration of the current lease and not part of Facility left behind for landlord. * Confidential Treatment Requested 4. Personnel. Artest shall offer employment, at comparable pay and benefits, to the operators and test personnel listed in Exhibit 2, Table I who are currently employed by Fairchild, to maintain continuity and knowledge of Fairchild products (the "TEST Personnel"). The TEST Personnel shall become employees of Artest and shall be the sole responsibility of Artest. In addition to the personnel listed in Exhibit 2, Artest shall provide to the TEST Personnel team two additional positions to be filled from current Artest personnel or to be newly hired by Artest at its discretion. These two positions shall be a shipping clerk and a supervisor of the TEST Personnel. 4.1 Retention of TEST Personnel. Artest, with the cooperation of Fairchild, shall use its best efforts to jointly develop a retention program to assure employment continuity of the TEST Personnel to be hired by Artest from Fairchild. Fairchild shall pay to Artest a Retention Amount to foster this continuity. The Retention Amount shall be paid in four (4) quarterly retainer payments to Artest during the twelve (12) months following the effective date of the Agreement. Any additional retention program to either new personnel or to personnel listed in Exhibit 2 is the sole responsibility of Artest. The Retention Amount shall be intended to meet any severance obligation of Fairchild to the TEST Personnel and they shall be notified of this fact. Any other obligations to employees of TEST prior to the transfer are the sole responsibility of Fairchild. IV. ENGINEERING TEST SERVICES 5. Engineering Test Services. Fairchild agrees to contract with Artest for production test and shipping services (the "Engineering Test Services"). Artest shall provide these services to Fairchild in the same manner as they are currently done by Fairchild. Artest shall use commercially reasonable efforts to perform its obligations under this Engineering Test Services Agreement and Fairchild agrees to cooperate in good faith to allow Artest to perform the Engineering Test Services. 6. Relationship of the Parties. For all purposes of this agreement Artest shall be acting as an independent contractor and not as an employee or agent of Fairchild. Artest further understands that, except as specifically provided in this Agreement, Fairchild is under no obligation to contract for any work exclusively from Artest, and Artest is free to contract to supply work to others. 7. Access to Teradyne and Trillium Equipment. Artest will provide access to TEST for Fairchild product and test engineers for test development and yield enhancement during the daytime shift (8 A.M - 5 P.M., Monday - Friday). Artest shall provide to Fairchild at the request of Fairchild, up to [*]. The Teradyne and Trillium equipment that Fairchild may use is described in Exhibit 1. Fairchild's time on said machines shall be allocated evenly throughout each month. 7.1 Notice of Change in Usage. Fairchild shall notify Artest if it doesn't need the minimum guarantee time and will release any unused machine time to Artest for its use. Conversely, Artest will notify Fairchild if it doesn't need the machine time * Confidential Treatment Requested beyond the minimum time listed above and release to Fairchild the right to use the machines beyond the agreed to hours. 7.2 User Fee. For the use of the Teradyne and Trillium machines described in Exhibit 1, Fairchild shall pay to Artest a user fee in the amount of [*] payable in equal monthly installments beginning on the date of the execution of this Agreement. The user fee shall be payable on or before the third day of each month. Any hours used in excess of the amounts listed in section 7 shall be billed at "most favorable price" offered by Artest to other customers but in no event are to exceed [*]. 7.3 License. Artest and Fairchild shall use their best efforts to work to transfer to Artest any Fairchild "right to use" license on the Teradyne or any other piece of the TEST equipment. Artest and Fairchild shall use their reasonable best efforts to minimize the cost of this transfer but any costs associated with the transfer of the license shall be born by Artest alone and Fairchild shall have no obligation to assure the transfer. 8. Eagle Test System. Artest shall purchase an Eagle test system and related interface hardware satisfactory to Fairchild to be located at the TEST Facilities. The Eagle test system and interface hardware shall be satisfactory to Fairchild and shall enable both production test and test development. Fairchild will use its best efforts to negotiate with the Eagle Test Company to allow Artest access to Fairchild's favorable price, but Fairchild shall not be obligated to obtain such price for Artest. 8.1 Access to Eagle Test System. Artest will provide access to the Eagle Test system to Fairchild product and test engineers for test development and yield enhancement during the daytime shift (8 A.M - 5 P.M., Monday - Friday). Artest shall provide to Fairchild at Fairchild's request up to 90 hours per month of machine during the daytime shift each month. Fairchild's time shall be allocated evenly throughout each month. 8.2 Notice of Change in Usage. Fairchild shall notify Artest when it doesn't need the minimum guarantee time and will release any unused machine time to Artest for its use. Conversely, Artest will notify Fairchild if it doesn't need the Eagle machine beyond the minimum time listed above and release to Fairchild the right to use the machines beyond the agreed to hours. 8.3 User Fee. For the use of the Eagle Test system as listed above, Fairchild shall pay to Artest a user fee in the amount of [*] payable in equal monthly installments beginning on the date of the execution of this Agreement. The user fee shall be payable on or before the third day of each month. Any hours used in excess of the amounts listed in section 8 shall be billed at "most favorable price" offered by Artest to other customers but in no event are to exceed [*]. 9. Production Test Services. Fairchild agrees to use Artest to perform all final test and shipping responsibilities for all currently sold Fairchild products listed in the Old 26MM Table of Exhibit 3 for a period of at least three (3) years, provided that Artest can maintain * Confidential Treatment Requested competitive costs, service and quality for test and shipping. While the costs for the production test services supplied by Artest must be competitive with equivalent services provided in the semiconductor industry, the costs shall not exceed the costs for test and shipping listed in Exhibit 3. The parties agree to meet from time to time during the course of the term of this agreement to discuss the services and quality for the testing provided by Artest to Fairchild under this agreement. If Fairchild determines that Artest's services are in any way non-competitive, then Fairchild shall give Artest written notice of such inadequacy and Artest shall have reasonable time to correct the deficiency. If Artest shall fail to correct then Fairchild can upon written notice obtain services from another source. 9.1 Test Services for Fairchild's Mixed Signal Business Unit. Fairchild shall endeavor to use Artest as its subcontractor for all final test and shipping for any new products Fairchild develops at its Mixed Signal Business facility provided that Artest's costs, service and quality are competitive with equivalent services provided in the semiconductor industry and meet Fairchild's needs; provided, however that nothing herein is intended to delay Fairchild with its business planning or ability to sell products. Exhibit 3, Table 2 lists some of these new products, along with estimated final test revenue. Fairchild is not bound by the projections listed in Exhibit 3, Table 2. 9.2 Test Services at Other Fairchild Owned Facilities. Artest agrees that any products developed by Fairchild that can be assembled at its other owned facilities (usually products with less than 20 pins) will be tested by Fairchild and not Artest. 9.3 Yearly Run Rates. Fairchild agrees to provide Artest yearly run rates of its products for all Engineering and Test Services set forth in Section IV of this Agreement, that can meet or exceed [*]. In addition, Fairchild does not guarantee any specific product mix. If at the end of each 12-month period from the execution of this agreement, Fairchild has not met the minimum guaranteed production revenue, then Fairchild shall pay [*]. 10. Term of Services Contract. Unless otherwise specified, the term of the Engineering Test Services part of the Agreement shall be for a minimum of three (3) years from the date of the execution of this Agreement. 11. Termination and Renewal. At least 90 but not more that 180 days before the expiration of this Agreement, the parties shall notify each other in writing whether the Agreement will terminate. If the parties do not provide such notification, the Agreement will automatically renew for a period of one year at prices to be agreed upon. Thereafter, the agreement will automatically renew each year until the parties provide written notice of its termination. 12. Termination for Cause. If either party materially breaches a provision and fails to cure such breach within the thirty (30) days after receiving written notice from the other party, such other party shall have the right at its option to terminate the Engineering Test Services portion of this Agreement. Upon termination of the Engineering Test Services portion of this * Confidential Treatment Requested Agreement for cause, the parties shall pay to each other any fees or rents due at the time of the termination. 13. Bankruptcy. Should either party: (i) become insolvent, (ii) make an assignment for the benefit of creditors; (iii) file or have filed against it a petition in bankruptcy or reorganization; (iv) have a receiver, manager, administrator, or administrative receiver appointed; or (v) institute any proceedings for liquidation or winding up; then the other party may, in addition to other rights and remedies it may have, terminate this Agreement immediately by written notice. 14. Property Upon Termination. Upon expiration or termination of this Agreement, both parties will deliver to the other all property of the other party that they may have in their possession or control. V. MISCELLANEOUS 15. Invoices. Unless otherwise provided in this Agreement, Artest and Fairchild shall invoice each other for fees for any Engineering Test Services provided pursuant to this agreement. All invoices shall be due and payable when invoiced, and shall be deemed overdue if they remain unpaid thirty (30) days after they become payable. Overdue amounts shall accrue interest at the rate of two (2) percent per month, or at the highest legal interest rate, if less. 16. Confidential Information. During the term of this Agreement and subsequent thereto, the receiving party will keep all Confidential Information of the other party in confidence and will not, without prior written consent of the disclosing party, publish, disclose or otherwise make available, directly or indirectly, any item of Confidential Information to any person other than those of the receiving party's employees, agents or contractors who need to know the same in the performance of their duties for the receiving party. 17. Dispute Resolution. The parties shall attempt in good faith to resolve any dispute arising out of this Agreement, including but not limited to any dispute regarding the interpretation of or performance under said Agreement, promptly by negotiations. If these negotiations should fail, the parties shall resolve any dispute by submitting it to binding arbitration in San Jose, California under the rules of the American Arbitration. Notwithstanding the foregoing, either party shall have the right to seek preliminary injunctive relief at any time. The prevailing party shall have all reasonable legal fees reimbursed. 18. Governing Law. This Agreement shall be governed in all respects by the laws of the United States of America and the State of California. The parties agree that the United Nations Convention on Contracts for the International Sale of goods is specifically excluded from application to this Agreement. 19. Notices. Any notices required or permitted hereunder will be given to the appropriate party at the address specified below or at such other address as the party may specify * Confidential Treatment Requested in writing. Such notice shall be deemed given upon personal delivery to the appropriate address or, if sent by certified or registered mail, three (3) days after the date of mailing. As to: Fairchild Semiconductor Sam Lee Fairchild Semiconductor 350 Ellis Street Mountain View, CA 94043 with a copy to Joel Pond Fairchild Semiconductor 333 Western Ave. South Portland, ME 04106 Artest Corporation: Jen Kao Artest Corporation 678 Almanor Ave. Sunnyvale, CA 94086 20. Counterparts. This Agreement may be signed in counterparts, each of which shall be deemed an original, and all of which shall together constitute one and the same Agreement. 21. Complete Understanding and Modification. This Agreement and the Exhibits attached hereto constitute the full and complete understanding and agreement of the parties relating to the subject matter hereof and supersedes all prior understandings and agreements relating to such subject matter. Any waiver, modification, or amendment of any provision of this Agreement shall be effective only if in writing and signed by each of the parties hereto. 22. Waiver. The failure of either party to insist upon strict compliance with any of the terms, covenants or conditions of this Agreement by the other party shall not be deemed a waiver of that term, covenant or condition, nor shall any waiver or relinquishment of any right or power at any one time be deemed a waiver or relinquishment of that right or power for all or any other time. 23. Force Majeure. The parties shall not be liable for any delay or failure to perform, in whole or in part, caused by the occurrence of any contingency beyond its reasonable control, including but not limited to, war, sabotage, insurrection, rebellion, riot or other act of civil disobedience, act of public enemy, failure or delay in transportation, act of any government or any agency or subdivision thereof, judicial action, labor disputes, shortages of materials, fire, accident, explosion, epidemic, quarantine restrictions, storm, flood or earthquake. * Confidential Treatment Requested In Witness Whereof, the duly authorized representative of the parties has executed this Agreement as of the effective Date.
FAIRCHILD SEMICONDUCTOR ARTEST CORPORATION Signed: /s/ Michael Hollabaugh Signed: /s/ Jen Kao ------------------------------------- ---------------------------------- Printed Name: Michael Hollabaugh Printed Name: Jen Kao Title: V.P., Mixed Signal Business Unit Title: President & CEO Date: September 28, 1999 Date: September 30, 1999
* Confidential Treatment Requested Exhibit 1 [*] * Confidential Treatment Requested Exhibit 2 [*] * Confidential Treatment Requested Exhibit 3 [*] * Confidential Treatment Requested EX-10.3 4 0004.txt CREDENCE DUO TEST RENTAL AGREEMENT EXHIBIT 10.3 Credence DUO Rental Agreement This Credence DUO Tester Rental Agreement ("Agreement") is entered into as of May 5, 1999 ("Effective Date") by and between Artest Corporation, with offices at 678 Almanor Avenue, Sunnyvale, CA 94086 ("Artest") and MMC Networks Inc., with offices at 1134 East Arques Avenue, Sunnyvale, CA 94086 ("MMC"). Whereas, Artest agrees to provide engineering rental time on one high-pincount Credence DUO to MMC; Now, therefore, the parties hereto agree as follows: 1. Terms and Conditions A. The duration of this Agreement is 12 months from the Effective Date. B. This Agreement is renewable with mutual consent of both parties. C. [*]. D. Artest will make all reasonable efforts to provide additional hours to MMC if needed. E. [*]. F. Artest to make all reasonable efforts to provide capacity and tester configuration based on MMC's forecasts. Artest and MMC to mutually agree on future capacity and tester configuration. G. In the event that MMC notifies Artest that it will not utilize the minimum number of hours per week, Artest will make all reasonable efforts to sell the tester time to another party. MMC will not be invoiced for any time that Artest is able to resell. H. Artest will invoice MMC on a monthly basis; payment terms are NET30. I. MMC will submit purchase orders based on their fiscal quarters. J. All precautions will be taken by Artest to insure that the tester and equipment are in excellent condition. If any damage to the tester and associated equipment is caused by MMC personnel during usage, then MMC will assume responsibility for repair charges after MMC verifies cause of damage in association with Artest. K. The validity, performance and construction of this Agreement shall be governed by the laws of the State of California, U.S.A. Accepted and Agreed: Artest Corporation MMC Networks Signature: /s/ Suheil Samaan Signature: /s/ Sena Reddy ----------------- ------------------- Name: Suheil Samaan Name: Sena Reddy Title: Vice President, Operations Title: Executive Vice President of Operations Date: May 5, 1999 Date: May 14, 1999 * Confidential Treatment Requested EX-10.4 5 0005.txt REGISTRANT'S SUBLEASE AGREEMENT EXHIBIT 10.4 SUBLEASE AGREEMENT ------------------ THIS SUBLEASE AGREEMENT (the "Sublease" or "Sublease Agreement") is entered into on this 21 day of February, 1990, by and between Micro-Comp Industries, a California corporation ("Sublessor"), and Artest Inc., a California corporation ("Sublessee"). WHEREAS, Sublessor entered into a Lease Agreement dated as February 10, 1997 (the "Master Lease"), a copy of which is attached hereto as Exhibit A, --------- under which it leases from The Irvine Company as Lessor, certain space in the building with a street address of 680 Almanor Avenue, Sunnyvale, California 94086 as provided in the Master Lease, together with certain appurtenant rights, the provisions of which Master Lease are incorporated herein by reference; NOW, THEREFORE, in consideration of the mutual promises herein provided, the parties agree as follows: 1. Premises and Term. Sublessor hereby subleases to Sublessee and ------------------ Sublessee hereby subleases from Sublessor premises known as 678 Almanor Avenue, Sunnyvale, California and consisting of approximately 7,899 square feet, subject to covenants, agreements, terms and conditions herein provided, for term commencing on April 1, 1997 and terminating on February 28, 1999. The term of this Sublease shall in no event extend beyond the expiration or earlier termination of the Master Lease. 1.1 Option to Extend. Sublessor grants to Sublessee an option to extend ----------------- the term of this Lease of the herein demised Premises for a period of three years beginning on the first day of March 1, 1999 and ending February 29, 2002 subject to all of the other terms, covenants and conditions herein contained; provided (1) Tenant is not in default in the performance of any of the terms and conditions of this Lease upon the commencement of said extended term, and (2) Sublessee has given Sublessor, One Hundred Twenty (120) days' prior to the expiration of this Lease term, written notice of his intention to exercise said option. In the event that Tenant shall exercise this option, then the amount of rental to be paid during said extended three (3) year term shall be determined as follows: (a) The rental rate for the option period shall be the same per square foot rent charged by the Master Lessor. The Irvine Company under the Master Lease which is attached as Exhibit A. The rental increase paragraph is evidenced on page 1, item 6, Basic Rent, under Article I - Basic Lease provisions. 1.2 Delay in Possession. Notwithstanding said commencement date, if for -------------------- any reason Sublessor cannot deliver possession of the premises to Sublessee on said date, Sublessor shall not be subject to any liability therefore, nor shall such failure affect the validity of this sublease or the obligations of Sublessee hereunder or extend the sublease term hereof, but in such case, Sublessee shall not be obligated to pay rent or perform any other obligation of sublease under the terms of this sublease, except as may be otherwise provided in this sublease until possession of the premises is tendered to Sublessee. 2. Rent. Sublessee covenants and agrees to pay rent to Sublessor for the ---- Premises as follows: Monthly rental of $12,573.39 NNN per month from April 1, 1997 - February 29, 1998 the rental rate from March 1, 1998 to February 28, 1999 shall be $12,573.39 NNN plus the Page 1 of 6 applicable CPI increase based on $1.50 NNN per square foot due under the Master Lease provisions. The rent is due and payable in advance on the 1st day of each month without notice or offset. Upon execution of this Sublease, Sublessee shall pay to Sublessor the sum of $12,573.39 NNN to be applied toward the first month's rent due under this Sublease. In addition to the base monthly rental, the sublessee shall pay its prorata share of all operating expenses as set forth on page 3, section 4.2 "Operating Expenses of the Master Lease". - See "Option to Extend 1.1" for rent due under the option period. All payments shall be made to: Micro-Comp Industries 1267 Oakmead Parkway Sunnyvale, California 94086 3. Improvements. The sublessee shall be provided with an amount of ------------- $3.00 per square foot leased and said monies are to be used toward the construction of the tenant improvements. All improvements need to be approved by the Master Lessor prior to construction and shall meet all applicable codes and constructed in a workman like manner, by a licensed, bonded contractor. All improvement costs above $3.00 per foot will be paid by the Sublessee. 4. Use. The Premises shall be used for office, sales, semiconductor ---- testing functions and other related legal uses. 5. Incorporation of Master Lease. All of the covenants, agreements, ------------------------------ terms and conditions of the Master Lease relating to or applicable to the Premises are incorporated herein and made a part hereof with the same force and effect as if set forth at length herein, except to the extent the same are modified or amended by this Sublease, it being understood and agreed that said provisions shall fix the rights and obligations of the Sublessee with the same effect as if the Sublessee were the lessee named in the Master Lease. Except as otherwise provided herein, Sublessee agrees that Sublessor shall have all of the rights and remedies of the Lessor under the Master Lease relating to the Premises with respect to Sublessee as if such rights and remedies were fully set forth herein. 6. Condition of Premises. Sublessee represents that it has inspected the ---------------------- Premises and agrees to accept possession of the Premises in their present condition without any obligation on the part of the Sublessor to make any alterations, decorations, installations or improvements. Sublessee acknowledges that the Master Lessor, Sublessor nor its broker have made any representation or warranties as to the suitability of the previous for the Lesser's intended use. 7. Adherence to Master Lease. Sublessee covenants and agrees (a) to -------------------------- perform and observe all of the agreements, covenants, terms and conditions of the Master Lease with respect to the Premises and to the extent that the same are not modified or amended by this Sublease, and (b) that it shall not do or suffer or permit anything to be done which would constitute a default under the Master Lease with respect to the premises, and (c) that any act or omission which constitutes a default under the Master Lease with respect to the Premises also constitutes a default hereunder. Sublessee agrees to name Sublessor as an additional insured on its Page 2 of 6 comprehensive liability insurance policy, and to provide Sublessor with a Certificate of Insurance certifying said coverage. 8. Default. If any default by Sublessee continues, in the case of -------- payment of rent or any other sum owned by Sublessee, for more than seven (7) days, or in the case of any of Sublessee's other covenants, agreements or obligations under this Sublease or the Master Lease for more than seven (7) days after notice by Sublessor, Sublessor may immediately or at any time thereafter and without further notice terminate this Sublease and take any and all actions permitted to be taken by the lessor under the Master Lease in respect of a termination. However, in the event of a non-monetary default said seven (7) day period shall be extended for up to a total of twenty (20) days, if such default is not susceptible and is within seven (7) days, Sublessee commences to correct the default with the seven (7) days, and Sublessee thereafter diligently pursues correction of the default. 9. Indemnity. Sublessee shall indemnify and hold harmless Sublessor from ---------- and against any and all cost, expense or liability (including reasonable attorney's fees) incurred in account of Sublessee's actions or the action of its employees, agents, licensees or contractors on or about the Premises or on account of any breach or violation by Sublessee of this Sublease, or the Master Lease, unless the same is due solely to the negligence of Sublessor's employees, agents, licensees, or contractors. Sublessee hereby releases and waives any right or claim against Sublessor for loss of business, loss of profits, inconvenience, or for any other incidental or consequential damages. 10. Assignment. Sublessee shall not assign this Sublease nor further ----------- sublet the Premises in whole or in part, and shall not permit Sublessee's interest in this Sublease Agreement to be vested in any third party by operation of law or otherwise. 11. Authority. Sublessee represents and warrants that it has read and is --------- familiar with the terms of the Master Lease and further represents and warrants that it has all requisite corporate power and authority to enter into this Sublease. 12. Late Charges. Other remedies for non-payment of rent notwithstanding, ------------- any rental payment not received within seven (7) days of the date it was due shall automatically be subject to a late payment fee in the amount of five percent (5%) of such overdue payment, which fee is a service charge intended to compensate Sublessor for the additional administrative and other costs and expenses it incurs by reason of such late payment. 13. Brokers. Divided Agency Sublessee and Sublessor acknowledge that BT ------- -------------- Commercial is solely the broker for the Sublessee and that Grubb & Ellis Company is solely the broker for the Sublessor, and that neither represents the client of the other. Sublessor agrees to pay broker a commission per the standard Grubb & Ellis agreement. 14. Insurance. During the term of this Sublease Agreement, Sublessee shall ---------- maintain public liability and property damage insurance in accordance with the provisions of the Master Lease. Sublessee shall maintain fire and extended coverage insurance on its fixtures, equipment and leasehold improvements in amounts equal to the full insurable value thereof. Sublessor and Page 3 of 6 Sublessee each release the other from any liability for loss or damage sustained by it to the extent the same would be or is covered by insurance as herein provided. 15. Services and Repairs. It is understood that all work, services, --------------------- repairs, restorations, equipment and access which are required to be provided and made by Sublessor hereunder or by lessor under the Master Lease, will, in fact, be provided by the lessor under the Master Lease, and Sublessor shall have no obligation during the term of this Sublease Agreement to do any such work, to provide any such services, equipment or access, or to make any such repairs or restorations or otherwise perform any obligations or observe any conditions required to be observed or performed by lessor under the Master Lease for the performance and observance of the same. Sublessor shall in no event be liable to Sublessee nor shall Sublessee's obligations hereunder be impaired or the performance thereof excused because of any failure or delay on the part of the lessor under the Master Lease in performing or observing the obligations of the lessor under the Master Lease, provided, however, that if a failure by the lessor under the Master Lease materially interferes with Sublessee's use and occupancy of the Premise, and Sublessee so notifies Sublessor in writing, Sublessor shall use its reasonable efforts to cause the lessor under the Master Lease to promptly correct the failure. 16. Surrender of Premises. Sublessee agrees that time shall be of the ---------------------- essence with respect to Sublessee's obligation to surrender possession of the Premises to Sublessor upon the termination of the term of this Sublease, and further agrees that in the event that Sublessee does not promptly surrender possession of the Premises to Sublessor upon such termination, Sublessor, in addition to any other rights and remedies Sublessor may have against Sublessee for such holding over, shall be entitled to bring summary proceedings against Sublessee, and Sublessee agrees to reimburse Sublessor for all Sublessor's damages sustained by reason of such holding over, including without limitation, Sublessor's reasonable attorneys' fees and disbursements incurred in connection with the exercise by Sublessor of its remedies against Sublessee. 17. Notices. Any notice, approval, consent or election made pursuant to -------- this Sublease or the Master Lease shall be in writing and shall be deemed duly delivered upon receipt if delivered personally or if mailed by registered or certified mail, return receipt requested, addressed if to Sublessor: Micro Comp Industries 1267 Oakmead Parkway Sunnyvale, CA 94086 if to Sublessee: Artest Inc. 680 Almanor Avenue Sunnyvale, CA 94086 Either party may, by notice as aforesaid, direct that future notices be sent to a different address. 18. Security Deposit. Sublessee has deposited with Sublessor the sum of ----------------- $12,573.39 as security for the faithful performance and observance by Sublessee of the terms, provisions and conditions of this Sublease; it is agreed that in the event Sublessee defaults in respect of any of Page 4 of 6 the terms, provisions and conditions of this Sublease, including, but not limited to, the payment of rent, Sublessor may use, apply or retain the whole or any part of the Security so deposited to the extend required for the payment of any rent and additional rent or any other sum as to which Sublessee is in default or for any sum which Sublessor may expend or may be required to expend by reason of Sublessee's default in respect of any of the terms, covenants and conditions of this lease. 19. Entire Agreement. All prior understandings and agreements between the ----------------- parties with respect to the subject matter hereof are merged within this Sublease. The covenants and agreements herein contained shall bind and inure to the benefit of Sublessor, Sublessee, and their respective successors and permitted assigns. 20. Effectiveness. This Sublease shall be effective only when executed by ------------- Sublessor and Sublessee and approved by the lessor under the Master Lease. Page 5 of 6 AGREED AND ACCEPTED: SUBLESSOR: SUBLESSEE: Micro-Comp Industries, Artest Inc., A California Corporation A California Corporation By: _____________________________ By: /s/ Jen Kao ------------------------------ Its: ____________________________ Its: President ------------------------------ Date: ___________________________ Date: 03-05-97 ----------------------------- CONSENT TO SUBLEASE DATED _____________________________________ BETWEEN ____________________________________________________ AS SUBLESSOR, AND __________________________ AS SUBLESSEE, FOR THE PREMISES COMMONLY KNOWN AS ___________________________________. The undersigned in consideration of the above Sublease, consents to the above Sublease, but this consent is given only on condition that it shall not be construed to release, alter, or modify in any way the obligation of the above original Lessee in the Master Lease or of any guarantor or surety. MASTER LESSOR: THE IRVINE COMPANY By: _____________________________ Its: ____________________________ Date: ___________________________ Page 6 of 6 CONSENT TO SUBLETTING I. PARTIES AND DATES. This Consent to Subletting ("Consent") dated February 21, 1997, is by and ----------- between THE IRVINE COMPANY, a Michigan corporation ("Landlord"), Micro-Comp ---------- Industries ("Tenant"), and Artest, Inc., A California Corporation ("Subtenant"). - ---------- -------------------------------------- II. RECITALS. On February 10, 1997, Landlord and Tenant entered into a lease ("Lease") ----------- for space in a building owned by Landlord and located at 680 Almanor Avenue, ------------------- Sunnyvale, CA 94086, Irvine, California ("Premises"). - ------------------- The Lease contains provisions which require, among other things, Tenant to obtain Landlord's consent to any subletting of the Premises. Tenant has requested Landlord to consent to a subletting of the Premises to Subtenant. III. CONSENT TO SUBLETTING. For valuable consideration including Tenant's and Subtenant's agreement to the provisions of this Consent, Landlord consents to a subletting to Subtenant of approximately 7899 rentable square feet of the Premises. Tenant and ---- Subtenant agree that this Consent is conditioned upon their agreement that: A. The sublease agreement ("Sublease") between Tenant and Subtenant is expressly subject to the provisions of the Lease, a copy of which Subtenant acknowledges it has received. B. Tenant will deliver a copy of the Sublease to Landlord within five (5) business days of Landlords request, provided that if the Sublease is not in writing, Tenant may deliver a reasonably detailed summary of the Sublease including information respecting the length of the term and the amount of rent and other charges payable under the Sublease, which summary shall be approved by Subtenant. C. Tenants obligations under the Lease shall not be affected by this Consent. D. Landlord shall be entitled to receive profits derived by Tenant from this subletting in accordance with the provisions of the Lease. E. The provisions of the Lease respecting assignment and subletting are not waived with respect to future assignments and sublettings. F. Subtenant is not claiming any interest in a right belonging solely to Tenant pursuant to the Lease. G. The Lease is in full force and effect and that Landlord is not in breach of any provision of the Lease. 1 H. That it the Sublease terminates by reason of a termination of the Lease, Landlord may, at its option, by delivering written notice to Subtenant, assume the obligation of Tenant under the Sublease in which event Subtenant shall recognize Landlord as if it were Sublandlord under the Sublease. IV. SUBTENANTS PRINCIPAL PLACE OF BUSINESS. The address of Subtenant's principal place of business is: 678 Almanor Avenue ------------------ Sunnyvale, CA 94086 ------------------- V. GENERAL. A. EFFECT OF SUBLETTING. The Lease and Tenant's obligations to Landlord shall not be deemed to have been modified by this Consent. B. ENTIRE AGREEMENT. This Consent embodies the entire understanding between Landlord, Tenant and Subtenant with respect to the subletting and can be changed only by an instrument in writing signed by the party against whom enforcement is sought. C. COUNTERPARTS. If this Consent is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one in the some Consent. In any action or proceeding, any photographic, photostatic, or other copy of this Consent may be introduced into evidence without foundation. D. DEFINED TERMS. All words commencing with initial capital letters in this Consent and defined in the Lease shall have the same meaning in this Consent as in the Lease. E. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a corporation or partnership, or is comprised of either or both of them, each individual executing this Consent for the corporation or partnership represents that he or she is duly authorized to execute and deliver this Consent on behalf of the corporation or partnership, and that this Consent is binding upon the corporation or partnership in accordance with its terms. F. ATTORNEYS, FEES. The provisions of the Lease respecting payment of attorneys' fees shall also apply to this Consent to Subletting. VI. EXECUTION. Landlord, Tenant and Subtenant have entered into this Consent as of the date set forth in "I. PARTIES AND DATE" above. TENANT: SUBTENANT: Micro-Comp Industries, A Artest, Inc., A California - ------------------------ -------------------------- California Corporation Corporation - ---------------------- ----------- By ___________________________ By /s/ Jen Kao ---------------------------------- Title ________________________ Title President ------------------------------- LANDLORD: THE IRVINE COMPANY, a Michigan corporation By _______________________________ Clarence W. Barker, President, Irvine Industrial Company, a division of The Irvine Company By _______________________________ John C. Tsu, Assistant Secretary Exhibit "B" ----------- Sublessee shall remove the following equipment (Sublessee trade fixtures) on or before Sublessee vacate the premises and shall restore the premises back to original condition at their sole cost and expense. 1. All water chillers installed on the roof. 2. All Artest Inc. specifically installed air conditioning equipment for their testers. 3. All Air/Vac equipment installed on the pad behind the building. READ AND APPROVED /s/ Jen Kao 03-05-97 - ------------------------------- -------------------------- Sublessee Date _______________________________ __________________________ Sublessor Date _______________________________ __________________________ Lessor Date [FLOOR PLAN APPEARS HERE] 5. EXHIBIT C STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE-GROSS AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION 1. Basic Provisions ("Basic Provisions"). 1.1 Parties: This Lease ("Lease"), dated for reference purposes only, May 01, 2000 is made by and between Micro Linear Corporation, a Delaware corporation, ("Lessor") and Artest Corporation, a California corporation ("Lessee"), (collectively the "Parties," or individually a "Party"). 1.2 (a) Premises: That certain portion of the Building, including all improvements therein or to be provided by Lessor under the terms of this Lease, commonly known by the street address of 2050 and 2092 Concourse Drive, located in the City of San Jose, County of Santa Clara, State of California, with zip code 95131, as outlined on Exhibit A attached hereto ("Premises"). The "Building" is that certain building containing the Premises and generally described as (describe briefly the nature of the Building): Two, one-story buildings located next door to one another, each consisting of approximately 47,000 square feet. In addition to Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) 1.2 (b) Parking: 18.23% of the unreserved vehicle parking spaces ("Unreserved Parking Spaces") located in the Industrial Center. (Also see Paragraph 2.6.) 1.3 Term: 3 years and 0 months ("Original Term") commencing See Addendum ("Commencement Date") and ending on the day before the 3rd Anniversary of the Commencement Date ("Expiration Date"). (Also see Paragraph-3). 1.4 Early Possession: N/A ("Early Possession Date"). (Also see Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $ 25,024 per month ("Base Rent"), payable on the 1st day of each month commencing on the Commencement Date (Also see Paragraph 4.) [ ] If this box is checked, this Lease provides for the Base Rent to be adjusted per Addendum ___, attached hereto. 1.6 (a) Base Rent Paid Upon Execution: $ N/A as Base Rent for the period N/A. 1.6 (b) Lessee's Share of Common Area Operating Expenses: N/A percent ( .%) ("Lessee's Share") as determined by [ ] prorata square footage of the Promises as compared to the total square footage of the Building or [ ] other criteria as described in Addendum _____. 1.7 Security Deposit: $ N/A ("Security Deposit"). (Also see Paragraph 5.) 1.8 Permitted Use: Semiconductor testing and manufacturing in the same manner and using the same equipment as Lessor immediately prior to the Commencement Date ("Permitted Use") (Also see Paragraph 6.) 1.9 Insuring Party: Lessor is the "Insuring Party." (Also see Paragraph 8.) 1.10 Addenda and Exhibits: Attached hereto is an Addendum or Addenda consisting of Paragraphs 1 through 7 and Exhibits A, all of which constitute a part of this Lease. 2. Premises, Parking and Common Areas. 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 [deleted] 2.3 [deleted] 2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that it has been advised by Lessor to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical and fire sprinkler systems, security, environmental aspects, seismic and earthquake requirements, and compliance with the Americans with Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws") and the present and future suitability of the Premises for Lessee's intended use; (b) that Lessee has made such investigation as it deems necessary with reference to such matters, is satisfied with reference thereto, and assumes all responsibility therefore as the same relate to Lessee's occupancy of the Promises and/or the terms of this Lease; and (c) that neither Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. Initials:________ ________ 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in this Paragraph 2 shall be of no force or effect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non- compliance of the Premises with said warranties. 2.6 Vehicle Parking. Lessee shall be entitled to use the number of Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated from time to time by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full- size passenger automobiles or pick-up trucks, herein called "Permitted Size Vehicles." Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease provide the parking facilities required by Applicable Law. 2.7 Common Areas-Definition. The term "Common Areas" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general now exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas-Lessee's Rights. Lessor hereby grants to Lessee, for the benefit of Lessee and its employees, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the non-exclusive right to use, in common with others entitled to such use, the Common Areas as they exist from time to time, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent may be revoked at any time. In the event that any unauthorized storage shall occur then Lessor shall have the right, without notice, in addition to such other rights and remedies that it may have, to remove the property and charge the cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas-Rules and Regulations. Lessor or such other person(s) as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 40. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas-Changes. Lessor shall have the right, in Lessor's sole discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To designate other land outside the boundaries of the Industrial Center to be a part of the Common Areas; (d) To add additional buildings and improvements to the Common Areas; (e) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (f) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. 3.1 Term. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3. Initials:_______ _______ -2- 3.2 Early Possession. If an Early Possession Date is specified in Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 3.3 Delay In Possession. If for any reason Lessor cannot deliver possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing to Lessor within ten (10) days after the end of said sixty (60) day period, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder; provided further, however, that if such written notice of Lessee is not received by Lessor within said ten (10) day period, Lessee's right to cancel this Lease hereunder shall terminate and be of no further force or effect. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges, as the same may be adjusted from time to time, to Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and ail other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 [deleted] 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. It Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the tuft amount required by this Lease. Any time the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional monies with Lessor as an addition to the Security Deposit so that the total amount of the Security Deposit shall at all times bear the same proportion to the then current Base Rent as the initial Security Deposit bears to the initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option, to the last assignee, it any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the Security Deposit shall be considered to be held in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. 6.1 Permitted Use. (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, and for no other purpose. Lessee shall not use or permit the use of the Promises in a manner that is unlawful, creates waste or a nuisance, or that disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) [deleted] 6.2 Hazardous Substances. (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Promises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a Initials:________ ________ -3- timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be tiled with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but upon notice to Lessor and in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may (but without any obligation to do so) condition its consent to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional assurances as Lessor, in its reasonable discretion, deems necessary to protect itself, the public, the Premises and the environment against damage, contamination or injury and/or liability therefor, including but not limited to the installation (and, at Lessor's option, removal on or before Lease expiration or earlier termination) of reasonably necessary protective modifications to the Premises (such as concrete encasements) and/or the deposit of an additional Security Deposit under Paragraph 5 hereof. (b) Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any govern-mental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance, including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system). (c) Indemnification. Lessee shall indemnify, protect, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, and the Premises, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's sole cost and expense, fully, diligently and in a timely manner, comply with all "Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) environmental conditions on, in, under or about the Premises, including soil and groundwater conditions, and (iii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance), now in effect or which may hereafter come into effect. Lessee shall, within five (5) days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Promises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the Inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. 7.1 Lessee's Obligations. (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's Initials:_______ _______ -4- use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, and skylights, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Promises in good order, condition and repair, shall exercise and perform good maintenance practices, Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Promises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) [deleted] (c) If Lessee fails to perform Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises in good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair the foundations, exterior walls, structural condition of interior bearing walls, exterior roof, fire sprinkler and/or standpipe and hose (it located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all pans thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the exterior or interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the Premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. (a) Definitions; Consent Required. The term "Utility Installations" is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications systems, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises which are provided by Lessor under the terms of this Lease other than Utility installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations and/or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non- structural Utility Installations to the interior of the Premises (excluding the roof) without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the root or any existing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cumulative cost thereof during the term of this Lease as extended does not exceed $2,500.00. (b) Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall he deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon: and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Lien Protection. Lessee shall pay when due all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at of for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on, or about the premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. It Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one and one-half times the amount of such contested item claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs in participating in such action if Lessor shall decide it is to its best interest to do so. 7.4 Ownership, Removal, Surrender, and Restoration. Initials:________ ________ -5- (a) Ownership. Subject to Lessor's right to require their removal and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the properly of and owned by Lessee, but considered a part of the Premises. Lessor may, at any time and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease. become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal. Unless otherwise agreed in writing, Lessor may require that any or all Lessee-Owned Alterations or Utility installations be removed by (he expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and fear excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by good maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements and/or good practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. 8.1 [deleted] 8.2 Liability Insurance. (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and properly damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises arid all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises" endorsement and contain the "Amendment of the Pollution Exclusion" endorsement for damage caused by heat, smoke or fumes from a hostile fire. The policy shall not contain any intra-insured exclusions as between insured persons or organizations, bill shall include coverage for liability assumed under this Lease as an "Insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Properly Insurance-Building, Improvements and Rental Value. (a) Building and Improvements. Lessor shall obtain and keep in force during the term of this Lease a policy or policies, in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Premises. Such insurance shall be for full replacement cost, as the same shall exist from time to time, or the amount required by any Lender(s), but in no event more than the commercially reasonable and available insurable value thereof it, by reason of the unique nature or age of the improvements involved, such latter amount is less than full replacement cost. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8 4. If the coverage is available arid commercially appropriate, Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender or included in the Base Premium), including coverage for any additional costs resulting from debris removal and reasonable amounts of cove-rage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, arid inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price index for Ali Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues Initials:_______ _______ -6- from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any co-insurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income. Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the premiums for the properly insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises. (d) Lessee's Improvements. Since Lessor is the Insuring Party, Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 8.5 Insurance Policies. Insurance required hereunder shall be In companies duly licensed to transact business in the state where the Promises are located, and maintaining during the policy term a "General Policyholders Rating" of at least A-, VIII or such other rating as may be required by a Lender, as set forth in the most current issue of "Best's Insurance Guide." Lessee shall not do or permit to be done anything which shall invalidate the insurance policies referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, certified copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to modification except after thirty (30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby, 8.7 Indemnity. Except for Lessor's negligence and/or breach of express warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master or ground lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, the occupancy of the Premises by Lessee, the conduct of Lessee's business, any act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The fore-going shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, tire sprinklers, wires, appliances, plumb-ing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. 9.1 Definitions. (a) "Premises Partial Damage" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations. the repair cost of which damage or destruction is less than fifty percent Initials:________ ________ -7- (50%) of the then Replacement Cost (as defined in Paragraph 9.1 (d)) of the Promises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. In addition, damage or destruction to the Building, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building, the cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures of any lessees of the Building) of the Building shall, at the option of Lessor, be deemed to be Premises Total Destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Promises. 9.2 Premises Partial Damage--Insured Loss. If Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available. Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Promises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and it Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed. Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction. Promises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs it made by either Party. 9.3 Partial Damage--Uninsured Loss. If Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by Lessee, Lessor shall have the right to recover Lessor's damages from Lessee except as released and waived in Paragraph 9.7. 9.5 Damage Near End of Term. If at any time during the last six (6) months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's option, terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to Lessee of Lessor's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day Initials:________ ________ -8- prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. (a) In the event of (i) Premises Partial Damage or (ii) Hazardous Substance Condition for which Lessee is not legally responsible, the Base Rent. Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not in excess of proceeds from insurance required to be carried under Paragraph 8.3(b). Except for abatement of Base Rent, Common Area Operating Expenses and other charges. if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within ninety (90) days after such obligation shall accrue. Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a (late not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Hazardous Substance Conditions. It a Hazardous Substance Condition occurs. unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at Lessor's option either (i) investigate and remediate such Hazardous Substances Condition. If required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) it file estimated cost to investigate and remediate such condition exceeds twelve (12) limes the then monthly Base Rent or $100,000 whichever is greater, give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition of Lessor s desire to terminate this Lease as of the date sixty (60), days following the date of such notice. In the event Lessor elects to give such notice of Lessor s intention to terminate this Lease. Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to Day for the excess costs of (a) investigation and remediation of such Hazardous Substance Condition to the extent required by Applicable Requirements, over (b) an amount equal to, waive (12) times the then monthly Base Rent or $100.000, whichever is greater. Lessee shall provide Lessor with the funds required of Lessee or satisfactory assurance thereof within thirty (30) days following said commitment by Lessee, if, such event this Lease shall continue in full force and effect. and Lessor shall proceed to make such investigation and remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time period specified above, this Lease shall terminate as of the date specified in Lessor's notice, of termination. 9.8 Term I nation-Advance Payments. Upon termination of this Lease pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease 9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. 10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as defined in Paragraph 10 2.1a), applicable to the Industrial Center. 10.2 Real Property Tax Definitions. (a) As used herein, the term "Real Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any license fee, commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof. Lessor's right to rent or other income therefrom, and/or Lessor's business of leasing the Premises. The term "Real Property Taxes" stall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the ownership of the Industrial Center or in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. Initials:_______ _______ -9- (b) As used herein, the term "Base Real Property Taxes" shall be the amount of Real Property Taxes, which are assessed against the Premises. Building or Common Areas in the calendar year during which the Lease is executed. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 10.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees of by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, the entirety of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed. Real Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from life real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. [deleted] 12. Assignment and Subletting. 12.1 Lessor's Consent Required. (a) Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent which may be withheld in Lessor's sole and absolute discretion. (b) A change in the control of Lessee shall constitute an assignment requiring Lessor's consent. The transfer, on a cumulative basis, of twenty-five per-cent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose. (c) The involvement of Lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee, as hereinafter defined, by an amount equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee as it was represented to Lessor at the time of full execution and delivery of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, at whichever time said Net Worth of Lessee was or is greater, shall be considered an assignment of this Lease by Lessee to which Lessor may withhold its consent in its sole discretion "Net Worth of Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding any Guarantors) established under generally accepted accounting principles consistently applied. (d) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1, or a non-curable Breach without the necessity of any notice and grace period. If lessor elects to treat such unconsented to assignment or subletting as a non-curable Broach, Lessor shall have the right to either: (i) terminate this Lease, or (ii) upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly Base Rent for the Premises to the greater of the then fair market rental value of the Premises, as reasonably determined by Lessor, or one hundred ten percent (110%) of the Base Rent then in effect. Pending determination of the new fair market rental value, if disputed by Lessee, Lessee shall pay the amount set forth in Lessor's Notice, with any overpayment credited against the next installment(s) of base Rent coming due, and any underpayment for the period retroactively to the effective date of the adjustment being due and payable immediately upon the determination thereof. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to the then fair market value as reasonably determined by Lessor (without the Lease being considered an encumbrance or any deduction for depreciation or obsolescence, and considering the Premises at its highest and best use and in good condition) or one hundred ten percent (110%) of the price previously in effect, (ii) any index-oriented rental or price adjustment formulas contained in this Lease shall be adjusted to require that the base index be determined with reference to the index applicable to the time of such adjustment, and (iii) any fixed rental adjustments scheduled during the remainder of the Lease term shall he increased in the same ratio as the new rental bears to the Base Rent in effect immediately prior to the adjustment specified in Lessor's Notice. (e) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. Initials:_______ _______ -10- 12.2 Terms and Conditions Applicable to Assignment and Subletting. (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Pont and other sums due Lessor hereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or sublessee. However, Lessor may consent to subsequent sublettings and assignments of the sublease or any amendments or modifications thereto without notifying Lessee or anyone else liable under this Lease or the sublease and without obtaining their consent, and such action shall not relieve such persons from liability under this Lease or the sublease. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or any-one else responsible for the performance of the Lessee's obligations under this Lease, including any sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security hold by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. (g) The occurrence of a transaction described in Paragraph 12.2(c) shall give Lessor the right (but not the obligation) to require that the Security Deposit be increased by an amount equal to six (6) times the then monthly Base Rent, and Lessor may make the actual receipt by Lessor of the Security Deposit Increase a condition to Lessor's consent to such transaction. (h) Lessor, as a condition to giving its consent to any assignment or subletting, may require that the amount and adjustment schedule of the rent payable under this Lease be adjusted to what is then the market value and/or adjustment schedule for property similar to the Premises as then constituted, as determined by Lessor. 12.3 Additional Terms and Conditions Applicable to Subletting. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessee hereby assigns and transfers to Lessor all of Lessee's interest in all rentals and income arising from any sublease of all or a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may collect such rent and income and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach (as defined in Paragraph 13.1) shall occur in the performance of Lessee's obligations under this Lease, Lessee may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Lessor shall not, by reason of the foregoing provision or any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists In the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. Initials:_______ _______ -11- (c) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessors prior written consent which may be withheld in Lessor's sole discretion. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee. 13. Default; Breach; Remedies. 13.1 Default; Breach. Lessor and Lessee agree that if an attorney is consulted by Lessor in connection with a Lessee Default or Breach (as hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence for legal services and costs in the preparation and service of a notice of Default, and that Lessor may include the cost of such services and costs in said notice as rent due and payable to cure said default. A "Default" by Lessee is defined as a failure by Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The vacating of the Premises without the intention to reoccupy same, or the abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee hereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) days following written notice thereof by or on behalf of Lessor to Lessee. (c) Except as expressly otherwise provided in this Lease, the failure by Lessee to provide Lessor with reasonable written evidence (in duly executed original form, if applicable) of (i) compliance with Applicable Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service contracts required under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the execution of any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this lease, where any such failure continues for a period of ten (10) days following written notice by or on behalf of Lessor to Lessee. (d) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that it the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure with-in said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (e) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days: or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(e) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (f) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially false. (g) If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory breach basis, and Lessee's failure, within sixty (60) days following written notice by or on behalf of Lessor to Lessee of any such event, to provide Lessor with written alternative assurances of security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease. 13.2 Remedies. It Lessee fails to perform any affirmative duly or obligation of Lessee under this Lease, within ten (10) days after written notice to Lessee (or in case of an emergency, without notice). Lessor may at its option (but Initials:________ _______ -12- without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. It any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand. and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) 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 the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lesser may reserve the right to recover all or any part thereof in a separate suit to for such rent and/or damages. If a notice and grace period required under Subparagraph 13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or to perform or quit, as the case may be, given to Lessee under any statute authorizing the forfeiture of !leases for unlawful detainer shall also constitute, the applicable notice for grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such case, the applicable grace period under the unlawful detainer statute shall run concurrently after the one such statutory notice, and the failure of Lessee to cure the Default within the greater of the two (2) such grace periods shall constitute both in unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this Lease and/or by said statute. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitation. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment or a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c) Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the, Promises. 13.3 Inducement Recapture In Event of Breach. Any agreement by Lessor for free or abated rent or other charges applicable to the Premises, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions" shall be doomed conditioned upon Lessee's hill and faithful performance of all of the terms, covenants and conditions of this Lease to be performed or observed by Lessee during the term hereof as the same may be extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no, further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, and recoverable by Lessor, as additional rent due under this Lease, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of such acceptance. 13.4 Late Charges. Lessee hereby acknowledges that late payment by Lessee to Lessor of rent and other sums due hereunder will cause Lessor 10 111CM 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 upon Lessor by the terms of any ground lease, mortgage or deed of trust covering the premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to six percent (6%) M Such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive Initials:________ _______ -13- installments of Base Rent, then notwithstanding Paragraph 4.1 or any other provision of this Lease to the contrary, Base Rent shall. at Lessor's option, become due and payable quarterly in advance. 13.5 Breach by Lessor. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease it performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called "condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. It more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in the same proportion as the rentable floor area of the Premises taken bears to the total rentable floor area of the Premises. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor. whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages; provided, however, that Lessee shall be entitled to any compensation, separately awarded to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation, matter, repair any damage to the Premises caused by such condemnation authority. Lessee shall be responsible for the payment of any amount in excess of such not severance damages required to complete such repair. 15. [deleted] 16. Tenancy and Financial Statements. 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or sell the Premises or the Building, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee and such Guarantors as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid. the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor hereunder, other than late charges. not received by Lessor within ten (10) days follow-ing the date on which it was due, shall bear interest from the date due at the prime rate charged by [he largest state chartered bank in the state in which the Premises are located plus four percent (4%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.4. 20. Time of Essence. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the terms of this Lease are deemed to be rent. 22. No Prior or other Agreements. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Initials: ____ ____ -14- 23. Notices. 23.1 Notice Requirements. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mail-ing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or it no delivery date is shown, the postmark thereon. If sent by regular mail. the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by Lessor of the Default or Breach of any term. covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or any other term, covenant or condition hereof. Lessor's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of Lessor's consent to. or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording. purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to two hundred percent (200%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Covenants and Conditions. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. 29. Binding Effect; Choice of Law. This Lease shall be binding upon the Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 30. Subordination; Attornment; Non-Disturbance. 30.1 Subordination. This Lease and any Option granted hereby shall be subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 30.2 Attornment. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who acquires owner- ship of the Promises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership, (it) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent. 30.3 Non-Disturbance. With respect to Security Devices entered into by Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a "non-disturbance agreement") from Initials: ____ ____ -15- the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 30.4 Self-Executing. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any such subordination or non-subordination, attornment and/or non-disturbance agreement as is provided for herein. 31. Attorneys' Fees. If any Party brings an action or proceeding to enforce the terms hereof or declare rights hereunder. the Prevailing Party (as here- after defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. 32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale" signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Promises any ordinary "For Lease" signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 33. Auctions. Lessee shall not conduct, nor permit to be conducted, either voluntarily or involuntarily, any auction upon the Promises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 34. Signs. Lessee shall not place any sign upon the exterior of the Premises or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). Unless otherwise expressly agreed herein, Lessor reserves all rights to the use of the roof of the Building, and the right to install advertising signs on the Building, including the roof. which do not unreasonably interfere with the conduct of Lessee's business; Lessor shall be entitled to all revenues from such advertising signs. 35. Termination; Merger. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided. however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. 36. Consents. (a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of. or response to. a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting or the presence or use of a Hazardous Substance. shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. In addition to the deposit described in Paragraph 12.2(e), Lessor may. as a condition to considering any such request by Lessee, require that Lessee deposit with Lessor an amount of money (in addition to the Security Deposit held under Paragraph 5) reasonably calculated by Lessor to represent the cost Lessor will incur in considering and responding to Lessee's request. Any unused portion of said deposit shall be refunded to Lessee without interest. Lessor's consent to any act. assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists. nor shall such consent be doomed a waiver of any then existing Default of Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reason-able with reference to the particular matter for which consent is being given. Initials: ____ ____ -16- 37. Guarantor. 37.1 Form of Guaranty. It there are to be any Guarantors of this Lease per Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor shall be in the form most recently published by the American Industrial Real Estate Association. and each such Guarantor shall have the same obligations as Lessee under this lease, including but not limited to the obligation to provide the Tenancy Statement and information required in Paragraph 16. 37.2 Additional Obligations of Guarantor. It shall constitute a Default of the Lessee under this Lease if any such Guarantor fails or refuses. upon reason-able request by Lessor to give: (a) evidence of the due execution of the guaranty called for by this Lease. including the authority of the Guarantor (and of the party signing on Guarantor's behalf) to obligate such Guarantor on said guaranty, and resolution of its board of directors authorizing the making of such guaranty, together with a certificate of incumbency showing the signatures of the persons authorized to sign on its behalf. (b) current financial statements of Guarantor as may from time to time be requested by Lessor. (c) a Tenancy Statement. or (d) written confirmation that the guaranty is still in effect. 38. Quiet Possession. Upon payment by Lessee of the rent for the Promises and the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease. Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 39. Options. 39.1 Definition. As used in this Lease. the word "Option" has the following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor: (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor: (c) the right to purchase the Premises, or the right of first refusal to purchase the Premises. or the right of first offer to purchase the Promises. or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor. or the right of first offer to purchase other property of Lessor. 39.2 Options Personal to Original Lessee. Each Option granted to Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and cannot be voluntarily or involuntarily assigned or exercised by any person or entity other than said original Lessee while the original Lessee is in full and actual possession of the Promises and without the intention of thereafter assigning or subletting. The Options, if any, herein granted to Lessee am not assignable, either as a pan of an assignment of this Lease or separately or apart therefrom, and no Option may be separated from this Lease in any manner by reservation or otherwise. 39.3 Multiple Options. In the event that Lessee has any multiple Options to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 39.4 Effect of Default on Options. (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during the twelve (12) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a). (c) All rights of Lessee under the provisions of an Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and during the term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee for a period of thirty (30) days after such obligation becomes due (without any necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under Paragraph 13.1 during any twelve (12) month period, whether of not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease. 40. Rules and Regulations. Lessee agrees that it will abide by, and keep and observe all reasonable rules and regulations ("Rules and Regulations") which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 41. [deleted]Reservations. Lessor reserves the right, from time to time, to grant, without the consent or joinder of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility race-ways, dedications, maps and restrictions do not reasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 43. Performance Under Protest. It at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that Initials: ____ ____ -17- there was no legal obligation on the pan of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 44. Authority. If either Party hereto is a corporation, trust, or general or limited partnership, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. It Lessee is a corporation, trust or partnership, Lessee shall, within thirty (30) days after request by Lessor, deliver to Lessor evidence satisfactory to Lessor of such authority. 45. Conflict. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or hand written provisions. 46. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 47. Amendments. This Lease may be modified only in writing, signed by the parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional Insurance company or pension plan Lender In connection with the obtaining of normal financing or refinancing of the property of which the Promises are a part. 48. Multiple Parties. Except as otherwise expressly provided herein, if more than one person or entity Is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee, Initials: ____ ____ -18- LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN IT HAS BEEN PREPARED FOR YOUR ATTORNEYS REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT. OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Executed at: ______________________________________________________ Executed at: ______________________________________________ on: _______________________________________________________________ on: _______________________________________________________ By LESSOR: By LESSEE: MICRO LINEAR CORPORATION ARTEST CORPORATION, a Delaware corporation a California corporation Name Printed: _____________________________________________________ Name Printed: _____________________________________________ Title: ____________________________________________________________ Title: ____________________________________________________ By: _______________________________________________________________ By: _______________________________________________________ Name Printed: _____________________________________________________ Name Printed: _____________________________________________ Title: ____________________________________________________________ Title: ____________________________________________________ Address: __________________________________________________________ Address: __________________________________________________ ___________________________________________________________________ ___________________________________________________________ Telephone: ( ) _______________________________________________ Telephone: ( ) _______________________________________
NOTE: These forms are often modified to meet changing requirements of law and needs of the industry. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 South Flower Street, Suite 600, Los Angeles, CA 90017. (213) 687-8777. Initials: ____ ____ -19- FIRST ADDENDUM TO STANDARD INDUSTRIAL/ COMMERCIAL MULTI-TENANT LEASE - GROSS THIS FIRST ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE (this "Addendum") is made by and between Micro Linear Corporation, a Delaware corporation ("Lessor") and Artest Corporation, a California corporation ("Lessee"), to be a part of that certain lease (the "Lease") of even date herewith between Lessor and Lessee concerning premises located at 2050 and 2092 Concourse Drive, San Jose, California (the "Premises"). Lessor and Lessee agree that, notwithstanding anything to the contrary in the Lease, the Lease is hereby modified and supplemented as set forth below. 1. Term. The Lease shall commence (the "Commencement Date") on the date ---- of the "Closing" of that certain Agreement for Purchase and Sale of Assets by and between Lessor and Lessee dated as of the date hereof. 2. Common Areas. The Common Areas shall be limited to the lobby, ------------ restrooms, lunch rooms and hallways leading directly between the foregoing and the Premises in each Building, as well as the parking areas and exterior sidewalks of the Industrial Center. 3. Hazardous Materials. Lessee shall not use, store or bring onto the ------------------- Premises or the Industrial Center any Hazardous Materials other than those of a type and in quantities used in the Premises by Lessor immediately before the Commencement Date. 4. Utilities. Lessor shall provide to the Premises electricity, water, --------- heating, ventilating and air conditioning and garbage disposal services at the levels provided to the Premises immediately prior to the Commencement Date. In addition, Lessor shall provide, at Lessee's cost, telephone service to the Premises at the level provided to the Premises immediately prior to the Commencement Date. Lessee shall pay any invoices for such telephone services within ten (10) days of receipt thereof. If such telephone service is not separately metered or billed to the Premises, Lessee shall pay to Lessor a reasonable portion to be determined by Lessor of any jointly metered or billed within ten (10) days of Lessee's receipt of an invoice therefor from Lessor. If, in Lessor's reasonable determination, Lessee uses any utilities or services (other than telephone services) in excess of levels used immediately before the Commencement Date, Lessor shall have the right to charge Lessee with the cost of any excess usage as reasonably calculated by Lessor, and Lessee shall pay such charges within ten (10) days of receipt of an invoice therefor. Lessor shall not be liable for the interruption of any such services or utilities for causes beyond Lessor's reasonable control. 5. Annual Negotiations. On or about each anniversary of the Commencement ------------------- Date, the parties shall meet upon the request of either party to discuss the possibility of increasing or decreasing the size of the Premises. In the event that the parties agree to change the size of the Premises, the Base Rent, Lessee's Share and Lessee's percentage of parking spaces shall be equitably adjusted based on any adjustment to the size of the Premises. 6. Lessor's Termination Right. In the event that (a) the agreement -------------------------- between Lessor or Lessee with respect to Lessee's performance of production, test and shipping functions for Lessor terminates for any reason, or (b) Lessee for any reason ceases carrying out such functions in the Premises, Lessor shall have the right at any time thereafter to terminate this Lease by delivering at least thirty (30) days prior written notice hereof to Lessee. 7. Effect of Addendum. All terms with initial capital letters used herein ------------------ as defined terms shall have the meanings ascribed to them in the Lease unless specifically defined herein. In the event of any inconsistency between this Addendum and the Lease, the terms of this Addendum shall prevail. LESSOR: LESSEE: MICRO LINEAR CORPORATION, ARTEST CORPORATION, a Delaware corporation a California corporation By: /s/ David L. Gellatly By: /s/ Jen Kao -------------------------------- ------------------------------ Name: David L. Gellatly Name: Jen Kao ------------------------------ ---------------------------- Its: President and CEO Its: President and CEO ------------------------------- ----------------------------- Initials: ____ ____ EXHIBIT A1 - Floor plan [FLOOR PLAN] EXHIBIT A2 - Floor plan [FLOOR PLAN] Addendum to Sub-lease: At the termination of the sub-lease Artest will remove all of Artest's assets and return that portion of the building which Artest has occupied to MLIN in an "As is" condition. INDUSTRIAL LEASE (Single Tenant; Net; Stand-Alone) ARTICLE I. BASIC LEASE PROVISIONS ARTICLE II. PREMISES SECTION 2.1. LEASED PREMISES SECTION 2.2. ACCEPTANCE OF PREMISES SECTION 2.3. BUILDING NAME AND ADDRESS ARTICLE III. TERM SECTION 3.1. GENERAL SECTION 3.2. DELAY IN POSSESSION ARTICLE IV. RENT AND OPERATING EXPENSES SECTION 4.1. BASIC RENT SECTION 4.2. OPERATING EXPENSES SECTION 4.3. SECURITY DEPOSIT ARTICLE V. USES SECTION 5.1. USE SECTION 5.2. SIGNS SECTION 5.3. HAZARDOUS MATERIALS ARTICLE VI. SERVICES SECTION 6.1. UTILITIES AND SERVICES SECTION 6.2. PARKING ARTICLE VII. MAINTAINING THE PREMISES SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR SECTION 7.3. ALTERATIONS SECTION 7.4. MECHANIC'S LIENS SECTION 7.5. ENTRY AND INSPECTION ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY ARTICLE IX. ASSIGNMENT AND SUBLETTING SECTION 9.1. RIGHTS OF PARTIES SECTION 9.2. EFFECT OF TRANSFER SECTION 9.3. SUBLEASE REQUIREMENTS SECTION 9.4. CERTAIN TRANSFERS ARTICLE X. INSURANCE AND INDEMNITY SECTION 10.1. TENANT'S INSURANCE SECTION 10.2. LANDLORD'S INSURANCE SECTION 10.3. TENANT'S INDEMNITY SECTION 10.4. LANDLORD'S NONLIABILITY SECTION 10.5. WAIVER OF SUBROGATION ARTICLE XI. DAMAGE Or DESTRUCTION SECTION 11.1. RESTORATION SECTION 11.2. LEASE GOVERNS i ARTICLE XII. EMINENT DOMAIN SECTION 12.1. TOTAL OR PARTIAL TAKING SECTION 12.2. TEMPORARY TAKING SECTION 12.3. TAKING OF PARKING AREA ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS SECTION 13.1. SUBORDINATION SECTION 13.2. ESTOPPEL CERTIFICATE SECTION 13.3. FINANCIALS ARTICLE XIV. DEFAULTS AND REMEDIES SECTION 14.1. TENANT'S DEFAULTS SECTION 14.2. LANDLORD'S REMEDIES SECTION 14.3. LATE PAYMENTS SECTION 14.4. RIGHT OF LANDLORD TO PERFORM SECTION 14.5. DEFAULT BY LANDLORD SECTION 14.6. EXPENSES AND LEGAL FEES SECTION 14.7. WAIVER OF JURY TRIAL SECTION 14.8. SATISFACTION OF JUDGMENT SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD ARTICLE XV. END OF TERM SECTION 15.1. HOLDING OVER SECTION 15.2. MERGER ON TERMINATION SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY ARTICLE XVI. PAYMENTS AND NOTICES ARTICLE XVII. RULES AND REGULATIONS ARTICLE XVIII. BROKER'S COMMISSION ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST ARTICLE XX. INTERPRETATION SECTION 20.1. GENDER AND NUMBER SECTION 20.2. HEADINGS SECTION 20.3. JOINT AND SEVERAL LIABILITY SECTION 20.4. SUCCESSORS SECTION 20.5. TIME OF ESSENCE SECTION 20.6. CONTROLLING LAW SECTION 20.7. SEVERABILITY SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES SECTION 20.9. INABILITY TO PERFORM SECTION 20.10. ENTIRE AGREEMENT SECTION 20.11. QUIET ENJOYMENT SECTION 20.12. SURVIVAL ARTICLE XXI. EXECUTION AND RECORDING SECTION 21.1. COUNTERPARTS SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER SECTION 21.4. RECORDING SECTION 21.5. AMENDMENTS SECTION 21.6. EXECUTED COPY ii SECTION 21.7. ATTACHMENTS ARTICLE XXII. MISCELLANEOUS SECTION 22.1. NONDISCLOSURE OF LEASE TERMS SECTION 22.2. GUARANTY SECTION 22.3. CHANGES REQUESTED BY LENDER SECTION 22.4. MORTGAGEE PROTECTION SECTION 22.5. COVENANTS AND CONDITIONS SECTION 22.6. SECURITY MEASURES SECTION 22.7. CONTINGENCY EXHIBITS EXHIBIT A DESCRIPTION OF PREMISES EXHIBIT A-1 DESCRIPTION OF THE SITE EXHIBIT B ENVIRONMENTAL QUESTIONNAIRE EXHIBIT C LANDLORD'S DISCLOSURES EXHIBIT D INSURANCE REQUIREMENTS EXHIBIT E RULES AND REGULATIONS EXHIBIT X WORK LETTER iii INDUSTRIAL LEASE (Single Tenant; Net; Stand-Alone) THIS LEASE is made as of the 10th day of February, 1997, by and between THE IRVINE COMPANY, a Michigan corporation, hereafter called "Landlord," and MICRO-COMP INDUSTRIES, a California corporation, hereinafter called "Tenant." ARTICLE I. BASIC LEASE PROVISIONS Each reference in this Lease to the "Basic Lease Provisions" shall mean and refer to the following collective terms, the application of which shall be governed by the provisions in the remaining Articles of this Lease. 1. Premises: The Premises are more particularly described in Section 2.1. 2. Address of Building: 680 Almanor Avenue, Sunnyvale, CA 94086 3. Use of Premises: Office, administration and related legal uses. 4. Commencement Date: March 1, 1997 5. Lease Term: Sixty (60) months, plus such additional days as may be required to cause this Lease to terminate on the final day of the calendar month. 6. Basic Rent: Twenty-Five Thousand Eight Hundred Sixty Dollars ($25,860.00) per month, based on $1.50 per rentable square foot. Basic Rent is subject to adjustment is follows: The Basic Rent shall be increased, as of the commencement of the thirteenth (13th) month of the Lease Term and every twelve (12) months thereafter (the "Rental Adjustment Date(s)"), by the percentage increase, if any, in the United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index for all Urban Consumers, San Francisco-Oakland Area Average, all items (1982-84=100) (the "Index"). The adjustment shall be calculated by comparing the Index published for the third month preceding the applicable Rental Adjustment Date with the Index published for the third month preceding the last prior Rental Adjustment Date (or the third month preceding the Commencement Date in the case of the first rental adjustment), and the Basic Rent then in effect shall be increased by the amount of the percentage increase, if any, between those published Index amounts. In no event shall the Basic Rent be reduced by reason of such computation. If at any Rental Adjustment Date the Index shall not exist, Landlord may substitute another reasonable index published by any governmental agency. Landlord shall use diligent efforts to calculate and give Tenant notice of any such increase in the Basic Rent on or near each Rental Adjustment Date, and Tenant shall commence to pay the increased Basic Rent effective on the applicable Rental Adjustment Date. In the event Landlord is unable to deliver to Tenant the notice of the increased Basic Rent at least five (5) days prior to any Rental Adjustment Date, Tenant shall commence to pay the increased Basic Rent on the first day of the month following the delivery of such notice (the "Payment Date"), provided Landlord's notice has been given at least five (5) days in advance. Tenant shall also pay, together with the first payment of the increased Basic Rent, an amount determined by multiplying the amount of the increase in Basic Rent times the number of months that have elapsed between the Rental Adjustment Date and the Payment Date. Notwithstanding the foregoing, the parties agree that as of any Rental Adjustment Date, the revised Basic Rent due to all cumulative increases pursuant to this paragraph shall neither (i) exceed the amount obtained by increasing the initial Basic Rent from the Commencement Date to said Rental Adjustment at the rate of seven percent (7%) per annum, compounded annually, nor (ii) be less than the amount obtained by 1 increasing the initial Basic Rent from the Commencement Date to said Rental Adjustment Date at the rate of three percent (3%) per annum, compounded annually. 7. Guarantor(s): N/A 8. Floor Area of Premises: approximately 17,240 rentable square feet 9. Security Deposit: $25,860.00 10. Broker(s): Grubb & Ellis 11. Additional Insureds: Insignia Commercial Group, Inc. 12. Address for Payments and Notices: LANDLORD TENANT INSIGNIA COMMERCIAL GROUP, INC. MICRO-COMP INDUSTRIES 160 West Santa Clara Street, Suite 1350 680 Almanor Avenue San Jose, CA 95113 Sunnyvale, CA 94086 with a copy of notices to: IRVINE INDUSTRIAL COMPANY P.O. Box 6370 Newport Beach, CA 92658-6370 Attn: Vice President, Industrial Operations 13. Tenant's Liability Insurance Requirement: $2,000,000.00 Exhibits: A Description of Premises A-1 Description of the Site B Environmental Questionnaire C Landlord's Disclosures D Insurance Requirements E Rules and Regulations X Work Letter 2 ARTICLE II. PREMISES SECTION 2.1. LEASED PREMISES. Landlord leases to Tenant and Tenant leases from Landlord the premises shown in EXHIBIT A (the "Premises"), including the --------- building identified in Item 2 of the Basic Lease Provisions (which together with the underlying real property, is called the "Building"), and containing approximately the floor area set forth in Item 8 of the Basic Lease Provisions. The Building is located on the site (the "Site") shown on EXHIBIT A-1 attached ----------- hereto. SECTION 2.2. ACCEPTANCE OF PREMISES. Tenant acknowledges that neither Landlord nor any representative of Landlord has made any representation or warranty with respect to the Premises or the Building or the suitability or fitness of either for any purpose, including without limitation any representations or warranties regarding zoning or other land use matters. Tenant further acknowledges that neither Landlord nor any representative of Landlord has agreed to undertake any alterations or additions or construct any improvements to the Premises except as expressly provided in this Lease. The taking of possession or use of the Premises by Tenant for any purpose other than construction shall conclusively establish that the Premises and the Building were in satisfactory condition and in conformity with the provisions of this Lease in all respects, except for those matters which Tenant shall have brought to Landlord's attention on a written punch list. The list shall be limited to any items required to be accomplished by Landlord under the Work Letter attached as Exhibit X, and shall be delivered to Landlord within sixty (60) days after --------- the term ("Term") of this Lease commences as provided in Article III below. If no items are required of Landlord under the Work Letter, by taking possession of the Premises Tenant accepts the improvements in their existing condition, and waives any right or claim against Landlord arising out of the condition of the Premises. Nothing contained in this Section shall affect the commencement of the Term or the obligation to Tenant to pay rent. Landlord shall diligently complete all punch list items of which it is notified as provided above. SECTION 2.3. BUILDING NAME AND ADDRESS. Tenant shall not utilize any name selected by Landlord from time to time for the Building as any part of Tenant's corporate or trade name. Landlord shall have the right to change the name, address, number of designation of the Building without liability to Tenant. ARTICLE III. TERM SECTION 3.1. GENERAL. The Term shall be for the period shown in Item 5 of the Basic Lease Provisions. Subject to the provisions of Section 3.2 and Section 22.7 below, the Term shall commence on the date set forth in Item 4 of the Basic Lease Provisions ("Commencement Date"). Within ten (10) days after possession of the Premises is tendered to Tenant, the parties shall memorialize on a form provided by Landlord the actual Commencement Date and the expiration date ("Expiration Date") of this Lease. Tenant's failure to execute that form shall not affect the validity of Landlord's determination of those dates. SECTION 3.2. DELAY IN POSSESSION. If Landlord, for any reason whatsoever, cannot deliver possession of the Premises to Tenant on or before the Commencement Date, this Lease shall not be void or voidable nor shall Landlord be liable to Tenant for any resulting loss or damage. However, Tenant shall not be liable for any rent and the Commencement Date shall not occur until Landlord delivers possession of the Premises and the Premises are in fact available for Tenant's occupancy with any Tenant Improvements that have been approved as per Section 3.1(a) above, except that if Landlord's failure to so deliver possession on the Commencement Date is attributable to any action or inaction by Tenant, then the Commencement Date shall not be advanced to the date on which possession of the Premises is tendered to Tenant, and Landlord shall be entitled to full performance by Tenant (including the payment of rent) from the date Landlord would have been able to deliver the Premises to Tenant but for Tenant's delay(s). ARTICLE IV. RENT AND OPERATING EXPENSES SECTION 4.1. BASIC RENT. From and after the Commencement Date, Tenant shall pay to Landlord without deduction or offset, Basic Rent for the Premises in the total amount shown (including subsequent adjustments, if any) in Item 6 of the Basic Lease Provisions. Any rental adjustment shown in Item 6 shall be deemed to occur on the specified monthly anniversary of the Commencement Date, whether or not the date occurs at the end of a calendar month. The rent shall be due and payable in advance commencing on the Commencement Date (as prorated for any partial month) and continuing thereafter on the first day of each successive calendar month 3 of the Term. No demand, notice or invoice shall be required for the payment of Basic Rent. An installment of rent in the amount of one (1) full month's Basic Rent at the initial rate specified in Item 6 of the Basic Lease Provisions shall be delivered to Landlord concurrently with Tenant's execution of this Lease and shall be applied against the Basic Rent first due hereunder. SECTION 4.2. OPERATING EXPENSES. (a) Tenant shall pay to Landlord, as additional rent, "Building Costs" and "Property Taxes," as those terms are defined below, incurred by Landlord in the operation of the Building. For convenience of reference, Property Taxes and Building Costs shall be referred to collectively as "Operating Expenses". (b) Commencing prior to the start of the first full "Expense Recovery Period" (as defined below) of the Lease, and prior to the start or each full or partial Expense Recovery Period thereafter, Landlord shall give Tenant a written estimate of the amount of Operating Expenses for the Expense Recovery Period. Tenant shall pay the estimated amounts to Landlord in equal monthly installments, in advance, with Basic Rent. If Landlord has not furnished its written estimate for any Expense Recovery Period by the time set forth above, Tenant shall continue to pay cost reimbursements at the rates established for the prior Expense Recovery Period, if any; provided that when the new estimate is delivered to Tenant, Tenant shall, at the next monthly payment date, pay any accrued cost reimbursements based upon the new estimate. For purposes hereof, "Expense Recovery Period" shall mean every twelve-month period during the Term (or portion thereof for the first and last lease years) commencing July 1 and ending June 30. (c) Within one hundred twenty (120) days after the end of each Expense Recovery Period, Landlord shall furnish to Tenant a statement showing in reasonable detail the actual or prorated Operating Expenses incurred by Landlord during the period, and the parties shall within thirty (30) days thereafter make any payment or allowance necessary to adjust Tenant's estimated payments, if any, to Tenant's actual owed amounts as shown by the annual statement. Any delay or failure by Landlord in delivering any statement hereunder shall not constitute a waiver of Landlord's right to require Tenant to pay Operating Expenses pursuant hereto. Any amount due Tenant shall be credited against installments next coming due under this Section 4.2, and any deficiency shall be paid by Tenant together with the next installment. If Tenant has not made estimated payments during the Expense Recovery Period, any amount owing by Tenant pursuant to subsection (a) above shall be paid to Landlord in accordance with Article XVI. Should Tenant fail to object in writing to Landlord's determination of actual Operating Expenses within sixty (60) days following delivery of Landlord's expense statement, Landlord's determination of actual Operating Expenses for the applicable Expense Recovery Period shall be conclusive and binding on the parties and any future claims to the contrary shall be barred. (d) Even though the Lease has terminated and the Tenant has vacated the Premises, when the final determination is made of Operating Expenses for the Expense Recovery Period in which the Lease terminates, Tenant shall upon notice pay the entire increase due over the estimated expenses paid. Conversely, any overpayment made in the event expenses decrease shall be rebated by Landlord to Tenant. (e) If, at any time during any Expense Recovery Period, any one or more of the Operating Expenses are increased to a rate(s) or amount(s) in excess of the rate(s) or amount(s) used in calculating the estimated expenses for the year, then the estimate of Operating Expenses shall be increased for the month in which such rate(s) or amount(s) becomes effective and for all succeeding months by an amount equal to the increase. Landlord shall give Tenant written notice of the amount or estimated amount of the increase, the month in which the increase will become effective, and the month for which the payments are due. Tenant shall pay the increase to Landlord as a part of Tenant's monthly payments of estimated expenses is provided in paragraph (b) above, commencing with the month in which effective. (f) The term "Building Costs" shall include all expenses of operation and maintenance of the Building and all landscaping, walkways, parking areas and lighting of the Site to the extent such expenses are not billed to and paid directly by Tenant, and shall include the following charges by way of illustration but not limitation: water and sewer charges; insurance premiums or reasonable premium equivalents should Landlord elect to self-insure any risk that Landlord is authorized to insure hereunder; license, permit, and inspection fees; heat; light; power; air conditioning; supplies; materials; equipment; tools; the cost of any insurance, tax or other 4 consultant utilized by Landlord in connection with the Building; costs incurred in connection with compliance of any laws or changes in laws applicable to the Building; the cost of any capital investments (other than tenant improvements for specific tenants) to the extent of the amortized amount thereof over the useful life of such capital investments calculated at a market cost of funds, all as determined by Landlord, for each such year of useful life during the Term; labor; reasonably allocated wages and salaries, fringe benefits, and payroll taxes for administrative and other personnel directly applicable to the Building, including both Landlord's personnel and outside personnel; any expense incurred pursuant to Sections 6.1, 6.2, 7.2, and 10.2; and a reasonable overhead/management fee for the professional operation of the Building. Notwithstanding anything to the contrary contained herein, the amount of such overhead/management fee to be charged to Tenant shall be determined by multiplying the actual fee charged (which from time to time may be with respect to the Building only or the Building together with other properties owned by Landlord and/or its affiliates) by a fraction, the numerator of which is the floor area of the Premises (as set forth in Item No. 8 of the Basic Lease Provisions) and the denominator of which is the total square footage of space charged with such fee actually leased to tenants (including Tenant). It is understood that Building Costs shall include competitive charges for direct services provided by any subsidiary or division of Landlord, and may include the Building's or the Site's proportionate share of the cost of maintenance or repair contracts which cover the Building and/or the Site and other buildings and/or projects in Landlord's portfolio, as reasonably allocated by Landlord. (g) The term "Property Taxes" as used herein shall include the following: (i) all real estate taxes or personal property taxes, as such property taxes may be reassessed from time to time; and (ii) other taxes, charges and assessments which are levied with respect to this Lease, to the Building or to the Site, and any improvements, fixtures and equipment and other property of Landlord located in the Building or on the Site, except that general net income and franchise taxes imposed against Landlord shall be excluded; and (iii) all assessments and fees for public improvements, services, and facilities and impacts thereon, including without limitation arising out of any Community Facilities Districts, "Mello Roos" districts, similar assessment districts and any traffic impact mitigation assessments or fees; and (iv) any tax, surcharge or assessment which shall be levied in addition to or in lieu of real estate or personal property taxes, other than taxes covered by Article VIII; and (v) costs and expenses incurred in contesting the amount or validity of any Property Tax by appropriate proceedings. SECTION 4.3. SECURITY DEPOSIT. Concurrently with Tenant's delivery of this Lease, Tenant shall deposit with Landlord the sum, if any, stated in Item 9 of the Basic Lease Provisions, to be held by Landlord as security for the full and faithful performance of Tenant's obligations under this Lease (the "Security Deposit"). Subject to the last sentence of this Section, the Security Deposit shall be understood and agreed to be the property of Landlord upon Landlord's receipt thereof, and may be utilized by Landlord in its discretion towards the payment of all prepaid expenses by Landlord for which Tenant would be required to reimburse Landlord under this Lease, including without limitation brokerage commissions and Tenant Improvement costs. Upon any default by Tenant, including specifically Tenant's failure to pay rent or to abide by its obligations under Section 7.1 and 15.3 below, whether or not Landlord is informed of or has knowledge of the default, the Security Deposit shall be deemed to be automatically and immediately applied, without waiver of any rights Landlord may have under this Lease or at law or in equity as a result of the default, as a setoff for full or partial compensation for that default. If any portion of the Security Deposit is applied after a default by Tenant, Tenant shall within five (5) days after written demand by Landlord deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. If Tenant fully performs its obligations under this Lease, the Security Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's interest in this Lease) after the expiration of the Term, provided that Landlord may retain the Security Deposit to the extent and until such time as all amounts due from Tenant in accordance with this Lease have been determined and paid in full. ARTICLE V. USES SECTION 5.1. USE. Tenant shall use the Premises only for the purposes stated in Item 3 of the Basic Lease Provisions, all in accordance with applicable laws and restrictions and pursuant to approvals to be obtained by Tenant from all relevant and required governmental agencies and authorities. The parties agree that any contrary use shall be deemed to cause material and irreparable harm to Landlord and shall entitle Landlord to injunctive relief in addition to any other available remedy. Tenant, it its expense, shall procure, maintain and make 5 available for Landlord's inspection throughout the Term, all governmental approvals, licenses and permits required for the proper and lawful conduct of Tenant's permitted use of the Premises. Tenant shall not use or allow the Premises to be used for any unlawful purpose, nor shall Tenant permit any nuisance or commit any waste in the Premises. Tenant shall not do or permit to be done anything which will invalidate or increase the cost of any insurance policy(ies) covering the Building or its contents, and shall comply with all applicable insurance underwriters rules and the requirements of the Pacific Fire Rating Bureau or any other organization performing a similar function. Tenant shall comply at its expense with all present and future laws, ordinances, restrictions, regulations, orders, rules and requirements of all governmental authorities that pertain to Tenant or its use of the Premises, including without limitation all federal and state occupational health and safety requirements, whether or not Tenant's compliance will necessitate expenditures or interfere with its use and enjoyment of the Premises. Tenant shall comply at its expense with all present and future covenants, conditions, easements or restrictions now or hereafter affecting or encumbering the Building, and any amendments or modifications thereto, including without limitation the payment by Tenant of any periodic or special dues or assessments charged against the Premises or Tenant which may be allocated to the Premises or Tenant in accordance with the provisions thereof. Tenant shall promptly upon demand reimburse Landlord for any additional insurance premium charged by reason of Tenant's failure to comply with the provisions of this Section, and shall indemnify Landlord from any liability and/or expense resulting from Tenant's noncompliance. SECTION 5.2. SIGNS. Except as approved in writing by Landlord, in its sole discretion, Tenant shall have no right to maintain identification signs in any location in, on or about the Premises or the Building and shall not place or erect any signs, displays or other advertising materials that are visible from the exterior of the Building. The size, design, graphics, material, style, color and other physical aspects of any permitted sign shall be subject to Landlord's written approval prior to installation (which approval may be withheld in Landlord's discretion), any covenants, conditions or restrictions encumbering the Premises, Landlord's signage program, if any, as in effect form time to time ("Signage Criteria"), and any applicable municipal or other governmental permits and approvals. Tenant acknowledges having received and reviewed a copy of the current Signage Criteria, if applicable. Tenant shall be responsible for the cost of any permitted sign, including the fabrication, installation, maintenance and removal thereof. If Tenant fails to maintain its sign, or if Tenant fails to remove same upon termination of this Lease and repair any damage caused by such removal, Landlord may do so at Tenant's expense. SECTION 5.3. HAZARDOUS MATERIALS. (a) For purposes of this Lease, the term "Hazardous Materials" includes (i) any "hazardous materials" as defined in Section 25501(n) of the California Health and Safety Code, (ii) any other substance or matter which results in liability to any person or entity from exposure to such substance or matter under any statutory or common law theory, and (iii) any substance or matter which is in excess of permitted levels set forth in any federal, California or local law or regulation pertaining to any hazardous or toxic substance, material or waste. (b) Tenant shall not cause or permit any Hazardous Materials to be brought upon, stored, used, generated, released or disposed of on, under, from or about the Premises or the Site (including without limitation the soil and groundwater thereunder) without the prior written consent of Landlord. Notwithstanding the foregoing, Tenant shall have the right, without obtaining prior written consent of Landlord, to utilize within the Premises standard office products that may contain Hazardous Materials (such as photocopy toner, "White Out", and the like), provided however, that (i) Tenant shall maintain ---------------- such products in their original retail packaging, shall follow all instructions on such packaging with respect to the storage, use and disposal of such products, and shall otherwise comply with all applicable laws with respect to such products, and (ii) all of the other terms and provisions of this Section 5.3 shall apply with respect to Tenant's storage, use and disposal of all such products. Landlord only, in its sole discretion, place such conditions as Landlord deems appropriate with respect to any such Hazardous Materials, and may further require that Tenant demonstrate that any such Hazardous Materials are necessary or useful to Tenant's business and will be generated, stored, used and disposed of in a manner that complies with all applicable laws and regulations pertaining thereto and with good business practices. Tenant understands that Landlord may utilize an environmental consultant to assist in determining conditions of approval in connection with the storage, generation, release, disposal or use of Hazardous Materials by Tenant on or about the Premises, and/or to conduct periodic inspections of the storage, generation, use, release and/or disposal of such Hazardous Materials by Tenant on and from the Premises, and Tenant agrees that any costs incurred by Landlord in connection therewith shall be reimbursed by Tenant to Landlord as additional rent hereunder upon demand. 6 (c) Prior to the execution of this Lease, Tenant shall complete, execute and deliver to Landlord an Environmental Questionnaire and Disclosure Statement (the "Environmental Questionnaire") in the form of Exhibit B attached --------- hereto. The completed Environmental Questionnaire shall be deemed incorporated into this Lease for all purposes, and Landlord shall be entitled to rely fully on the information contained therein. On each anniversary of the Commencement Date until the expiration or sooner termination of this Lease, Tenant shall disclose to Landlord in writing the names and amounts of all Hazardous Materials which were stored, generated, used, released and/or disposed of on, under or about the Premises for the twelve-month period prior thereto, and which Tenant desires to store, generate, use, release and/or dispose of on, under or about the Premises for the succeeding twelve-month period. In addition, to the extent Tenant is permitted to utilize Hazardous Materials upon the Premises, Tenant shall promptly provide Landlord with complete and legible copies of all the following environmental documents relating thereto: reports filed pursuant to any self-reporting requirements; permit applications, permits, monitoring reports, workplace exposure and community exposure warnings or notices and all other reports, disclosures, plans or documents (even those which may be characterized as confidential) relating to water discharges, air pollution, waste generation or disposal, and underground storage tanks for Hazardous Materials; orders, reports, notices, listings and correspondence (even those which may be considered confidential) of or concerning the release, investigation of, compliance, cleanup, remedial and corrective actions, and abatement of Hazardous Materials; and all complaints, pleadings and other legal documents filed by or against Tenant related to Tenant's use, handling, storage, release and/or disposal of Hazardous Materials. (d) Landlord and its agents shall have the right, but not the obligation, to inspect, sample and/or monitor the Premises, the Site and/or the soil groundwater thereunder at any time to determine whether Tenant is complying with the terms of this Section 5.3, and in connection therewith, Tenant shall provide Landlord with full access to all relevant facilities, records and personnel. If Tenant is not in compliance with any of the provisions of this Section 5.3, or in the event of a release of any Hazardous Material on, under or about the Premises and/or the Site caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees, Landlord and its agents shall have the right, but not the obligation, without limitation upon any of Landlord's other rights and remedies under this Lease, to immediately enter upon the Premises and/or the Site without notice and to discharge Tenant's obligations under this Section 5.3 at Tenants expense, including without limitation the taking of emergency or long-term remedial action. Landlord and its agents shall endeavor to minimize interference with Tenant's business in connection therewith, but shall not be liable for any such interference. In addition, Landlord, at Tenant's expense, shall have the right, but not the obligation, to join and participate in any legal proceedings or actions initiated in connection with any claims arising out of the storage, generation, use, release and/or disposal by Tenant or its agents, employees, contractors, licensees or invitees of Hazardous Materials on, under, from or about the Premises and/or the Site. (e) If the presence of any Hazardous Materials on, under, from or about the Premises and/or the Site caused or permitted by Tenant or its agents, employees, contractors, licensees or invitees results in (i) injury to any person, (ii) injury to or any contamination of Premises and/or the Site, or (iii) injury to or contamination or any real or personal property wherever situated, Tenant, at its expense, shall promptly take all actions necessary to return the Premises, the Site and any other affected real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials and to remedy or repair any such injury or contamination, including without limitation, any cleanup, remediation, removal, disposal, neutralization or other treatment of any such Hazardous Materials. Notwithstanding the foregoing, Tenant shall not, without Landlord's prior written consent, take any remedial action in response to the presence or any Hazardous Materials on, under or about the Premises, the Site or any other affected real or personal property owned by Landlord or enter into any similar agreement, consent, decree or other compromise with any governmental agency with respect to any Hazardous Materials claims; provided however, Landlord's prior written consent shall not be necessary in the event that the presence of Hazardous Materials on, under or about the Premises, the Site or any other affected real or personal property owned by Landlord (i) imposes all immediate threat to the health, safety or welfare of any individual or (ii) is of such a nature that an immediate remedial response is necessary and it is not possible to obtain Landlord's consent before taking such action. To the fullest extent permitted by law, Tenant shall indemnify, hold harmless, protect and defend (with attorneys acceptable to Landlord) Landlord and any successors to all or any portion or Landlord's interest in the Premises, the Site and any other real or personal property owned by Landlord from and against any and all liabilities, losses, damages, diminution in value, judgments, fines, demands, claims, recoveries, deficiencies, costs and expenses (including without limitation attorneys' fees, court costs and other professional expenses), whether foreseeable or unforeseeable, arising directly or indirectly out of the use, 7 generation, storage, treatment, release, on- or off-site disposal or transportation of Hazardous Materials on, into, from, under or about the Premises, the Site and any other real or personal property owned by Landlord caused or permitted by Tenant its agents, employees, contractors, licensees or invitees, specifically including without limitation the cost of any required or necessary repair, restoration, cleanup or detoxification of the Premises, the Site and any other real or personal property owned by Landlord, and the preparation of any closure or other required plans, whether or not such actions is required or necessary during the Term or after the expiration of this Lease. If Landlord at any time discovers that Tenant or its agents, employees, contractors, licensees or invitees may have caused or permitted the release of a Hazardous Material on under, from or about the Premises, the Site or any other real or personal property owned by Landlord, Tenant shall, at Landlord's request, immediately prepare and submit to Landlord a comprehensive plan, subject to Landlord's approval, specifying the actions to be taken by Tenant to return the Premises, the Site or any other real or personal property owned by Landlord to the condition existing prior to the introduction of such Hazardous Materials. Upon Landlord's approval of such cleanup plan, Tenant shall, at its expense, and without limitation of any rights and remedies of Landlord under this Lease or at law or in equity, immediately implement such plan and proceed to cleanup such Hazardous Materials in accordance with all applicable laws and as required by such plan and this Lease. The provisions of this subsection (e) shall expressly survive the expiration or sooner termination of this Lease. (f) Landlord hereby discloses to Tenant, and Tenant hereby acknowledges, certain facts relating to Hazardous Materials at the Premises and/or the Site known by Landlord to exist is of the date of this Lease, as more particularly described in Exhibit C attached hereto. Tenant shall have no --------- liability or responsibility with respect to the Hazardous Materials facts described in Exhibit C, nor with respect to any Hazardous Materials which --------- Tenant proves were not caused or permitted by Tenant, its agents, employees, contractors, licensees or invitees. Notwithstanding the preceding two sentences, Tenant agrees to notify its agents, employees, contractors, licensees, and invitees of any exposure or potential exposure to Hazardous Materials at the Premises and/or the Site that Landlord brings to Tenant's attention. ARTICLE VI. SERVICES SECTION 6.1. UTILITIES AND SERVICES. Tenant shall be responsible for and shall pay promptly, directly to the appropriate supplier, all charges for water, gas, electricity, sewer, heat, light, power, telephone, refuse pickup, janitorial service, interior landscape maintenance and all other utilities, materials and services furnished directly to Tenant or the Premises or used by Tenant in, on or about the Premises during the Term, together with any taxes thereon. Landlord shall not be liable for damages or otherwise for any failure or interruption of any utility or other service furnished to the Premises, and no such failure or interruption shall be deemed an eviction or entitle Tenant to terminate this Lease or withhold or abate any rent due hereunder, Landlord shall at all reasonable times have free access to all electrical and mechanical installations of Landlord. SECTION 6.2. PARKING. Tenant shall be entitled to unreserved and unassigned vehicle parking spaces on those portions of the Site designated by Landlord for parking. Tenant shall not use more parking spaces than such number. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers or invitees to be loaded, unloaded or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of the prohibited activities described above, then Landlord shall have the right, without notice, in addition to such other rights and remedies that Landlord may have, to remove or tow away the vehicle involved and charge the costs to Tenant. Parking shall be limited to striped parking stalls, and no parking shall be permitted in any driveways, access ways or in any similar area. Nothing contained in this Lease shall he deemed to create liability upon Landlord for any damage to motor vehicles of visitors or employees, for any loss of property from within those motor vehicles, or for any injury to Tenant, its visitors or employees, unless ultimately determined to be caused by the sole active negligence or willful misconduct of Landlord, its agents, servants and employees. Landlord shall have the right to establish, and from time to time amend, and to enforce against all users all reasonable rules and regulations (including the designation of areas for employee parking) that Landlord may deem necessary and advisable for the proper and efficient operation and maintenance of parking. Landlord shall have the right to construct, maintain and operate lighting facilities within the parking areas; to change the area, level, location and arrangement of the parking areas and improvements therein; and to do and perform such other acts in and to the parking areas and improvements therein as, in the use of good business judgment, Landlord shall determine to be advisable. Parking areas shall be used only for parking vehicles. Washing, waxing, cleaning or servicing of vehicles, or the storage of vehicles for 24-hour periods, is 8 prohibited unless otherwise authorized by Landlord. Tenant shall be liable for any damage to the parking areas caused by Tenant or Tenant's employees, suppliers, shippers, customers or invitees, including without limitation damage from excess oil leakage. Tenant shall have no right to install any fixtures, equipment or personal property in the parking areas. ARTICLE VII. MAINTAINING THE PREMISES SECTION 7.1. TENANT'S MAINTENANCE AND REPAIR. Tenant at its sole expense shall comply with all applicable laws and governmental regulations governing the Premises and make all repairs necessary to keep the Premises in the condition as existed on the Commencement Date (or on any later date that the improvements may have been installed), excepting ordinary wear and tear, including without limitation the electrical and mechanical systems, any air conditioning, ventilating or healing equipment which serves the Premises, all walls, glass, windows, doors, door closures, hardware, fixtures, electrical, plumbing, fire extinguisher equipment and other equipment. Any damage or deterioration of the Premises shall not be deemed ordinary wear and tear if the same could have been prevented by good maintenance practices by Tenant. As part of its maintenance obligations hereunder, Tenant shall, at Landlord's request, provide Landlord with copies of all maintenance schedules, reports and notices prepared by, for or on behalf of Tenant. Tenant shall obtain preventive maintenance contracts from a licensed heating and air conditioning contractor to provide for regular inspection and maintenance of the heating, ventilating and air conditioning systems servicing the Premises, all subject to Landlord's approval. All repairs shall be at least equal in quality to the original work, shall be made only by a licensed contractor approved in writing in advance by Landlord and shall be made only at the time or times approved by Landlord. Any contractor utilized by Tenant shall be subject to Landlord's standard requirements for contractors, as modified from time to time. Landlord shall have the right at all times to inspect Tenant's maintenance of all equipment (including without limitation air conditioning, ventilating and heating equipment), and may impose reasonable restrictions and requirements with respect to repairs, as provided in Section 7.3, and the provisions of Section 7.4 shall apply to all repairs. Alternatively, Landlord may elect to make any repair or maintenance required hereunder on behalf of Tenant and at Tenant's expense, and Tenant shall promptly reimburse Landlord for all costs incurred upon submission of an invoice. SECTION 7.2. LANDLORD'S MAINTENANCE AND REPAIR. Subject to Section 7.1 and Article XI, Landlord shall provide service, maintenance and repair with respect to the roof, foundations, and footings of the Building, all landscaping, walkways, parking areas, exterior lighting of the Site, and the exterior surfaces of the exterior walls of the Building, except that Tenant at its expense shall make all repairs which Landlord deems reasonably necessary as a result of the act or negligence of Tenant, its agents, employees, invitees, subtenants or contractors. Landlord shall have the right to employ or designate any reputable person or firm, including any employee or agent of Landlord or any of Landlord's affiliates or divisions, to perform any service, repair or maintenance function. Landlord need not make any other improvements or repairs except as specifically required under this Lease, and nothing contained in this Section shall limit Landlord's right to reimbursement from Tenant for maintenance, repair costs and replacement costs as provided elsewhere in this Lease. Tenant understands that it shall not make repairs at Landlord's expense or by rental offset. Tenant further understands that Landlord shall not be required to make any repairs to the roof, foundations or footings unless and until Tenant has notified Landlord in writing of the need for such repair and Landlord shall have a reasonable period of time thereafter to commence and complete said repair, if warranted. All costs of any maintenance and repairs on the part of Landlord provided hereunder shall be considered part of Building Costs; except that the costs of any repairs or replacements to the foundations, footings, and structural components of the walls and roof of the Building shall be Landlord's responsibility, at its sole cost and expense and shall not be considered as part of the Building Costs, for the initial Term of the Lease. SECTION 7.3. ALTERATIONS. Tenant shall make no alterations, additions or improvements to the Premises without the prior written consent of Landlord, which consent shall not be unreasonably withheld, provided that in no event shall such alterations, additions or improvements: (i) affect the exterior of the Building or outside areas (or be visible from adjoining sites), or (ii) affect or penetrate any of the structural portions of the Building, including but not limited to the roof, or (iii) require any change to the basic floor plan of the Premises, any change to any structural or mechanical systems of the Premises, or any governmental permit as a prerequisite to the construction thereof, or (iv) interfere in any manner with the proper functioning of or Landlord's access to any mechanical, electrical, plumbing or HVAC systems, facilities or equipment located in or serving the Building, or 9 (v) diminish the value of the Premises. Landlord may impose, as a condition to its consent, any requirements that Landlord in its discretion may deem reasonable or desirable, including but not limited to a requirement that all work be covered by a lien and completion bond satisfactory to Landlord and requirements as to the manner, time, and contractor for performance of the work. Tenant shall obtain all required permits for the work and shall perform the work in compliance with all applicable laws, regulations and ordinances, all covenants, conditions and restrictions affecting the Premises, and the Rules and Regulations (hereafter defined). Tenant understands and agrees that, to the extent Landlord elects to supervise the work, Landlord shall be entitled to a supervision fee in the amount of five percent (5%) of the cost of the work. If any governmental entity requires, as a condition to any proposed alterations, additions or improvements to the Premises by Tenant that improvements be made to the outside areas, and if Landlord consents to such improvements to the outside areas, then Tenant shall, at Tenant's sole expense, make such required improvements to the outside areas in such manner, utilizing such materials, and with such contractors (including, if required by Landlord, Landlord's contractors) as Landlord may require in its sole discretion. Under to circumstances shall Tenant make any improvement which incorporates any Hazardous Materials, including without limitation asbestos-containing construction materials into the Premises. Any request for Landlord's consent shall be made in writing and shall contain architectural plans describing the work in detail reasonably satisfactory to Landlord. Unless Landlord otherwise agrees in writing, all alterations, additions or improvements affixed to the Premises (excluding moveable trade fixtures and furniture) shall become the property of Landlord and shall be surrendered with the Premises at the end of the Term, except that Landlord may, by notice to Tenant given at the time of Landlord's consent to the applicable alteration, require Tenant to remove by the Expiration Date, or sooner termination date of this Lease, all or any alterations, decorations, fixtures, additions, improvements and the like installed either by Tenant or by Landlord at Tenant's request and to repair any damage to the Premises arising from that removal. Except as otherwise provided in this Lease or in any Exhibit to this Lease, should Landlord make any alteration or improvement to the Premises for Tenant, Landlord shall be entitled to prompt reimbursement from Tenant for all costs incurred. SECTION 7.4. MECHANIC'S LIENS. Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished, or obligations incurred by or for Tenant. Upon request by Landlord, Tenant shall promptly cause any such lien to be released by posting a bond in accordance with California Civil Code Section 3143 or any successor statute. In the event that Tenant shall not, within thirty (30) days following the imposition of any lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have, in addition to all other available remedies, the right to cause the lien to be released by any means it deems proper, including payment of or defense against the claim giving rise to the lien. All expenses so incurred by Landlord, including Landlord's attorneys' fees, and any consequential or other damages incurred by Landlord arising out of such lien, shall be reimbursed by Tenant promptly following Landlord's demand, together with interest from the date of payment by Landlord at the maximum rate permitted by law until paid. Tenant shall give Landlord no less than twenty (20) days' prior notice in writing before commencing construction of any kind on the Premises so that Landlord may post and maintain notices of nonresponsibility on the Premises. SECTION 7.5. ENTRY AND INSPECTION. Landlord shall at all reasonable times, upon written or oral notice (except in emergencies, when no notice shall be required) have the right to enter the Premises to inspect them, to supply services in accordance with this Lease, to protect the interests of Landlord in the Premises, and to submit the Premises to prospective or actual purchasers or encumbrance holders (or, during the last one hundred and eighty (180) days of the Term or when an uncured Tenant default exists, to prospective tenants), all without being deemed to have caused an eviction of Tenant and without abatement of rent except as provided elsewhere in this Lease. Landlord shall have the right, if desired, to retain a key which unlocks all of the doors in the Premises, excluding Tenant's vaults and safes, and Landlord shall have the right to use any and all means which Landlord may deem proper to open the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord shall not under any circumstances be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or any eviction of Tenant from the Premises. ARTICLE VIII. TAXES AND ASSESSMENTS ON TENANT'S PROPERTY Tenant shall be liable for and shall pay, at least ten (10) days before delinquency, all taxes and assessments levied against all personal property of Tenant located in the Premises, and against any alterations, additions or like improvements made to the Premises by or on behalf of Tenant. When possible Tenant shall cause its personal property and alterations to be assessed and billed separately from the real property of which the 10 Premises form a part. If any taxes on Tenant's personal property and/or alterations are levied against Landlord or Landlord's property and if Landlord pays the same, or if the assessed value of Landlord's property is increased by the inclusion of a value placed upon the personal property and/or alterations of Tenant and if Landlord pays the taxes based upon the increased assessment, Tenant shall pay to Landlord the taxes so levied against Landlord or the proportion of the taxes resulting from the increase in the assessment. In calculating what portion of any tax bill which is assessed against Landlord separately, or Landlord and Tenant jointly, is attributable to Tenant's alterations and personal property, Landlord's reasonable determination shall be conclusive. ARTICLE IX. ASSIGNMENT AND SUBLETTING SECTION 9.1. RIGHTS OF PARTIES. (a) Notwithstanding any provision of this Lease to the contrary, Tenant will not, either voluntarily or by operation of law, assign, sublet, encumber, or otherwise transfer all or any part of Tenant's interest in this lease, or permit the Premises to be occupied by anyone other than Tenant, without Landlord's prior written consent, which consent shall not unreasonably be withheld in accordance with the provisions of Section 9.1(b). No assignment (whether voluntary, involuntary or by operation of law) and no subletting shall be valid or effective without Landlord's prior written consent and, at Landlord's election, any such assignment or subletting or attempted assignment or subletting shall constitute a material default of this Lease. Landlord shall not be deemed to have given its consent to any assignment or subletting by any other course of action, including its acceptance of any name for listing in the Building directory. To the extent not prohibited by provisions of the Bankruptcy Code, 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"), including Section 365(f)(1), Tenant on behalf of itself and its creditors, administrators and assigns waives the applicability of Section 365(c) of the Bankruptcy Code unless the proposed assignee of the Trustee for the estate of the bankrupt meets Landlord's standard for consent as set forth in Section 9.1(b) of this Lease. If this Lease is assigned to any person or entity pursuant to the provisions of the Bankruptcy Code, any and all monies or other considerations to be delivered in connection with the assignment shall be delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any person or entity to which this Lease is assigned pursuant to the provisions of the Bankruptcy Code shall be deemed to have assumed all of the obligations arising under this Lease on and after the date of the assignment, and shall upon demand execute and deliver to Landlord an instrument confirming that assumption. (b) If Tenant desires to transfer an interest in this Lease, it shall first notify Landlord of its desire and shall submit in writing to Landlord: (i) the name and address of the proposed transferee; (ii) the nature of any proposed subtenant's or assignee's business to be carried on in the Premises; (iii) the terms and provisions of any proposed sublease or assignment, including a copy of the proposed assignment or sublease form; (iv) evidence of insurance of the proposed assignee or subtenant complying with the requirements of Exhibit D --------- hereto; (v) a completed Environmental Questionnaire from the proposed assignee or subtenant; and (vi) any other information requested by Landlord and reasonably related to the transfer. Except as provided in Subsection (e) of this Section, Landlord shall not unreasonably withhold its consent, provided: (1) the use of the Premises will be consistent with the provisions of this Lease; (2) the proposed assignee or subtenant has not been required by any prior landlord, lender or governmental authority to take remedial action in connection with Hazardous Materials contaminating a property arising out of the proposed assignee's or subtenants' actions or use of the property in question and is not subject to any enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material; (3) at Landlord's election, insurance requirements shall be brought into conformity with Landlord's then current leasing practice; (4) any proposed subtenant or assignee demonstrates that it is financially responsible by submission to Landlord of all reasonable information as Landlord may request concerning the proposed subtenant or assignee, including, but not limited to, a balance sheet of the proposed subtenant or assignee as of a date within ninety (90) days of the request for Landlord's consent and statements of income or profit and loss of the proposed subtenant or assignee for the two-year period preceding the request for Landlord's consent, and/or a certification signed by the proposed subtenant or assignee that it has not been evicted or been in arrears in rent at any other leased premises for the 3-year period preceding the request for Landlord's consent; and (5) any proposed subtenant or assignee demonstrates to Landlord's reasonable satisfaction a record of successful experience in business. If Tenant has any exterior sign rights under this Lease, such rights are personal to Tenant and may not be assigned or transferred to any assignee of this Lease or subtenant of the Premises without Landlord's prior written consent, which may be withheld in Landlord's reasonable discretion. 11 If Landlord consents to the proposed transfer, Tenant may within ninety (90) days after the date of the consent effect the transfer upon the terms described in the information furnished to Landlord; provided that any material change in the terms shall be subject to Landlord's consent as set forth in this Section. Landlord shall approve or disapprove any requested transfer within fifteen (15) days following receipt of Tenant's written request, the information set forth above, and the fee set forth below. (c) Notwithstanding the provisions of Subsection (b) above, in lieu of consenting to a proposed assignment or subletting, Landlord may elect to (i) sublease the Premises (or the portion proposed to be subleased), or take an assignment of Tenant's interest in this Lease, upon the same term as offered to the proposed subtenant or assignee (excluding terms relating to the purchase of personal property, the use of Tenant's name or the continuation of Tenant's business), or (ii) terminate this Lease as to the portion of the Premises proposed to be subleased or assigned with a proportionate abatement in the rent payable under this Lease, effective on the dale that the proposed sublease or assignment would have become effective. Landlord may thereafter, at its option, assign or re-let any space so recaptured to any third party, including without limitation the proposed transferee of Tenant. (d) Tenant agrees that fifty percent (50%) of any amounts paid by the assignee or subtenant, however described, in excess of (i) the Basic Rent payable by Tenant hereunder, or in the case of a sublease of a portion of the Premises, in excess of the Basic Rent reasonably allocable to such portion, plus (ii) Tenant's direct out-of-pocket costs which Tenant certifies to Landlord have been paid to provide occupancy related services to such assignee or subtenant of a nature commonly provided by landlords of similar space, shall be the property of Landlord and such mounts shall be payable directly to Landlord by the assignee or subtenant or, at Landlord's option, by Tenant. At Landlord's request, a written agreement shall be entered into by and among Tenant, Landlord and the proposed assignee or subtenant confirming the requirements of this subsection. (e) Tenant shall pay to Landlord a fee of Five Hundred Dollars ($500.00) if and when any transfer hereunder is requested by Tenant. Such fee is hereby acknowledged as a reasonable amount to reimburse Landlord for its costs of review and evaluation of a proposed assignee/sublessee, and Landlord shall not be obligated to commence such review and evaluation unless and until such fee is paid. SECTION 9.2. EFFECT OF TRANSFER. No subletting or assignment, even with the consent of Landlord, shall relieve Tenant of its obligation to pay rent and to perform all its other obligations under this Lease. Moreover, Tenant shall indemnify and hold Landlord harmless, as provided in Section 10.3, for any act or omission by an assignee or subtenant. Each assignee, other than Landlord, shall be deemed to assume all obligations of Tenant under this Lease and shall be liable jointly and severally with Tenant for the payment of all rent, and for the due performance of all of Tenant's obligations, under this Lease. No transfer shall be binding on Landlord unless any document memorializing the transfer is delivered to Landlord and both the assignee/sublessee and Tenant deliver to Landlord an executed consent to transfer instrument prepared by Landlord and consistent with the requirements of this Article. The acceptance by Landlord of any payment due under this Lease from any other person shall not be deemed to be a waiver by Landlord of any provision of this Lease or to be a consent to any transfer. Consent by Landlord to one or more transfers shall not operate as a waiver or estoppel to the future enforcement by Landlord of its rights under this Lease. SECTION 9.3. SUBLEASE REQUIREMENTS. The following terms and conditions shall apply to any subletting by Tenant of all or any part of the Premises and shall be deemed included in each sublease: (a) Each and every provision contained in this Lease (other than with respect to the payment of rent hereunder) is incorporated by reference into and made a part of such sublease, with "Landlord" hereunder meaning the sublandlord therein and "Tenant" hereunder meaning the subtenant therein. (b) Tenant hereby irrevocably assigns to Landlord all of Tenant's interest in all rentals and income arising from any sublease of the Premises, and Landlord may collect such rent and income and apply same toward Tenant's obligations under this Lease; provided, however, that until a default occurs in the performance of Tenant's obligations under this Lease, Tenant shall have the right to receive and collect the sublease rentals. Landlord shall not, by reason of this assignment or the collection of sublease rentals, be deemed liable to the subtenant for the performance of any of Tenant's obligations under the sublease. Tenant hereby irrevocably authorizes and directs any subtenant, upon receipt of a written notice from Landlord staling that an uncured default 12 exists in the performance of Tenant's obligations under this Lease, to pay to Landlord all sums then and thereafter due under the sublease. Tenant agrees that the subtenant may rely on that notice without any duty of further inquiry and notwithstanding any notice or claim by Tenant to the contrary. Tenant shall have no right or claim against the subtenant or Landlord for any rentals so paid to Landlord. (c) In the event of the termination of this Lease, Landlord may, at its sole option, take over Tenant's entire interest in any sublease and, upon notice from Landlord, the subtenant shall attorn to Landlord. In no event, however, shall Landlord be liable for any previous act or omission by Tenant under the sublease or for the return of any advance rental payments or deposits under the sublease that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification executed without Landlord's consent or for any advance rental payment by the subtenant in excess of one month's rent. The general provisions of this Lease, including without limitation those pertaining to insurance and indemnification, shall be deemed incorporated by reference into the sublease despite the termination of this Lease. SECTION 9.4. CERTAIN TRANSFERS. The sale of all or substantially all of Tenant's assets (other than bulk sales in the ordinary course of business) or, if Tenant is a corporation, an unincorporated association, or a partnership, the transfer assignment or hypothecation of any stock or interest in such corporation, association, or partnership in the aggregate of twenty-five percent (25%) (except for publicly traded shares of stock constituting a transfer of twenty-five percent (25%) or more in the aggregate, so long as no change in the controlling interest of Tenant occurs as a result thereof) shall be deemed an assignment within the meaning and provisions of this Article. Notwithstanding the foregoing, Landlord's consent shall not be required for the assignment of this Lease as a result of a merger by Tenant with or into another entity, so long as (i) the net worth of the successor entity after such merger is at least equal to the greater of the net worth of Tenant as of the execution of this Lease by Landlord or the net worth of Tenant immediately prior to the date of such merger, evidence of which, satisfactory to Landlord, shall be presented to Landlord prior to such merger, (ii) Tenant shall provide to Landlord, prior to such merger, written notice of such merger and such assignment documentation and other information as Landlord may request in connection herewith, and (iii) all of the other terms and requirements of this Article shall apply with respect to such assignment. ARTICLE X. INSURANCE AND INDEMNITY SECTION 10.1. TENANT'S INSURANCE. Tenant, at its sole cost and expense, shall provide and maintain in effect the insurance described in Exhibit D. --------- Evidence of that insurance must be delivered to Landlord prior to the Commencement Date. SECTION 10.2. LANDLORD'S INSURANCE. Landlord may, at its election, provide any or all of the following types of insurance, with or without deductible and in amounts and coverages as may be determined by Landlord in its discretion: "all risk" property insurance, subject to standard exclusions, covering the Building, and such other risks as Landlord or its mortgagees may from time to lime deem appropriate, including leasehold improvements made by Landlord, and commercial general liability coverage. Landlord shall not be required to carry insurance of any kind on Tenant's property, including leasehold improvements, trade fixtures, furnishings, equipment, plate glass, signs and all other items of personal property, and shall not be obligated to repair or replace that property should damage occur. All proceeds of insurance maintained by Landlord upon the Building shall be the property of Landlord, whether or not Landlord is obligated to or elects to make any repairs. At Landlord's option, Landlord may self-insure all or any portion of the risks for which Landlord elects to provide insurance hereunder. SECTION 10.3. TENANT'S INDEMNITY. To the fullest extent permitted by law, Tenant shall defend, indemnify, protect, save and hold harmless Landlord, its agents, and any and all affiliates of Landlord, including, without limitation, any corporations or other entities controlling, controlled by or under common control with Landlord, from and against any and all claims, liabilities, costs or expenses arising either before or after the Commencement Date from Tenant's use or occupancy of the Premises or the Building, or from the conduct of its business, or from any activity, work, or thing done, permitted or suffered by Tenant or its agents, employees, invitees or licensees in or about the Premises or the Building, or from any default in the performance of any obligation on Tenant's part to be performed under this Lease, or from any act or negligence of Tenant or its agents, employees, visitors, patrons, guests, invitees or licensees. Landlord may, at its option, require Tenant to assume 13 Landlord's defense in any action covered by this Section through counsel satisfactory to Landlord. The provisions of this Section shall expressly survive the expiration or sooner termination of this Lease. SECTION 10.4. LANDLORD'S NONLIABILITY. Landlord shall not be liable to Tenant, its employees, agents and invitees, and Tenant hereby waives all claims against Landlord for loss of or damage to any property, or any injury to any person, or loss or interruption of business or income, or any other loss, cost, damage, injury or liability whatsoever (including without limitation any consequential damages and lost profit or opportunity costs) resulting from, but not limited to, Acts of God, acts of civil disobedience or insurrection, fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak or flow from or into any part of the Building or from the breakage, leakage, obstruction or other defects of the pipes, sprinklers, wires, appliances, plumbing, air conditioning, electrical works or other fixtures in the Building. It is understood that any such condition may require the temporary evacuation or closure of all or a portion of the Building. Except as provided in Sections 11.1 and 12.1 below, there shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business (including without limitation consequential damages and lost profit or opportunity costs) arising from the making of any repairs, alterations or improvements to any portion of the Building, including repairs to the Premises, nor shall any related activity by Landlord constitute an actual or constructive eviction; provided, however, that in making repairs, alterations or improvements, Landlord shall interfere as little as reasonably practicable with the conduct of Tenant's business in the Premises. Neither Landlord nor its agents shall be liable for interference with light or other similar intangible interests. Tenant shall immediately notify Landlord in case of fire or accident in the Premises or the Building and of defects in any improvements or equipment. SECTION 10.5. WAIVER OF SUBROGATION. Landlord and Tenant each hereby waives all rights of recovery against the other and the other's agents on account of loss and damage occasioned to the property of such waiving party to the extent only that such loss or damage is required to be insured against under any "all risk" property insurance policies required by this Article X; provided however, that (i) the foregoing waiver shall not apply to the extent of Tenant's obligations to pay deductibles under any such policies and this Lease, and (ii) if any loss is due to the act, omission or negligence or willful misconduct of Tenant or its agents, employees, contractors, guests or invitees, Tenant's liability insurance shall be primary and shall cover all losses and damages prior to any other insurance hereunder. By this waiver it is the intent of the parties that neither Landlord nor Tenant shall be liable to any insurance company (by way of subrogation or otherwise) insuring the other party for any loss or damage insured against under any "all-risk" property insurance policies required by this Article, even though such loss or damage might be occasioned by the negligence of such party, its agents, employees, contractors, guests or invitees. The provisions of this Section shall not limit the indemnification provisions elsewhere contained in this Lease. ARTICLE XI. DAMAGE OR DESTRUCTION SECTION 11.1. RESTORATION. (a) If the Building is damaged, Landlord shall repair that damage as soon as reasonably possible, at its expense, unless: (i) Landlord reasonably determines that the cost of repair is not covered by Landlord's fire and extended coverage insurance plus such additional amounts Tenant elects, at its option, to contribute, excluding however the deductible (for which Tenant shall be responsible for Tenant's proportionate share); (ii) Landlord reasonably determines that the Premises cannot, with reasonable diligence, be fully repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, including without limitation Hazardous Materials, earthquake faults, and other similar dangers) within two hundred seventy (270) days after the date of the damage; (iii) an event of default by Tenant has occurred and is continuing at the time of such damage; or (iv) the damage occurs during the final twelve (12) months of the Term. Should Landlord elect not to repair the damage for one of the preceding reasons, Landlord shall so notify Tenant in writing within sixty (60) days after the damage occurs and this Lease shall terminate as of the date of that notice. (b) Unless Landlord elects to terminate this Lease in accordance with subsection (a) above, this Lease shall continue in effect for the remainder of the Term; provided that so long as Tenant is not in default under this Lease, if the damage is so extensive that Landlord reasonably determines that the Premises cannot, with reasonable diligence, be repaired by Landlord (or cannot be safely repaired because of the presence of hazardous factors, earthquake faults, and other similar dangers) so as to allow Tenant's substantial use and enjoyment of the 14 Premises within two hundred seventy (270) days after the date of damage, then Tenant may elect to terminate this Lease by written notice to Landlord within the sixty (60) day period stated in subsection (a). (c) Commencing on the date of any damage to the Building, and ending on the sooner of the date the damage is repaired or the date this Lease is terminated, the rental to be paid under this Lease shall be abated in the same proportion that the floor area of the Building that is rendered unusable by the damage from time to time bears to the total floor area of the Building, but only to the extent that any business interruption insurance proceeds are received by Landlord therefor from Tenant's insurance described in Exhibit D. --------- (d) Notwithstanding the provisions of subsections (a), (b) and (c) of this Section, and subject to the provisions of Section 10.5 above and to the extent not covered by applicable insurance coverage, the cost of any repairs shall be borne by Tenant, and Tenant shall not be entitled to rental abatement or termination rights, if the damage is due to the fault or neglect of Tenant or its employees, subtenants, invitees or representatives. In addition, the provisions of this Section shall not be deemed to require Landlord to repair any improvements or fixtures that Tenant is obligated to repair or insure pursuant to any other provision of this Lease. (e) Tenant shall fully cooperate with Landlord in removing Tenant's personal property and any debris from the Premises to facilitate all inspections of the Premises and the making of any repairs. Notwithstanding anything to the contrary contained in this Lease, if Landlord in good faith believes there is a risk of injury to persons or damage to property from entry into the Building or Premises following any damage or destruction thereto, Landlord may restrict entry into the Building or the Premises by Tenant, its employees, agents and contractors in a non-discriminatory manner, without being deemed to have violated Tenant's rights of quiet enjoyment to, or made an unlawful detainer of, or evicted Tenant from, the Premises. Upon request, Landlord shall consult with Tenant to determine if there are safe methods of entry into the Building or the Premises solely in order to allow Tenant to retrieve files, data in computers, and necessary inventory, subject however to all indemnities and waivers of liability from Tenant to Landlord contained in this Lease and any additional indemnities and waivers of liability which Landlord may require. SECTION 11.2. LEASE GOVERNS. Tenant agrees that the provisions of this Lease, including without limitation Section 11.1, shall govern any damage or destruction and shall accordingly supersede any contrary statute or rule of law. ARTICLE XII. EMINENT DOMAIN SECTION 12.1. TOTAL OR PARTIAL TAKING. If all or a material portion of the Premises is taken by any lawful authority by exercise of the right of eminent domain, or sold to prevent a taking, either Tenant or Landlord may terminate this Lease effective as of the date possession is required to be surrendered to the authority. In the event title to a portion of the Premises is taken or sold in lieu of taking, and if Landlord elects to restore the Premises in such a way as to alter the Premises materially, either party may terminate this Lease, by written notice to the other party, effective on the date of vesting of title. In the event neither patty has elected to terminate this Lease as provided above, then Landlord shall promptly, after receipt of a sufficient condemnation award, proceed to restore the Premises to substantially their condition prior to the taking, and a proportionate allowance shall be made to Tenant for the rent corresponding to the time during which, and to the part of the Premises of which, Tenant is deprived on account of the taking and restoration. In the event of a taking, Landlord shall be entitled to the entire amount of the condemnation award without deduction for any estate or interest of Tenant; provided that nothing in this Section shall be deemed to give Landlord any interest in, or prevent Tenant from seeking any award against the taking authority for, the taking of personal property and fixtures belonging to Tenant or for relocation or business interruption expenses recoverable from the taking authority. SECTION 12.2. TEMPORARY TAKING. No temporary taking of the Premises shall terminate this Lease or give Tenant any right to abatement of rent, and any award specifically attributable to a temporary taking of the Premises shall belong entirely to Tenant. A temporary taking shall be deemed to be a taking of the use or occupancy of the Premises for a period of not to exceed one hundred eighty (180) days. SECTION 12.3. TAKING OF PARKING AREA. In the event there shall be a taking of the parking area such that Landlord can no longer provide sufficient parking to comply with this Lease, Landlord may substitute 15 reasonably equivalent parking in a location reasonably close to the Building; provided that if Landlord fails to make that substitution within one hundred eighty (180) days following the taking and if the taking materially impairs Tenant's use and enjoyment of the Premises, Tenant may, at its option, terminate this Lease by written notice to Landlord. If this Lease is not so terminated by Tenant, there shall be no abatement of rent and this Lease shall continue in effect. ARTICLE XIII. SUBORDINATION; ESTOPPEL CERTIFICATE; FINANCIALS SECTION 13.1. SUBORDINATION. At the option of Landlord, this Lease shall be either superior or subordinate to all ground or underlying leases, mortgages and deeds of trust, if any, which may hereafter affect the Premises, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, that so long as Tenant is not in default under this Lease, this Lease shall not be terminated or Tenant's quiet enjoyment of the Premises disturbed in the event of termination of any such ground or underlying lease, or the foreclosure of any such mortgage or deed of trust, to which Tenant has subordinated this Lease pursuant to this Section. In the event of a termination or foreclosure, Tenant shall become a tenant of and attorn to the successor-in- interest to Landlord upon the same terms and conditions as are contained in this Lease, and shall execute any instrument reasonably required by Landlord's successor for that purpose. Tenant shall also, upon written request of Landlord, execute and deliver all instruments as may be required from time to time to subordinate the rights of Tenant under this Lease to any ground or underlying lease or to the lien of any mortgage or deed of trust (provided that such instruments include the nondisturbance and attornment provisions set forth above), or, if requested by Landlord, to subordinate, in whole or in part, any ground or underlying lease or the lien of any mortgage or deed of trust to this Lease. SECTION 13.2. ESTOPPEL CERTIFICATE. (a) Tenant shall, at any time upon not less than ten (10) days prior written notice from Landlord, execute, acknowledge and deliver to Landlord, in any form that Landlord may reasonably require, a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of the modification and certifying that this Lease, as modified, is in full force and effect) and the dates to which the rental, additional rent and other charges have been paid in advance, if any, and (ii) acknowledging that, to Tenant's knowledge, there are no uncured defaults on the part of Landlord, or specifying each default if any are claimed, and (iii) setting forth all further information that Landlord may reasonably require. Tenant's statement may be relied upon by any prospective purchaser or encumbrancer of the Premises. (b) Notwithstanding any other rights and remedies of Landlord, Tenant's failure to deliver any estoppel statement within the provided time shall be conclusive upon Tenant that (i) this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) there are no uncured defaults in Landlord's performance, and (iii) not more than one month's rental has been paid in advance. SECTION 13.3. FINANCIALS. (a) Tenant shall deliver to Landlord, prior to the execution of this Lease and thereafter at any time upon Landlord's request, Tenant's current tax returns and financial statements, certified true, accurate and complete by the chief financial officer of Tenant, including a balance sheet and profit and loss statement for the most recent prior year (collectively, the "Statements"), which Statements shall accurately and completely reflect the financial condition of Tenant. Landlord agrees that it will keep the Statements confidential, except that Landlord shall have the right to deliver the same to any proposed purchaser or encumbrancer of the Premises. (b) Tenant acknowledges that Landlord is relying on the Statements in its determination to enter into this Lease, and Tenant represents to Landlord, which representation shall be deemed made on the date of this Lease and again on the Commencement Date, that no material change in the financial condition of Tenant, as reflected in the Statements, has occurred since the date Tenant delivered the Statements to Landlord. The Statements are represented and warranted by Tenant to be correct and to accurately and fully reflect Tenant's true financial condition as of the date of submission by any Statements to Landlord. 16 ARTICLE XIV. DEFAULTS AND REMEDIES SECTION 14.1. TENANT'S DEFAULTS. In addition to any other event of default set forth in this Lease, the occurrence of any one or more of the following events shall constitute a default by Tenant: (a) The failure by Tenant to make any payment of rent or additional rent required to be made by Tenant, as and when due, where the failure continues for a period of three (3) days after written notice from Landlord to Tenant; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. For purposes of these default and remedies provisions, the term "additional rent" shall be deemed to include all amounts of any type whatsoever other than Basic Rent to be paid by Tenant pursuant to the terms of this Lease. (b) Assignment, sublease, encumbrance or other transfer of the Lease by Tenant, either voluntarily or by operation of law, whether by judgment, execution, transfer by intestacy or testacy, or other means, without the prior written consent of Landlord. (c) The discovery by Landlord that any financial statement provided by Tenant, or by any affiliate, successor or guarantor of Tenant, was materially false. (d) The failure of Tenant to timely and fully provide any subordination agreement, estoppel certificate or financial statements in accordance with the requirements of Article XIII. (e) The failure or inability by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in any other subsection of this Section, where the failure continues for a period of thirty (30) days after written notice from Landlord to Tenant or such shorter period as is specified in any other provision of this Lease; provided, however, that any such notice shall be in lieu of, and not in addition to, any notice required under California Code of Civil Procedure Section 1161 and 1161(a) as amended. However, if the nature of the failure is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences the cure within thirty (30) days, and thereafter diligently pursues the cure to completion. (f) (i) The making by Tenant of any general assignment for the benefit of creditors; (ii) the filing by or against Tenant of a petition to have Tenant adjudged a Chapter 7 debtor under the Bankruptcy Code or to have debts discharged or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within thirty (30) days; (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, if possession is not restored to Tenant within thirty (30) days; (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where the seizure is not discharged within thirty (30) days; or (v) Tenant's convening of a meeting of its creditors for the purpose of effecting a moratorium upon or composition of its debts. Landlord shall not be deemed to have knowledge of any event described in this subsection unless notification in writing is received by Landlord, nor shall there be any presumption attributable to Landlord of Tenant's insolvency. In the event that any provision of this subsection is contrary to applicable law, the provision shall be of no force or effect. SECTION 14.2. LANDLORD'S REMEDIES. (a) In the event of any default by Tenant, or in the event of the abandonment of the Premises by Tenant, then in addition to any other remedies available to Landlord, Landlord may exercise the following remedies: 17 (i) Landlord may terminate Tenant's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. Such termination shall not affect any accrued obligations of Tenant under this Lease. Upon termination, Landlord shall have the right to reenter the Premises and remove all persons and property. Landlord shall also be entitled to recover from Tenant: (1) The worth at the time of the award of the unpaid rent and additional rent which had been earned at the time of termination; (2) The worth at the time of award of the amount by which the unpaid rent and additional rent which would have been earned after termination until the time of award exceeds the amount of such loss that Tenant proves could have been reasonably avoided; (3) The worth at the time of award of the amount by which the unpaid rent and additional rent for the balance of the Term after the time of award exceeds the amount of such loss that Tenant proves could be reasonably avoided; (4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result from Tenant's default, including, but not limited to, the cost of recovering possession of the Premises, refurbishment of the Premises, marketing costs, commissions and other expenses of reletting, including necessary repair, the unamortized portion of any tenant improvements and brokerage commissions funded by Landlord in connection with this Lease, reasonable attorneys' fees, and any other reasonable costs; and (5) At Landlord's election, all other amounts in addition to or in lieu of the foregoing as may be permitted by law. The term "rent" as used in this Lease shall be deemed to mean the Basic Rent and all other sums required to be paid by Tenant to Landlord pursuant to the terms of this Lease. Any sum, other than Basic Rent, shall be computed on the basis of the average monthly amount accruing during the twenty-four (24) month period immediately prior to default, except that if it becomes necessary to compute such rental before the twenty-four (24) month period has occurred, then the computation shall be on the basis of the average monthly amount during the shorter period. As used in subparagraphs (1) and (2) above, the "worth at the time of award" shall be computed by allowing interest at the rate of ten percent (10%) per annum. As used in subparagraph (3) above, the "worth at the time of award" shall be computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). (ii) Landlord may elect not to terminate Tenant's right to possession of the Premises, in which event Landlord may continue to enforce all of its rights and remedies under this Lease, including the right to collect all rent as it becomes due. Efforts by the Landlord to maintain, preserve or relet the Premises, or the appointment of a receiver to protect the Landlord's interests under this Lease, shall not constitute a termination f the Tenant's right to possession of the Premises. In the event that Landlord elects to avail itself of the remedy provided by this subsection (ii), Landlord shall not unreasonably withhold its consent to an assignment or subletting of the Premises subject to the reasonable standards for Landlord's consent as are contained in this Lease. (b) Landlord shall be under no obligation to observe or perform any covenant of this Lease on its part to be observed or performed which accrues after the date of any default by Tenant unless and until the default is cured by Tenant, it being understood and agreed that the performance by Landlord of its obligations under this Lease are expressly conditioned upon Tenant's full and timely performance of its obligations under this Lease. The various rights and remedies reserved to Landlord in this Lease or otherwise shall be cumulative and, except as otherwise provided by California law, Landlord may pursue any or all of its rights and remedies at the same time. (c) No delay or omission of Landlord to exercise any right or remedy shall be construed as a waiver of the right or remedy or of any default by Tenant. The acceptance by Landlord of rent shall not be a (i) waiver of any preceding breach or default by Tenant of any provision of this Lease, other than the failure of Tenant to pay the particular rent accepted, regardless of Landlord's knowledge of the preceding breach or default at the time of acceptance of rent, or (ii) a waiver of Landlord's right to exercise any remedy available to Landlord by 18 virtue of the breach or default. The acceptance of any payment from a debtor in possession, a trustee, a receiver or any other person acting on behalf of Tenant or Tenant's estate shall not waive or cure a default under Section 14.1. No payment by Tenant or receipt by Landlord of a lessor amount than the rent required by this Lease shall be deemed to be other than a partial payment on account of the earliest due stipulated rent, nor shall any endorsement or statement on any check or letter be deemed an accord and satisfaction and Landlord shall accept the check or payment without prejudice to Landlord's right to recover the balance of the rent or pursue any other remedy available to it. No act or thing done by Landlord or Landlord's agents during the Term shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept a surrender shall be valid unless in writing and signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys to the Premises prior to the termination of this Lease, and the delivery of the keys to any employee shall not operate as a termination of the Lease or a surrender of the Premises. SECTION 14.3. LATE PAYMENTS (a) Any rent due under this Lease that is not received by Landlord within five (5) business days of the date when due shall bear interest at the maximum rate permitted by law from the date due until fully paid. The payment of interest shall not cure any default by Tenant under this Lease. In addition, Tenant acknowledges that the late payment by Tenant to Landlord of rent will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult and impracticable to ascertain. Those costs may include, but are not limited to administrative, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any ground lease, mortgage or trust deed covering the Premises. Accordingly, if any rent due from Tenant shall not be received by Landlord or Landlord's designee within five (5) business days after the date due, then Tenant shall pay to Landlord, in addition to the interest provided above, a late charge in a sum equal to the greater of five percent (5%) of the amount overdue or Two Hundred Fifty Dollars ($250.00) for each delinquent payment. Acceptance of a late charge by Landlord shall not constitute a waiver of Tenant's default with respect to the overdue amount, nor shall it prevent Landlord from exercising any of its other rights and remedies. (b) Following each second consecutive installment of rent that is not paid within five (5) business days following notice of nonpayment from Landlord, Landlord shall have the option (i) to require that beginning with the first payment of rent next due, rent shall no longer be paid in monthly installments but shall be payable in quarterly three (3) months in advance and/or (ii) to require that Tenant increase the amount, if any, of the Security Deposit by one hundred percent (100%). Should Tenant deliver to Landlord, at any time during the Term, two (2) or more insufficient checks, the Landlord may require that all monies then and thereafter due from Tenant be paid to Landlord by cashier's check. SECTION 14.4. RIGHT OF LANDLORD TO PERFORM. All covenants and agreements to be performed by Tenant under this Lease shall be performed at Tenant's sole cost and expense and without any abatement of rent or right of set-off. If Tenant fails to pay any sum of money, other than rent, or fails to perform any other act on its part to be performed under this Lease, and the failure continues beyond any applicable grace period set forth in Section 14.1, then in addition to any other available remedies, Landlord may, at its election make the payment or perform the other act on Tenant's part. Landlord's election to make the payment or perform the act on Tenant's part shall not give rise to any responsibility of Landlord to continue making the same or similar payments or performing the same or similar acts. Tenant shall, promptly upon demand by Landlord, reimburse Landlord for all sums paid by Landlord and all necessary incidental costs, together with interest at the maximum rate permitted by law from the date of the payment by Landlord. Landlord shall have the same rights and remedies if Tenant fails to pay those amounts as Landlord would have in the event of a default by Tenant in the payment of rent. SECTION 14.5. DEFAULT BY LANDLORD. Landlord shall not be deemed to be in default in the performance of any obligation under this Lease unless and until it has failed to perform the obligation within thirty (30) days after written notice by Tenant to Landlord specifying in reasonable detail the nature and extent of the failure; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if it commences performance within the thirty (30) day period and thereafter diligently pursues the cure to completion. 19 SECTION 14.6. EXPENSES AND LEGAL FEES. All sums reasonably incurred by Landlord in connection with any event of default by Tenant under this Lease or holding over of possession by Tenant after the expiration or earlier termination of this Lease including without limitation all costs, expenses and actual accountants, appraisers, attorneys and other professional fees, and any collection agency or other collection charges, shall be due and payable by Tenant to Landlord on demand, and shall bear interest at the rate of ten percent (10%) per annum. Should either Landlord or Tenant bring any action in connection with this Lease, the prevailing party shall be entitled to recover as a part of the action its reasonable attorneys' fees, and all other costs. The prevailing party for the purpose of this paragraph shall be determined by the trier of the facts. SECTION 14.7. WAIVER OF JURY TRIAL. LANDLORD AND TENANT EACH ACKNOWLEDGES THAT IT IS AWARE OF AND HAS HAD THE ADVICE OF COUNSEL OF ITS CHOICE WITH RESPECT TO ITS RIGHTS TO TRIAL BY JURY, AND EACH PARTY DOES HEREBY EXPRESSLY AND KNOWINGLY WAIVE AND RELEASE ALL SUCH RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER PARTY HERETO AGAINST THE OTHER (AND/OR AGAINST ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, OR SUBSIDIARY OR AFFILIATED ENTITIES) ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS LEASE, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM OF INJURY OR DAMAGE. SECTION 14.8. SATISFACTION OF JUDGMENT. The obligations of Landlord do not constitute the personal obligations of the individual partners, trustees, directors, officers or shareholders of Landlord or its constituent partners. Should Tenant recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Building and out of the rent or other income from such property receivable by Landlord or out of consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title or interest in the Building, and no action for any deficiency may be sought or obtained by Tenant. SECTION 14.9. LIMITATION OF ACTIONS AGAINST LANDLORD. Any claim, demand or right of any kind by Tenant which is based upon or arises in connection with this Lease shall be barred unless Tenant commences in action thereon within six (6) months after the date that the act, omission, event or default upon which the claim, demand or right arises, has occurred. ARTICLE XV. END OF TERM SECTION 15.1. HOLDING OVER. This Lease shall terminate without further notice upon the expiration of the Term, and any holding over by Tenant after the expiration shall not constitute a renewal or extension of this Lease, or give Tenant any rights under this Lease, except when in writing signed by both parties. If Tenant holds over for any period after the expiration (or earlier termination) of the Term without the prior written consent of Landlord, such possession shall constitute a tenancy at sufferance only; such holding over with the prior written consent of Landlord shall constitute a month-to-month tenancy commencing on the first (1st) day following the termination of this Lease. In either of such events, possession shall be subject to all of the terms of this Lease, except that the monthly Basic Rent shall be the greater of (a) one hundred seventy-five percent (175%) of the Basic Rent for the month immediately preceding the date of termination or (b) the then currently scheduled Basic Rent for comparable space in the Building. If Tenant fails to surrender the Premises upon the expiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claims made by any succeeding tenant relating to such failure to surrender. Acceptance by Landlord of rent after the termination shall not constitute a consent to a holdover or result in a renewal of this Lease. The foregoing provisions of this Section are in addition to and do not affect Landlord's right of re-entry or any other rights of Landlord under this Lease or at law. SECTION 15.2. MERGER ON TERMINATION. The voluntary or other surrender of this Lease by Tenant, or a mutual termination of this Lease, shall terminate any or all existing subleases unless Landlord, at its option, elects in writing to treat the surrender or termination as an assignment to it of any or all subleases affecting the Premises. 20 SECTION 15.3. SURRENDER OF PREMISES; REMOVAL OF PROPERTY. Upon the Expiration Date or upon any earlier termination of this Lease, Tenant shall quit and surrender possession of the Premises to Landlord in as good order, condition and repair as when received or as hereafter may be improved by Landlord or Tenant, reasonable wear and tear and repairs which are Landlord's obligation excepted, and shall, without expense to Landlord, remove or cause to be removed from the Premises all personal property and debris, except for any items that Landlord may by written authorization allow to remain. Tenant shall repair all damage to the Premises resulting from the removal, which repair shall include the patching and filling of holes and repair of structural damage, provided that Landlord may instead elect to repair any structural damage at Tenant's expense. If Tenant shall fail to comply with the provisions of this Section, Landlord may effect the removal and/or make any repairs, and the cost to Landlord shall be additional rent payable by Tenant upon demand. If Tenant fails to remove Tenant's personal property from the Premises upon the expiration of the Term, Landlord may remove, store, dispose of and/or retain such personal property, at Landlord's option, in accordance with the then applicable laws, all at the expense of Tenant. If requested by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an instrument in writing releasing and quit claiming to Landlord all right, title and interest of Tenant in the Premises. ARTICLE XVI. PAYMENTS AND NOTICES All sums payable by Tenant to Landlord shall be paid, without deduction or offset, in lawful money of the United States to Landlord at its address set forth in Item 12 of the Basic Lease Provisions, or at any other place as Landlord may designate in writing. Unless this Lease expressly provides otherwise, as for example in the payment of rent pursuant to Section 4.1, all payments shall be due and payable within five (5) days after demand. All payments requiring proration shall be prorated on the basis of a thirty (30) day month and a three hundred sixty (360) day year. Any notice, election, demand, consent, approval or other communication to be given or other document to be delivered by either party to the other may be delivered in person or by courier or overnight delivery service to the other party, or may be deposited in the United States mail, duly registered or certified, postage prepaid, return receipt requested, and addressed to the other party at the address set forth in Item 12 of the Basic Lease Provisions, or if to Tenant, at that address or, from and after the Commencement Date, at the Premises (whether or not Tenant has departed from, abandoned or vacated the Premises), or may be delivered by telegram, telex or telecopy, provided that receipt thereof is telephonically confirmed. Either party may, by written notice to the other, served in the manner provided in this Article, designate a different address. If any notice or other document is sent by mail, it shall be deemed served or delivered twenty-four (24) hours after mailing. If more than one person or entity is named as Tenant under this Lease, service of any notice upon any one of them shall be deemed as service upon all of them. ARTICLE XVII. RULES AND REGULATIONS Tenant agrees to observe faithfully and comply strictly with the Rules and Regulations, attached as Exhibit E, and any reasonable and nondiscriminatory --------- amendments, modifications and/or additions as may be adopted and published by written notice to tenants by Landlord for the safety, care, security, good order, or cleanliness of the Premises. Landlord shall not be liable to Tenant for any violation of the Rules and Regulations or the breach of any covenant or condition in any lease by any other tenant or such tenant's agents, employees, contractors, guests or invitees. One or more waivers by Landlord of any breach of the Rules an Regulations by Tenant or by any other tenant(s) shall not be a waiver of any subsequent breach of that rule or any other. Tenant's failure to keep and observe the Rules and Regulations shall constitute a default under this Lease. In the case of any conflict between the Rules and Regulations and this Lease, this Lease shall be controlling. ARTICLE XVIII. BROKER'S COMMISSION The parties recognize as the broker(s) who negotiated this Lease the firm(s), if any, whose name(s) is (are) stated in Item 10 of the Basic Rent Provisions, and agree that Landlord shall be responsible for the payment of brokerage commissions to those broker(s) unless otherwise provided in this Lease. Tenant warrants that it has had no dealings with any other real estate broker or agent in connection with the negotiation of this Lease, and Tenant agrees to indemnify and hold Landlord harmless from any cost, expense or liability (including reasonable attorneys' fees) for any compensation, commissions or charges claimed by any other real estate broker or agent employed or claiming to represent or to have been employed by Tenant in connection with the negotiation of this Lease. The foregoing agreement shall survive the termination of this Lease. If Tenant fails to take possession of the 21 Premises or if this Lease otherwise terminates prior to the Expiration Date as the result of failure of performance by Tenant, Landlord shall be entitled to recover from Tenant the unamortized portion of any brokerage commission funded by Landlord in addition to any other damages to which Landlord may be entitled. ARTICLE XIX. TRANSFER OF LANDLORD'S INTEREST In the event of any transfer of Landlord's interest in the Premises, the transferor shall be automatically relieved of all obligations on the part of Landlord accruing under this Lease from and after the date of the transfer, provided that any funds held by the transferor in which Tenant has an interest shall be turned over, subject to that interest, to the transferee and Tenant is notified of the transfer as required by law. No holder of a mortgage and/or deed of trust to which this Lease is or may be subordinate, and no landlord under a so-called sale-leaseback, shall be responsible in connection with the Security Deposit, unless the mortgagee or holder of the deed of trust or the landlord actually receives the Security Deposit. It is intended that the covenants and obligations contained in this Lease on the part of Landlord shall, subject to the foregoing, be binding on Landlord, its successors and assigns, only during and in respect to their respective successive periods of ownership. ARTICLE XX. INTERPRETATION SECTION 20.1. GENDER AND NUMBER. Whenever the context of this Lease requires, the words "Landlord" and "Tenant" shall include the plural as well as the singular, and words used in neuter, masculine or feminine genders shall include the others. SECTION 20.2. HEADINGS. The captions and headings of the articles and sections of this Lease are for convenience only, are not a part of this Lease and shall have no effect upon its construction or interpretation. SECTION 20.3. JOINT AND SEVERAL LIABILITY. If more than one person or entity is named as Tenant, the obligations imposed upon each shall be joint and several and the act of or notice from, or notice or refund to, or the signature of, any one or more of them shall be binding on all of them with respect to the tenancy of this Lease, including, but not limited to, any renewal, extension, termination or modification of this Lease. SECTION 20.4. SUCCESSORS. Subject to Articles IX and XIX, all rights and liabilities given to or imposed upon Landlord and Tenant shall extend to and bind their respective heirs, executors, administrators, successors and assigns. Nothing contained in this Section is intended, or shall be construed, to grant to any person other than Landlord and Tenant and their successors and assigns any rights or remedies under this Lease. SECTION 20.5. TIME OF ESSENCE. Time is of the essence with respect to the performance of every provision of this Lease. SECTION 20.6. CONTROLLING LAW. This Lease shall be governed by and interpreted in accordance with the laws of the Stale of California. SECTION 20.7. SEVERABILITY. If any term or provision of this Lease, the deletion of which would not adversely affect the receipt of any material benefit by either party or the deletion of which is consented to by the party adversely affected, shall be held invalid or unenforceable to any extent, the remainder of this Lease shall not be affected and each term and provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. SECTION 20.8. WAIVER AND CUMULATIVE REMEDIES. One or more waivers by Landlord or Tenant of any breach of any term, covenant or condition contained in this Lease shall not be a waiver of any subsequent breach of the same or any other term, covenant or condition. Consent to any act by one of the parties shall not be deemed to render unnecessary the obtaining of that party's consent to any subsequent act. No breach by Tenant of this Lease shall be deemed to have been waived by Landlord unless the waiver is in a writing signed by Landlord. The rights and remedies of Landlord under this Lease shall be cumulative and in addition to any and all other rights and remedies which Landlord may have. 22 SECTION 20.9. INABILITY TO PERFORM. In the event that either party shall be delayed or hindered in or prevented from the performance of any work or in performing any act required under this Lease by reason of any cause beyond the reasonable control of that party, then the performance of the work or the doing of the act shall be excused for the period of the delay and the time for performance shall be extended for a period equivalent to the period of the delay. The provisions of this Section shall not operate to excuse Tenant from the prompt payment of rent or from the timely performance of any other obligation under this Lease within Tenant's reasonable control. SECTION 20.10. ENTIRE AGREEMENT. This Lease and its exhibits and other attachments cover in full each and every agreement of every kind between the parties concerning the Premises and the Building. and all preliminary negotiations, oral agreements, understandings and/or practices, except those contained in this Lease, are superseded and of no further effect. Tenant waives its rights to rely on any representations or promises made by Landlord or others which are not contained in this Lease. No verbal agreement or implied covenant shall be held to modify the provisions of this Lease, any statute, law, or custom to the contrary notwithstanding. SECTION 20.11. QUIET ENJOYMENT. Upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed, and subject to the other provisions of this Lease, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term without hindrance or interruption by Landlord or any other person claiming by or through Landlord. SECTION 20.12. SURVIVAL. All covenants of Landlord or Tenant which reasonably would be intended to survive the expiration or sooner termination of this Lease, including without limitation any warranty or indemnity hereunder, shall so survive and continue to be binding upon and inure to the benefit of the respective parties and their successors and assigns. ARTICLE XXI. EXECUTION AND RECORDING SECTION 21.1. COUNTERPARTS. This Lease may be executed in one or more counterparts, each of which shall constitute an original and all of which shall be one and the same agreement. SECTION 21.2. CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a corporation or partnership, each individual executing this Lease on behalf of the corporation or partnership represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of the corporation or partnership, and that this Lease is binding upon the corporation or partnership in accordance with its terms. Tenant shall, at Landlord's request, deliver a certified copy of its board of directors' resolution or partnership agreement or certificate authorizing or evidencing the execution of this Lease. SECTION 21.3. EXECUTION OF LEASE; NO OPTION OR OFFER. The submission of this Lease to Tenant shall be for examination purposes only, and shall not constitute an offer to or option for Tenant to lease the Premises. Execution of this Lease by Tenant and its return to Landlord shall not be binding upon Landlord, notwithstanding any time interval, until Landlord has in fact executed and delivered this Lease to Tenant, it being intended that this Lease shall only become effective upon execution by Landlord and delivery of a fully executed counterpart to Tenant. SECTION 21.4. RECORDING. Tenant shall not record this Lease without the prior written consent of Landlord. Tenant, upon the request of Landlord, shall execute and acknowledge a "short form" memorandum of this Lease for recording purposes. SECTION 21.5. AMENDMENTS. No amendment or termination of this Lease shall be effective unless in writing signed by authorized signatories of Tenant and Landlord, or by their respective successors in interest. No actions, policies, oral or informal arrangements, business dealings or other course of conduct by or between the parties shall be deemed to modify this Lease in any respect. SECTION 21.6. EXECUTED COPY. Any fully executed photocopy or similar reproduction of this Lease shall be deemed an original for all purposes. 23 SECTION 21.7. ATTACHMENTS. All exhibits, amendments, riders and addenda attached to this Lease are hereby incorporated into and made a part of this Lease. ARTICLE XXII. MISCELLANEOUS SECTION 22.1. NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms of this Lease are confidential and constitute proprietary information of Landlord. Disclosure of the terms could adversely affect the ability of Landlord to negotiate other leases and impair Landlord's relationship with other tenants. Accordingly, Tenant agrees that it, and its partners, officers, directors, employees and attorneys, shall not intentionally and voluntarily disclose the terms and conditions of this Lease to any other tenant or apparent prospective tenant of the Landlord, either directly or indirectly, without the prior written consent of Landlord, provided, however, that Tenant may disclose the terms to prospective subtenants or assignees under this Lease. SECTION 22.2. GUARANTY. As a condition to the execution of this Lease by Landlord, the obligations, covenants and performance of the Tenant as herein provided shall be guaranteed in writing by the Guarantor(s) listed in Item 7 of the Basic Lease Provisions, if any, on a form of guaranty provided by Landlord. SECTION 22.3. CHANGES REQUESTED BY LENDER. If, in connection with obtaining financing for the Building, the lender shall request reasonable modifications in this Lease as a condition of the financing, Tenant will not unreasonably withhold or delay its consent, provided that the modifications do not materially increase the obligations of Tenant or materially and adversely affect the leasehold interest created by this Lease. SECTION 22.4. MORTGAGEE PROTECTION. No act or failure to act on the part of Landlord which would otherwise entitle Tenant to be relieved of its obligations hereunder or to terminate this Lease shall result in such a release or termination unless (a) Tenant has given notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises whose address has been furnished to Tenant and (b) such beneficiary is afforded a reasonable opportunity to cure the default by Landlord (which in no event shall be less than sixty (60) days), including, if necessary to effect the cure, time to obtain possession of the Premises by power of sale or judicial foreclosure provided that such foreclosure remedy is diligently pursued. Tenant agrees that each beneficiary of a deed of trust or mortgage covering the Premises is am express third party beneficiary hereof, Tenant shall have no right or claim for the collection of any deposit from such beneficiary or from any purchaser at a foreclosure sale unless such beneficiary or purchaser shall have actually received and not refunded the deposit, and Tenant shall comply with any written directions by any beneficiary to pay rent due hereunder directly to such beneficiary without determining whether an event of default exists under such beneficiary's deed of trust. SECTION 22.5. COVENANTS AND CONDITIONS. All or the provisions of this Lease shall be construed to be conditions as well as covenants as though the words specifically expressing or imparting covenants and conditions were used in each separate provision. SECTION 22.6. SECURITY MEASURES. Tenant hereby acknowledges that Landlord shall have no obligation whatsoever to provide guard service or other security measures for the benefit of the Premises. Tenant assumes all responsibility for the protection of Tenant, its agents, invitees and property from acts of third parties. Nothing herein contained shall prevent Landlord, at its sole option, from providing security protection for the Premises or any part thereof, in which event the cost thereof shall be included within the definition of Building Costs. SECTION 22.7. CONTINGENCY. Tenant understands and agrees that the effectiveness of this Lease is contingent upon the mutual execution and delivery or a lease surrender and termination agreement between Landlord and Integrated Silicon Solutions, Inc., the current tenant in possession of the Premises. [Signatures on following page.] 24 LANDLORD: TENANT: THE IRVINE COMPANY, MICRO-COMP INDUSTRIES, a Michigan corporation a California corporation By /s/ Clarence W. Baker By /s/ ---------------------------------- ------------------------------- Clarence W. Baker, Title President President, Irvine Industrial Company, a division of The Irvine Company By /s/ David A. Patty By /s/ ---------------------------------- ------------------------------- David A. Patty, Title Vice President Senior Vice President - Finance, Investment Property Group 25 EXHIBIT A Description of Premises [DIAGRAM] EXHIBIT A-1 Description of the Site [DIAGRAM] [DIAGRAM OF PALOMAR] EXHIBIT B IRVINE INDUSTRIAL COMPANY ------------------------- HAZARDOUS MATERIALS SURVEY FORM ------------------------------- The purpose of this form is to obtain information regarding the use of hazardous substances on Irvine Industrial Company property. Prospective tenants and contractors should answer the questions in light of their proposed operations on the premises. Existing tenants and contractors should answer the questions as they relate to ongoing operations on the premises and should update any information previously submitted. If additional space is needed to answer the questions, you may attach separate sheets of paper to this form. When completed, the form should be sent to the following address: ___________________________________ ___________________________________ ___________________________________ ___________________________________ (insert address of Property Management Company) Your cooperation in this matter is appreciated. If you have any questions, please do not hesitate to call [insert name of Property Manager] at [insert phone number] for assistance. 1. GENERAL INFORMATION ------------------- Name of Responding Company: Check all that apply: Tenant ( ) Contractor ( ) Prospective ( ) Existing ( ) Mailing Address: ______________________________________________________________ Contact Person & Title: _______________________________________________________ Telephone Number: _____________________________________________________________ Address of Leased Premises: ___________________________________________________ Length of Lease or Contract Term: _____________________________________________
Describe the proposed operations to take place on the property, including principal products manufactured or services to be conducted. Existing tenants and contractors should describe any proposed changes to ongoing operations. _______________________________________________________________________________ _______________________________________________________________________________ 1 2. STORAGE OF HAZARDOUS MATERIALS ------------------------------ 2.1. Will any hazardous materials be used or stored on-site? Wastes Yes ( ) No ( ) Chemical Products Yes ( ) No ( ) Biological Hazards Yes ( ) No ( ) Infectious Wastes Yes ( ) No ( ) Radioactive Materials Yes ( ) No ( ) 2.2. List any hazardous materials to be used or stored, the quantities that will be on-site at any given time, and the location and method of storage (e.g., bottles in storage closet on the premises). Location and Method ------------------- Waste/Products of Storage Quantity -------------- ---------- -------- ______________________ ___________________ _________________ ______________________ ___________________ _________________ ______________________ ___________________ _________________ ______________________ ___________________ _________________ ______________________ ___________________ _________________ 2.3. Is any underground storage of hazardous substances proposed or currently conducted on the premises? Yes ( ) No ( ) If yes, describe the materials to be stored, and the size and construction of the tank. Attach copies of any permits obtained for the underground storage of such substances. ------------------------------------------------------------------- ------------------------------------------------------------------- 3. SPILLS ------ 3.1. During the past year, have any spills occurred on the premises? Yes ( ) No ( ) If so, please describe the spill and attach the results of any testing conducted to determine the extent of such spills. 3.2. Were any agencies notified in connection with such spills? Yes ( ) No ( ) If so, attach copies of any spill reports or other correspondence with regulatory agencies. 3.3. Were any clean-up actions undertaken in connection with the spills? Yes ( ) No ( ) If so, briefly describe the actions taken. Attach copies of any clearance letters obtained from any regulatory agencies involved and the results of any final soil or groundwater sampling done upon completion of the clean-up work. 2 4. WASTE MANAGEMENT ---------------- 4.1. List the waste, if any, generated or to be generated at the premises, whether it is as hazardous waste, biological or radioactive hazard, its hazard class and the quantity generated on a monthly basis. Waste Hazard Class Quantity/Month ----- ------------ -------------- ___________________ ____________________ ____________________ ___________________ ____________________ ____________________ ___________________ ____________________ ____________________ ___________________ ____________________ ____________________ ___________________ ____________________ ____________________ 4.2. Describe the method(s) of disposal for each waste. Indicate where and how often disposal will take place. ____________________________________________________________________ ____________________________________________________________________ 4.3. Is any treatment or processing of hazardous, infectious or radioactive wastes currently conducted or oposed to be conducted at the premises? Yes ( ) No ( ) If yes, please describe any existing or proposed treatment methods. ____________________________________________________________________ ____________________________________________________________________ 4.4. Attach copies of any hazardous waste permits or licenses issued to your company with respect to its operations on the Premises. 5. WASTEWATER TREATMENT/DISCHARGE ------------------------------ 5.1. Do you discharge industrial wastewater to: ___ storm drain? ___ sewer? ___ surface water? ___ no industrial discharge 5.2. Is your industrial wastewater treated before discharge? Yes ( ) No ( ) If yes, describe the type of treatment conducted. 5.3. Attach copies of any wastewater discharge permits issued to your company with respect to its operations on the premises. 6. AIR DISCHARGES -------------- 6.1. Do you have any air filtration systems or stacks that discharge into the air? Yes ( ) No ( ) 3 6.2. Do you operate any equipment that require air emissions permits? Yes ( ) No ( ) 6.3. Attach copies of any air discharge permits pertaining to these operations. 7. HAZARDOUS MATERIALS DISCLOSURES ------------------------------- 7.1. Does your company handle an aggregate of at least 500 pounds, 55 gallons or 200 cubic feet of hazardous materials at any given time? If so, state law requires that you prepare a hazardous materials management plan. Yes ( ) No ( ) 7.2. Has your company prepared a hazardous materials management plan (`business plan') pursuant to state and Orange County Fire Department requirements? Yes ( ) No ( ) If so, attach a copy of the business plan. 7.3. Are any of the chemicals used in your operations regulated under Proposition 65? Yes ( ) No ( ) If so, describe the actions taken, or proposed actions to be taken, to comply with Proposition 65 requirements. 7.4. Is your company subject to OSHA Hazard Communication Standard Requirements? Yes ( ) No ( ) If so, describe the procedures followed to comply with these requirements. 8. ENFORCEMENT ACTIONS, COMPLAINTS ------------------------------- 8.1. Has your company ever been subject to any agency enforcement actions, administrative orders, or consent decrees? Yes ( ) No ( ) If so, describe the actions and any continuing compliance obligations imposed as a result of these actions. 8.2. Has your company ever received requests for information, notice or demand letters, or any other inquiries regarding its operations? Yes ( ) No ( ) 8.3. Have there ever been, or are there now pending, any lawsuits against your company regarding any environmental or health and safety concerns? Yes ( ) No ( ) 8.4. Has an environmental audit ever been conducted at your company's current facility? Yes ( ) No ( ) If so, discuss the results of the audit. 8.5. Have there been any problems or complaints from neighbors at your company's current facility? Yes ( ) No ( ) ________________________ ________________________ By: ____________________ Name: ______________ Title: _____________ Date: ______________ 4 January 14, 1997 Sunnyvale Leases EXHIBIT C HAZARDOUS MATERIALS DISCLOSURE Tenant acknowledges the following disclosures by Landlord with respect to Hazardous Materials at the Premises. Tenant agrees to comply with the precautionary requirements and other provisions, set forth below, that are associated with these Hazardous Materials. (1) Portions of the structures on the Premises may contain asbestos- containing materials. Accordingly, Tenant agrees that it will not make any repairs or alterations to the structures on the Premises: (a) without inquiring from Landlord whether Tenant's planned repairs or alterations are likely to disturb asbestos-containing materials in the structures, and (b) if, in Landlord's judgment, the planned repairs or alterations will disturb the asbestos-containing materials, without securing Landlord's prior consent to the repairs or alterations. (2) Portions of the groundwater in the City of Sunnyvale contain volatile organic compounds and/or solvents. These substances may be present in the groundwater. Landlord is unaware of any practical impediment to the use or occupancy of the Premises as a result of the presence of these substances in the groundwater. (3) Tenant agrees that its exemption in Section 5.3(f) of the Lease from liability or responsibility with respect to the Hazardous Materials described in this Exhibit C shall not extend to any such Hazardous --------- Materials whose presence was caused or permitted by Tenant, its agents, employees, contractors, licensees, or invitees. EXHIBIT D --------- TENANT'S INSURANCE The following standards for Tenant's insurance shall be in effect at the Premises. Landlord reserves the right to adopt reasonable nondiscriminatory modifications and additions to those standards. Tenant agrees to obtain and present evidence to Landlord that it has fully complied with the insurance requirements. 1. Tenant shall, at its sole cost and expense, commencing on the date Tenant is given access to the Premises for any purpose and during the entire Term, procure, pay for and keep in full force and effect: (i) commercial general liability insurance with respect to the Premises and the operations of or on behalf of Tenant in, on or about the Premises, including but not limited to personal injury, owned and nonowned automobile, blanket contractual, independent contractors, broad form property damage (with an exception to any pollution exclusion with respect to damage arising out of heat, smoke or fumes from a hostile fire), fire and water legal liability, products liability (if a product is sold from the Premises), liquor law liability (if alcoholic beverages are sold, served or consumed within the Premises), and severability of interest , which policy(ies) shall be written on an "occurrence" basis and for not less than the amount set forth in Item 13 of the Basic Lease Provisions, with a combined single limit (with a $50,000 minimum limit on fire legal liability) per occurrence for bodily injury, death, and property damage liability, or the current limit of liability carried by Tenant, whichever is greater, and subject to such increases in amounts as Landlord may determine from time to time; (ii) workers' compensation insurance coverage as required by law, together with employers' liability insurance; (iii) with respect to improvements, alterations, and the like required or permitted to be made by Tenant under this Lease, builder's all-risk insurance, in an amount equal to the replacement cost of the work; (iv) insurance against fire, vandalism, malicious mischief and such other additional perils as may be included in a standard "all risk" form in general use in Orange County, California, insuring Tenant's leasehold improvements, trade fixtures, furnishings, equipment and items of personal property of Tenant located in the Premises, in an amount equal to not less than ninety percent (90%) of their actual replacement cost (with replacement cost endorsement); and (v) business interruption insurance in amounts satisfactory to cover one (1) year of loss. In no event shall the limits of any policy be considered as limiting the liability of Tenant under this Lease. 2. In the event Landlord consents to Tenant's use, generation or storage of Hazardous Materials on, under or about the Premises pursuant to Section 5.3 of this Lease, Landlord shall have the continuing right to require Tenant, at Tenant's sole cost and expense (provided the same is available for purchase upon commercially reasonable terms), to purchase insurance specified and approved by Landlord, with coverage not less than Five Million Dollars ($5,000,000.00), insuring (i) any Hazardous Materials shall be removed from the Premises; (ii) the Premises shall be restored to a clean, healthy, safe and sanitary condition, and (iii) any liability of Tenant, Landlord and Landlord's officers, directors, shareholders, agents, employees and representatives, arising from such Hazardous Materials. 3. All policies of insurance required to be carried by Tenant pursuant to this Exhibit D containing a deductible exceeding Ten Thousand Dollars --------- ($10,000.00) per occurrence must be approved in writing by Landlord prior to the issuance of such policy. Tenant shall be solely responsible for the payment of all deductibles. 4. All policies of insurance required to be carried by Tenant pursuant to this Exhibit D shall be written by responsible insurance companies authorized to --------- do business in the State of California and with a Best's rating of not less than "A" subject to final acceptance and approval by Landlord. Any insurance required of Tenant may be furnished by Tenant under any blanket policy carried by it or under a separate policy, so long as (i) the Premises are specifically covered (by rider, endorsement or otherwise), (ii) the limits of the policy are applicable on a "per location" basis to the Premises and provide for restoration of the aggregate limits, and (iii) the policy otherwise complies with the provisions of this Exhibit D. A true and exact copy of each paid up policy --------- evidencing the insurance (appropriately authenticated by the insurer) or a certificate of insurance, certifying that the policy has been issued, provides the coverage required by this Exhibit D and contains the required provisions, --------- shall be delivered to Landlord prior to the date Tenant is given the right of possession of the Premises. Proper evidence of the renewal of any insurance coverage shall also be delivered to Landlord not less than thirty (30) days prior to the expiration of the coverage. Landlord may at any time, and from time to time, inspect and/or copy any and all insurance policies required by this Lease. Page 1 of 2 5. Each policy evidencing insurance required to be carried by Tenant pursuant to this Exhibit D shall contain the following provisions and/or clauses --------- satisfactory to Landlord: (i) a provision that the policy and the coverage provided shall be primary and that any coverage carried by Landlord shall be noncontributory with respect to any policies carried by Tenant except as to workers' compensation insurance; (ii) a provision including Landlord, the Additional Insureds identified in Item 11 of the Basic Lease Provisions, and any other parties in interest designated by Landlord as an additional insured, except as to workers' compensation insurance; (iii) a waiver by the insurer of any right to subrogation against Landlord, its agents, employees, contractors and representatives which arises or might arise by reason of any payment under the policy or by reason of any act or omission of Landlord, its agents, employees, contractors or representatives; and (iv) a provision that the insurer will not cancel or change the coverage provided by the policy without first giving Landlord thirty (30) days prior written notice. 6. In the event that Tenant fails to procure, maintain and/or pay for, at the times and for the durations specified in Exhibit D, any insurance required --------- by this Exhibit D, or fails to carry insurance required by any governmental --------- authority, Landlord may at its election procure that insurance and pay the premiums, in which event Tenant shall repay Landlord all sums paid by Landlord, together with interest at the maximum rate permitted by law and any related costs or expenses incurred by Landlord, within ten (10) days following Landlord's written demand to Tenant. Page 2 of 2 EXHIBIT E --------- RULES AND REGULATIONS This Exhibit sets forth the rules and regulations governing Tenant's use of the Premises leased to Tenant pursuant to the terms, covenants and conditions of the Lease to which this Exhibit is attached and therein made part thereof. In the event of any conflict or inconsistency between this Exhibit and the Lease, the Lease shall control. 1. Tenant shall not place anything or allow anything to be placed near the glass of any window, door, partition or wall which may appear unsightly from outside the Premises. 2. The walls, walkways, sidewalks, entrance passages, courts and vestibules shall not be obstructed or used for any purpose other than ingress and egress of pedestrian travel to and from the Premises, and shall not be used for loitering or gathering, or to display, store or place any merchandise, equipment or devices, or for any other purpose. The walkways, entrance passageways, courts, vestibules and roof are not for the use of the general public and Landlord shall in all cases retain the right to control and prevent access thereto by all persons whose presence in the judgment of the Landlord shall be prejudicial to the safety, character, reputation and interests of the Building and its tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom Tenant normally deals in the ordinary course of Tenant's business unless such persons are engaged in illegal activities. No tenant or employee or invitee of any tenant shall be permitted upon the roof of the Building. 3. No awnings or other projection shall be attached to the outside walls of the Building. No security bars or gates, curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises without the prior written consent of Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the express written consent of Landlord. 4. Tenant shall not mark, nail, paint, drill into, or in any way deface any part of the Premises or the Building. Tenant shall not lay linoleum, tile, carpet or other similar floor covering so that the same shall be affixed to the floor of the Premises in any manner except as approved by Landlord in writing. The expense of repairing any damage resulting from a violation of this rule or removal of any floor covering shall be borne by Tenant. 5. The toilet rooms, urinals, wash bowls and other plumbing apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, caused it. 6. Landlord shall direct electricians as to the manner and location of any future telephone wiring. No boring or cutting for wires will be allowed without the prior consent of Landlord. The locations of the telephones, call boxes and other office equipment affixed to the Premises shall be subject to the prior written approval of Landlord. 7. The Premises shall not be used for manufacturing or for the storage of merchandise except as such storage may be incidental to the permitted use of the Premises. No exterior storage shall be allowed at any time without the prior written approval of Landlord. The Premises shall not be used for cooking or washing clothes without the prior written consent of Landlord, or for lodging or sleeping or for any immoral or illegal purposes. 8. Tenant shall not make, or permit to be made, any unseemly or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, phonograph, noise, or otherwise. Tenant shall not use, keep or permit to be used, or kept, any foul or obnoxious gas or substance in the Premises or permit or suffer the Premises to be used or occupied in any manner offensive or objectionable to Landlord or other occupants of this or neighboring buildings or premises by reason of any odors, fumes or gases. 9. No animals shall be permitted at any time within the Premises. 1 10. Tenant shall not use the name of the Building or the Project in connection with or in promoting or advertising the business of Tenant, except as Tenant's address, without the written consent of Landlord. Landlord shall have the right to prohibit any advertising by any Tenant which, in Landlord's reasonable opinion, tends to impair the reputation of the Project or its desirability for its intended uses, and upon written notice from Landlord any Tenant shall refrain from or discontinue such advertising. 11. Canvassing, soliciting, peddling, parading, picketing, demonstrating or otherwise engaging in any conduct that unreasonably impairs the value or use of the Premises or the Project are prohibited and each Tenant shall cooperate to prevent the same. 12. No equipment of any type shall be placed on the Premises which in Landlord's opinion exceeds the load limits of the floor or otherwise threatens the soundness of the structure or improvements of the Building. 13. No air conditioning unit or other similar apparatus shall be installed or used by any Tenant without the prior written consent of Landlord. 14. No aerial antenna shall be erected on the roof or exterior walls of the Premises, or on the grounds, without in each instance, the prior written consent of Landlord. Any aerial or antenna so installed without such written consent shall be subject to removal by Landlord at any time without prior notice at the expense of the Tenant, and Tenant shall upon Landlord's demand pay a removal fee to Landlord of not less than $200.00. 15. The entire Premises, including vestibules, entrances, doors, fixtures, windows and plate glass, shall at all times be maintained in a safe, neat and clean condition by Tenant. All trash, refuse and waste materials shall be regularly removed from the Premises by Tenant and placed in the containers at the locations designated by Landlord for refuse collection. All cardboard boxes must be "broken down" prior to being placed in the trash container. All styrofoam chips must be bagged or otherwise contained prior to placement in the trash container, so as not to constitute a nuisance. Pallets may not be disposed of in the trash container or enclosures. The burning of trash, refuse or waste materials is prohibited. 16. Tenant shall use at Tenant's cost such pest extermination contractor as Landlord may direct and at such intervals as Landlord may require. 17. All keys for the Premises shall be provided to Tenant by Landlord and Tenant shall return to Landlord any of such keys so provided upon termination of the Lease. Tenant shall not change locks or install other locks on doors of the Premises, without the prior written consent of Landlord. In the event of loss of any keys furnished by Landlord for Tenant, Tenant shall pay to Landlord the costs thereof. 18. No person shall enter or remain within the Project while intoxicated or under the influence of liquor or drugs. Landlord shall have the right to exclude or expel from the Project any person who, in the absolute discretion of Landlord, is under the influence of liquor or drugs. Landlord reserves the right to amend or supplement the foregoing Rules and Regulations and to adopt and promulgate additional rules and regulations applicable to the Premises. Notice of such rules and regulations and amendments and supplements thereto, if any, shall be given to Tenant. 2 EXHIBIT X WORK LETTER ----------- TENANT IMPROVEMENTS - ------------------- The tenant improvement work by Landlord shall consist of repainting the Premises, installing new carpet in the Premises, and demolishing select areas of the Premises ("Tenant Improvements"). All materials and finishes utilized in completing the Tenant Improvements shall be Landlord's building standard. Landlord's total contribution for the Tenant Improvements shall not exceed Fifty-One Thousand Seven Hundred Twenty Dollars ($51,720.00). Landlord's contribution shall include a construction management fee of five percent (5%) of the cost of the work, unless the work consists only of repainting and/or recarpeting in which event no management fee shall be included. Any excess cost shall be borne solely by Tenant and shall be paid to Landlord within ten (10) days following Landlord's billing for such excess cost. CONSENT TO SUBLETTING 21. PARTIES AND DATES. This Consent to Subletting ("Consent") dated July ___, 1999, is by and between THE IRVINE COMPANY, a Delaware corporation ("Landlord"), MICRO-COMP INDUSTRIES, a California corporation ("Tenant"), and ARTES, INC., a California corporation ("Subtenant"). 22. RECITALS. On February 10, 1997, Landlord and Tenant entered into a lease ("Lease") for space in a building owned by Landlord and located at 680 Almanor Avenue, Sunnyvale, California ("Premises"). The Lease contains provisions which require, among other things, Tenant to obtain Landlord's consent to any subletting of the Premises. Tenant has requested Landlord to consent to a subletting of the Premises to Subtenant. 23. CONSENT TO SUBLETTING. For valuable consideration including Tenant's and Subtenant's agreement to the provisions of this Consent, Landlord consents to a subletting to Subtenant of approximately 17,240 rentable square feet of the Premises. Tenant and Subtenant agree that this Consent is conditioned upon their agreement that: 23.1 The sublease agreement ("Sublease") between Tenant and Subtenant is expressly subject to the provisions of the Lease, a copy of which Subtenant acknowledges it has received. 23.2 Tenant will deliver a copy of the Sublease to Landlord within five (5) business days of Landlord's request, provided that if the Sublease is not in writing, Tenant may deliver a reasonably detailed summary of the Sublease including information respecting the length of the term and the amount of rent and other charges payable under the Sublease, which summary shall be approved by Subtenant. 23.3 Tenant's obligations under the Lease shall not be affected by this Consent. 23.4 Landlord shall be entitled to receive profits derived by Tenant from this subletting in accordance with the provisions of the Lease. 23.5 The provisions of the Lease respecting assignment and subletting are not waived with respect to future assignments and sublettings. 23.6 Subtenant is not claiming any interest in a right belonging solely to Tenant pursuant to the Lease. 8 23.7 The Lease is in full force and effect and that Landlord is not in breach of any provision of the Lease. 23.8 That if the Sublease terminates by reason of a termination of the Lease, Landlord may, at its option, by delivering written notice to Subtenant, assume the obligation of Tenant under the Sublease in which event Subtenant shall recognize Landlord as if it were Sublandlord under the Sublease. 24. SUBTENANT'S PRINCIPAL PLACE OF BUSINESS. The address of Subtenant's principal place of business is: 678 Almanor Avenue ------------------ Sunnyvale, CA 94086 ------------------- 25. GENERAL. 25.1 EFFECT OF SUBLETTING. The Lease and Tenant's obligations to Landlord shall not be deemed to have been modified by this Consent. 25.2 ENTIRE AGREEMENT. This Consent embodies the entire understanding between Landlord, Tenant and Subtenant with respect to the subletting and can be changed only by an instrument in writing signed by the party against whom enforcement is sought. 25.3 COUNTERPARTS. If this Consent is executed in counterparts, each is hereby declared to be an original; all, however, shall constitute but one in the same Consent. In any action or proceeding, any photographic, photostatic, or other copy of this Consent may be introduced into evidence without foundation. 25.4 DEFINED TERMS, All words commencing with initial capital letters in this Consent and defined in the Lease shall have the same meaning in this Consent as in the Lease. 25.5 CORPORATE AND PARTNERSHIP AUTHORITY. If Tenant is a corporation or partnership, or is comprised of either or both of them, each individual executing this Consent for the corporation or partnership represents that he or she is duly authorized to execute and deliver this Consent on behalf of the corporation or partnership and that this Consent is binding upon the corporation or partnership in accordance with its terms. 25.6 ATTORNEYS' FEES. The provisions of the Lease respecting payment of attorneys' fees shall also apply to this Consent to Subletting. 26. EXECUTION. Landlord, Tenant and Subtenant have entered into this Consent as of the date set forth in "I. PARTIES AND DATE" above. 9 TENANT: SUBTENANT: MICRO-COMP INDUSTRIES ARTEST, INC. A California Corporation A California Corporation By /s/ Micro Comp Industries By /s/ David Ganapol 7-30-99 Title Title VP Engineering By By Title Title LANDLORD: THE IRVINE COMPANY, a Delaware Corporation By Robert E. Williams, Jr., President, Irvine Industrial Company, a division of The Irvine Company 10 By Nancy E. Trujillo Assistant Secretary 11 FIRST ADDENDUM TO SUBLEASE AGREEMENT THIS ADDENDUM IS HEREBY ATTACHED AND SHALL BECOME PART OF THAT CERTAIN SUBLEASE AGREEMENT BY AND BETWEEN MICROCOMP INDUSTRIES, A CALIFORNIA CORPORATION AS THE SUBLESSOR AND ARTEST INC., A CALIFORNIA CORPORATION AS THE SUBLESSEE FOR THAT CERTAIN PREMISES OF APPROXIMATELY 7,899 SQUARE FEET COMMONLY KNOWN 680 ALMANOR AVENUE, SUNNYVALE, CALIFORNIA ALL OF THE TERMS AND CONDITIONS OF THE SUBLEASE SHALL REMAIN IN FULL FORCE AND EFFECT WITH THE EXCEPTION OF THE FOLLOWING: 21. Option to Extend: The Sublessee has previously exercised its Option to ---------------- Extend the sublease for the current 7,899 square foot premises for the period March 1, 1999 to February, 28, 2002. 22. 22. Expansion of Premises: Upon the vacating of the balance of the premises or --------------------- approximately 9,341 square feet by the Sublessor, the Sublessee will occupy and sublease the entire facility. The entire premises are approximately 17,240 square feet, as per the attached Exhibit A. 23. Sublease Term: The sublease term for the entire premises will be from the ------------- substantial vacating of the property by the Sublessor until February 28, 2002. 24. Rental Rate: The rental rate for the sublease term shall be as follows: ----------- Occupancy to February 29, 2000: $27,762.70 NNN per month Thereafter the rental rate shall increase on March 1, 2000 and March 1, 2001 as set forth in Article 1. Basic Lease Provisions, Item #6 of the Master Lease. 25. Security Deposit: As per paragraph 18 of the original sublease agreement, ---------------- the Sublessee has deposited with the Sublessor, a security deposit in the amount of $12,573.39. The security deposit will be increased to a total of $27,756.64 upon mutual execution of this sublease addendum. 26. Condition, Furniture, and Fixtures: The Sublessee shall, upon mutual ---------------------------------- execution of this agreement, give to the Sublessor an amount of Four Hundred Thousand ($400,000.00) Dollars as payment for the furniture and fixtures as shown on the attached Exhibit B. However, the Sublessee shall be credited an amount of Four Hundred Thirty ($430.00) per day from July 11, 1999 until the date the Sublessee vacates the space as a penalty for non-delivery of the premises. If necessary, a Bill of Sale will be executed between the parties. The Lessee will take possession of the premises in an "as-is" condition. 27. Contingency: This Addendum is contingent upon the approval of the Master ----------- Lessor, The Irvine Company to the terms and conditions contained herein. 12 AGREED AND ACCEPTED: SUBLESSOR: MICRO-COMP IND. A CALIFORNIA CORP. BY: ____________________________________ ITS: ____________________________________ DATE: __________________________________ SUBLESSEE: ARTEST INC., A CALIFORNIA CORPORATION BY:_____________________________________ ITS: _____________________________________ DATE:___________________________________ 13 The undersigned, in consideration of the above Addendum, consents to the above Addendum, but this consent is given only on the condition that it shall not be construed to release, alter, or modify in any way the obligation of the original Lessee in the Master Lease or of any guarantor or surety. MASTER LESSOR: THE IRVINE COMPANY BY:_______________________________________ ITS: _______________________________________ DATE:_____________________________________ 14 EXHIBIT A (DIAGRAM) [FLOOR PLAN APPEARS HERE] [UMC LOGO APPEARS HERE] UMC-USA OFFICE LAYOUT [FLOOR PLAN] Exhibit B for the UMC All items have been received for "Exhibit B" on 7/30/99 Sub-lease Artest Corp /s/ [ILLEGIBLE]^^ ----------------- UMC Building Sherry DB office Desk Chair M/T Small chair Ron Hsu Ken White Board Chris Desk chair Computer Table Tall bookcase Desk Desk Li-Kuo Office chair Drawers Desk chair Desk Chair Small chair Simon Computer table Desk chair (2) White board YI-NAN Computer Table Desk chair Desk Web Small chair Small chair Tall bookcase Whiteboard Desk D.K. Chair desk M/T Ambrose Computer table Whiteboard Small drawers Jolle Small chair Small chair Desk Chair Cube desk Furn Fax/copier Storage Metal desk Desk Desk chair Jim K Wen AA office Computer table M.T. Computer table Small Chair WS Lin Desk Desk Chair Cube Furn Bookcase Desk Chair Desk chair WhiteBoard Small chair Wesley Bellis Jean Cube Furn Desk chair Computer table Desk Chair Small chair Desk Small chair Desk Tall bookcase Whiteboard White board 2 small chairs Desk Chair/White board George Yeh Tony Sammy Cube Furn. Tall bookcase Desk Desk Chair White board Desk Chair Desk Computer Chair Conf Rm. Desk chair Small Chair Small chair Computer table Tall bookcase Small cabinet/White board Computer rm Arthur M/T Computer table 2 small chairs Computer rm Desk M/T Office Chair
Exhibit B for the UMC building Vickie Desk chair Small Chair Iris Desk Chair Jessica Lin Jessie Lee Chair Desk chair Small chair Judy Small chair Justin Desk Chair Helen Desk chair Fenny Small Chair Desk Chair Jade Eunice Desk chair Desk chair Small chair Mei-Chu Desk Chair Jenny Lee Desk Chair Small Chair Cafe' Round Table Seven Chairs Henry Lin Desk chair Small Chair Exhibit B for the UMC Sub-lease Arques Building - ------------------------- Computer Desk Metal desk Half wood bookcase Office Chair Small chair Whiteboard Tall White bookcase - ------------------------- - ------------------------- Half Wood bookcase Metal desk Office Chair Small Chair Large bookcase Whiteboard - ------------------------- - ------------------------- Bookcase tall - ------------------------- - ------------------------- Half Bookcase Wood Desk Wood computer Table Whiteboard Office Chair Tall bookcase - ------------------------- Ray's office - ------------------------- Tall bookcase Half bookcase Wood Desk Computer table Desk chair Whiteboard - ------------------------- Bellone - ------------------------- Desk chair Desk Small chair Tall bookcase Half drawer - ------------------------- Aileen - ------------------------- Wood computer table Desk Desk chair Small chair Wood computer table Desk Desk chair Small chair Printer chair - ------------------------- Ron's office - ------------------------- Wood computer table Desk chair Desk Half drawers Tall wood bookcase Green Chair Whiteboard - ------------------------- Five cubes 3 small chairs Cafe' Round table 3 small chairs 2 tables Computer room Credenza Front Desk Desk chair 2 chairs and table EX-23.1 6 0006.txt CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. San Jose, California June 30, 2000 -----END PRIVACY-ENHANCED MESSAGE-----