-----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, UIXIq+NbXlfUi1n8iWmNzdEmEcw0p+YLvxBILVIf86uIZoBgtYPv3WKvReDpZJDK /QO6A0cniZlf3SKmZ/ngPg== 0000950159-03-000413.txt : 20030514 0000950159-03-000413.hdr.sgml : 20030514 20030514172728 ACCESSION NUMBER: 0000950159-03-000413 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTSON TECHNOLOGY INC CENTRAL INDEX KEY: 0000928421 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 770208119 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-24838 FILM NUMBER: 03700312 BUSINESS ADDRESS: STREET 1: 2800 BAYVIEW DR CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5106575900 10-Q 1 matt10q_1qtr.txt MATTSON TECHNOLOGY 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q --------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 0-21970 ------------------ MATTSON TECHNOLOGY, INC. ------------------------ (Exact name of registrant as specified in its charter) Delaware 77-0208119 -------- ---------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 47131 Bayside Drive Fremont, California 94538 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (510) 657-5900 -------------- (Registrant's telephone number, including area code) --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Number of shares of common stock outstanding as of May 2, 2003: 44,866,783. MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES --------------------- TABLE OF CONTENTS PART I. FINANCIAL INFORMATION PAGE NO. -------- Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets at March 30, 2003 and December 31, 2002 ......................................... 3 Condensed Consolidated Statements of Operations for the three months ended March 30, 2003 and March 31, 2002 ................ 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 30, 2003 and March 31, 2002 ............... 5 Notes to Condensed Consolidated Financial Statements ............ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................... 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 31 Item 4. Controls and Procedures ........................................ 32 PART II. OTHER INFORMATION Item 1. Legal Proceedings .............................................. 33 Item 2. Changes in Securities .......................................... 33 Item 3. Defaults Upon Senior Securities................................. 34 Item 4. Submission of Matters to a Vote of Security Holders............. 34 Item 5. Other Information............................................... 34 Item 6. Exhibits and Reports on Form 8-K ............................... 34 Signatures...................................................... 36 Certifications ................................................. 37 2 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands) ASSETS Mar. 30, Dec. 31, 2003 2002 --------- --------- Current assets: Cash and cash equivalents $ 81,719 $ 87,879 Restricted cash 586 1,105 Accounts receivable, net 21,960 34,834 Advance billings 21,621 27,195 Inventories 28,624 50,826 Inventories - delivered systems 3,692 47,444 Prepaid expenses and other current assets 21,465 13,676 --------- --------- Total current assets 179,667 262,959 Property and equipment, net 15,591 18,855 Goodwill 8,239 12,675 Intangibles 3,611 15,254 Other assets 144 2,416 --------- --------- $ 207,252 $ 312,159 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit $ 810 $ -- Accounts payable 12,409 14,346 Accrued liabilities 82,535 77,795 Deferred revenue 24,413 108,698 --------- --------- Total current liabilities 120,167 200,839 --------- --------- Long-term liabilities: Deferred income taxes 1,341 5,215 --------- --------- Total long-term liabilities 1,341 5,215 --------- --------- Total liabilities 121,508 206,054 --------- --------- Stockholders' equity: Common stock 45 45 Additional paid-in capital 542,502 542,482 Accumulated other comprehensive income 2,741 7,131 Treasury stock (2,987) (2,987) Accumulated deficit (456,557) (440,566) --------- --------- Total stockholders' equity 85,744 106,105 --------- --------- $ 207,252 $ 312,159 ========= ========= See accompanying notes to condensed consolidated financial statements. 3 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited) THREE MONTHS ENDED --------------------------- MAR. 30, MAR. 31, 2003 2002 ------------ ---------- Net sales $ 67,758 $ 46,205 Cost of sales 49,167 38,786 --------- --------- Gross profit 18,591 7,419 --------- --------- Operating expenses: Research, development and engineering 7,550 9,564 Selling, general and administrative 16,873 22,097 Amortization of intangibles 1,167 1,687 --------- --------- Total operating expenses 25,590 33,348 --------- --------- Loss from operations (6,999) (25,929) Loss on disposition of Wet Business (10,257) - Interest and other income, net 1,203 1 --------- ---------- Loss before benefit from income taxes (16,053) (25,928) Benefit from income taxes (62) (151) --------- --------- Net loss $ (15,991) $ (25,777) ========= ========== Net loss per share: Basic $ (0.36) $ (0.70) Diluted $ (0.36) $ (0.70) Shares used in computing net loss per share: Basic 44,859 37,079 Diluted 44,859 37,079 See accompanying notes to condensed consolidated financial statements. 4 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
THREE MONTHS ENDED ------------------------ MAR. 30, MAR. 31, 2003 2002 -------- -------- Cash flows from operating activities: Net loss $(15,991) $(25,777) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 2,389 2,400 Deferred taxes (454) (621) Provision for allowance for doubtful accounts (585) 277 Provision for excess and obsolete inventories -- 1,216 Amortization of goodwill and intangibles 1,167 1,687 Loss on disposition of Wet Business 10,257 -- Loss on disposal of property and equipment 245 84 Changes in assets and liabilities: Accounts receivable 11,403 15,327 Advance billings (1,637) 11,311 Inventories 2,110 10,043 Inventories - delivered systems 12,871 9,781 Prepaid expenses and other current assets (8,982) 1,728 Other assets 2,184 (811) Accounts payable (1,678) (2,567) Accrued liabilities 11,291 (2,718) Deferred revenue (33,890) (12,036) -------- -------- Net cash provided by (used in) operating activities (9,300) 9,324 -------- -------- Cash flows from investing activities: Purchases of property and equipment (731) (91) Proceeds from the sale of equipment -- 2,413 Proceeds from disposition of Wet Business 2,000 -- Net proceeds from the sale and maturity (purchases) of investments -- (383) -------- -------- Net cash provided by investing activities 1,269 1,939 -------- -------- Cash flows from financing activities: Payments on line of credit and long-term debt -- (5,119) Borrowings against line of credit 810 177 Proceeds from exercise of options 20 -- Change in interest accrual on STEAG note -- 647 Proceeds from the issuance of common stock, net of costs -- 457 Restricted cash 519 (1,271) -------- -------- Net cash provided by (used in) financing activities 1,349 (5,109) -------- -------- Effect of exchange rate changes on cash and cash equivalents 522 (216) -------- -------- Net increase in cash and cash equivalents (6,160) 5,938 Cash and cash equivalents, beginning of period 87,879 64,057 -------- -------- Cash and cash equivalents, end of period $ 81,719 $ 69,995 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 MATTSON TECHNOLOGY, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS March 30, 2003 (unaudited) Note 1 Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet as of December 31, 2002 has been derived from the audited financial statements as of that date, but does not include all disclosures required by generally accepted accounting principles. The financial statements should be read in conjunction with the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Estimates are used for, but are not limited to, the accounting for the allowance for doubtful accounts, inventory reserves, depreciation and amortization periods, sales returns, warranty costs and income taxes. Actual results could differ from these estimates. The condensed consolidated financial statements include the accounts of Mattson Technology, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the three months ended March 30, 2003 are not necessarily indicative of results that may be expected for the future quarters or for the entire year ending December 31, 2003. Recent Accounting Pronouncements In November 2002, the EITF reached a consensus on issue 00-21, "Multiple - Deliverable Revenue Arrangements" (EITF 00-21). EITF 00-21 addresses how to account for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The consensus mandates how to identify whether goods or services or both which are to be delivered separately in a bundled sales arrangement should be accounted for separately because they are "separate units of accounting." The guidance can affect the timing of revenue recognition for such arrangements, even though it does not change rules governing the timing or patterns of revenue recognition of individual items accounted for separately. The final consensus will be applicable to agreements entered into in fiscal years beginning after June 15, 2003 with early adoption permitted. Additionally, companies will be permitted to apply the consensus guidance to all existing arrangements as the cumulative effect of a change in accounting principle in accordance with APB Opinion No. 20, "Accounting Changes." The Company is assessing the potential impact of this guidance, but at this point does not believe the adoption of EITF 00-21 will have a material impact on its financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure. The statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosures in both annual and interim financial statements about the method of accounting for stock-based employee 6 compensation and the effect of the method used on reported results. The Company adopted the disclosure provisions of SFAS No. 148 on January 1, 2003. We do not anticipate that adoption of this statement will have a material impact on our consolidated balance sheets or consolidated statements of operations. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities", an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of this standard will have no material impact on the consolidated financial statements. Stock-Based Compensation The Company accounts for its stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net loss, as all options granted under those plans had an exercise price equal to market value of the underlying common stock on the date of grant. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure." The statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of SFAS No. 148 on January 1, 2003. The following table sets forth the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, "Accounting For Stock-Based Compensation", to stock-based employee compensation (in thousands, except per share data): THREE MONTHS ENDED ------------------------- MAR. 30, MAR. 31, 2003 2002 ---------- ---------- Net loss: As reported $ (15,991) $ (25,777) Add: Total stock-based employee compensation expense included in net loss -- -- Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (473) (2,574) ---------- ---------- Pro forma $ (16,464) $ (28,351) ========== ========== Diluted net loss per share: As reported $ (0.36) $ (0.70) Pro forma $ (0.37) $ (0.76) 7 Note 2 Balance Sheet Detail (in thousands): MAR. 30, DEC. 31, 2003 2002 -------- ------- Inventories: Purchased parts and raw materials $13,537 $27,085 Work-in-process 14,766 20,492 Finished goods 321 3,249 ------- ------- $28,624 $50,826 ======= ======= Note 3 Disposition of Wet Business On March 17, 2003, the Company sold the portion of its business that was engaged in developing, manufacturing, selling, and servicing wet surface preparation products for the cleaning and preparation of semiconductor wafers (the "Wet Business") to SCP Global Technologies, Inc. ("SCP"). The Company had originally acquired the Wet Business on January 1, 2001, as part of its merger with the STEAG Semiconductor Division and CFM. As part of this disposition, SCP acquired certain subsidiaries and assets, and assumed certain contracts relating to the Wet Business, including the operating assets, customer contracts and inventory of CFM, all outstanding stock of Mattson Technology IP, Inc. ("Mattson IP"), a subsidiary that owns various patents relating to the Wet Business, and all equity ownership interest in Mattson Wet Products GmbH, a subsidiary in Germany that owned the Company's principal Wet Business operations. The Company retained all the cash from the Wet Business entities, and the Company retained all rights to payments under the settlement and license agreements with DNS. SCP acquired the rights to any damages under pending patent litigation relating to patents owned by Mattson IP. SCP assumed responsibility for the operations, sales, marketing and technical support services for the Company's former wet product lines worldwide. The initial purchase price paid to the Company by SCP to acquire the Wet Business was $2 million in cash. That initial purchase price is subject to adjustment based on a number of things, including the net working capital of the Wet Business at closing, to be determined based on a pro forma post-closing balance sheet, and an earn-out, up to an aggregate maximum of $5 million, payable to the Company based upon sales by SCP of certain products to identified customers through December 31, 2004. The Company is obligated to (i) fund salary and severance costs relating to reductions in force to be implemented in Germany after the closing, (ii) assume certain real property leases relating to transferred facilities, subject to a sublease to SCP, (iii) reimburse SCP for future legal fees, up to a maximum of $1 million, in pending patent litigations, and (iv) reimburse SCP for amounts necessary to cover specified customer responsibilities. In the first quarter of 2003, the Company recorded a $10.3 million loss on the disposition of its Wet Business, as detailed below (in thousands): Contractual purchase price payment from SCP $ 2,000 Net book value of assets sold, including goodwill and intangibles (80,824) Net book value of liabilities assumed by SCP, including deferred revenues 76,117 Other (7,550)(A) -------- Loss on disposition of Wet Business $(10,257) ======== 8 (A) Included in other category are cumulative translation adjustments, costs associated with reduction in force, working capital adjustment, legal indemnification, investment banker's fees, legal, accounting and other professional fees directly associated with the disposition of Wet Business. Note 4 Goodwill and Intangible Assets The following table summarizes the components of goodwill, other intangible assets and related accumulated amortization balances (in thousands):
March 31, 2003 December 31, 2002 ----------------------------------------- ------------------------------------------ Gross Net Gross Net Carrying Accumulated Carrying Carrying Accumulated Carrying Amount Amortization Amount Amount Amortization Amount ------------ -------------- ------------ ------------ -------------- ------------- (unaudited) Goodwill $ 8,239 $ -- $ 8,239 $12,675 $ -- $12,675 Other intangible assets -- -- -- -- -- -- Developed technology 6,565 (2,954) 3,611 24,994 (9,740) 15,254 ------- ------- ------- ------- ------- ------- Total goodwill and intangible assets $14,804 $(2,954) $11,850 $37,669 $(9,740) $27,929 ======= ======= ======= ======= ======= =======
Amortization expense related to intangible assets was as follows (unaudited, in thousands): THREE MONTHS ENDED ------------------------ MAR. 30, MAR. 31, 2003 2002 ---------- ---------- Developed technology amortization $1,167 $1,687 ------ ------ Total amortization $1,167 $1,687 ====== ====== The Company adopted SFAS No. 141 and SFAS No. 142, on January 1, 2002, and is no longer amortizing goodwill. The Company had completed the annual goodwill impairment test in the fourth quarter of 2002 and determined no impairment existed. The Company evaluates goodwill at least on an annual basis and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future cash flow. No assurances can be given that future evaluations of goodwill will not result in charges as a result of future impairment. The Company will continue to amortize the identified intangibles. The amortization expense is estimated to be $2.2 million for fiscal 2003 and thereafter $1.3 million for each of fiscal years 2004 and 2005. Amortization of intangibles for the three months ended March 30, 2003 was approximately $1.2 million. In the first quarter of 2003, the Company sold goodwill amounting to $4.4 million and intangible assets relating to developed technology with a net book value of $10.5 million, in connection with the Wet Business divestiture. Note 5 Net Income (Loss) Per Share Earnings per share is calculated in accordance with SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires dual presentation of basic and diluted net income (loss) per share on the face of the income statement. Basic earnings per share (EPS) is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. For purposes of computing diluted earnings per share, weighted average common share equivalents do not include stock options with an exercise price that exceeded the average market price of the Company's common stock for the period. All amounts in the following table are in thousands except per share data. 9 THREE MONTHS ENDED ------------------------ MAR. 30, MAR. 31, 2003 2002 ---------- ---------- BASIC AND DILUTED LOSS PER SHARE: Loss available to common stockholders $ (15,991) $ (25,777) Weighted average common shares outstanding 44,859 37,079 ---------- ---------- Basic and diluted loss per share $ (0.36) $ (0.70) ========== ========== Total stock options outstanding at March 30, 2003 and March 31, 2002 of 5,374,250 and 4,614,367 shares, respectively, were excluded from the computation of diluted EPS because the effect of including them would have been antidilutive. Note 6 Comprehensive Income (Loss) SFAS No. 130 establishes standards for disclosure and financial statement presentation for reporting total comprehensive income and its individual components. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The following are the components of comprehensive loss: THREE MONTHS ENDED ----------------------------- (in thousands) MAR. 30, MAR. 31, 2003 2002 -------- -------- Net loss $(15,991) $(25,777) Cumulative translation adjustments (129) (66) Decrease in minimum pension liability -- (36) Unrealized investment gain (loss) 88 (14) Loss on cash flow hedging instruments (34) (116) -------- -------- Comprehensive loss $(16,066) $(26,009) ======== ======== The components of accumulated other comprehensive income (loss), net of related tax, are as follows: (in thousands) MAR. 30, DEC. 31, 2003 2002 -------- ------- Cumulative translation adjustments $ 2,404 $ 6,848 Unrealized investment gain (loss) 1 (87) Gain on cash flow hedging instruments 336 370 ------- ------- $ 2,741 $ 7,131 ======= ======= 10 Note 7 Reportable Segments SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for reporting information about operating segments in financial statements. 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 of the Company is the Company's chief decision maker. As the Company's business is completely focused on one industry segment, design, manufacturing and marketing of advanced fabrication equipment to the semiconductor manufacturing industry, management believes that the Company has one reportable segment. The Company's revenues and profits are generated through the sale and service of products for this one segment. As a result, no additional operating segment information is required to be disclosed. The following is net sales information by geographic area for the periods presented (dollars in thousands): Three Months Ended ------------------------------------------- March 30, 2003 March 31, 2002 ------------------ -------------------- ($) (%) ($) (%) --------- ------ --------- ------ United States $ 10,715 16 $ 7,163 16 Germany 8,228 12 5,857 13 Europe - others 533 1 4,658 10 Taiwan 19,776 29 7,055 15 Asia Pacific (including Korea, Singapore and China) 26,347 39 17,714 38 Japan 2,159 3 3,758 8 --------- -------- $ 67,758 $ 46,205 ========= ======== The net sales above have been allocated to the geographic areas based upon the installation location of the systems. For purposes of determining sales to significant customers, the Company includes sales to customers through its distributor (at the sales price to the distributor) and excludes the distributor as a significant customer. In the first quarter of 2003, three customers accounted for 16%, 24% and 25% of net sales. In the first quarter of 2002, three customers accounted for 11%, 14% and 16% of net sales. Note 8 Debt The Company's Japanese subsidiary has a credit facility with a Japanese bank in the amount of 900 million Yen (approximately $7.5 million at March 30, 2003), secured by specific trade accounts receivable of the Japanese subsidiary. The facility bears interest at a per annum rate of TIBOR plus 75 basis points. The term of the facility is through June 20, 2003. The Company has given a corporate guarantee for this credit facility. At March 30, 2003, $0.8 million has been borrowed under this credit facility. On March 29, 2002 the Company entered into a one-year revolving line of credit with a bank in the amount of $20.0 million. The expiration date of the line of credit has been extended from March 27, 2003 to April 26, 2004. All borrowings under this credit line bear interest at a per annum rate equal to the bank's prime rate plus 125 basis points. The line of credit is secured by a blanket lien on all of the Company's domestic assets including intellectual property. The line of credit requires the Company to satisfy certain quarterly financial covenants, including maintaining a minimum quick ratio and minimum tangible net worth, and meeting minimum revenue targets. At March 30, 2003, the Company was in compliance with the covenants and there were no borrowings under this credit line. 11 Note 9 Private Placement On April 30, 2002, the Company issued 7.4 million shares of common stock in a private placement transaction. Of the 7.4 million shares issued, 1.3 million shares were issued to Steag Electronic Systems AG upon conversion of $8.1 million of outstanding promissory notes at $6.15 per share. The remaining 6.1 million shares were sold to other investors at $6.15 per share for aggregate gross cash proceeds of $37.5 million. Note 10 Related Party Transactions The Company has outstanding three loans to Brad Mattson, who was formerly a director and the Chief Executive Officer of the Company. Mr. Mattson resigned as an officer of the Company in October 2001 and resigned as a director in November 2002. In the second quarter of 2000, the Company extended a loan to Mr. Mattson in the principal amount of $200,000, with interest payable at 6% per annum. The loan was originally due in the first quarter of 2001, but was subsequently extended to December 31, 2002. Mr. Mattson is currently in default on the repayment of this loan. In April 2002, the Company extended a loan to Mr. Mattson in the principal amount of $700,000. This loan did not bear interest and was due and payable on August 31, 2002. Mr. Mattson has partially repaid this loan in the amount of $200,000, and is currently in default as to the balance. On July 3, 2002, the Company extended an additional loan to Brad Mattson in the principal amount of $2,600,647. The interest rate on this loan is the greater of the prime rate plus 125 basis points, or that interest rate that would have been charged under a margin agreement the borrower had previously maintained with Prudential Securities. The loan is secured by a pledge of shares of stock of the Company, and was due and payable on December 31, 2002. In late December 2002, the Company entered into a Forbearance Agreement with Mr. Mattson in which the Company agreed to forbear from taking legal action provided that Mr. Mattson repays the loan in quarterly installments, with final payment due December 31, 2003. On March 28, 2003, Mr. Mattson paid $115,000 towards the installment payment. Mr. Mattson has acknowledged the amounts due, and has indicated his intention to repay them as soon as practicable. The Company intends to pursue the collection of the loan balances. In April 2002, the Company extended a loan to Diane Mattson, a shareholder, in the principal amount of $700,000. The loan did not bear interest and was due and payable on August 31, 2002. On July 3, 2002, the Company issued an additional loan to Ms. Mattson in the principal amount of $1,141,058. The Company and Ms. Mattson subsequently agreed to consolidate her loans, such that she owed the Company $1,841,058 under the terms of the July 3, 2002 loan. The interest rate on this loan is the greater of the prime rate plus 125 basis points, or that interest rate that would have been charged under a margin agreement the borrower had previously maintained with Prudential Securities. The loan is secured by a pledge of shares of stock of the Company, and was originally due and payable on December 31, 2002. In November 2002, Ms. Mattson repaid $90,000 on the loan. Ms. Mattson and the Company subsequently agreed to payment terms under which her loan is payable in quarterly installments beginning June 30, 2003 with final payment due June 30, 2004. Note 11 DNS Patent Infringement Suit Settlement On March 5, 2002, a jury in San Jose, California rendered a verdict in favor of the Company's then subsidiary, Mattson Wet Products, Inc. (formally CFM Technologies, Inc.), in a patent infringement suit against Dainippon Screen Manufacturing Co., Ltd. ("DNS"), a large Japanese manufacturer of semiconductor wafer processing equipment. The jury found that six different DNS wet processing systems infringed on two of CFM's drying technology patents and that both patents were valid. On June 24, 2002, the Company and DNS jointly announced that they have amicably resolved their legal disputes with a comprehensive, global settlement agreement, which included termination of all outstanding litigation between the companies. The Company also released all DNS customers from any claims of infringement relating to their purchase and future use of DNS wet processing equipment. In addition, DNS and the Company entered into a cross license agreement pertaining to automated batch immersion wet processing systems. 12 Under the cross license agreement, the Company and DNS will pay royalties to each other for future sales of products utilizing the cross licensed technologies. The settlement agreement and license agreement requires DNS to make payments to Mattson totaling between $75 million (minimum) and $105 million (maximum), relating to past damages, partial reimbursement of attorney's fee and costs, and royalties. The settlement and minimum royalty payments are payable in varying amounts at varying dates through April 1, 2007, as follows: Fiscal Year Ending DNS December 31, Payments ------------------ -------------- (in thousands) 2002 $ 27,000 2003 24,000 2004 6,000 2005 6,000 2006 6,000 2007 6,000 -------- Total $ 75,000 ======== As of March 30, 2003, the Company had received payments aggregating $27.0 million from DNS under the terms of the settlement agreement. Additionally, on April 1, 2003 and April 30, 2003, the Company received $6.0 million and $7.0 million, respectively, from DNS. The Company has obtained an independent appraisal of the DNS arrangements to determine, based on relative fair values, how much of the aggregate payments due to Mattson are attributable to past disputes and how much are attributable to future royalties on DNS sales of the wet processing products. Based on the appraisal, the Company allocated $15.0 million to past damages, which was recorded as "other income" during 2002, and allocated $60 million to royalty income, which is being recognized in the income statement on a straight-line basis over the license term. During the three months ended March 30, 2003, the Company recognized approximately $3.0 million of royalty income. On March 17, 2003, as part of the disposition of the Wet Business, the Company sold to SCP the subsidiary that owns the patents licensed to DNS. However, the Company retained all rights to payments under the settlement and license agreements. See Note 3. Note 12 Guarantees The Company adopted Financial Accounting Standards Board Interpretation No. 45 "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Indebtedness of Others" (FIN 45) during the fourth quarter of 2002. FIN 45 requires disclosures concerning the Company's obligation under certain guarantees, including its warranty obligations. The warranty offered by the Company on its systems ranges from 12 months to 36 months depending on the product. A provision for the estimated cost of warranty is recorded as a cost of sales when the revenue is recognized. Under its warranty obligations, the Company is required to repair or replace defective products or parts, generally at a customer's site, during the warranty period at no cost to the customer. The warranty offered on the Company's systems ranges from 12 months to 36 months depending on the product. A provision for the estimated cost of warranty is recorded as a cost of sales, based on the historical costs, at the time of revenue recognition. The actual system performance and/or field expense profiles may differ from historical experience, and in those cases the Company adjusts its warranty accruals accordingly. The following table is the detail of the 13 product warranty accrual, for the three months ended March 30, 2003 and March 31, 2002: (in thousands) Three months ended ------------------------- March 30, March 31, 2003 2002 -------- -------- Balance at beginning of period $ 16,486 $ 19,936 Accrual for warranties issued during the period 2,207 3,222 Changes in liability related to pre-existing warranties -- -- Settlements made during the period (1,156) (1,357) -------- -------- Balance at end of period $ 17,537 $ 21,801 ======== ======== During the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties as required. As of March 30, 2003, the maximum potential amount of future payments that the Company could be required to make under these guarantee agreements is approximately $0.8 million. The Company has not recorded any liability in connection with these guarantee arrangements beyond that required to appropriately account for the underlying transaction being guaranteed. The Company does not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these guarantee arrangements. The Company is a party to a variety of agreements pursuant to which it may be obligated to indemnify the other party with respect to certain matters. Typically, these obligations arise in the context of contracts entered into by the Company, under which the Company may agree to hold the other party harmless against losses arising from a breach of representations or under which the Company may have an indemnity obligation to the counterparty with respect to certain intellectual property matters or certain tax related matters. Customarily, payment by the Company with respect to such matters is conditioned on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party s claims. Further, the Company's obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by the Company. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company's financial position or results of operations. The Company believes if it were to incur a loss in any of these matters, such loss should not have a material effect on the Company's financial position or results of operations. Note 13 Non-Recurring, Restructuring and Other Charges During the third and fourth quarter of 2002, the Company recorded restructuring and other charges of $17.3 million in connection with the plan to align its cost structure with projected sales resulting from the unfavorable economic conditions and to reduce future operating expenses. This restructuring program included a workforce reduction at certain locations, the shut-down of its Malvern, Pennsylvania operations, the write-down of certain fixed assets and intangible assets and the consolidation of excess facilities. The following is a summary of activities in restructuring related accruals during the three months ended March 30, 2003: Liability as of Liability as of December 31, Cash Payments March 30, 2002 in 2003 2003 --------------- ------------- --------------- Workforce reduction $ 2,307 $(1,738) $ 569 Consolidation of excess facilities 2,056 (187) 1,869 ------- ------- ------- Total $ 4,363 $(1,925) $ 2,438 ======= ======= ======= The Company anticipates that the accrued liabilities at March 30, 2003 for the workforce reduction and the consolidation of excess facilities will be paid out in the next three months and the next two to three years, respectively. 14 Note 14 Commitments and Contingencies The Company is party to certain claims arising in the ordinary course of business. While the outcome of these matters is not presently determinable, management believes that they will not have a material adverse effect on the financial position or results of operations of the Company. The Company, at its Exton, Pennsylvania location, leases two buildings previously used to house its manufacturing and administrative functions related to wet surface preparation products. The lease for both buildings has approximately 16 years remaining with an approximate combined rental cost of $1.5 million annually. The lease agreement for both buildings allows for subleasing the premises without the approval of the landlord. The administrative building has been sublet for a period of five years with an option for the tenant to extend for an additional five years. The sublease is expected to cover all related costs on the administrative building. In the second quarter of 2002, the Company leased space in two new facilities in Malvern, Pennsylvania to house its administrative functions previously located in Exton, Pennsylvania. These leases are each for a two year term. In determining the facilities lease loss, net of cost recovery efforts from expected sublease income, various assumptions were made, including, the time period over which the building will be vacant; expected sublease terms; and expected sublease rates. The Company has estimated that under certain circumstances the facilities lease losses could increase approximately $1.5 million for each additional year that the facilities are not leased and could aggregate approximately $24.0 million under certain circumstances. The Company expects to make payments related to the above noted facilities lease losses over the next sixteen years, less any sublet amounts. In connection with the disposition of the Wet Business, the Company agreed to assume the lease obligations with respect to the facilities used to house the manufacturing and administrative functions of the transferred Wet Business in Pliezhausen Germany. That lease has approximately 3 years remaining with an approximate rental cost of $1.2 million annually. The Company has sublet the facilities to SCP on terms that cover all rent and costs payable by the Company under the primary lease. Under its sublease, SCP has the right upon 90 days notice to partially or completely terminate the sublease, in which case the Company would become responsible for the lease costs, net of cost recovery efforts and any sublease income. In the ordinary course of business, the Company is subject to claims and litigation, including claims that it infringes third party patents, trademarks and other intellectual property rights. Although the Company believes that it is unlikely that any current claims or actions will have a material adverse impact on its operating results or our financial position, given the uncertainty of litigation, we can not be certain of this. Moreover, the defense of claims or actions against the Company, even if not meritorious, could result in the expenditure of significant financial and managerial resources. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report. In addition to historical information, this discussion contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors including, but not limited to, those set forth or incorporated by reference under "Factors That May Affect Future Results and Market Price of Stock" and elsewhere in this document. Overview We are a leading supplier of semiconductor wafer processing equipment used in the front-end-of-line fabrication of integrated circuits. Our products include dry strip, RTP and PECVD equipment. Our manufacturing equipment utilizes innovative technology to deliver advanced processing capability and high productivity for both 200 mm and 300 mm wafer production at technology nodes at and below 130 nm. Our business depends upon capital expenditures by manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices. The semiconductor industry has 15 been experiencing a severe downturn since 2001, which has resulted in capital spending cutbacks by our customers. Semiconductor companies continue to reevaluate their capital spending, postpone their new capital equipment purchase decisions, and reschedule or cancel existing orders. Declines in demand for semiconductors occurred throughout 2001 and 2002, and have continued into 2003. Global economic conditions and consumer-related demand have not improved, resulting in low levels of investment in corporate infrastructure. The overall demand outlook is still uncertain over the intermediate term. The cyclicality and uncertainties regarding overall market conditions continue to present significant challenges to us and impair our ability to forecast near term revenue. Given that many of our costs are fixed in the short-term, our ability to quickly modify our operations in response to changes in market conditions is limited. During 2002, we took steps to restructure our operations and reduce our operating cost levels to align them with expected market conditions. Although we continue to look for ways to reduce costs, we are largely dependent upon increases in sales in order to attain profitability. If our sales do not increase, our current operating expenses could prevent us from attaining profitability and adversely affect our financial position and results of operations. On January 1, 2001, we simultaneously acquired the semiconductor equipment division of STEAG Electronic Systems AG (the "STEAG Semiconductor Division") and CFM Technologies, Inc. ("CFM"), which we refer to as "the merger." The merger substantially changed the size of our company and the nature and breadth of our product lines. At the time we completed the merger, our industry was entering an economic downturn that deepened sequentially and still continues. The merger more than doubled the size of our company, and we faced a number of challenges in integrating the merged companies, coupled with the impact of lower sales as a result of the downturn in the industry, that resulted in excess production capacity. Subsequently, during 2002, we realigned our workforce and production capacity in light of business levels experienced at that time. During 2002, we determined to refocus our business on our core technologies in dry strip and rapid thermal processing. Restructuring actions were taken in 2002 and the first quarter of 2003 to align the company with this focus and to reduce operational expenses. As part of this restructuring effort, we divested one significant line of business, our wet surface preparation products business (our "Wet Business"), which was sold to SCP Global Technologies, Inc. ("SCP") on March 17, 2003. We had originally acquired the Wet Business on January 1, 2001, as part of our merger with the STEAG Semiconductor Divison and CFM. We also narrowed our CVD focus to a limited number of strategic customers, and divested the subsidiary that had constituted our epi products group. These divestitures were the last major actions in completing our strategic restructuring plan. These actions are intended to reduce our cost structure and allow us to concentrate resources on the development of core products in enabling RTP and strip solutions. Our wet products business represented a significant portion of our revenue and our costs in 2001, 2002 and the first quarter of 2003, and the divestiture of that business will affect the comparability of our financial statements in future periods to our reported results for 2001, 2002 and the first quarter of 2003. As part of our disposition of the Wet Business, SCP acquired the operating assets, including customer contracts and inventory of one of our subsidiaries (formerly CFM Technologies, Inc.), all outstanding stock of Mattson Technology IP, Inc., which is the owner of various patents relating to the Wet Business, and all equity ownership of Mattson Wet Products GmbH, a German corporation. We retained all cash in the Wet Business, and all rights to payments under the settlement and license agreements with DNS, but we transferred all rights to any damages under pending and future patent litigation to SCP. Upon closing, SCP assumed responsibility for the operations, sales, marketing and technical support services for our former wet product lines worldwide. During the first quarter of 2003, we recorded additional accruals of approximately $11.9 million to cover certain future obligations relating to this transaction. On June 24, 2002, we settled a patent infringement lawsuit with Dainippon Screen Manufacturing Co., Ltd. ("DNS"). As part of the settlement, DNS agreed to pay us, at minimum, $75 million, relating to past damages, partial reimbursement of attorney's fees and costs, and royalties, payable in varying amounts at varying dates through 16 April 1, 2007, in return for our granting DNS a worldwide license under the previously infringed patents. Depending on the volume of future product sales by DNS, we could receive up to an additional $30 million in royalty payments. We determined, based on relative fair values, how much of the aggregate payments due to us are attributable to past damages and how much are attributable to future royalties on DNS sales of wet processing products. Based on our analysis, which included an independent appraisal, we allocated $15.0 million to past damages, which we recorded as "other income" during 2002, and we allocated $60 million to royalty income, which is being recognized in our income statements on a straight-line basis over the license term. During 2002 and in the first quarter of 2003, we recognized royalty revenue of approximately $6.3 million and $3.0 million, respectively. During 2002, we received payments aggregating $27.0 million and during April 2003, we received additional payments aggregating $13.0 million. During the quarter ended March 30, 2003, we had a net loss of $16.0 million, including $10.3 million related to the disposition of the Wet Business. Future results will depend on a variety of factors, particularly overall market conditions and the timing of significant orders, our cost reduction efforts, our ability to bring new systems to market, the timing of new product releases by our competitors, patterns of capital spending by our customers, market acceptance of new and/or enhanced versions of our systems, changes in pricing by us, our competitors, customers, or suppliers and the mix of products sold. We are dependent upon increases in sales or reductions in our cost structures in order to achieve and sustain profitability. If our sales do not increase, the current levels of operating expenses could materially and adversely affect our financial position and results. CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgements, including those related to reserves for excess and obsolete inventory, warranty obligations, bad debts, intangible assets, income taxes, restructuring costs, retirement benefits, contingencies and litigation. Management bases its estimates and judgements on historical experience and on various other factors that are believed to be reasonable under the circumstances. These form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to revenue recognition, warranty obligations, inventories, goodwill and other intangible assets, impairment of long-lived assets, and income taxes as critical to our business operations and an understanding of our results of operations. Revenue recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101). We derive revenue from two primary sources- equipment sales and spare part sales. We account for equipment sales as follows: 1) for equipment sales of existing products with new specifications or to a new customer, for all sales of new products, and for all sales of our wet surface preparation products, revenue is recognized upon customer acceptance; 2) for equipment sales to existing customers, who have purchased the same equipment with the same specifications and previously demonstrated acceptance provisions, we recognize revenue on a multiple element approach in which we bifurcate a sale transaction into two separate elements based on objective evidence of fair value of the individual elements. The two elements are shipment of the tool and 17 installation of the tool. Under this approach, the portion of the invoice price that is due after installation services have been performed and upon final customer acceptance of the tool has been obtained, generally 10% of the total invoice price, is deferred until final customer acceptance of the tool. The remaining portion of the total invoice price relating to the tool, generally 90% of the total invoice price, is recognized upon shipment and title transfer of the tool. From time to time, however, we allow customers to evaluate systems, and since customers can return such systems at any time with limited or no penalty, we do not recognize revenue until these evaluation systems are accepted by the customer. Revenues associated with sales to customers in Japan are recognized upon customer acceptance, with the exception of sales of our RTP products through our distributor in Japan, where revenues are recognized upon title transfer to the distributor. For spare parts, revenue is recognized upon shipment. Service and maintenance contract revenue is recognized on a straight-line basis over the service period of the related contract. Revenues are difficult to predict, due in part to our reliance on customer acceptance related to a portion of our revenues. Any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and could result in future operating losses. Warranty. Our warranties require us to repair or replace defective products or parts, generally at a customer's site, during the warranty period at no cost to the customer. The warranty offered on our systems ranges from 12 months to 36 months, depending on the product. At the time of revenue recognition, a provision for the estimated cost of warranty is recorded as a cost of sales based on our historical costs. While our warranty costs have historically been within our expectations and the provisions we have established, we cannot be certain that we will continue to experience the same warranty repair costs that we have in the past. A significant increase in the costs to repair our products could have a material adverse impact on our operating results for the period or periods in which such additional costs materialize. Inventories. We state inventories at the lower of cost or market, with cost determined on a first-in, first out basis. Due to changing market conditions, estimated future requirements, age of the inventories on hand and our introduction of new products, we regularly monitor inventory quantities on hand and declare obsolete inventories that are no longer used in current production. Accordingly, we write down our inventories to estimated net realizable value. Actual demand may differ from forecasted demand and such difference may result in write downs that have a material effect on our financial position and results of operations. In the future, if our inventory is determined to be overvalued, we would be required to recognize the decline in value in our cost of goods sold at the time of such determination. Although we attempt to accurately forecast future product demand, given the competitive pressures and cyclicality of the semiconductor industry there may be significant unanticipated changes in demand or technological developments that could have a significant impact on the value of our inventory and our reported operating results. Goodwill and Other Intangible Assets. We assess the realizability of goodwill and other intangible assets at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with the provisions of SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Our judgments regarding the existence of impairment indicators are based on changes in strategy, market conditions and operational performance of our business. Future events, including significant negative industry or economic trends, could cause us to conclude that impairment indicators exist and that goodwill or other intangible assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. In assessing the recoverability of goodwill and other intangible assets, we must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. 18 Impairment of Long-Lived Assets. We assess the impairment of identified intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable, in accordance with the provisions of SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets." Our judgments regarding the existence of impairment indicators are based on changes in strategy, market conditions and operational performance of our business. Future events, including significant negative industry or economic trends, could cause us to conclude that impairment indicators exist and that long-lived assets are impaired. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations. In assessing the recoverability of long-lived assets, we must make assumptions regarding estimated future cash flows and other factors, including discount rates and probability of cash flow scenarios, to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. Income taxes. We record a valuation allowance to reduce our net deferred tax asset to the amount that is more likely than not to be realized. In assessing the need for a valuation allowance, we consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, we would record an adjustment to the deferred tax asset valuation allowance. This adjustment would increase income in the period such determination was made. Results of Operations The following table sets forth our statement of operations data expressed as a percentage of net sales for the periods indicated: THREE MONTHS ENDED ------------------------- MAR. 30, MAR. 31, 2003 2002 --------- -------- Net sales 100% 100% Cost of sales 73% 84% ---- ---- Gross profit 27% 16% ---- ---- Operating expenses: Research, development and engineering 11% 21% Selling, general and administrative 25% 48% Amortization of intangibles 2% 3% ---- ---- Total operating expenses 38% 72% ---- ---- Loss from operations (11)% (56)% Loss on disposition of wet business (15)% - Interest and other income, net 2% - ---- ---- Loss before provision for income taxes (24)% (56)% Benefit from income taxes - - ---- ---- Net loss (24)% (56)% ==== ==== 19 Net Sales Net sales for the first quarter of 2003 of $67.8 million reflected an increase of 46.6% compared to $46.2 million for the first quarter of 2002, and an increase of 37.6% compared to $49.2 million for the fourth quarter of 2002. Net sales in the first quarter of 2003 increased compared to the same period of 2002 primarily due to increased customer acceptances and resulting recognition of revenue from wet systems that we delivered in earlier periods, higher shipments of dry strip and RTP products, and royalty revenue of approximately $3.0 million. Net sales increased in the first quarter of 2003 compared to the fourth quarter of 2002 primarily due to increased customer acceptances of wet systems and higher shipments of dry strip and RTP products. The divestiture of our Wet Business on March 17, 2003 will reduce our net sales and affect the comparability of our results from future periods. Net sales of Wet Business products were $32.3 million in the first quarter of 2003, $23.7 million in the first quarter of 2002 and $23.0 million in the fourth quarter of 2002, or 47.6%, 51.3% and 46.7% of total net sales, respectively. We anticipate that net sales for the second quarter of 2003 will be in the range of between $28 million and $33 million. Total deferred revenue at March 30, 2003 was approximately $24.4 million, down from $124.5 million at the end of the first quarter of 2002, and down from $108.7 million at the end of the fourth quarter of 2002. The decrease was primarily due to the elimination of deferred revenue related Wet tools as a result of the divestiture of our Wet Business on March 17, 2003. Wet Business product sales accounted for the majority of our deferred revenue. We generally expect deferred revenue from particular product sales to be recognized as revenue in our consolidated statement of operations with a time lag of six to nine months from product shipment. International sales, which are predominantly to customers based in Europe, Japan and the Pacific Rim (which includes Taiwan, Singapore, Korea and China), accounted for 84.2% and 84.5% of net sales for the first quarter of 2003 and 2002, respectively. We anticipate that international sales will continue to account for a significant portion of net sales for 2003. Gross Margin Our gross margin for the first quarter of 2003 was 27.4%, an increase from 16.1% for the first quarter of 2002. The increase in gross margin was primarily due to higher gross margins associated with wet products shipped in earlier periods for which we received customer acceptance this quarter, better absorption of our production facilities, improved manufacturing overhead efficiencies, royalty revenue recognized from DNS with no associated cost of sales, and a decrease in inventory valuation charges related to the merger that adversely affected margins in the first quarter of 2002. The divestiture of our Wet Business on March 17, 2003, will affect the comparability of our gross margins in future periods to our historical margins. We anticipate that our gross margin will rise for the second quarter of 2003, into the mid-30% range. Due to intense competition we are continuing to face pricing pressure from competitors that is also affecting our gross margin. In response, we are continuing with our cost reduction efforts and efforts to differentiate our product portfolio. We continue to have excess capacity at our remaining manufacturing sites but have reduced costs at those sites in an effort to improve our gross margin. Our gross margin has varied over the years and will continue to vary based on many factors, including competitive pressures, product mix, economies of scale, overhead absorption levels and costs associated with the introduction of new products. Research, Development and Engineering Research, development and engineering expenses for the first quarter of 2003 were $7.6 million, or 11.1% of net sales, as compared to $9.6 million, or 20.7% of net 20 sales, for the first quarter of 2002. The decrease in research, development and engineering expenses in the first quarter of 2003 was primarily due to the reduction of personnel and associated costs, more selective research and development project funding, and various cost control measures that resulted in reduction in expenses. Total research, development and engineering expenses declined from $8.5 million in the fourth quarter of 2002 as a result of the reduction of personnel and continuing cost controls during the first quarter of 2003. Our results for the first quarter ending March 30, 2003 reflect research, development and engineering expenses relating to our Wet Business only until March 17, 2003, the date the disposition was completed. As a result of the divestiture, we expect our research, development and engineering expenses to decrease in future periods, compared to historical expenses. Selling, General and Administrative Selling, general and administrative expenses for the first quarter of 2003 were $16.9 million, or 24.9% of net sales, as compared to $22.1 million, or 47.8% of net sales, for the first quarter of 2002. The decrease in selling, general and administrative expenses is primarily due to a reduction in personnel and related costs, fewer buildings, lower utilities, lower sales commissions, and lower travel expenses. Total selling, general and administrative expenses declined from $21.0 million in the fourth quarter of 2002, as a result of the reduction of personnel and continuing cost controls during the first quarter of 2003. Our results for the first quarter ending March 30, 2003 reflect selling, general and administrative expenses relating to our Wet Business only until March 17, 2003, the date disposition was completed. As a result of the divestiture, we expect our selling, general and administrative expenses to decrease in future periods, compared to historical expenses. Amortization of Goodwill and Intangibles We no longer amortize goodwill following our adoption of SFAS 142 on January 1, 2002. We continue to amortize the identified intangibles, in an amount estimated to be $2.2 million for fiscal 2003 and thereafter $1.3 million for each fiscal years 2004 and 2005. Interest and Other Income Interest and other income for the first quarter of 2003 was $1.2 million, or 1.8% of net sales, as compared to approximately $1,000, for the first quarter of 2002. During the first quarter of 2003, other income consisted of interest income of $0.3 million resulting from the investment of our cash balances, a foreign exchange gain of $0.5 million and other income of $0.4 million. In the same period of 2002, interest income of $0.5 million primarily related to the investment of our cash balances, and a foreign exchange gain of $0.9 million were offset by interest expense of $1.4 million primarily related to interest on our notes payable to SES. Provision for Income Taxes We recorded an income tax benefit for the first quarter of 2003 of approximately $62,000. The benefit consists of the deferred tax benefit on the amortization of certain intangible assets of approximately $454,000 offset by foreign taxes incurred by our foreign sales and service operations of approximately $67,000, foreign withholding taxes of approximately $300,000, and state income taxes of approximately $25,000. There is no US or German current income tax benefit or expense. In the first quarter of 2002, we recorded an income tax benefit of $0.1 million which primarily related to the reversal of the deferred tax liability associated with 21 impairment of the related intangible assets. The deferred tax liability was recorded upon acquisition of CFM and the STEAG Semiconductor Division and represented the difference between the book and tax basis of identified intangible assets. Liquidity and Capital Resources Our cash and cash equivalents, excluding restricted cash, were $81.7 million at March 30, 2003, a decrease of $6.2 million from $87.9 million at December 31, 2002. Stockholders' equity at March 30, 2003 was approximately $85.7 million compared to $106.1 million as of December 31, 2002. On April 30, 2002, we issued 7.4 million shares of common stock in a private placement transaction. Of the 7.4 million shares issued, 1.3 million shares were issued to Steag Electronic Systems AG upon conversion of $8.1 million of outstanding promissory notes at $6.15 per share. The remaining 6.1 million shares were sold to other investors at $6.15 per share for aggregate gross cash proceeds of $37.5 million. Our Japanese subsidiary has a credit facility with a Japanese bank in the amount of 900 million Yen (approximately $7.5 million at March 30, 2003), secured by specific trade accounts receivable of our Japanese subsidiary. The facility bears interest at a per annum rate of TIBOR plus 75 basis points. The term of the facility is through June 20, 2003. We have given a corporate guarantee for this credit facility. At March 30, 2003, the borrowing under this credit facility is $0.8 million. On March 29, 2002 we entered into a one-year revolving line of credit with a bank in the amount of $20.0 million. The expiration date of the line of credit has been extended from March 27, 2003 to April 26, 2004. All borrowings under this line bear interest at a per annum rate equal to the bank's prime rate plus 125 basis points. The line of credit is secured by a blanket lien on all of our domestic assets including intellectual property. The line of credit requires us to satisfy certain quarterly financial covenants, including maintaining a minimum quick ratio, minimum tangible net worth and meeting minimum revenue targets. At March 30, 2003, we were in compliance with the covenants and there were no borrowings under this credit line. On June 24, 2002, we entered into a settlement agreement and a cross license agreement with DNS under which DNS agreed to make payments to us totaling between $75 million and $105 million, relating to past damages, partial reimbursement of attorney's fee and costs, and royalties. The settlement and minimum royalty payments are payable in varying amounts at varying dates through April 1, 2007, as follows: Fiscal Year Ending DNS December 31, Payments - ------------------------ -------------- (in thousands) 2002 $ 27,000 2003 24,000 2004 6,000 2005 6,000 2006 6,000 2007 6,000 -------- Total $ 75,000 ======== Payments under the cross license agreement total a minimum of $30 million and a maximum $60 million. Once total license payments equal $30 million, the minimum payment schedule no longer applies. No further royalties are payable once total payments reach $60 million. The royalty obligations of DNS would cease if all four patents that had been the subject of the lawsuit were to be held invalid by a court. As of March 30, 2003, we had received payments aggregating $27.0 million ($24.3 million, net, after deducting 10% Japanese withholding tax) from DNS under the terms of the 22 settlement agreement. Additionally, in April 2003, we received payments aggregating $13.0 million ($11.7 million, net of withholding tax) from DNS. Net cash used in operating activities was $9.3 million during the first quarter of 2003 as compared to $9.3 million provided by operating activities during the same quarter in 2002. The net cash used in operating activities during the first quarter of 2003 was primarily attributable to a net loss of $16.0 million, a decrease in deferred revenue of $33.9 million, a decrease in prepaid expenses and other current assets of $9.0 million, a decrease in accounts payable of $1.7 million, and an increase in advanced billings of $1.6 million. The cash used in operating activities was offset by a net loss attributable to the disposition of the Wet Business of $10.3 million, a decrease in inventories of $15.0 million, an increase in accrued liabilities of $11.3 million, a decrease in accounts receivable of $11.4 million, and the non-cash depreciation and amortization of $2.4 million. The net cash provided by operating activities during the first quarter of 2002 was primarily attributable to the non-cash depreciation and amortization of $2.4 million, a decrease in accounts receivable of $15.3 million, a decrease in advance billings of $11.3 million and a decrease in inventories of $19.8 million. The cash provided by operating activities was offset by a net loss of $25.8 million, a decrease in deferred revenue of $12.0 million, a decrease in accounts payable of $2.6 million, and a decrease in accrued liabilities of $2.7 million. Net cash provided by investing activities was $1.3 million during the first quarter of 2003 as compared to $1.9 million during the same quarter last year. The net cash provided by investing activities during the first quarter of 2003 is attributable to proceeds from the disposition of the Wet Business of $2.0 million offset by purchase of property and equipment of $0.7 million. Net cash provided by investing activities during the first quarter of 2002 was $1.9 million and was attributable to the proceeds from the sale of investments of $4.1 million, and sale of equipment of $2.4 million, offset by purchases of investments of $4.4 million. Net cash provided by financing activities was $1.3 million during the first quarter of 2003 as compared $5.1 million used in financing activities during the same quarter last year. The net cash provided by financing activities during the first quarter of 2003 is primarily attributable to borrowing against our Japanese line of credit in the amount of $0.8 million and a decrease in restricted cash of $0.5 million. Net cash used in financing activities during the first quarter of 2002 was $5.1 million and was primarily attributable to the payment against our Japanese line of credit and long-term debt of $5.1 million and an increase in restricted cash by $1.3 million offset by a reduction in the interest accrual on a note payable to SES of $0.6 million, borrowings under our Japanese line of credit in the amount of $0.2 million and proceeds from our stock plans of $0.5 million. Based on current projections, we believe that our current cash and investment positions will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Our primary source of liquidity is our existing unrestricted cash balance, and cash generated by our operations. During 2001, 2002 and the first three months of 2003, we had operating losses. Our operating plans are based on and require that we reduce our operating losses, control our expenses, manage our inventories, and collect our accounts receivable balances. In this market downturn, we are exposed to a number of challenges and risks, including delays in payments of our accounts receivable by our customers, and postponements or cancellations of orders. Postponed or cancelled orders can cause us to have excess inventory and underutilized manufacturing capacity. If we are not able to significantly reduce our present operating losses over the upcoming quarters, our operating losses could adversely affect our cash and working capital balances, and we may be required to seek additional sources of financing. We may need to raise additional funds in future periods through public or private financing, or other sources, to fund our operations. We may not be able to obtain adequate or favorable financing when needed. Failure to raise capital when needed 23 could harm our business. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders would be reduced, and these equity securities may have rights, preferences or privileges senior to our common stock. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants on our operations and financial condition. RISK FACTORS: Factors That May Affect Future Results and Market Price of Stock In this report and from time to time, we may make forward looking statements regarding, among other matters, our anticipated sales and gross margins in future periods, changes in our future costs as result of our disposition of the Wet Business, our future strategy, product development plans, productivity gains of our products, financial performance and growth. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements address matters which are subject to a number of risks and uncertainties which could cause actual results to differ materially, including those set forth in our Annual Report on Form 10-K, all of which are incorporated here by reference, in addition to the following: The Semiconductor Equipment Industry is Cyclical, is Currently Experiencing a Severe and Prolonged Downturn, and Causes Our Operating Results to Fluctuate Significantly. The semiconductor industry is highly cyclical and has historically experienced periodic downturns, whether the result of general economic changes or capacity growth temporarily exceeding growth in demand for semiconductor devices. During periods of declining demand for semiconductor manufacturing equipment, customers typically reduce purchases, delay delivery of products and/or cancel orders. Increased price competition may result, causing pressure on our net sales, gross margin and net income. We are experiencing cancellations, delays and push-outs of orders, which reduce our revenues, cause delays in our ability to recognize revenue on the orders and reduce backlog. Further order cancellations, reductions in order size or delays in orders will materially adversely affect our business and results of operations. Following the very strong year in 2000, the semiconductor industry is now, since 2001, in the midst of a significant and prolonged downturn, and we and other industry participants are experiencing lower bookings, significant push outs and cancellations of orders. The severity and duration of the downturn are unknown, but is impairing our ability to sell our systems and to operate profitably. If demand for semiconductor devices and our systems remains depressed for an extended period, it will seriously harm our business. As a result of the acquisition of the STEAG Semiconductor Division and CFM at the beginning of 2001, we grew to be a larger, more geographically diverse company, less able to react quickly to the cyclicality of the semiconductor business, particularly in Europe and other regions where restrictive laws relating to termination of employees prohibited us from quickly reducing costs in order to meet the downturn. Accordingly, during this latest downturn we have been unable to reduce our expenses quickly enough to avoid incurring a loss. For the fiscal year ended December 31, 2002 and 2001, and for the first quarter of 2003, our net loss was $94.3 million, $336.7 million, and $16.0 million, respectively, compared to net income of $1.5 million for the year ended December 31, 2000. The net loss in 2002 primarily reflected the impact of our continuing decline in net sales. Subsequent to December 31, 2002, we have sold the Wet Business to SCP, which business had originally been acquired as part of our acquisition of the STEAG Semiconductor Division and CFM. If our actions to date, including our recent sale to SCP of the Wet Business, are insufficient to effectively align our cost structure with prevailing market conditions, we may be required to undertake additional cost-cutting measures, and may be unable to continue to invest in marketing, research and development and engineering at the levels we believe are necessary to maintain our competitive position in our remaining core businesses. Our failure to make these investments could seriously harm our long-term business prospects. 24 We Are Implementing New Financial Systems, and Will Need to Continue to Improve or Implement New Systems, Procedures and Controls. We are implementing new financial systems used in the consolidation of our financial results, in order to further automate processes and align the disparate systems used by our acquired businesses. The integration of the STEAG Semiconductor Division and CFM and their operational and financial systems and controls after the merger in 2001 placed a significant strain on our management information systems and our administrative, operational and financial resources, requiring us to improve our systems and implement new operational and financial systems, procedures and controls. Since that acquisition, we have been pursuing integration of the businesses, systems and controls of the three companies, as each business historically used a different financial system. We have recently implemented new financial systems to aid in the consolidation of our financial reporting operations. These financial systems are new and not yet fully operational, and we have not had extensive experience with them. We may encounter unexpected difficulties, costs or other challenges that make implementation and use of these systems more difficult or costly than expected, may cause the consolidation and reporting of our financial results to be more time-consuming than expected, and may require additional management resources than expected before they are fully implemented and operating smoothly. In addition, the sale of our Wet Business to SCP will continue to place a significant strain on our management information systems and our administrative, operational and financial resources as we separate out the Wet Business as a discontinued operation from our core businesses. Continued improvement or implementation of new systems, procedures and controls may be required, and could cause us to incur additional costs, and place further burdens on our management and internal resources. If our new financial systems do not result in the expected improvements, or if we are unable to fully implement these systems, procedures and controls in a timely manner, our business could be harmed. In addition, as a result of new requirements proposed by the Securities and Exchange Commission, in response to the passage of the Sarbanes-Oxley Act of 2002, requiring annual review and evaluation of our internal control systems, and attestation of these systems by our independent auditors, we are currently reviewing our internal control procedures, and working with our auditors to implement any enhancements of such procedures, or further documentation of such procedures, that may be necessary. Any improvements in our internal control systems or in documentation of such internal control systems could be costly to prepare or implement, divert attention of management or finance staff, and may cause our operating expenses to increase over the ensuing year. The Sale of Our Wet Business to SCP May Fail to Result in the Benefits We Anticipate, and May Cause Us to Incur Greater Costs Than Anticipated. We may not obtain the benefits we expect as a result of the sale of the Wet Business to SCP, such as greater strategic focus on our core businesses. Our agreement with SCP may require an adjustment to the initial purchase price, if the net working capital of the Wet Business after the sale is not within a specified range, and could result in a reduction of the purchase price to us. We expect the purchase price adjustment based on the net working capital at closing to result in a payment to SCP, in an amount approximately $2.0 million. We have agreed with SCP to (i) fund salary and severance costs for certain reductions in force to be implemented in Germany after the closing, (ii) assume real property leases relating to our former Pliezhausen facilities, subject to a sublease of all or a portion of such facilities to SCP, (iii) pay legal fees up to a maximum of $1 million in connection with certain pending patent litigation, and (iv) reimburse SCP for amounts to cover specified arrangements and responsibilities with customers and other costs. We recorded additional accruals of approximately $11.9 million to cover certain future obligations relating to this transaction. However, our actual costs and expenses could be greater or lesser than expected, and if greater, could materially adversely affect our results of operation in future periods. 25 In addition, our consolidated financial statements do not reflect what our financial position, results of operations and cash flows would have been had the Wet Business been a separate stand-alone entity during the periods presented. Therefore, we cannot predict with certainty what the effects of the divestiture might be on ongoing operations and results, and whether the expected cost savings will materialize, or whether the transaction may have a material effect on our financial position, results of operations or cash flows taken as a whole, or whether the transaction will contribute to our financial results differently from the investment community's expectations. Our divestiture of the Wet Business may also result in the cancellation of orders by customers who may be unhappy that we are discontinuing the product line, particularly if the customer has previously purchased wet processing products from us. We may lose future orders if customers are wary or unsure of our long-term plans, or become concerned that we will discontinue other product lines, or they elect to purchase products from suppliers that appear to have a broader product offering. Customers of our wet processing products may attempt to return the products if they fear that ongoing maintenance and support of the product will not be available. The divestiture may also prove more costly or difficult than expected, could cause us to lose key employees, and divert management attention and resources from our other core businesses, particularly over the next several quarters. In addition to the employees and facilities transferred to SCP as part of the divestiture, we are shutting down other facilities in the United States previously devoted largely to the Wet Business, and terminating additional employees not hired by SCP who had predominantly worked in the Wet Business. In order to achieve the desired cost savings from the divestiture, we will need to incur substantial restructuring costs, including severance costs associated with headcount reductions, and asset write-offs associated with manufacturing and facility closures. We may incur additional costs associated with the discontinued operations, and the dedication of management resources to the sale has distracted and may continue to distract attention from our remaining core businesses. We may incur additional costs associated with these activities, which could materially reduce our short term earnings. We Depend on Large Purchases From a Few Customers, and Any Loss, Cancellation, Reduction or Delay in Purchases By, or Failure to Collect Receivables From, These Customers Could Harm Our Business. Currently, we derive most of our revenues from the sale of a relatively small number of systems to a relatively small number of customers, which makes our relationship with each customer critical to our business. The list prices on our systems range from $500,000 to over $2.2 million. Our lengthy sales cycle for each system, coupled with customers' capital budget considerations, make the timing of customer orders uneven and difficult to predict. In addition, our backlog at the beginning of a quarter is not expected to include all orders required to achieve our sales objectives for that quarter. As a result, our net sales and operating results for a quarter depend on our ability to ship orders as scheduled during that quarter as well as obtain new orders for systems to be shipped in that same quarter. Any delay in scheduled shipments or in acceptances of shipped products would delay our ability to recognize revenue, collect outstanding accounts receivable, and would materially adversely affect our operating results for that quarter. A delay in a shipment or customer acceptance near the end of a quarter may cause net sales in that quarter to fall below our expectations and the expectations of market analysts or investors. Our list of major customers changes substantially from year to year, and we cannot predict whether a major customer in one year will make significant purchases from us in future years. Accordingly, it is difficult for us to accurately forecast our revenues and operating results from year to year. If we are unable to collect a receivable from a large customer, our financial results will be negatively impacted. 26 Our Quarterly Operating Results Fluctuate Significantly and Are Difficult to Predict, and May Fall Short of Anticipated Levels, Which Could Cause Our Stock Price to Decline. Our quarterly revenue and operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it difficult for us to predict our future operating results. This fluctuation is due to a number of factors, including: o cyclicality of the semiconductor industry; o delays, cancellations and push-outs of orders by our customers; o delayed product acceptance or payments of invoices by our customers; o size and timing of sales, shipments and acceptance of our products; o entry of new competitors into our market, or the announcement of new products or product enhancements by competitors; o sudden changes in component prices or availability; o variability in the mix of products sold; o manufacturing inefficiencies caused by uneven or unpredictable order patterns, reducing our gross margins; o higher fixed costs due to increased levels of research and development costs; and o successful expansion of our worldwide sales and marketing organization. A substantial percentage of our operating expenses are fixed in the short term and we may be unable to adjust spending to compensate for an unexpected shortfall in revenues. As a result, any delay in generating or recognizing revenues could cause our operating results to be below the expectations of market analysts or investors, which could cause the price of our common stock to decline. The Price of Our Common Stock Has Fluctuated in the Past and May Continue to Fluctuate Significantly in the Future, Which May Lead to Losses By Investors or to Securities Litigation. The market price of our common stock has been highly volatile in the past, and our stock price may decline in the future. We believe that a number of factors could cause the price of our common stock to fluctuate, perhaps substantially, including: o general conditions in the semiconductor industry or in the worldwide economy; o announcements of developments related to our business; o fluctuations in our operating results and order levels; 27 o announcements of technological innovations by us or by our competitors; o new products or product enhancements by us or by our competitors; o developments in patent litigation or other intellectual property rights; or o developments in our relationships with our customers, distributors, and suppliers. In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, have experienced extreme price fluctuations. These fluctuations have frequently been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. Legislative actions, higher insurance cost and potential new accounting pronouncements are likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations. In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and advisory services, all of which will cause our general and administrative costs to increase. Insurers are also likely to increase premiums as a result of the high claims rates incurred over the past year, and so our premiums for our various insurance policies, including our directors' and officers' insurance policies, are likely to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as a compensation expense among others, could materially increase the expenses that we report under generally accepted accounting principles and adversely affect our operating results. Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk Interest Rate Risk. Our exposure to market risk for changes in interest rates relates to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. We place our investments with high credit quality issuers and, by policy, limit the amount of credit exposure to any one issuer. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We have no cash flow exposure due to rate changes for cash equivalents and short-term investments, as all of these investments are at fixed interest rates. The table below presents the fair value of principal amounts and related weighted average interest rates for our investment portfolio as of March 30, 2003. 28 Fair Value March 30, 2003 -------------- (In thousands) Assets Cash and cash equivalents $ 81,719 Average interest rate 0.83% Restricted cash $ 586 Average interest rate 1.00% Foreign Currency Risk We are primarily a US Dollar functional currency entity. We transact business in various foreign countries and employ a foreign currency hedging program, utilizing foreign currency forward exchange contracts, to hedge foreign currency fluctuations associated with the Japanese Yen, Korean Won, Singapore Dollar and Taiwan Dollar. Our subsidiaries in Germany are EURO functional currency entities and they also employ foreign currency hedging programs, utilizing foreign currency forward exchange contracts, to hedge foreign currency fluctuations associated with the US Dollar and Japanese Yen. The goal of the hedging program is to lock in exchange rates to minimize the impact of foreign currency fluctuations. We do not use foreign currency forward exchange contracts for speculative or trading purposes. The following table provides information as of March 30, 2003 about us and our subsidiaries' derivative financial instruments, which are comprised of foreign currency forward exchange contracts. The information is provided in U.S. dollar and EURO equivalent amounts, as listed below. The table presents the notional amounts (at the contract exchange rates), the weighted average contractual foreign currency exchange rates, and the estimated fair value of those contracts.
Average Estimated Notional Contract Fair Amount Rate Value --------- ------------ -------- (In thousands, except for average contract rate) Foreign currency forward sell exchange contracts: Mattson Technology Inc. (US Dollar equivalent amount) Japanese Yen $ 4,100 120.28 $ 4,119 Mattson Thermal Products GmbH (Euro equivalent amount) U.S. Dollar EUR 8,022 1.04 EUR 7,805 Japanese Yen EUR 1,722 123.17 EUR 1,676
The local currency is the functional currency for all our foreign sales operations. Our exposure to foreign currency risk has increased as a result of our global expansion of business. To neutralize its US operation's exposure to exchange rate volatility, the Company keeps EUROS in a foreign currency bank account. The balance of this bank account was 22.3 million EUROS at March 30, 2003. 29 Item 4. Controls and Procedures (a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our "disclosure controls and procedures" (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal accounting officer concluded that, although effective, our disclosure controls and procedures continue to need improvement. In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2002, our independent accountant, PricewaterhouseCoopers LLP ("PwC") noted as a reportable condition our ongoing need to improve and automate procedures for our month-end closings. As previously reported, the same condition had been noted by our former independent accountants, Arthur Andersen LLP, in connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2001. Our management did not disagree with the report made by PwC or Andersen. In the first quarter of 2003, we implemented a new computerized system to automate these procedures. Our work to implement and improve the new system continues as an active project. (b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the quarterly evaluation by our senior management referenced in paragraph (a) above. As noted in paragraph (a) above, in the first quarter of 2003 we implemented a new computer system to automate our monthly closing procedures. PART II -- OTHER INFORMATION Item 1. Legal Proceedings. In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe that it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we can not be certain of this. Moreover, the defense of claims or actions against us, even if not meritorious, could result in the expenditure of significant financial and managerial resources. As previously reported in our most recent annual report on Form 10-K, we have been litigating three ongoing cases involving wet surface preparation intellectual property, all of which were brought in the United States District Court for the District of Delaware by our subsidiary Mattson Wet Products, Inc. (formerly CFM Technologies, Inc.) and our former subsidiary Mattson Technology IP, Inc. (formerly CFMT, Inc.). On March 17, 2003, we divested our wet surface preparation business. As part of that transaction, we sold the stock of Mattson Technologies IP, Inc., which is the owner of all the patents at issue in the three cases, and we sold the operating assets of Mattson Wet Products, Inc., including its right to damages in the pending lawsuits, to SCP Global Technologies, Inc. As a result, we no longer control Mattson Technology IP, Inc. and its actions in the pending patent litigations, although our subsidiary Mattson Wet Products, Inc. remains as a nominal co-plaintiff in those actions. Except as reported in our most recent annual report on Form 10-K, there have been no material developments in the pending cases during the first quarter of 2003. Our involvement in any patent dispute, or other intellectual property dispute or action to protect trade secrets and know-how, could result in a material adverse effect on our business. Adverse determinations in current litigation or any other litigation in which we may become involved could subject us to significant liabilities to third parties, require us to grant licenses to or seek licenses from third parties, and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business. 30 Item 2. Changes in Securities and Use of Proceeds. None Item 3. Defaults Upon Senior Securities. None Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits
2.5(1) Stock and Asset Purchase Agreement for Wet Products Division dated as of February 12, 2003, by and among Mattson Technology, Inc., a Delaware corporation, Mattson International, Inc., a Delaware corporation, Mattson Wet Products, Inc., a Pennsylvania corporation, Mattson Technology Finance, Inc., a Delaware corporation, and SCP Global Technologies, Inc., an Idaho corporation. 2.6(1) First Amendment to Stock and Asset Purchase Agreement for Wet Products Division dated as of March 17, 2003, by and among Mattson Technology, Inc., a Delaware corporation, Mattson International, Inc., a Delaware corporation, Mattson Wet Products, Inc., a Pennsylvania corporation, Mattson Technology Finance, Inc., a Delaware corporation, and SCP Global Technologies, Inc., an Idaho corporation. 3.1(2) Amended and Restated Certificate of Incorporation of the Company 3.2(3) Third Amended and Restated Bylaws of the Company 10.15 Sublease agreement dated February 27, 2003, by and between Lam Research Corporation, a Delaware Corporation, and Mattson Technology, Inc., a Delaware Corporation, for lease of building. 10.16 Lease agreement dated September 2, 2001, by and between RENCO EQUITIES IV, a California partnership, and Lam Research Corporation, a Delaware Corporation, for lease of building. 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. 99.3 Risk Factors incorporated by reference to Annual Report on Form 10-K.
31 (b) Reports on Form 8-K None - ----------- (1) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K filed on April 1, 2003. (2) Incorporated by reference from Mattson Technology, Inc. current report on Form 8-K filed on January 30, 2001. (3) Incorporated by reference from Mattson Technology, Inc. quarterly report on Form 10-Q filed on August 14, 2002. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MATTSON TECHNOLOGY, INC. Date: May 14, 2003 /s/ David Dutton --------------------------------------- David Dutton President and Chief Executive Officer /s/ Ludger Viefhues --------------------------------------- Ludger Viefhues Executive Vice President -- Finance and Chief Financial Officer 33 CERTIFICATIONS MATTSON TECHNOLOGY, INC. SARBANES-OXLEY ACT SECTION 302(a) CERTIFICATION I, David Dutton, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mattson Technology, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /S/ DAVID DUTTON ------------------------------------- David Dutton President and Chief Executive Officer 34 ************* I, Ludger Viefhues, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mattson Technology, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /S/ LUDGER VIEFHUES ------------------------------------- Ludger Viefhues Executive Vice President-Finance and Chief Financial Officer 35 EX-10 3 exb10_15.txt EXB 10.15 SUBLEASE Exhibit 10.15 SUBLEASE This Sublease ("Sublease") is entered into between Lam Research Corporation, ("Lam"), a Delaware corporation, and Mattson Technology Inc. ("Mattson") effective on February ___, 2003 (the "Effective Date"). Whereas Lam has leased some 100,728 square feet of commercial space located at 47131 Bayside Parkway, Fremont, CA (the "Premises") from Renco Equities IV ("Master Landlord") pursuant to a real property lease including an Addendum with an effective date of September 12, 2001 (the "Lease") a copy of which is attached hereto as Exhibit "A". (Initially capitalized terms not otherwise defined in this Sublease shall have the meanings attributed to such terms in the Lease); Whereas, Lam desires to sublease the Premises (as that term is defined above) to Mattson; Whereas Mattson is willing to sublease the Premises from Lam subject to the terms of the Lease, and pursuant to the terms and conditions set forth herein; and Whereas a depiction of the Premises is attached as Exhibit "B"; Based on the mutual promises contained herein and other good and valuable consideration, the parties agree as follows: 1. DEMISE. Subject to the approval of the Master Landlord and in consideration for the rents and all other charges and payments payable by Mattson, and for the agreements, terms and conditions to be performed by Mattson in this Sublease, Lam does hereby sublease to Mattson and Mattson does hereby hire and sublease from Lam, the Premises located at 47131 Bayside Parkway, Fremont, CA upon the agreements, terms and conditions of this Sublease for the term hereinafter stated. 2. USE. Mattson may use the Premises for such uses as are permitted under the Lease. 3. TERM. The term of this Sublease (the "Sublease Term") shall be for the period beginning on March 1, 2003 (the "Sublease Commencement Date") provided that the following conditions (the "Commencement Conditions") have been satisfied: (a) the execution of the Sublease by both parties; (b) Master Landlord's written consent to the Sublease in accordance with Section 24 below, (c) Mattson's payment of the Security Deposit and (d) Lam's delivery of the Premises to Mattson. Except for any early termination for default, the term shall expire on May 17, 2007 (the "Sublease Expiration Date"). If the Commencement 1 Conditions have not been satisfied by March 1, 2003, then Mattson shall be entitled to terminate this Sublease at any time prior to the satisfaction of the Commencement Conditions by providing Lam written notice of such election whereupon Lam shall return any advance rent and security deposit paid by Mattson and the parties shall thereafter have no further rights or obligations hereunder. 4. EARLY POSSESSION. If the Commencement Conditions have been satisfied prior to March 1, 2003, Mattson may negotiate with Lam for the right of early access to the second floor of the Premises as of such date for the purposes of installing furniture, equipment, phones and data connections. In the event of such early possession, Mattson agrees and acknowledges that such access (a) shall be subject to all of the provisions of this Sublease, except as the parties may otherwise agree and (b) shall not advance the Sublease Expiration Date. 4.1 SHARED PREMISES. 4.1(a). Until May 31, 2003, Mattson will only be entitled to use the second floor of the Premises (approximately 29,232 square feet) and the front lobby area of the first floor of the Premises (approximately 3,662 square feet) for a total of 32,894 square feet (collectively, referred to herein as "Mattson's Premises"), as more particularly depicted on the floor plan attached hereto as Exhibit "C". Until May 31, 2003, Lam will continue to occupy the remainder of the Premises (approximately 67,834 square feet) (referred to herein as "Lam's Premises"), as more particularly depicted on the floor plan attached hereto as Exhibit "D". During the time of shared occupancy by Mattson and Lam, the parties hereby agree that Mattson's Rent obligations shall be prorated as set forth in Section 6.2 below. Prior to the Sublease Commencement Date, Lam shall, at its sole cost and expense, install a demising wall on the first floor separating Mattson's Premises from Lam's Premises. 4.1(b). Lam shall fully vacate and surrender Lam's Premises to Mattson no later than May 31, 2003 (the "Lam Vacation Date") in accordance with the terms of Section 10 below. 4.1(c). The parties hereby agree to abide by all reasonable policies and procedures established by the other party for security and confidentiality. The parties hereby agree that their respective employees, affiliates, and agents shall not enter the premises of the other party or attempt to access any propriety information owned or held by the other party. Except in the event of an emergency or as otherwise provided in the Lease, Mattson shall have sole access to Mattson's Premises and Lam shall not enter Mattson's Premises without the prior written consent of Mattson. Except in the event of an emergency, Lam shall have sole access to Lam's Premises until the Lam Vacation Date and Mattson shall not enter Lam's Premises without the 2 prior written consent of Lam. Each party hereby agrees to indemnify and defend the other party and their affiliates, officers, directors, agents, and employees from and against any and all claims, judgments, settlements, fines, assessments, penalties, demands, losses, damages, actions, causes of action, liabilities, costs and expenses, including, without limitation, attorneys' fees and costs, which either party at any time may suffer, sustain or incur that arise, result from or are related to the unauthorized entry by one party on the premises of the other. The foregoing indemnity shall survive the expiration or earlier termination of this Sublease. The breach of any obligation of this Section 4.1(c) shall entitle the non-breaching party to terminate this Sublease. 5. SECURITY DEPOSIT. Mattson shall deliver to Lam a security deposit in the total amount of One Hundred Ninety Three Thousand Three Hundred Ninety Seven and 76/100 Dollars ($193,397.76) within three (3) business days of delivery of a fully executed copy of this Sublease. That deposit shall be held by Lam as security for Mattson's full and faithful performance of each and every term, covenant and condition of the Sublease, and Lam may retain the deposit, or any part thereof, to remedy the breach or failure to fulfill any such term, covenant or condition which (if a notice and cure period applies) Mattson has failed to cure within any applicable notice and cure period set forth in the Sublease. In the event that Lam does retain all or any portion of the deposit, such action shall be in addition to, and not in lieu of, any other rights or remedies that Lam may have under this Sublease and shall not be construed as an election of remedies. Lam shall not be required to keep the Security Deposit separate from its general funds and Mattson shall not be entitled to any interest on the deposit. If Lam so uses or applies all or any portion of the Security Deposit, Mattson shall within fifteen (15) days after written demand deposit with Lam in cash an amount sufficient to restore the Security Deposit to the full original amount. The Security Deposit, or so much thereof as has not theretofore been applied or retained by Lam pursuant to this paragraph 5, shall be returned to Mattson within sixty (60) days after the later of the expiration of the term or the date which Mattson vacates the Premises and completes its restoration conditions as described in Section 9 below. 6. RENT. Mattson shall pay Rent to Lam as provided herein. Rent under this Sublease has two components: (1) Sublease Base Rent, as set forth in Section 6.1 below; and (2) Additional Rent, as described in the Lease and as modified or supplemented by the additional items described herein (Sublease Base Rent and Additional Rent are collectively referred to herein as "Rent"). The intent of the parties is for Mattson to pay all expenses imposed on Lam by virtue of the Lease, including those expenses incurred by Lam for upkeep, repair, maintenance and landscaping performed by Lam as Additional Rent under this Sublease, calculated (where applicable) in the manner described in the Lease, except to the extent of (a) Lam's obligation to pay Base Monthly Rent under the Lease; (b) the cost to Lam to maintain the property insurance required by the Lease; (c) any obligations of Lam which relate to events that occurred prior to 3 Mattson's occupancy; and (d) Lam's obligation to pay any brokerage commission that it has assumed the obligation to pay. Rent shall be due and payable to Lam by Mattson on the same dates on which Rent is due under the Lease. At each anniversary of the Sublease Commencement Date, when the Master Landlord changes the Additional Rent payment due, and at such other mutually agreeable times, the parties shall conduct a reconciliation of the Additional Rent to provide that Mattson is paying (or has paid) to Lam the sum of Additional Rent that Lam is paying (or has paid) to Master Landlord in addition to the other amounts described herein. Lam will provide a credit against the following month(s) Additional Rent for any excess payments revealed by the reconciliation. At a reasonable time following the conclusion of the Sublease, the parties will also do a reconciliation of Additional Rent payments and will render payment to the other any sums due based on that reconciliation. Mattson's obligation to pay rent under this Sublease shall abate only to the extent that Lam's obligation to pay rent to Master Landlord shall be abated under the terms of the Lease. Upon request to Lam, Mattson shall have the right to review all of Lam's records pertaining to Additional Rent. 6.1 Sublease Base Rent. Monthly Sublease Base Rent for the Premises is as follows: Commencement Date - September 30, 2003: $0 per month; October 1, 2003 - February 29, 2004: $50,364 per month; March 1, 2004 - February 28, 2005: $92,669.76 per month; March 1, 2005 - February 28, 2006: $94,684.32 per month; March 1, 2006 - May 17, 2007: $96,698.88 per month (except for May 2007, which shall be prorated). 6.2. Additional Rent. Additional Rent will be due on the Sublease Commencement Date. Lam shall notify Mattson at least ten days in advance of the Sublease Commencement Date of the amount due as Additional Rent. During the period of shared occupation of the Premises by Mattson and Lam pursuant to Section 4.1(a) above, Mattson shall only be responsible for the Additional Rent attributable to Mattson's Premises (i.e. Mattson's Additional Rent obligation shall be prorated based on the formula of 32,894/100,728) until the earlier of (a) May 31, 2003; provided that Lam has fully vacated Lam's Premises by such date in accordance with the terms of this Sublease, or (b) Mattson's occupancy of Lam's Premises in accordance with paragraphs 4 and 4.1 above. As prorated Mattson will be responsible for all Additional Rent on the Premises, as provided in the Lease. 6.3. Prorated Rent. Notwithstanding that the parties intend the Sublease Commencement Date shall be March 1, 2003, if the Sublease Commencement Date occurs in the middle of a month, or the Expiration 4 Date occurs in the middle of a month, Base Rent and Additional Rent will be charged at a prorated rate for that month. 6.4. Payment of Property Taxes. Except to the extent prorated in accordance with Section 6.2 above, Mattson shall pay all property taxes due and payable by Lam under the Lease for the term of the Sublease. Property taxes will be paid as part of Additional Rent on a monthly basis. 6.5 Property Tax Appellant Rights. As stated in Article 13.1 of the Lease, Mattson shall have the right, and Lam's reasonable cooperation, to bring suit in any court of competent jurisdiction to recover from the taxing authority the amount of any such taxes, assessment, fee or public charge so paid. If Mattson desires to file suit to a court of competent jurisdiction or file a property tax appeal to an administrative agency as stated in the Lease, Lam agrees to give Mattson its reasonable cooperation to provide Mattson the necessary documentation to file its suit or administrative claim. 7. RIGHT TO EXTEND. Notwithstanding the right to extend set forth in Section 15 of the Addendum to the Lease, Lam hereby agrees that from and after the Effective Date and until May 17, 2006 (the "Outside Date") Mattson shall have the right to negotiate with Master Landlord and enter into a direct lease with Master Landlord for possession of the Premises upon the expiration of this Sublease. During such time period, Lam shall not exercise its option to extend under the Lease or otherwise attempt to re-occupy the Premises. If Mattson successfully enters into a direct lease with Master Landlord, Mattson shall notify Lam in writing (the "Lease Notice") on or before the Outside Date. Upon receipt of the Lease Notice from Mattson, Lam hereby agrees and acknowledges that Lam shall forfeit any right to extend the Lease as provided in Section 15 of the Addendum to the Lease and Lam covenants with Mattson that Lam shall not attempt to exercise its right to extend the Lease or otherwise seek to re-occupy the Premises. In exchange for Lam's forfeiture of its extension rights under the Lease, Mattson hereby agrees that if Mattson provides the Lease Notice to Lam in accordance with this Section 7, Mattson shall undertake the restoration obligations for the Premises set forth in Section 9.2 below. 8. LAM'S OBLIGATIONS. Lam covenants that Lam shall not voluntarily terminate or modify, or consent to the termination or modification of the Lease for any reason without Mattson's consent; provided, however, that it shall not be deemed a voluntary termination on Lam's part if Master Landlord terminates the Lease in the event of condemnation pursuant to Section 11.2 or Section 11.4 of the Lease, if Master Landlord terminates the Lease in the event of casualty pursuant to Section 10.3 of the Lease or if Lam terminates the Lease as permitted by Sections 10.4 or 11.1 of the Lease. In the event that Lam defaults on its rental obligations under the Lease, Lam shall immediately inform Mattson of same and forward any notice Lam receives from Master Landlord on to Mattson promptly upon its receipt. Lam shall immediately deliver to Mattson copies of all default notices pertaining to the Premises Lam sends to or receives from Master Landlord. 5 9. RESTORATION AND SURRENDER 9.1 Except as set forth in Section 9.2 below, Mattson shall, at its sole expense, surrender the Premises at the conclusion of the Sublease to Lam in substantially the same condition as when Mattson first took possession thereof at the beginning of this Sublease for Mattson's Premises and upon Lam's vacation for Lam's Premises, as such condition was documented in accordance with Section 10 below, except for the following items: (a) normal wear and tear, (b) any condemnation covered by Article XIII of the Lease, and (c) the remediation of Hazardous Materials present on or under the Premises, the Building, the Property or the Project, except to the extent such presence occurs during Mattson's occupancy or is caused by the acts or omissions of Mattson or Mattson's agents, invitees or employees. Notwithstanding the foregoing, Lam hereby agrees and acknowledges that Mattson shall not be responsible for the removal of any improvements, alterations or fixtures to the Premises not made or permitted by Mattson during the Sublease Term and then, only if so required by Master Landlord at the time Master Landlord grants consent for such alterations or improvements. Lam hereby agrees and acknowledges that Mattson shall not be required to comply with the surrender, removal and restoration obligations set forth in the Lease, including without limitation, Section 2.6 thereof except as provided in Section 9.2 below. 9.2 If Mattson provides Lam with the Lease Notice pursuant to Section 7 above, then Mattson shall comply with the surrender and restoration obligations set forth in Section 2.6 of the Lease. Notwithstanding the foregoing, Lam hereby agrees and acknowledges that Mattson shall not be responsible for the remediation of Hazardous Materials present on or under the Premises, the Building, the Property or the Project, except to the extent such presence occurs during Mattson's occupancy or is caused by the acts or omissions of Mattson or Mattson's agents, invitees or employees. 10. CONDITION. Except as otherwise set forth herein, Lam shall deliver to Mattson the Premises "as is", less removal of excess equipment. Lam shall deliver all building systems and subsystems in good working order and repair to the best of Lam's knowledge prior to Mattson's occupancy. Prior to the Sublease Commencement Date for Mattson's Premises and prior to the Lam Vacation Date for Lam's Premises, Lam shall take all necessary steps to obtain a hazardous materials building closure permit from the City of Fremont. Both parties acknowledge that the actual permit may not be received by the time that Mattson occupies the Premises, but Mattson's occupancy shall not relieve Lam of the obligation to obtain the building closure permit unless this Sublease is terminated as described herein. Lam shall provide Mattson with all documentation relevant to such permit process. Lam will make no tenant improvements to the Premises nor provide Mattson with any allowance for Tenant Improvements. 6 Prior to the Sublease Commencement Date, Lam and Mattson shall together complete a walk through and inspect the Premises (which inspection shall include the testing of all utility facilities, lighting, HVAC equipment, and other service equipment affecting the Premises, and an inspection of all ceilings, walls, and floors) using their best efforts to document, with digital photographs or otherwise, the existing condition of the Premises, including the identification and location of all improvements, alterations or fixtures (whether permitted or not by Master Landlord) in the Premises. Prior to the Lam Vacation Date, Lam and Mattson shall again complete a walk through and inspection of Lam's Premises to document the existing condition of Lam's Premises and identify all existing improvement, alterations and fixtures. 11. PARKING AND COMMON AREA ACCESS. Subject to the terms and conditions of the Lease, Mattson shall have the right to use the parking lot and other Common Areas on the real property on which the Premises are situated. 12. SIGNAGE. Signage shall be permitted, with the Master Landlord's approval and subject to any governmental rule or regulation, as permitted in the Lease. Mattson shall be entitled to install signage on the exterior of the Building on or after March 1, 2003. 13. ADA; Other Laws and Regulations. 13.1 To Lam's actual knowledge, it has not received any notices that the Premises are in violation of the Americans with Disabilities Act ("ADA"). Mattson acknowledges that it has been informed that it may be required to construct improvements on the Premises or invest substantial sums in the Premises to comply with governmental laws, rules or regulations (including the ADA) arising out of Mattson's alterations to the Premises or particular use of the Premises. Mattson has conducted its own independent investigation concerning its obligations under the ADA, as well as other governmental acts, rules and regulations, and is satisfied with that investigation. Mattson agrees to indemnify and hold Lam and Master Landlord harmless from any claim, cost or obligation arising from Mattson's violation or non-compliance with any governmental law, rule or regulation (including the ADA) arising out of Mattson's alterations to the premises or particular use of the Premises. 13.2 Notwithstanding the foregoing, Lam hereby agrees and acknowledges that Mattson shall not be responsible for any non-compliance with any governmental law, rule or regulation, including without limitation, the Laws, Private Restrictions, the ADA or the remediation of Hazardous Materials, concerning the Mattson Premises existing on or prior to the Sublease Commencement Date and concerning the Lam Premises existing on or 7 prior to the Lam Vacation Date. Prior to the Sublease Commencement Date for Mattson's Premises and prior to the Lam Vacation Date for Lam's Premises, Lam shall take all necessary steps to obtain a hazardous materials building closure permit from the City of Fremont. If Lam fails to obtain a hazardous materials building closure permit within twelve (12) months of the Sublease Commencement Date, then either party shall be entitled to terminate this Sublease. Lam shall provide Mattson with all documentation relevant to such permit process. Additionally, Mattson shall be entitled to have an environmental engineer conduct environmental baseline site sampling on the Premises and submit the results of such sampling (the "Environmental Report") to Mattson within forty five (45) days of the Effective Date. If the Environmental Report indicates site contamination above minimum detectable analytical levels on the Property, Building or the Premises, or any portion thereof, then, Mattson shall be entitled to terminate this Sublease by providing Lam written notice of such election. In the event that Mattson terminates this Sublease pursuant to this Section 13.2, Lam shall return to Mattson any advance rent and security deposit paid by Mattson and the parties shall thereafter have no further rights or obligations hereunder. 14. LEASE OBLIGATIONS. (A) Except as expressly set forth below in Paragraphs 14(B) or 14(C) or contrary to the terms of this Sublease, the Lease is incorporated herein in its entirety by this reference. For the purpose of this Sublease, all references in the Lease to "Landlord" shall be deemed to mean Lam and all references to "Tenant" shall be deemed to mean Mattson, all references to "Leased Premises" shall be deemed to mean Premises and all references to "Lease" shall mean this Sublease. (B) The following provisions of the Lease are specifically excluded from incorporation into this Sublease: Sections 2.3; 3.6 and 7.2 of the Lease and Section 17 of the Addendum. Article 1 of the Lease shall be used for reference only. The following provisions of the Lease are incorporated herein, with a modification, in that all references in these paragraphs to "Landlord" shall be deemed to mean "Renco Equities IV" (i.e. Landlord under the Lease): Sections 5.1.B.; 5.2; 6.2; 9.2; 10.1; 10.4; 13.3; 13.4; 13.5; 13.6; all of Article 11; and Sections 5.1; 6.1; 13.12-C of the Addendum. To the extent any of the provisions of the Lease incorporated herein are inconsistent with this Sublease, the terms of the Sublease shall prevail. Except as excluded from the Sublease or as otherwise modified by the terms of this Sublease, the following provisions of the Lease are modified in that all references in these paragraphs to "Landlord" shall be deemed to mean (i) either Lam or Renco Equities IV (when the provision refers to the Landlord's representations or ability to exercise a power or right) or (ii) both Lam and Renco Equities IV (when the provision refers to the tenant's representations, duty or obligation): Sections 4.9; 4.14; 5.1; 5.3; 5.4; 5.5; 6.1; 6.3; 8.1; 8.2; 9.1; 10:3; 13.8; 14.4 and Section 9.1 of the Addendum. To the extent any of the provisions of the Lease incorporated herein are inconsistent with this Sublease, the terms of the Sublease shall prevail. 8 (C) Notwithstanding the foregoing incorporation of the terms and conditions of the Lease, Lam shall not be responsible for the performance of any obligations to be performed by the Master Landlord under the Lease, and Mattson agrees to look solely to the Master Landlord for the performance of such obligations. At Mattson's written request, Lam covenants to use good faith, reasonable efforts to enforce against Master Landlord all provisions of the Lease benefiting Mattson. Mattson shall reimburse Lam for all reasonable costs incurred by Lam in enforcing such covenants against Master Landlord, except to the extent Master Landlord is required to reimburse Lam or directly pay for such reasonable costs pursuant to the Lease. If Master Landlord shall default in the performance of any of its obligations under the Lease or at law, Lam shall, upon request of Mattson, cooperate with Mattson in the prosecution of any action or proceeding in order to have Master Landlord (i) make such repairs, furnish such electricity, provide such services or comply with any other obligation of Master Landlord under the Lease or as required by law, and/or (ii) compensate Mattson for any earlier default by Master Landlord in the payment or performance of its liabilities and obligations under the Lease during the Sublease Term. If Lam fails to take prompt and appropriate action to enforce Lam's rights against Master Landlord, Mattson shall have the right to take such action in Lam's name and, for the purpose and to such extent, all rights and remedies of Lam under the Lease are hereby conferred upon and assigned to Mattson (D) Mattson agrees to defend, indemnify and hold Lam harmless from and against any and all claims, liabilities, losses, damages and expenses (including reasonable attorneys' fees) incurred by Lam arising out of, from or in connection with (i) the use or occupancy of the Premises by Mattson, (ii) any breach or default by Mattson under this Sublease, (iii) the failure of Mattson to perform any obligation under the terms and provisions of the Lease assumed by Mattson hereunder or required to be performed by Mattson as provided herein or (iv) any damage, injury or loss incurred by Lam as a result of the actions of Mattson or its agents, employees, contractors or invitees. 15. DEFAULT. Section 12.1 of the Lease is incorporated herein with the following modifications: the notice to cure period is shortened from ten (10) days to seven (7) days in Section 12.1.A. of the Lease and the notice to cure period is shortened from thirty (30) days to twenty (20) days in Section 12.1.C of the Lease. In the event of default by Mattson, if Lam assumes possession of the Premises, it shall be entitled, but not obligated, to seek another subtenant for the Premises. 15.1 HOLDING OVER. If Mattson remains in possession of all or any part of the Premises after the expiration of the Sublease Term (or any approved extension thereof) without the prior written consent of Lam, Lam shall have the right to seek immediate eviction of Mattson, in addition to any other remedies at law or equity. In addition, Mattson shall be obligated to pay Lam as Sublease Base Rent the amount imposed on Lam as Holdover Rent pursuant to Section 13.2 of the Lease, in addition to Additional Rent, attorneys' fees, expert fees and costs of litigation. Any such holding over shall still be subject to every other term, condition and covenant of this Sublease. 9 16. MAINTENANCE. Except as provided herein, Mattson shall assume and fulfill all maintenance or repair obligations on the Premises, to the same extent required by Lam under the Lease. Mattson shall also be responsible for the cost of all standard operating expenses, such as utilities, janitorial costs and interior maintenance. 17. TENANT IMPROVEMENTS AND EQUIPMENT. There is no allowance for Tenant Improvements under this Sublease. Lam shall, however, allow Mattson to use certain Lam telephone systems and office equipment and chattels during the term of this Sublease, as inventoried on the schedule attached hereto as Exhibit "E". All such equipment and chattels are provided "as is" without warranty of any kind. Mattson shall maintain all such equipment and chattels in substantially the same condition existing, normal wear and tear excepted. Provided that Mattson fully performs all obligations of this Sublease, Mattson shall acquire ownership of such equipment and chattels from Lam at the conclusion of the Sublease Term for no additional consideration. Mattson may, at its own expense, make tenant improvements provided that, before Mattson makes any tenant improvements or changes to the Premises, Mattson shall first obtain Lam and Master Landlord's written approval of such changes. Mattson may use the contractor of its choice for such tenant improvements, and Lam's consent to those improvements shall not be unreasonably withheld. All such improvements or changes shall comply with all laws, regulations and building codes applicable thereto. 18. INSURANCE. Lam shall continue to maintain existing insurance policies for the Premises as required under the Lease until such time as Lam has fully vacated the Premises. Mattson shall maintain insurance on the Premises as required by Article 9 of the Lease, naming both Master Landlord and Lam as additional insureds. The parties hereby agree that the waiver of subrogation contained in Section 9.3 of the Lease shall be a three party agreement binding among and inuring to the benefit of Master Landlord, Lam and Mattson; subject to Master Landlord's consent. 19. ADDITIONAL MEASURES. At no cost to Lam, Mattson shall take such reasonable, additional actions as are necessary, in Mattson's reasonable judgment, for Lam to comply with all applicable laws, rules and regulations relating to the Premises and to permit Lam's compliance with the Lease. Mattson shall conduct itself in a way so as to avoid imposing obligations upon Lam which are not created by the terms of this Sublease. 10 20. ENTIRE AGREEMENT. This Sublease in conjunction with the attachments and the provisions of the Lease incorporated herein constitute an integrated agreement and supersede all prior written or oral negotiations and agreements between the parties relating to this Sublease. 21. REPRESENTATIONS AND WARRANTIES. Lam and Mattson each make the following representations and warranties, each of which is material to the execution of this Sublease: (1) It is a corporation, duly organized, validly existing and in good standing under the laws of its state of incorporation. (2) The person executing the Sublease on its behalf has full power and authority to execute and deliver this Sublease. (3) This Sublease, once executed, is a legal, valid and binding obligation on it. (4) That it is not aware of any event, cause or condition which would constitute a breach any term or condition of the Lease by the execution of this Sublease. 23. CONSTRUCTION OF AGREEMENT. This agreement is governed by California law. The parties agree that this Sublease represents an agreement that has been mutually negotiated and agreed to by the parties, each possessing equal bargaining power, so that there will be no presumption in favor of either party in construing any ambiguities in the agreement. Should any provision of this agreement be held illegal or unenforceable, the remaining terms of this agreement shall not be affected thereby and the illegal or unenforceable provision shall be replaced by a mutually agreeable provision which reflects the intent of the parties. This agreement may not be modified or altered except by an agreement in writing signed by an authorized representative of both parties. 24. CONSENT REQUIREMENT. This Sublease is conditional upon receipt of Master Landlord's written consent, in form and substance satisfactory to Mattson. If such consent is not obtained by Lam and approved by Mattson, all prepaid deposits will be returned and neither party will have rights or obligations to the other hereunder. 25. BROKER. Lam and Mattson each warrant and represent to the other that neither has had any dealings with any real estate broker, agent or finder in connection with the negotiation of this Sublease or the introduction of the parties to this transaction, except for _____________________ (collectively, the "Brokers"). The commission for the Brokers shall be paid by Lam pursuant to the terms of a separate written agreement between Lam and the Brokers. Each party further represents and warrants that it knows of no other real estate broker, agent or finder who is, or might be, entitled to a commission or a fee in connection with this Sublease. In the event of any additional claim for brokers' or finders' fees with respect to this Lease, Mattson shall indemnify, hold harmless, protect and defend Lam from and against such claims if they shall be based upon any statement or representation or agreement made by Mattson and Lam shall indemnify, hold harmless, protect and defend Mattson from and against such claims if they shall be based on any statement, representation or agreement made by Lam. 11 26. NOTICES. All notices, demands, statements and other communications that may or are required to be given by either party to the other hereunder shall be in writing and shall be (i) personally delivered to the address or addressee provided herein or sent via facsimile to the fax number provided below, or (ii) sent by first class United States mail, postage prepaid, or (iii) delivered by a reputable messenger or overnight courier service and, in any case, addressed as follows: If to Lam: Lam Research Corporation 4300 Cushing Parkway Fremont, California 94538 Attn: Terry Bean If to Mattson (prior to the Mattson Technology, Inc., Sublease Commencement Date): 2800 Bayview Drive Fremont, California 94538 Attn: Neal Holmlund If to Mattson (after the Mattson Technology, Inc., Sublease Commencement Date): 47131 Bayside Parkway Fremont, California 94538 Attn: Neal Holmlund 27. CONFIDENTIALITY. Mattson shall preserve the confidential nature of any of Lam's confidential or proprietary information to which it is exposed. If Mattson comes into possession of any of Lam's confidential or proprietary information, it shall immediately return such information to Lam without disseminating or copying it. Wherefore, the parties affix their signatures to this Sublease as evidence of their agreement to its terms and conditions. Lam Research Corporation Mattson Technology Inc. by __________________________ by _____________________ its __________________________ its _____________________ 12 EX-10 4 exb10_16.txt EXH. 10.16 LAM LEASE Exhibit 10.16 INDUSTRIAL SPACE LEASE THIS LEASE, dated September 2, 2001 for reference purposes only, if made by and between RENCO EQUITIES IV, a California partnership ("Landlord") and Lam Research Corporation, a Delaware corporation ("Tenant"), to be effective and binding upon the parties as of the date the last of the designated signatories to this Lease shall have executed this Lease (the "Effective Date of this Lease"). ARTICLE 1 REFERENCE 1.1 Reference. All references in this Lease (subject to any further clarifications contained in this Lease) to the following terms shall have the following meaning or refer to the respective address, person, date, time period, amount, percentage, calendar year or fiscal year as below set forth: A. Tenant's Address for Notices: Lam Research Corporation 4650 Cushing Parkway Fremont, California 94538 B. Tenant's Representative: Mr. Ed Novak Phone Number: (510) 572-5291 C. Landlord's Address for Notices: RENCO EQUITIES IV 1285 Oakmead Parkway Sunnyvale, California 94085 D. Landlord's Representative: Mr. William N. Neidlg Phone Number: (408) 730-5500 E. Intended Commencement Date: May 18, 2002 F. Intended Term: Five (5) Years and 14 Days G. Lease Expiration Date: May 31, 2007 H. Tenant's Punchlist Period: N/A I. First Month's Prepaid Rent: $211,530.00, Payable May 18, 2002 J. Last Month's Prepaid Rent: N/A K. Tenant's Security Deposit: $211,530.00, Payable May 18, 2002 L. Late Charge Amount: Five Percent (5%) of the Delinquent Amount M. Tenant's Required Liability Coverage: $3,000,000.00 Combined Single Limit N. Tenant's Number of Parking Spaces: 400 O. Brokers: Mr. Craig Zodikoff, EQUIS P. Project or Property. That certain real property situated in the City of Fremont, County of Alameda, State of California, as presently improved with one (1) building, which real properly is shown on the Site Plan attached hereto as Exhibit "A" and is commonly known as Renco 38 or otherwise described as follows: 47131 Bayside Parkway Fremont, California 94538 1 Q. Building. That certain Building within the Project in which the Leased Premises are located, which Building is shown outlined in red on Exhibit "A" hereto. R. Common Areas. The "Common Areas" shall mean those areas within the Project, which are located outside the buildings and which are provided and designated by Landlord from time to time for general use by tenants of the Project, including driveways, pedestrian walkways, parking spaces, landscaped areas and enclosed trash disposal areas. S. Leased Premises. That certain space which is shown outlined in red on the Floor Plan attached as Exhibit "B" consisting of approximately 100,728 square feet of gross leasable area and, for purposes of this Lease, agreed to contain said number of square feet. The Leased Premises are commonly known as or otherwise described as follows: Renco 38 47131 Bayside Parkway Fremont, California 94538 T. Base Monthly Rent. The term "Base Monthly Rent" shall mean the following: Period Base Monthly Rent ----------------- ----------------- 05/18/02-05/31/03 $211,530.00 06/01/03-05/31/04 $218,932.00 06/01/04-05/31/05 $226,595.00 06/01/05-05/31/06 $234,528.00 06/01/06-05/31/07 $242,734.00 U. Permitted Use. The term "Permitted Use" shall mean the following: Research and development, office, light manufacturing, storage of Tenant's products. V. Exhibits. The term "Exhibits" shall mean the Exhibits to this Lease which are described as follows: Exhibit "A" Site Plan showing the Project and delineating the Building in which the Leased Premises are located. Exhibit "B" Floor Plan outlining the Leased Premises. Exhibit "D" Acceptance Agreement W. Addenda. The term "Addenda" shall mean the Addendum (or Addenda) to this Lease, which is (or are) described as follows: ARTICLE 2 LEASED PREMISES, TERM AND POSSESSION 2.1 Demise of Leased Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord for the Lease Term and upon the terms and subject to the conditions of this Lease that certain interior space described in Article 1(s) as the Leased Premises, reserving Tenant's lease of the Leased Premises, together with the appurtenant right to use the Common Areas as described in Article 2.2 below, shall be conditioned upon and be subject to the continuing compliance by Tenant with (i) all the terms and conditions of the Lease, (ii) all Laws governing the use of the Leased Premises and the Project, (iii) all Private Restrictions, easements and other matters now of public record respecting the use of the Leased Premises and the Project, and (iv) all reasonable rule and regulations from time to time established by Landlord. 2 2.2 Right to Use Common Areas. As an appurtenant right to Tenant's right to the use of the Leased Premises. Tenant shall have the non-exclusive right to use the Common Areas in conjunction with other tenants of the Project and their invitees, subject to the limitations of such use as set forth in Article 4 and solely for the purposes for which they were designated and intended. Tenant's right to use the Common Areas shall terminate concurrently with any termination of this Lease. 2.3 Lease Commencement Date and Lease Term. The term of this Lease shall begin, and the Lease Commencement Date shall be deemed to have occurred, on the Intended Commencement Date (as set forth in Article 1) unless either (i) Landlord is unable to deliver possession of the Leased Premises to Tenant on the Intended Commencement Date, in which case the Lease Commencement Date shall be as determined pursuant to Article 2.4 below. The term of the Lease shall end on the Lease Expiration Date (as set forth in Article 1), irrespective of whatever date the Lease Commencement Date is determined to be pursuant to the foregoing sentence. The Lease Term shall be that period of time commencing on the Lease Commencement Date and ending on the Lease Expiration Date (the "Lease Term"). 2.4 Delivery of Possession. By execution of this Lease, Tenant accepts possession of the Leased Premises in the presently existing condition. 2.5 Acceptance of Possession. Tenant acknowledges that it has inspected the Leased Premises and accepts them in their existing condition. 2.6 Surrender of Possession. Immediately prior to the expiration or upon the sooner termination of this Lease, Tenant shall remove all of Tenant's signs from the exterior of the Building and shall remove all of Tenant's equipment, trade fixtures, furniture, supplies, wall decorations and other personal property from the Leased Premises and shall vacate and surrender the Leased Premises to Landlord in the same condition, broom clean, as existed at the Lease Commencement Date(s). Tenant shall repair all damage to the Leased Premises caused by Tenant's removal of Tenant's property and all damage in the exterior of the Building caused by Tenant's removal of Tenant's signs. Tenant shall patch and refinish, to Landlord's reasonable satisfaction, all penetrations made by Tenant or its employees to the floor, walls or ceiling of the Leased Premises, whether such penetrations were made with Landlord's approval or not. Tenant shall clean, repair or replace all stained or damaged ceiling tile, wall coverings, except for damage caused by Landlord or Landlord's agents, and clean or replace as may be required floor coverings to the reasonable satisfaction of Landlord. Tenant shall replace all burned out light bulbs and damaged light lenses, and repair and repaint all damaged walls. Landlord shall retain a mechanical contractor at Tenant's expense to service all heating, ventilating and air conditioning equipment, and Tenant shall pay the reasonable cost for the service and the cost to restore (or replace as required) said equipment to good working order. Tenant shall pay the costs of restoring or replacing all trees, shrubs, plants, lawn and ground cover, and repair (or replace as required) all paved surfaces of the Property, and otherwise satisfy all requirements to repair any damage or excessive wear to the Leased Premises, Building, Outside Areas and/or Property [reasonable wear and tear excepted and except for those improvements or alterations installed by Tenant which Tenant has a right to remove and those improvements Landlord has notified Tenant that it shall not be required to remove]. Tenant shall repair all damage caused by Tenant to the exterior surface of the Building and the paved surfaces of the outside areas adjoining the Leased Premises and, where necessary, replace or resurface same [reasonable wear and tear excepted and except for those improvements or alterations installed by Tenant which Tenant has a right to remove and those improvements Landlord has notified Tenant that it shall not be required to remove]. Additionally, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any improvements constructed or installed by Tenant which Landlord requests be so removed by Tenant and repair all damage caused by such removal. If the Leased Premises are not surrendered to Landlord in the condition required by this Article at the expiration or sooner termination of this Lease. Landlord may, at Tenant's expense, [after giving notice and time to perform], so remove Tenant's signs, property and/or improvements not so removed and make such repairs and replacements not so made or hire, at Tenant's expense, independent contractors to perform such work. Tenant shall be liable to Landlord for all reasonable costs incurred by Landlord in returning the Leased Premises to the required condition, plus interest on all costs incurred from the date paid by Landlord at the then maximum rate of interest not prohibited by Law until paid, payable by Tenant to Landlord within ten days after receipt of a statement therefore from Landlord, and Tenant shall be deemed to have impermissibly held over until such time as such required and material work is completed [Landlord shall complete any work it performs in a reasonable time period], and Tenant shall pay Base Monthly Rent and Additional Rent in accordance with the terms of Section 13.2 ("Holding Over") until such 3 work is completed. Tenant shall indemnify Landlord against loss or liability to the extent such liability or _______ results from delay by Tenant in so surrendering the Leased Premises, including, without limitation, any claims made by any succeeding tenant or any losses to Landlord due to lost opportunities lease to succeeding tenants. 2.7 Early Occupancy. If Tenant enters into possession of the Leased Premises prior to the Intended Commencement Date (or permits its contractors to enter the Leased Premises prior to the Intended Commencement Date), unless otherwise agreed in writing by Landlord, the Lease Commencement Date shall be deemed to have occurred on such sooner date, and Tenant shall be obligated to perform all its obligations under this Lease, including the obligation to pay rent, from that sooner date. ARTICLE 3 RENT, LATE CHARGES AND SECURITY DEPOSITS 3.1 Base Monthly Rent. Commencing on the Lease Commencement Date (as determined pursuant to Article 2.3 above) and continuing throughout the Lease Term, Tenant shall pay to Landlord without prior demand therefor, in advance on the first day of each calendar month, as base monthly rent, the amount set forth as "Base Monthly Rent" in Article 1 ("Base Monthly Rent"). 3.2 Additional Rent. Commencing on the Lease Commencement Date (as determined pursuant to Article 2.3 above) and continuing throughout the Lease Term, in addition to the Base Monthly Rent, Tenant shall pay to Landlord as additional rent (the "Additional Rent") the following amounts: A. An amount equal to all Property Operating Expenses (as defined in Article 13) incurred by Landlord. Payments shall be made by whichever of the following methods (or combination of methods) is (are) from time to time designed by Landlord: (1) Landlord may bill to Tenant, on a periodic basis not more frequently than monthly, the amount of such expenses (or group of expenses) as paid or incurred by Landlord, and Tenant shall pay to Landlord the amount of such expenses within ten days after receipt of a written bill therefore from Landlord; and/or (2) Landlord may deliver to Tenant Landlord's reasonable estimate of any given expense (such as Landlord's Insurance Costs or Real Property Taxes), or group of expenses, which it anticipates will be paid or incurred for the ensuing calendar or fiscal year, as Landlord may determine, and Tenant shall pay to Landlord an amount equal to the estimated amount of such expenses for such year in equal monthly, installments during such year with the installments or Base Monthly Rent. (3) Landlord reserves the right to change from time to time the methods of billing Tenant for any given expense or group of expenses or the period basis on which such expenses are billed. B. Landlord's share of the consideration received by Tenant upon certain assignments and sublettings as required by Article 7. C. Any legal fees and costs that Tenant is obligated to pay or reimburse to Landlord pursuant to Article 13; and D. Any other charges or reimbursements due Landlord from Tenant pursuant to the terms of this Lease other than late charges and interest on a defaulted rent. 3.3 Year-End Adjustments. If Landlord shall have elected to bill Tenant for the Property Operating Expenses (or any group of such expenses) on an estimated basis in accordance with the provisions of Article 3.2A(2) above, Landlord shall furnish to Tenant within three months following the end of the applicable calendar or fiscal year, as the case may be, a statement setting forth (i) the amount of such expenses paid or incurred during the just ended calendar or fiscal year, as appropriate, and (ii) the amount that Tenant has paid to Landlord for credit against such expenses for such period. If Tenant shall have paid more than its obligation for such expenses for the stated 4 period. Landlord shall, at its election, either (i) credit the amount of such overpayment toward the next ensuing payment or payments of Additional Rent that would otherwise be due or (ii) refund in cash to Tenant the amount of such overpayment. If such year-end statement shall show that Tenant did not pay its obligation for such expenses in full, then Tenant shall pay to Landlord the amount of such underpayment within ten days from Landlord's billing of same to Tenant. The provisions of this Article shall survive the expiration or sooner termination of this Lease. 3.4 Late Charge and Interest on Rent in Default. Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expense not contemplated under this Lease, the exact amounts of which are extremely difficult or impractical to fix. Such costs and expenses will include, without limitation, administration and collection costs and processing and accounting expenses. Therefore, if any installment of Base Monthly Rent is not received by Landlord from Tenant within six calendar days after Tenant's receipt of written notice from Landlord that the same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to the amount set forth in Article 1 as the "Late Charge Amount," and if any Additional Rent is not received by Landlord within ten calendar days after same Tenant's receipt of written notice from Landlord that becomes due. Tenant shall immediately pay to Landlord a late charge in an amount equal to five percent of the Additional Rent not so paid. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for the anticipated loss Landlord would suffer by reason of Tenant's failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within to pay any rental installment or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant's failure to pay each rental installment due under this Lease when due, including the right to terminate this Lease. If any rent remains delinquent for a period in excess of twenty calendar days, then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not so paid from said twentieth day at the then maximum rate of interest not prohibited or made usurious by Law until paid. 3.5 Payment of Rent. All rent shall be paid in lawful money of the United States, without any abatement, reduction or offset for any reason whatsoever, to Landlord at such address as Landlord may designate from time to time. Tenant's obligation to pay Base Monthly Rent and all Additional Rent shall be appropriately prorated at the commencement and expiration of the Lease Term. The failure by Tenant to pay any Additional Rent as required pursuant to this Lease when due shall be treated the same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord shall have the same rights and remedies against Tenant as Landlord would have if Tenant failed to pay the Base Monthly Rent when due. 3.6 Prepaid Rent. Concurrent with the execution of this Lease, Tenant shall pay to Landlord the amount set forth in Article 1 as "First Month's Prepaid Rent" as prepayment of rent or credit against the first installment(s) of Base Monthly Rent due hereunder. Additionally, Tenant has paid to Landlord the amount set forth in Article 1 as "Last Month's Prepaid Rent" as prepayment of rent for credit against the last installment(s) of Base Monthly Rent due hereunder, subject, however, to the provisions of Article 3.7 below. 3.7 Security Deposit. Concurrent with the execution of this Lease, Tenant shall deposit with Landlord the amount set forth in Article 1 as the "Security Deposit" as security for the performance by Tenant of the terms of this Lease to be performed by Tenant, and not as prepayment of rent, Landlord may apply such portion or portions of the Security Deposit as are reasonably necessary for the following purposes: (i) to remedy any default by Tenant, in the payment of Base Monthly Rent or Additional Rent or a late charge or interest on defaulted rent; (ii) to repair damage to the Leased Premises, the Building or the Outside Areas caused by Tenant; (iii) to clean and repair the Leased Premises, the Building or the Outside Areas following their surrender to Landlord if not surrendered in the condition required pursuant to the provisions of Article 2; and (iv) to remedy any other default of Tenant to the extent permitted by Law, including, without limitation, paying in full on Tenant's behalf any sums claimed by materialmen or contractors of Tenant to be owing to them by Tenant for work done or improvements made at Tenant's request to the Leased Premises. In this regard, Tenant hereby waives any restriction on the uses to which the Security Deposit may be applied as contained in Section 1950.7(c) of the California Civil Code and/or any successor statute. In the event the Security Deposit or any portion thereof is so used, Tenant shall pay to Landlord, promptly upon demand, an amount in cash sufficient to restore the Security Deposit to the full original sum. If Tenant fails to promptly restore the Security Deposit and if Tenant shall have paid to Landlord any sums as "Last Month's Prepaid Rent," Landlord may, in addition to any other remedy Landlord may have under this Lease, reduce the amount of Tenant's Last Month's Prepaid Rent by transferring all or portions of such Last Month's Prepaid Rent 5 to Tenant's Security Deposit until such Security Deposit is restored to the amount set forth in Article 1. Landlord shall not be deemed a trustee of the Security Deposit. Landlord may use the Security Deposit in Landlord's ordinary business and shall not be required to segregate it from its general accounts. Tenant shall not be entitled to any interest on the Security Deposit. If Landlord transfers the Building or the Property during the Lease Term, Landlord may pay the Security Deposit to any subsequent owner in conformity with the provisions of Section 1950.7 of the California Civil Code and/or any successor statute, in which event the transferring landlord shall be released from all liability for the return of the Security Deposit. Tenant specifically grants to Landlord (and Tenant hereby waives the provisions of California Civil Code Section 1950.7 to the contrary) a period of sixty days following a surrender of the Leased Premises by Tenant to Landlord within which to return the Security Deposit (less permitted deductions) to Tenant, it being agreed between Landlord and Tenant that sixty days is a reasonable period of time within which to inspect the Leased Premises, make required repairs, receive and verify workmen's billings therefor, and prepare a final accounting with respect to such deposit. In no event shall the Security Deposit, or any portion thereof, be considered prepaid rent. ARTICLE 4 USE OF LEASED PREMISES AND OUTSIDE AREA 4.1 Permitted Use. Tenant shall be entitled to use the Leased Premises solely for the "Permitted Use" as set forth in Article 1 and for no other purpose whatsoever. Tenant shall leave the right to use the Outside Areas in conjunction with its Permitted Use of the Leased Premises solely for the purposes for which they were designed and intended and for no other purpose whatsoever. 4.2 General Limitations on Use. Tenant shall not do anything to in or about the Leased Premises, the Building, the Outside Areas or the Property which does or could (i) unreasonably jeopardize the structural integrity of the Building or (ii) cause damage to any part of the Leased Premises, the Building, the Outside Areas or the Property. Tenant shall not operate any equipment within the Leased Premises which does or could (i) except with Landlord's prior written consent, injure, vibrate, or shake the Leased Premises or the Building, (ii) damage, overload, corrode, or impair the efficient operation of any electrical, plumbing, sewer, heating, ventilating or air conditioning systems within or servicing the Leased Premises or the Building, or (iii) damage or impair the efficient operation of the sprinkler system (if any) within or servicing the Leased Premises or the Building. Tenant shall not install any equipment or antennas on or make any penetrations of the exterior walls or roof of the Building. Tenant shall not affix any equipment to or make any penetrations or cuts in the floor, roof or exterior walls of the Leased Premises. Tenant shall not place any loads upon the floors, walls, ceiling or roof systems which could endanger the structural integrity of the Building or damage its floors, foundations or supporting structural components. Tenant shall not place any explosive, flammable or Hazardous Materials in the drainage systems of the Leased Premises, the Building, the Outside Areas or the Property. Tenant shall not drain or discharge any fluids in the landscaped areas or across the paved areas of the Property. Tenant shall not use any of the Outside Areas for the storage of its materials, supplies, inventory or equipment, and all such materials, supplied, inventory or equipment shall at all times be stored within the Leased Premises. Tenant shall not commit nor permit to be committed any waste in or about the Leased Premises, the Building, the Outside Areas or the Property. 4.3 Noise and Emissions. All noise generated by Tenant in its use of the Leased Premises shall be confined or muffled so that it does not interfere with the businesses of or annoy the occupants and/or users of adjacent properties. All dust, fumes, odors and other emissions generated by Tenant's use of the Leased Premises shall be sufficiently dissipated in accordance with sound environmental practices and exhausted from the Leased Premises in such a manner so as not to interfere with the businesses of or annoy the occupants and/or users of adjacent properties, or cause any damage to the Leased Premises, the Building, the Outside Areas or the Property or any component part thereof or the property of adjacent property owners. 4.4 Trash Disposal. Tenant shall provide trash bins (or other adequate garbage disposal facilities) within the trash enclosure areas provided or permitted by Landlord outside the Leased Premises sufficient for the interim disposal of all of its trash, garbage and waste. All such trash, garbage and waste temporarily stored in such areas shall be stored in such a manner so that it is not visible from outside of such areas, and Tenant shall cause such trash, garbage and waste to be regularly removed from the Property at Tenant's sole cost. Tenant shall at all times keep the Leased Premises, the Building, the Outside Areas and the Property in a clean, safe and neat condition free and clear of all trash, garbage, waste and/or boxes, pallets and containers containing same at all times. 6 4.5 Signs. Other than one business identification sign which is first approved by Landlord in accordance with this Article, Tenant shall not place or install on or within any portion of the Leased Premises, the exterior of the Building, the Outside Areas or the Property any sign, advertisement, banner, placard, or picture which is visible from the exterior of the Leased Premises. Tenant shall not place or install on or within any portion of the Lease Premises, the exterior of the Building, the Outside Areas of the Property any business identification-identification sign which is visible from the exterior of the Leased Premises until Landlord shall have first approved in writing the location, size, content, design, method of attachment and material to be used in the making of such sign. Any sign, once approved by Landlord, shall be installed only in strict compliance with Landlord's approval, at Tenant's expense, using a person first approved by Landlord to install same. Landlord shall not unreasonably withhold its approval of Tenant's signs. Landlord may remove any signs (which have not been first approved in writing by Landlord), advertisements, banners, placards or pictures so placed by Tenant on or within the Leased Premises, the exterior of the Building, the Outside Areas or the Property and charge to Tenant the cost of such removal, together with any costs incurred by Landlord to repair any damage caused thereby, including any cost incurred to restore the surface upon which such sign was so affixed to its original condition. Tenant shall remove all of Tenant's signs, repair any damage caused thereby, and restore the surface upon which the sign was affixed to its original condition, all to Landlord's reasonable satisfaction, upon the termination of this Lease. 4.6 Compliance with Laws and Private Restrictions. Tenant shall abide by and shall promptly observe and comply with, at its sole cost and expense, all Laws and Private Restrictions respecting the use and occupancy of the Leased Premises, the Building, the Outside Areas or the Property, including, without limitation, all Laws governing the use and/or disposal of hazardous materials. 4.7 Compliance with Insurance Requirements. With respect to any insurance policies required or permitted to be carried by Landlord in accordance with the provisions of this Lease, Tenant shall not conduct (or permit any other person to conduct) any activities nor keep, store or use (or allow any other person to keep, store or use) any item or thing within the Leased Premises, the Building, the Outside Areas or the Property which (i) is prohibited under the terms of any of such policies, (ii) could result in the termination of the coverage afforded under any of such policies, (iii) could give to the insurance carrier the right to cancel any of such policies, or (iv) could cause an increase in the rates (over standard rates) charged for the coverage afforded under any of such policies. Tenant shall comply with all requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters which are necessary to maintain, at standard rates, the insurance coverages carried by either Landlord or Tenant pursuant to this Lease. 4.8 Landlord's Right to Enter. Landlord and its agents shall have the right to enter the Leased Premises during normal business hours after giving Tenant 24 hour notice except in an emergency and subject to Tenant's reasonable security measures for the purpose of (i) inspecting the same; (ii) showing the Leased Premises to prospective purchasers, mortgagees or tenants; (iii) making necessary alterations, additions or repairs; (iv) performing any of Tenant's obligations which Tenant has failed to do so. After expiration of all notice and cure periods, Landlord shall have the right to enter the Leased Premises during normal business hours (or as otherwise agreed) subject to Tenant's reasonable security measures, for purposes of supplying any maintenance or services agreed to be supplied by Landlord. Landlord shall have the right to enter the Outside Areas during the normal business hours for purposes of (i) inspecting the exterior of the Building and the Outside Areas, (ii) posting notices of non-responsibility, or "For Lease" of signs and showing the space to prospective tenants in last 6 months of Lease, and (iii) supplying any services to be provided by Landlord. Any entry into the Leased Premises or the Outside Areas obtained by Landlord in accordance with this Article shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Lease Premises, or an eviction, actual or constructive or Tenant from the Leased Premises or any portion thereof. 4.9 Use of Outside Areas. Tenant, in its use of the Outside Areas, shall at all times keep the Outside Areas in a safe condition free and clear of all materials, equipment, debris, trash (except within existing enclosed trash areas), inoperable vehicles, and other items which are not specifically permitted by Landlord to be stored or located thereon by Tenant. If, in the opinion of Landlord, unauthorized persons are using any of the Outside Areas by reason of, or under claim of, the express or implied authority or consent of Tenant, then Tenant, upon demand of Landlord, shall take reasonable action to restrain such unauthorized use, and shall initiate such appropriate proceedings as may be required to so restrain such use. 7 4.10 Rules and Regulations. Landlord shall have the right from time to time to establish reasonable rules and regulations and/or amendments or additions thereto resulting the use of the Leased Premises and the Outside Areas for the care and orderly management of the Property. Upon delivery to Tenant of a copy of such rules and regulations or any amendments or addition thereto, Tenant shall comply with such rules and regulations. A violation by Tenant of any such rules and regulations shall constitute a default by Tenant under this Lease. If there is a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible or liable to Tenant for the violation of such rules and regulations by any other tenant of the Property. 4.11 Outside Areas. No materials, pallets, supplies, tanks or containers whether above or below ground level, equipment, finished products or semi-finished products, raw materials, inoperable vehicles or articles of any nature shall be stored upon or permitted to remain outside of the Leased Premises except in fully fenced and screened areas outside the Building which have been designed for such purposes and have been approved in writing by Landlord for such use by Tenant. Tenant may mark parking spaces on the Property for its exclusive use. 4.12 Hazardous Materials. Landlord and Tenant agree as follows with respect to the existence or use of Hazardous Materials on the Property: A. Any handling, transportation, storage, treatment, disposal or use of Hazardous Materials by Tenant, Tenant's Agents, or any other party after the Effective Date of this Lease in or about the Property shall strictly comply with all applicable Hazardous Materials Laws. Tenant shall indemnify, defend upon demand with counsel reasonably acceptable to Landlord, and hold harmless Landlord from and against any and all liabilities, losses, claims, damages, lost profits, consequential damages, interest, penalties, fines, court costs, remediation costs, investigation costs, and other expenses which result from or arise in any manner whatsoever out of the use, storage, treatment, transportation, release, or disposal of Hazardous Materials on or about the Property by Tenant, Tenant's Agents, Permittees, or Invitees after the Effective Date and throughout the term of this Lease. B. If the presence of Hazardous Materials on the Property caused or permitted by Tenant, Tenant's Agents, Permittees or Invitees after the Effective Date of this Lease results in contamination or deterioration of water or soil or any other party of the Property, then Tenant shall promptly take any and all action necessary to investigate and remediate such contamination. Tenant shall further be solely responsible for, and shall defend, indemnify and hold Landlord and its agents harmless from and against all claims, costs and liabilities, including attorneys' fees and costs, arising out of or in connection with Tenant's use of Hazardous Materials on the Property. C. Landlord and Tenant shall each give written notice to the other as soon as reasonably practicable of (i) any communication received from any governmental authority concerning Hazardous Materials which relates to the Property, and (ii) any contamination of the Property by Hazardous Materials which constitutes a violation of any Hazardous Materials Law. Tenant may use small quantities of household chemicals, such as adhesives, lubricants and cleaning fluids in order to conduct its business at the Premises and such other Hazardous Materials as are necessary to the operation of Tenant's business of which Landlord receives notice prior to such Hazardous Materials being brought onto the Property by Tenant (or any portion thereof) and which Landlord consents in writing may be brought onto the Property. In granting Landlord's consent, Landlord may specify the location and manner or use, storage or handling of any Hazardous Material. Landlord's consent shall in no way relieve Tenant from any of its obligations as contained herein. Tenant shall notify Landlord in writing at least ten (10) days prior to Tenant bringing any Hazardous Material on the Leased Premises, Building, Common Areas, Outside Areas and/or Property. Tenant shall provide Landlord with a list of all Hazardous Materials and the quantities of each Hazardous Material to be stored on any portion of the Property, and upon Landlord's request, Tenant shall provide Landlord with copies of any and all Hazardous Materials Management Plans, Material Safety Data Sheets, Hazardous Waste Manifests and other documentation maintained or received by Tenant pertaining to the Hazardous Materials used, stored or transported, or to be used, stored or transported, on any portion of the Property. At any time during the Lease Term, Tenant shall, within five days after written request therefor received from Landlord, disclose in writing all Hazardous Materials that are being used by Tenant on the Property (or have been used on the Property), the nature of such use and the manner of storage and disposal. 8 D. Landlord may cause testing wells to be installed on the Property, and may cause the ground water to be tested to detect the presence of Hazardous Materials by the use of such tests as are then customarily used for such purposes. If Tenant so requests, Landlord or Tenant shall supply Tenant or Landlord with copies of such test results. The cost of such tests and of the installation, maintenance, repair and replacement of such wells shall be paid by Tenant or Landlord if such tests disclose the existence of Hazardous Materials deposited by Landlord or Tenant as appropriate. In the event the tests do not disclose the presence of Hazardous Materials, or disclose Hazardous Materials not deposited by the other party, then the costs of the tests shall be paid by the party who conducted said tests. Landlord may retain consultants to inspect the Property, conduct periodic environmental audits, and review any information provided by Tenant. Tenant shall pay the reasonable cost of fees charged by Landlord and/or Landlord's consultants as a Property Maintenance Cost. E. Upon the expiration or earlier termination of the Lease, Tenant, at its sole cost, shall remove all Hazardous Materials from the Property caused by Tenant, Tenant's Agents, Permittees or Invitees. If Tenant fails to so surrender the Property, Tenant shall indemnify and hold Landlord harmless from all damages resulting from Tenant's failure to surrender the Property required by this Subsection, including, without limitation, any claims or damages in connection with the condition of the Property, including, without limitation, damages occasioned by the inability to release the Property (or any portion thereof) or a reduction in the fair market and/or rental value of the Property, Building, Common Areas, Outside Areas and/or Property by reason of the existence of any Hazardous Materials in or around the Leased Premises, Building, Common Areas, Outside Areas and/or Property caused by Tenant, Tenant's Agents, Permittees or Invitees. If any action is required to be taken by a governmental authority to test, monitor and/or clean up Hazardous Materials from the Leased Premises, Building, Common Areas, Outside Areas and/or Property and such action is not completed prior to the expiration or earlier termination of the Lease. Landlord shall be entitled to all damages directly or indirectly incurred in connection, as a result of any release of Hazardous Materials caused or permitted by Tenant, Tenant's Agents, Permittees or Invitees, including, without limitation, damages occasioned by the inability to release the Property or a reduction of the fair market and/or rental value of the Leased Premises, Building, Common Areas, Outside Areas and/or Property. F. As used herein, the term "Hazardous Material(s)" means any hazardous or toxic substance, material or waste, which is or becomes regulated by any federal, state, regional or local governmental authority because it is in any way hazardous, toxic, carcinogenic, mutagenic or otherwise adversely affects any part of the environment or creates risks of any such hazards or effects, including, but not limited to, petroleum, asbestos and polychlorinated biphenyls and any material, substance or waste (a) defined as a "hazardous waste," "extremely hazardous waste" or "restricted hazardous waste" under Sections 25115, 25117 or 25122.7 or listed pursuant to Section 25140 of the California Health and Safety Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law); (b) defined as a "hazardous substance" under Section 25316 of the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley Tanner Hazardous Substance Account Act); (c) defined as "hazardous material," "hazardous substance" or "hazardous waste" under Section 25501 of the California Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and Inventory); (d) defined as a "hazardous substance" under Section 25281 of the California Health and Safety Code, Division 20, Chapter 6.7 (Underground Storage of Hazardous Substances); (e) defined as a "hazardous substance" pursuant to Section 311 of the Clean Water Act, 33 United States Code Sections 125, et seq. (33 U.S.C. 1321) or listed pursuant to Section 307 of the Clean Water Act (33 U.S.C. 1317); (f) defined as a "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 United States Code Sections 6901, et seq. (42 U.S.C. 6903); (g) defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 United States Code Section 9601, et seq. (42 U.S.C. 9601), (h) defined as a "hazardous substance" pursuant to Section 311 of the Federal Water Pollution Control Act (33 U.S.C. 1251, et seq.) or (i) listed pursuant to Section 307 of the Federal Water Pollution Control Act (33 U.S.C. 1317); (j) regulated under the Toxic Substances Control Act (15 U.S.C. 2601, et seq.); (k) defined as a "hazardous material" under Section 66680 or 66084 of Title 22 of the California Code of Regulations (Administrative Code); (l) listed in the United States Department of Transportation Hazardous Materials Table (49 C.F.R. 172.101); or (m) listed by the Environmental Protection Agency as "hazardous substances" (40 C.F.R. Part 302) and amendments thereto. The term "Hazardous Material Laws" shall mean (i) all of the foregoing laws as amended from time to time and (ii) any other federal, state or local law, ordinance, regulation or order regulating Hazardous Materials. G. Tenant's failure to comply with any of the requirements of this Section regarding the storage, use, disposal or transportation of Hazardous Materials on the Leased Premises, Building, Common Areas, 9 Outside Areas and/or the Property without Landlord's consent shall, after the expiration of all notice and cure periods, be an Event of Default as defined in this Lease. The obligations of Landlord and Tenant under this Section shall survive the expiration or earlier termination of the Lease Term. The rights and obligations of Landlord and Tenant within respect to issues relating to Hazardous Materials are exclusively established by this section. In the event of any inconsistency between any other part of this Lease and this Section, the terms of this Section shall control. ARTICLE 5 REPAIRS, MAINTENANCE, SERVICES AND UTILITIES 5.1 Repair and Maintenance. Except in the case of damage to or destruction of the Leased Premises, the Building, the Outside Areas or the Property caused by an Act of God or other peril, in which case the provisions of Article 10 shall control, the parties shall have the following obligations and responsibilities with respect to the repair and maintenance of the Leased Premises, the Building and the Outside Areas. A. Tenant's Obligation. Tenant shall, at all times during the Lease Term and at its sole cost and expense, regularly clean and continuously keep and maintain in good order, condition and repair the Leased Premises and every non-structural part thereof, including, without limiting the generality of the foregoing, (i) all interior walls, floors and ceilings, (ii) all windows, doors and skylights, (iii) all electrical wiring, conduits, connectors and fixtures, (iv) all plumbing, pipes, sinks, toilets, faucets and drains, (v) all lighting fixtures, bulbs and lamps, (vi) all heating, ventilating and air conditioning equipment, and (vii) all entranceways to the Leased Premises. Tenant, if requested to do so by Landlord, shall have, at Tenant's sole cost and expense, a licensed heating, ventilating and air conditioning contractor to regularly and periodically (not less frequently than every three months) inspect and perform required maintenance on the heating, ventilating and air conditioning equipment and systems serving the Leased Premises, or alternatively, Landlord may, at its election, contract in its own name for such regular and periodic inspections of and maintenance on such heating, ventilating and air conditioning equipment and systems, and charge to Tenant, as Additional Rent, the reasonable cost thereof. Tenant shall, at all times during the Lease Term, keep in a clean and orderly condition the Outside Areas. Tenant shall regularly and periodically sweep and clean the driveways and parking areas. Tenant shall, at its sole cost and expense, repair all damage to the Leased Premises, the Building, the Outside Areas or the Property caused by the activities of Tenant, its employees, invitees or contractors promptly following written notice from Landlord to so repair such damage (to the extent not covered by insurance required to be maintained hereunder). If Tenant shall fail to perform the required maintenance or fail to make repairs required of it pursuant to this Article within a reasonable period of time following notice from Landlord to do so, then Landlord may, at its election and without waiving any other remedy it may otherwise have under this Lease or at Law, perform such maintenance or make such repairs and charge to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All glass within or a part of the Leased Premises, both interior and exterior, is at the sole risk of Tenant and any broken glass shall promptly be replaced by Tenant, at Tenant's expense, with glass of the same kind, size and quality. B. Landlord's Obligation. Landlord shall, at all times during the Lease Term, maintain in good condition and repair (i) the exterior and structural parts of the Building (including the foundation, subflooring, loadbearing and exterior walls and roof; and (ii) the landscaped areas located outside the Building. The provisions of this Subarticle B shall in no way limit the right of Landlord to charge to Tenant, as Additional Rent pursuant to Article 3 (to the extent permitted pursuant to Article 3), the costs incurred by Landlord in performing such maintenance and/or making such repairs. 5.2 Utilities. Tenant shall arrange, at its sole cost and expense and in its own name, for the supply of gas and electricity to the Leased Premises. Landlord shall maintain the water meter(s) in its own name; provided, however, that if at the time during the Lease Term Landlord shall require Tenant to put the water service in Tenant's name, Tenant shall do so at Tenant's sole cost. Tenant shall be responsible for determining if the local supplier of water, gas and electricity can supply the needs of Tenant and whether or not the existing water, gas and electricity distribution systems within the Building and the Leased Premises are adequate for Tenant's needs. Tenant shall be responsible for determining if the existing sanitary and storm sewer systems now servicing the Leased Premises and the Property are adequate for Tenant's needs. Tenant shall pay all charges for water, gas, electricity and storm and sanitary sewer services as so supplied to the Leased Premises during the Lease Term. Landlord shall not interfere with delivery of utility service to the Property irrespective of whether or not the services are maintained in Landlord's or Tenant's name. 10 5.3 Security. Tenant acknowledges that Landlord has not undertaken any duty whatsoever to provide security for the Leased Premises, the Building, the Outside Areas or the Property and, accordingly, Landlord is not responsible for the security of same or the protection of Tenant's property or Tenant's employees, invitees or contractors. To the extent Tenant determines that such security or protection services are advisable or necessary, Tenant shall arrange for and pay the costs of providing same. 5.4 Energy and Resource Consumption. Landlord may cooperate in a reasonable manner with the mandatory efforts of governmental agencies and/or utility suppliers in reducing energy or other resource consumption within the Property. Tenant shall not be entitled to terminate this Lease or to any reduction in, or abatement of, rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all reasonable rules established by Landlord (i) in order to maximize the efficient operation of the electrical, heating, ventilating and air conditioning systems and all other energy or other resource consumption systems within the Property and/or (ii) in order to comply with the requirements and recommendations of utility suppliers and governmental agencies regulating the consumption of energy and/or other resources. 5.5 Limitation of Landlord's Liability. Except for injury, damage or loss which arises from the negligence, willful misconduct or breach of this Lease by Landlord's agents, employees or contractors, Landlord shall not be liable to Tenant for injury to Tenant, its employees, agents, invitees or contractors, damage to Tenant's property or loss of Tenant's business or profits, nor shall Tenant be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of (i) Landlord's failure to provide security services or systems within the Property for the protection of the Leased Premises, the Building or the Outside Areas, or the protection of Tenant's property or Tenant's employees, invitees, agents or contractors, (ii) Landlord's failure to perform any maintenance or repairs to the Leased Premises, the Building, the Outside Areas or the Property until Tenant shall have first notified Landlord, in writing, of the need for such maintenance or repairs, and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such maintenance or repairs, (iii) any failure, interruption, rationing or other curtailment in the supply of water, electric current, gas or other utility service to the Leased Premises, the Building, the Outside Areas or the Property from whatever cause (other than Landlord's sole active negligence or willful misconduct), or (iv) the unauthorized intrusion or entry into the Leased Premises by third parties (other than Landlord). ARTICLE 6 ALTERATIONS AND IMPROVEMENTS 6.1 Tenant. Tenant shall not make any alterations to or modifications of the Leased Premises or construct any improvements within the Leased Premises until Landlord shall have first approved, in writing, the plans and specifications therefore, which approvals shall not be unreasonably withheld or delayed. Landlord's consent shall not be required for non-structural interior improvements costing less than $10,000 in any calendar year. Plans are required. All such modifications, alterations or improvements, once so approved, shall be made, constructed or installed by Tenant at Tenant's expense (including all permit fees and governmental charges related thereto), using a licensed contractor first approved by Landlord, in substantial compliance with the Landlord approved plans and specifications therefore. All work undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using new materials of good quality. Tenant shall not commence the making of any such modifications or alterations or the construction of any such improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant shall have given Landlord at least five business days prior written notice of its intention to commence such work so that Landlord may post and file notices of non-responsibility, and (iv) if requested by Landlord, Tenant shall have obtained contingent liability and broad form builder's risk insurance in an amount reasonably satisfactory to Landlord to cover any perils relating to the proposed work not covered by insurance carried by Tenant pursuant to Article 9. In no event shall Tenant make any modifications, alterations or improvements whatsoever to the Outside Areas or the exterior or structural components of the Building including, without limitation, any cuts or penetrations in the floor, roof or exterior walls of the Leased Premises without Landlord's approval which shall not be unreasonably withheld. As used in this Article, the term "modifications, alterations and/or improvements" shall include, without limitation, the installation of additional electrical outlets, overhead lighting fixtures, drains, sinks, partitions, doorways, or the like. 11 6.2 Ownership of Improvements. All modifications, alterations or improvements made or added to the Leased Premises by Tenant (other than Tenant's inventory, equipment, movable furniture, wall decorations and trade fixtures) shall be deemed real property and a part of the Leased Premises, but shall remain the property of Tenant during the Lease Term. Any such modifications, alterations or improvements, once completed, shall not be altered or removed from the Leased Premises during the Lease Term without Landlord's written approval first obtained in accordance with the provisions of Article 6.1 above. At the expiration or sooner termination of this Lease, all such modifications, alterations and improvements (other than Tenant's inventory, personal property, equipment, movable furniture, wall decorations and trade fixtures) shall automatically become the property of Landlord and shall be surrendered to Landlord as a part of the Leased Premises as required pursuant to Article 2, unless Landlord shall require Tenant to remove any of such modifications, alterations or improvements in accordance with the provisions of Article 2, in which case Tenant shall so remove same. Landlord shall have no obligation to reimburse to Tenant all or any portion of the cost or value of any such modifications, alterations or improvements so surrendered to Landlord. All modifications, alterations or improvements which are installed or constructed on or attached to the Leased Premises by Landlord at Landlord's expense shall be deemed real property and a part of the Leased Premises and shall be the property of Landlord. All lighting, plumbing, electrical, heating, ventilating and air conditioning fixtures, partitioning, window coverings, wall coverings and floor coverings installed by Tenant shall be deemed improvements to the Leased Premises and not trade fixtures of Tenant. 6.3 Alterations. Tenant shall, at its sole cost make all modifications, alterations and improvements to the Leased Premises that are required by any Law because of (i) Tenant's use or occupancy of the Leased Premises, the Building, the Outside Areas, or the Property, (ii) Tenant's application for any permit or governmental approval, or (iii) Tenant's making of any modifications, alterations or improvements to or within the Leased Premises. If Landlord shall, at any time during the Lease Term, (i) be required by any governmental authority to make any modifications, alterations or improvements to the Building or the Project, the cost incurred by Landlord in making such modifications, alterations or improvements, including an eighteen percent per annum cost of money factor, shall be amortized by landlord over the useful life of such modifications, alterations or improvements, as determined in accordance with generally accepted accounting standards, and the monthly amortized cost of such modifications, alterations and improvements as so amortized shall be considered a Property Maintenance Cost. 6.4 Liens. Tenant shall keep the Property and every part thereof free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Property. If any such claim of lien is recorded against Tenant's interest in this Lease, the Property or any part thereof, Tenant shall bond against discharge or otherwise cause such lien to be entirely released within 15 days after the same has been so recorded. Tenant's failure to do so shall be conclusively deemed a material default under the terms of this Lease. ARTICLE 7 ASSIGNMENT AND SUBLETTING BY TENANT 7.1 By Tenant. Tenant shall not sublet the Leased Premises (or any portion thereof) or assign or encumber its interest in this Lease, whether voluntarily or by operation of Law, without Landlord's prior written consent which shall not be unreasonably withheld or delayed first obtained in accordance with the provisions of this Article 7. Any attempted subletting, assignment or encumbrance without Landlord's prior written consent, at Landlord's election, shall constitute a default by Tenant under the terms of the Lease. The acceptance of rent by Landlord from any person or entity other than Tenant, or the acceptance of rent by Landlord from Tenant with knowledge of a violation of the provisions of this Article, shall not be deemed to be a waiver by Landlord of any provision of this Article or this Lease or to be a consent to any subletting by Tenant or any assignment or encumbrance of Tenant's interest in this Lease. 7.2 Merger or Reorganization. 12 7.3 Landlord's Election. If Tenant shall desire to assign its interest under this Lease or to sublet the Leased Premises, Tenant must first notify Landlord, in writing, of its intent to so assign or sublet, at least 20 days in advance of the date it intends to so assign its interest in this Lease or sublet the Leased Premises but not sooner than one hundred eighty days in advance of such date, specifying in detail the terms of such proposed assignment or subletting, including the name of the proposed assignee or subleasee, the proposed assignee's or subleasee's intended use of the Leased Premises, a current financial statement of such proposed assignee or subleasee and the form of documents to be used in effectuating such assignment or subletting. Landlord shall have a period of 10 days following receipt of such notice within which to do one of the following: (i) consent to such requested assignment or subletting subject to Tenant's compliance with the conditions set forth in Article 7.4 below or (ii) refuse to so consent to such requested assignment or subletting, provided that such consent shall not be unreasonably refused. It shall not be unreasonable for Landlord to withhold its consent to any proposed assignment or subletting if (i) the proposed assignee's or subtenant's anticipated use of the Premises involves the storage, use or disposal of a Hazardous Material; (ii) if the proposed assignee or subtenant has been required by any prior landlord, lender or governmental authority to clean up Hazardous Materials unlawfully discharged by the proposed assignee or subtenant; or (iii) if the proposed assignee or subtenant is subject to investigation or enforcement order or proceeding by any governmental authority in connection with the unlawful use, disposal or storage of a Hazardous Material. During said fifteen day period, Tenant covenants and agrees to supply to Landlord, upon request, all necessary or relevant information which Landlord may reasonably request respecting such proposed assignment or subletting and/or the proposed assignee or subleasee. 7.4 Conditions to Landlord's Consent. If Landlord elects to consent, or shall have been ordered to so consent by a court of competent jurisdiction, to such requested assignment, subletting or encumbrance, such consent shall be expressly conditioned upon the occurrence of each of the conditions below set forth and any purported assignment, subletting or encumbrance made or ordered prior to the full and complete satisfaction of each of the following conditions shall be void and, at the election of Landlord, which election may be exercised at any time following such a purported assignment, subletting or encumbrance but prior to the satisfaction of each of the stated conditions, shall constitute a material default by Tenant under this Lease until cured by satisfying in full each such condition by the assignee, subleases or encumbrances. The conditions are as follows. A. Landlord having approved in form and substance the assignment or sublease agreement (or the encumbrance agreement), which approval shall not be unreasonably withheld by Landlord if the requirements of this Article 7 are otherwise complied with. B. Each such subleasee or assignee having agreed, in writing satisfactory to Landlord and its counsel and for the benefit of Landlord, to assume, to be bound by, and to perform the obligations of this Lease to be performed by Tenant (or, in the case of an encumbrance, each such encumbrancer having similarly agreed to assume, be bound by and to perform Tenant's obligations upon a foreclosure or transfer in lieu thereof). C. Tenant having fully and completely performed all of its obligations under the terms of this Lease as of the date of such assignment or subletting. D. Tenant having reimbursed to Landlord all reasonable costs and atorneys' fees incurred by Landlord in conjunction with the processing and documentation of any such requested subletting assignment or encumbrance. E. Tenant having delivered to Landlord a complete and fully-executed duplicate original of such sublease agreement, assignment agreement or encumbrance (as applicable) and all related agreements. F. Tenant having paid, or having agreed in writing to pay as to future payments, to Landlord 50 percent of all assignment consideration or excess rentals to be paid to Tenant or to any other on Tenant's behalf or for Tenant's benefit for such assignment or subletting as follows: (1) If Tenant assigns its interest under this Lease and if all or a portion of the consideration for such assignment is to be paid by the assignee at the time of the assignment, that Tenant shall have paid to Landlord and Landlord shall have received an amount equal to 50 percent of the assignment consideration so paid or to be paid (whichever is the greater) at the time of the assignment by the assignee; or 13 (2) If Tenant assigns its interest under this Lease and if Tenant is to receive all or a portion of the consideration for such assignment in future installments, that Tenant and Tenant's assignee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant's assignee jointly agree to pay to Landlord an amount equal to 50 percent of all such future assignment consideration installments to be paid by such assignee as and when such assignment consideration is so paid. (3) If Tenant subleases the Leased Premises, that Tenant and Tenant's subleasee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant's subleasee jointly agree to pay to Landlord 50 percent of all excess rentals to be paid by such subleases as and when such excess rentals are so paid. 7.5 Assignment Consideration and Excess Rentals Defined. For purposes of the Article, the term "assignment consideration" shall mean all consideration to be paid by the assignee to Tenant or to any other on Tenant's behalf or for Tenant's benefit as consideration for such assignment, less any commissions paid by Tenant to a licensed real estate broker for arranging such assignment (not to exceed then standard rates), and the term "excess rentals" shall mean all consideration to be paid by the subleases to Tenant or to any other on Tenant's behalf or for Tenant's benefit for the sublease of the Leased Premises in excess of the rent due to Landlord under the terms of this Lease for the same period, less any commissions paid by Tenant to a licensed real estate broker for arranging such sublease (not to exceed then standard rates) and the cost of improvements made to the subleased premises by Tenant at its expense for the purpose of subleasing. Tenant agrees that the portion of any assignment consideration and/or excess rentals arising from any assignment or subletting by Tenant which is to be paid to Landlord pursuant to this Article now is and shall then be the property of Landlord and not the property of Tenant. 7.6 Payments. All payments required by this Article to be made to Landlord shall be made in cash in full as and when they become due. At the time Tenant, Tenant's assignee or subleases makes each such payment to Landlord, Tenant or Tenant's assignee or subleases, as the case may be, shall deliver to Landlord an itemized statement in reasonable detail showing the method by which the amount due Landlord was calculated and certified by the party making such payment as true and correct. 7.7 Good Faith. The rights granted to Tenant by this Article are granted in consideration of Tenant's express covenant that all pertinent allocations which are made by Tenant between the rental value of the Leased Premises and the value of any of Tenant's personal property which may be conveyed or leased generally concurrently with and which may reasonably be considered a part of the same transaction as the permitted assignment or subletting shall be made fairly, honestly and in good faith. 7.8 Effect of Landlord's Consent. No subletting, assignment or encumbrance, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay rent and to perform all of the obligations to be performed by Tenant hereunder. Consent by Landlord to one or more assignments or encumbrances of Tenant's interest in this Lease or to one or more sublettings of the Leased Premises shall not be deemed to be a consent to any subsequent assignment, encumbrance or subletting. If Landlord shall have been ordered by a court of competent jurisdiction to consent to a requested assignment or subletting, or such an assignment or subletting shall have been ordered over the objection of Landlord, such assignment or subletting shall not be binding between the assignee (or subleases) and Landlord until such time as all conditions set forth in Article 7.3 above have been fully satisfied (to the extent not then satisfied) by the assignee or subleases, including, without limitation, the payment to Landlord of all agreed assignment consideration and/or excess rentals then due Landlord. ARTICLE 8 LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY 8.1 Limitation on Landlord's Liability and Release. Landlord shall not be liable to Tenant for, and Tenant hereby releases Landlord and its partners, principals, officers, agents and employees from, any and all liability, whether in contract, tort or on any other basis, for any injury to or any damage sustained by Tenant, Tenant's agents, employees, contractors or invitees; any damage to Tenant's property; or any loss to Tenant's business, loss of Tenant's profits or other financial loss of Tenant resulting from or attributable to the condition of, 14 the management of, the repair or maintenance of, the protection of, the supply of services or utilities to, the damage to or destruction of the Leased Premises, the Building, the Project or the Common Areas, including without limitation (i) the failure, interruption, rationing or other curtailment or cessation in the supply of electricity, water, gas or other utility service to the Project, the Building or the Leased Premises; (ii) the vandalism or forcible entry into the Building or the Leased Premises; (iii) the penetration of water into or onto any portion of the Leased Premises through roof leaks or otherwise; (iv) the failure to provide security and/or adequate lighting in or about the Project, the Building or the Leased Premises; (v) the existence of any design or construction defects within the Project, the Building or the Leased Premises; (vi) the failure of any mechanical systems to function properly (such as the HVAC systems); or (vii) the blockage of access to any portion of the Project, the Building or the Leased Premises, except that Tenant does not so release Landlord from such liability to the extent such damage was proximately caused by Landlord's sole negligence, willful misconduct, or Landlord's failure to perform an obligation expressly undertaken pursuant to this Lease after a reasonable period of time shall have lapsed following receipt of written notice from Tenant to so perform such obligation. 8.2 Tenant's Indemnification of Landlord. Tenant shall defend with competent counsel reasonably satisfactory to Landlord any claims made or legal actions filed or threatened against Landlord with respect to the violation of any law, or the death, bodily injury, personal injury, property damage, or interference with contractual or property rights suffered by any third party (including other tenants within the Project) occurring within the Leased Premises to the extent arising from or as a result of Tenant's negligence or resulting from Tenant's use of occupancy of the Leased Premises, the Building or the Outside Areas, or resulting from Tenant's activities in or about the Leased Premises, the Building, the Outside Areas or the Property, and Tenant shall indemnify and hold Landlord, Landlord's principals, employees, agents and contractors harmless from any loss, liability, penalties, or expense whatsoever (including any loss attributable to vacant space which otherwise would have been leased, but for such activities) resulting therefrom, except to the extent proximately caused by the sole negligent acts or omissions or willful misconduct of Landlord or arising as a result of Landlord's breach of the terms of this Lease. This indemnity agreement shall survive until the latter to occur of (i) the date of the expiration, or sooner termination, of this Lease, or (ii) the date Tenant actually vacates the Leased Premises. ARTICLE 9 INSURANCE 9.1 Tenant's Insurance. Tenant shall maintain insurance complying with all of the following: A. Tenant shall procure, pay for and keep in full force and effect, at all times during the Lease Term, the following; (1) Commercial General Liability insurance insuring Tenant against liability for bodily injury, death, property damage and personal injury occurring at the Leased Premises, or resulting from Tenant's use or occupancy of the Leased Premises or the Building, Outside Areas, Property, or Common Areas or resulting from Tenant's activities in or about the Leased Premises. Such insurance shall be on an occurrence basis with a combined single limit of liability of not less than the amount of Tenant's Required Liability Coverage (as set forth in Article 1). The policy or policies shall be endorsed to name Landlord and such others as are designated by Landlord as additional insureds in the form equivalent to CG20111185 or successor and shall contain the following additional endorsement: "The insurance afforded to the additional insureds is primarily insurance. If the additional insureds have other insurance which is applicable to the loss on a contributing, excess or contingent basis, the amount of this insurance company's liability under this policy shall not be reduced by the existence of such other insurance. Any insurance carried by the additional insureds shall be excess and non contributing with the insurance provided by the tenant." The policy shall not be canceled or reduced without at least 30 days written notice to additional insureds. If the policy insures more than one location, it shall be endorsed to show that the limits and aggregate apply per location using endorsement CG25041185 or successor. Tenant's policy shall also contain the severability of interest and cross-liability endorsement or clauses. (2) Fire and property damage insurance in so-called Special Form insuring Tenant against loss from physical damage to Tenant's property and improvements within the Leased Premises with coverage for the full actual replacement cost thereof; 15 (3) Boiler and machinery insurance, if applicable; (4) including without limitation Liquor Liability insurance for liability arising out of the distribution, sale, or consumption of food and/or beverages including alcoholic beverages at the Leased Premises for not less than the Tenant's Required Liability Coverage as set forth in Article 1. (5) Workers' compensation insurance. Tenant may self insure for workers' compensation insurance. (6) With respect to making of alterations or the construction of improvements or the like undertaken by Tenant, contingent liability and builder's risk insurance, in an amount and with coverage satisfactory to Landlord; and (7) Business Income Insurance at a minimum of 50% coinsurance including coverage for loss of business income due to damage to equipment from perils covered under the so-called Special Form. B. Each policy of liability insurance required to be carried by Tenant pursuant to this Article or actually carried by Tenant with respect to the Leased Premises or the Property (i) shall be in a form reasonably satisfactory to Landlord, (ii) Shall be provided by carriers licensed to do business in the state of California, with a Best rating of "A/Vi" or better and/or reasonably acceptable to Landlord. Property insurance shall contain a waiver and/or a permission to waive by the insurer any right of subrogation against Landlord, its principal, employees, agents and contractors which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its principals, employees, agents or contractors. C. Prior to the time Tenant or any of its contractors enters the Leased Premises, Tenant shall deliver to the Landlord with respect to each policy of insurance required to be carried by Tenant pursuant to this article, a certificate of the insurer certifying, in a form reasonably satisfactory to the Landlord, that the policy has been issued and premium paid providing the coverage required by this Article and containing the provisions herein. Attached to such a certificate shall be endorsements naming Landlord as additional insured, and including the wording under primary insurance above. With respect to each renewal or replacement of any such insurance, the requirements of this Article must be complied with not less than 30 days prior to the expiration or cancellation of the policy being renewed or replaced. Landlord may at any time and from time-to-time inspect and/or copy any and all insurance policies required to be carried by Tenant pursuant to this article. See Addendum. D. The Commercial General Liability insurance carried by Tenant shall specifically insure the performance by Tenant of the Indemnification provisions set forth in Article 8.2 of this Lease provided, however, nothing contained in this Article 9 shall be construed to limit the liability of Tenant under the Indemnification provisions set forth in said Article 8.2. 9.2 Landlord's Insurance. With respect to insurance maintained by Landlord: A. Landlord shall maintain, as the minimum coverage required of it by this Lease, property insurance in so-called "Special" form insuring Landlord (and such others as Landlord may designate) against loss from physical damage to the Building with coverage of not less than one hundred percent of the full actual replacement cost thereof and against loss of rents for a period of not less than twelve months. Such property damage insurance, at Landlord's election but without any requirement on Landlord's behalf to do so, (i) may be written in so-called Special Form, excluding only those perils commonly excluded from such coverage by Landlord's then property damage insurer, (ii) may provide coverage for physical damage to the improvements so insured for up to the entire full actual replacement cost thereof; (iii) may be endorsed to include or separate policies may be carried to cover loss or damage caused by any additional perils against which Landlord may elect to insure, including earthquake and/or flood; (iv) may provide coverage for loss of rents for a period of up to twelve months; and/or (v) may contain "deductibles" per occurrence in an amount reasonably acceptable to Landlord. Landlord shall not be required to cause such insurance to cover any of Tenant's personal property, inventory and trade fixtures, or any modifications, alterations or improvements made or constructed by Tenant to or within the Leased Premises. 16 B. Landlord shall maintain Commercial General Liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring in, on or about, or resulting from the use or occupancy of the Property, or any portion thereof, with combined single limit coverage of at least Two Million Dollars. Landlord may carry such greater coverage as Landlord or Landlord's Lender, insurance broker or advisor or counsel may from time to time determine is reasonably necessary for the adequate protection of Landlord and the Property. 9.3 Mutual Waiver of Subrogation. Landlord hereby releases Tenant, and Tenant hereby releases Landlord and its respective principals, officers, agents, employees and servants, from any and all liability for loss, damage or injury to the property of the other in or about the Leased Premises or the Property which is caused by or results from a peril or event or happening which would be covered by insurance required to be carried by the party sustaining such loss under the terms of this Lease, or is covered by insurance actually carried and in force at the time of the loss, by the party sustaining such loss; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering such loss and to the extent such insurance is not prejudiced thereby. ARTICLE 10 DAMAGE TO LEASED PREMISES 10.1 Landlord's Duty to Restore. If the Leased Premises, the Building or the Outside Areas are damaged by any peril after the Effective Date of this Lease, Landlord shall restore the same, as and when required by this Article, unless this Lease is terminated by Landlord pursuant to Article 10.3 or by Tenant pursuant to Article 10.4. If this Lease is not so terminated and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion the restoration of the Leased Premises, the Building or the Outside Areas, as the case may be, to the extent then allowed by Law, to substantially the same condition in which it existed as of the Lease Commencement Date. Landlord's obligation to restore shall be limited to the improvements constructed by Landlord. Landlord shall have no obligation to restore any improvements made by Tenant to the Leased Premises or any of Tenant's personal property, inventory or trade fixtures. 10.2 Insurance Proceeds. All insurance proceeds available from the fire and property damage insurance carried by Landlord shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either Article 10.3 or 10.4, all insurance proceeds available from insurance carried by Tenant which cover loss of property that is Landlord's property or would become Landlord's property on termination of this Lease shall be paid to and become the property of Landlord but only in an amount equal to the amortized portion of said improvement, and the remainder of such proceeds shall be paid to and become the property of Tenant. 10.3 Landlord's Right to Terminate. Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty days after the date of such damage or destruction: A. The Building is damaged by any peril which Landlord was required to insure against at the time of such damage or destruction (an "insured peril") to such an extent that the estimated cost to restore the Building exceeds seventy-five percent of the then actual replacement cost thereof; B. The Building is damaged by an uninsured peril, which peril Landlord was not required to insure against pursuant to the provisions of Article 9 of this Lease, to any extent; C. The Building is damaged by any peril and, because of the Laws then in force, the Building (i) cannot be restored at reasonable cost or (ii) if restored, cannot be used for the same use being made thereof before such damage. 10.4 Tenant's Right to Terminate. If the Leased Premises, the Building or the Outside Areas are damage by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to this Article, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord's architect or construction consultant as to when the restoration work required of Landlord may be complete. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which 17 option may be exercised in the case of A or B below only by delivery to Landlord of a written notice of election to terminate within seven days after Tenant receives from Landlord the estimate of the time needed to complete such restoration: A. The Leased Premises are damaged by any peril and, in the reasonable opinion of Landlord's architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within nine months after the date of such notice from Landlord; or B. The Leased Premises are damaged by any peril within nine months of the last day of the Lease Term and, in the reasonable opinion of Landlord's architect or constructive consultant, the restoration of the Leased Premises cannot be substantially completed within ninety days after the date such restoration is commenced. 10.5 Tenant's Waiver. Landlord and Tenant agree that the provisions of Article 10.4 above, captioned "Tenant's Right to Terminate," are intended to supersede and replace the provisions contained in California Civil Code, Section 1932, Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant hereby waives the provisions of said Civil Code Sections and the provisions of any successor Code Sections or similar laws hereinafter enacted. 10.6 Abatement of Rent. In the event of damage to the Leased Premises which does not result in the termination of this Lease, the Base Monthly Rent (and any Additional Rent) shall be temporarily abated during the period of restoration in proportion to the degree to which Tenant's use of the Leased Premises is impaired by such damage. ARTICLE 11 CONDEMNATION 11.1 Tenant's Right to Terminate. Except as otherwise provided in Article 11.4 below regarding temporary takings, Tenant shall have the option to terminate this Lease if, as a result of any taking, (i) all of the Leased Premises is taken, (ii) 25 percent or more of the Leased Premises is taken and the part of the Leased Premises that remains cannot, within a reasonable period of time, be made reasonably suitable for the continued operation of Tenant's business, or (iii) there is a taking of a portion of the Outside Areas and, as a result of such taking, Landlord cannot provide parking spaces within the Property (or within a reasonable distance therefrom) equal in number to at least sixty-six and two-thirds percent of the number of parking spaces existing within the Outside Areas immediately prior to such taking, whether by rearrangement of the remaining parking areas in the Outside Areas (including, if Landlord elects, construction of multi-deck parking structures or respiring for compact cars where permitted by Law). Tenant must exercise such option within a reasonable period of time, to be effective on the later to occur of (i) the date that possession of that portion of the Leased Premises or the Outside Areas that is condemned is taken by the condemnor or (ii) the date Tenant vacated the Leased Premises. 11.2 Landlord's Right to Terminate. Except as otherwise provided in Article 11.4 below regarding temporary takings, Landlord shall have the option to terminate this Lease if, as a result of any taking (i) all or a substantial part of the Leased Premises is taken, (ii) more than thirty-three and one-third percent of the Outside Areas is taken, or (iii) because of the Laws then in force, the Leased Premises may not be used for the same use being made thereof before such taking, whether or not restored as required by Article 11.3 below. Any, such option to terminate by Landlord must be exercisable within a reasonable period of time, to be effective as of the date possession is taken by the condemnor. 11.3 Restoration. If any part of the Leased Premises, the Building or the Outside Area is taken and this Lease is not terminated, then Landlord shall repair any damage occasioned thereby to the remainder thereof to a condition reasonably suitable for Tenant's continued operations and otherwise, to the extent practicable, in the manner and to the extent provided in Article 10.1. 11.4 Temporary Taking. If any portion of the Leased Premises is temporarily taken for a period of 9 months of less and such period does not extend beyond the Lease Expiration Date, this Lease shall remain in effect. If any portion of the Leased Premises which portion causes a material disruption of Tenant's business is temporarily taken for a period which either exceeds 9 months or which extends beyond the Lease Expiration Date, then Landlord and Tenant shall each independently have the option to terminate this Lease, effective on the date possession is taken by the condemnor. 18 11.5 Division of Condemnation Award. Any award made for any taking of the Property, the Building, the Outside Areas or the Leased Premises, or any portion thereof, shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to receive any portion of the award that is made specifically (i) for the taking of personal property, inventory or trade fixtures belong to Tenant, (ii) for the interruption of Tenant's business or its moving costs, (iii) for loss of Tenant's goodwill, or (iv) for any temporary taking where this Lease is not terminated as a result of such taking. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure, and the provisions of any similar law hereinafter enacted, allowing either party to petition the Superior Court to terminate this Lease and/or otherwise allocate condemnation awards between Landlord and Tenant in the event of a taking of the Leased Premises. 11.6 Abatement of Rent. In the event of a taking of the Leased Premises which does not result in a termination of this Lease, then, as of the date possession is taken by the condemning authority, the Base Monthly Rent shall be reduced in the same proportion that the area of that part of the Leased Premises so taken (less any addition to the area of the Leased Premises by reason of any reconstruction) bears to the area of the Leased Premises immediately prior to such taking. 11.7 Taking Defined. The term "taking" or "taken" as used in this Article 11 shall mean any transfer or conveyance of all or any portion of the Property in a public or quasi-public agency or other entity have the power of eminent domain pursuant to or as a result of the exercise of such power by such an agency, including any inverse condemnation and/or any sale or transfer by Landlord of all or any portion of the Property to such an agency under threat of condemnation or the exercise of such power. ARTICLE 12 DEFAULT AND REMEDIES 12.1 Events of Tenant's Default. Tenant shall be in default of its obligations under this Lease if any of the following events occur within 10 days following receipt of written notice: A. Tenant shall have failed to pay Base Monthly Rent or any Additional Rent when due; or B. Tenant shall have done or permitted to have done any act, use or thing in its use, occupancy or possession of the Leased Premises or the Building or the Outside Areas which is prohibited by the terms of this Lease; or C. Tenant shall have failed to perform any term, covenant or condition of this Lease, except those requiring the payment of Base Monthly Rent or Additional Rent, within 30-days after written notice from Landlord to Tenant specifying the nature of such failure and requesting Tenant to perform same. D. Tenant shall have sublet the Leased Premises or assigned or encumbered its interest in this Lease in violation of the provisions contained in Article 7, whether voluntarily or by operation of Law; or E. Tenant shall have abandoned the premises; or F. Tenant or any Guarantor of this Lease shall have permitted or suffered the sequestration or attachment of, or execution on, or the appointment of a custodian or receiver with respect to, all or any substantial part of the property or assets of Tenant (or such Guarantor) or any property or asset essential to the conduct of Tenant's (or such Guarantors) business, and Tenant (or such Guarantor) shall have failed to obtain a return or release of the same within thirty days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or 19 G. Tenant or any Guarantor of this Lease shall have made in general assignment of all or a substantial part of its assets for the benefit of its creditors; or H. Tenant or any Guarantor of this Lease shall have allowed (or sought) to have entered against it a decree or order which: (i) grants or constitutes an order for relief, appointment of a trustee, or confirmation or a reorganization plan under the bankruptcy laws of the United States; (ii) approves as properly filed a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor's relief law or similar statute of the United States or any state thereof; or (iii) otherwise directs the winding up or liquidation of Tenant; provided, however, if any decree or order was entered without Tenant's consent or over Tenant's objection, Landlord may not terminate this Lease pursuant to this Subarticle if such decree or order is rescinded or reversed within thirty days after its original entry. I. Tenant or any Guarantor of this Lease shall have availed itself of the protection of any debtor's relief law, moratorium law or other similar Law which does not require the prior entry of a decree or order. 12.2 Landlord's Remedies. In the event of any default by Tenant, and without limiting Landlord's right to indemnification as provided in Article 8.2, Landlord shall have the following remedies, in addition to all other rights and remedies provided by Law or otherwise provided in this Lease, to which Landlord may resort cumulatively, or in the alternative: A. Landlord may, at Landlord's election, keep this Lease in effect and enforce, by an action at law or in equity, all of its rights and remedies under this Lease including, without limitation, (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required by Tenant, or perform Tenant's obligations and be reimbursed by Tenant for the cost thereof with interest at the then maximum rate of interest not prohibited by Law from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies or injunctive relief and specific performance to prevent Tenant from violating the terms of this Lease and/or to compel Tenant to perform its obligations under this Lease, as the case may be. B. Landlord may, at Landlord's election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this Subarticle shall not relieve Tenant from its obligation to pay to Landlord all Base Monthly Rent and Additional Rent then or thereafter due, or any other sums due or thereafter accruing to Landlord, or from any claim against Tenant for damages previously accrued or then or thereafter accruing. In no event shall any one or more of the following actions by Landlord, in the absence of a written election by Landlord to terminate the Lease, constitute a termination of the Lease: (1) Appointment of a receiver or keeper in order to protect Landlord's interest hereunder; (2) Consent to any subletting of the Leased Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or (3) Any other action by Landlord or Landlord's agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including, without limitation, any action taken to maintain and preserve the Leased Premises or any action taken to relet the Leased Premises, or any portion thereof, for the account of Tenant and in the name of Tenant. C. In the event Tenant breaches this Lease and abandons the Leased Premises, Landlord may terminate this Lease, but this Lease shall not terminate unless Landlord gives Tenant written notice of termination. If Landlord does not terminate this Lease by giving written notice of termination, Landlord may enforce all its rights and remedies under this Lease, including the right to recover rent as it becomes due under this Lease as provided in California Civil Code Section 1951.4, as in effect on the Effective Date of this Lease. 20 D. In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord's election, to damages in an amount as set forth in California Civil Code Section 1951.2, as in effect on the Effective Date of this Lease. For purposes of computing damages pursuant to Section 1951.2, an interest rate equal to the maximum rate of interest then not prohibited by Law shall be used where permitted. Such damages shall include, without limitation: (1) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco, at the time of award plus one percent; and (2) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which in the ordinary course of things would be likely to result therefrom, including without limitation, the following: (i) reasonable expenses for cleaning, repairing or restoring the Leased Premises; (ii) reasonable expenses for altering, remodeling or otherwise improving the Leased Premises for the purpose of reletting, including removal of existing leasehold improvements and/or installation of additional leasehold improvements (regardless of how the same is funded, including reduction of rent, a direct payment or allowance to a new tenant, or otherwise); (iii) reasonable broker's fees, advertising costs and other expenses of reletting the Leased Premises; (iv) reasonable costs of carrying and maintaining the Leased Premises which costs would have been billed to Tenant as Additional Rent had Tenant not defaulted and which include but are not limited to taxes, insurance premiums, utility charges, landscape maintenance costs, costs of maintaining electrical, plumbing and HVAC equipment and costs for providing security; (v) reasonable expenses incurred in removing, disposing of and/or storing any of Tenant's personal property, inventory or trade fixtures remaining therein; (vi) reasonable attorneys' fees, expert witness fees, court costs and other reasonable expenses incurred by Landlord but not limited to taxable costs) in retaking possession of the Leased Premises, establishing damages hereunder, and releasing the Leased Premises; and (vii) any other expenses, costs or damages otherwise incurred or suffered as a result of Tenant's default. 12.3 Landlord's Default and Tenant's Remedies. In the event Landlords fails to perform any of its obligations under this Lease, Landlord shall nevertheless not be in default under the terms of this Lease until such time as Tenant shall have first given Landlord written notice specifying the nature of such failure to perform its obligations, and then only after Landlord shall have had a reasonable period of time followings its receipt of such notice within which to perform such obligations. In the event of Landlord's default as above set forth, then, and only then, Tenant shall have the following remedies only: A. Tenant may then proceed in equity or at law to compel Landlord to perform its obligations and/or to recover damages proximately caused by such failure to perform (except as and to the extent Tenant has waived its right to damages as provided in this Lease). B. Tenant, at its option, may then cure any default of Landlord at Landlord's cost. If, pursuant to this Subarticle, Tenant reasonably pays any sum to any third party or does any act that requires the payment of any sum to any third party at any time by reason of Landlord's default, the sum paid by, Tenant shall be immediately due from Landlord to Tenant at the time Tenant supplies Landlord with an invoice therefor (provided such invoice sets forth and is accompanied by a written statement of Tenant setting forth in reasonable detail the amount paid, the party to whom it was paid, the date it was paid, and the reasons giving rise to such payment), together with interest at twelve percent per annum from the date of such invoice until Tenant is reimbursed by Landlord. Tenant may not offset such sums against any installment of rent due Landlord under the terms of this Lease. 12.4 Limitation on Tenant's Recourse. If Landlord is a corporation, trust, partnership, joint venture, unincorporated association, or other form of business entity, Tenant agrees that (i) the obligations of Landlord under this Lease shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals of such business entity and (ii) Tenant shall have recourse only to the assets of such business entity for the satisfaction of such obligations and not against the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders or principals (other than to the extent of their interest in the assets owned by such business entity). Additionally, if Landlord is a partnership, then Tenant covenants and agrees: 21 A. No partner of Landlord shall be sued or named as a party in any suit or action brought by Tenant with result to any alleged breach of this Lease (except to the extent necessary to secure jurisdiction over the partnership and then only for that sole purpose); B. No service of process shall be made against any partner of Landlord except for the sole purpose of securing jurisdiction of the partnership; and C. No writ of execution will ever be levied against the assets of any partner of Landlord other than to the extent of his interest in the assets of the partnership. Tenant further agrees that each of the foregoing covenants and agreements shall be enforceable by Landlord and by any partner of Landlord and shall be applicable to any actual or alleged misrepresentation or nondisclosure made respecting this Lease or the Leased Premises or any factual or alleged failure, default or breach of any covenant or agreement either expressly or implicitly contained in this Lease or imposed by statue or at common law. 12.5 Tenant's Waiver. Landlord and Tenant agree that the provisions of Article 12.3 above are intended to supersede and replace the provisions of California Civil Code Sections 1932(l), 1941 and 1942, and accordingly, Tenant hereby waives the provisions of California Civil Code Sections 1932(l), 1941 and 1942 and/or any similar or successor Law regarding Tenant's right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. ARTICLE 13 GENERAL PROVISIONS 13.1 Taxes on Tenant's Property. Tenant shall pay before delinquency any and all taxes, assessments, license fees, use fees, permit fees and public charges of whatever nature or description levied, assessed or imposed against Tenant or Landlord by a governmental agency arising out of, cause by reason of or based upon Tenant's estate in this Lease, Tenant's ownership of property, improvements made by Tenant to the Leased Premises or the Outside Areas, improvements made by Landlord for Tenant's use within the Leased Premises or the Outside Areas, Tenant's use (or estimated use) of public facilities or services or Tenant's consumption (or estimated consumption) of public utilities, energy, water or other resources. Upon demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. If any such taxes, assessments, fees or public charges are levied against Landlord, Landlord's property, the Building or the Property, or if the assessed value of the Building or the Property is increased by the inclusion therein of a value placed upon same, then Landlord, after giving written notice to Tenant, shall have the right to pay such taxes, assessment, fee or public charge and bill Tenant, as Additional Rent, the amount of such taxes, assessment, fee or public charge so paid on Tenant's behalf. Tenant shall, within ten days from the date it receives an Invoice from Landlord setting forth the amount of such taxes, assessment, fee or public charge so levied, pay to Landlord, as Additional Rent, the amount set forth in said invoice. Failure by Tenant to pay the amount so invoiced within said ten day period shall be conclusively deemed a default by Tenant under this Lease. Tenant shall have the right, and the Landlord's full cooperation to bring suit in any court of competent jurisdiction to recover from the taxing authority the amount of any such taxes, assessment, fee or public charge so paid. 13.2 Holding Over. This Lease shall terminate without further notice on the Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant after expiration of the Lease Term shall neither constitute a renewal nor extension of this Lease nor give Tenant any rights in or to the Leased Premises except as expressly provided in this Article. Any such holding over shall be deemed an unlawful detainer of the Leased Premises unless Landlord has consented to same. Any such holding over to which Landlord has consented shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable, except that the Base Monthly Rent shall be increased to an amount equal to one hundred fifty percent of the Base Monthly Rent payable during the last full month immediately preceding such holding over. 22 13.3 Subordination to Mortgages. Subject to Tenant's receiving a Nondisturbance agreement reasonably acceptable to Tenant, this Lease is subject to and subordinate to all underlying ground leases, mortgages and deeds of trust which affect the Building or the Property and which are of public record as of the Effective Date of this Lease, and to all renewals, modifications, consolidations, replacements and extensions thereof. However, if the lessor under any such ground lease or any lender holding any such mortgage or deed of trust shall advise Landlord that it desires or requires this Lease to be made prior and superior thereto, then, upon written request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and deliver any and all documents or instruments which Landlord and such lessor or lender deem necessary or desirable to make this Lease prior thereto. Tenant hereby consents to Landlord's ground leasing the land underlying the Building or the Property and/or encumbering the Building or the Property as security for future loans on such terms as Landlord shall desire, all of which future ground leases, mortgages or deeds of trust shall be subject to and subordinate to this Lease. However, if any lessor under any such future ground lease or any lender holding such future mortgage or deed of trust shall desire or require that this Lease be made subject to and subordinate to such future ground lease, mortgage or deed of trust, then Tenant agrees, within ten days after Landlord's written request therefor, to execute, acknowledge and deliver to Landlord any and all documents or instruments reasonably requested by Landlord or by such lessor or lender as may be necessary or proper to assure the subordination of this Lease to such future ground lease, mortgage or deed of trust, but only if such lessor or lender delivers a non disturbance agreement to Tenant in a form reasonably acceptable to Tenant, agrees to recognize Tenant's rights under this Lease and agrees not to disturb Tenant's quiet possession of the Leased Premises so long as Tenant is not in default under this Lease. 13.4 Tenant's Attornment Upon Foreclosure. Tenant shall, upon request, attorn (i) to any purchaser of the Building or the Property at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Building of the Property, (ii) to any grantee or transferee designated in any deed given in lieu of foreclosure of any security interest encumbering the Building or the Property, or (iii) to the lessor under any underlying ground lease of the land underlying the Building or the Property, should such ground lease be terminated, provided that such purchaser, grantee or lessor recognizes Tenant's rights under this Lease. 13.5 Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered mail to any Lender or lessor under any underlying ground lease who shall have requested, in writing, to Tenant that it be provided with such notice, and Tenant shall offer such Lender or lessor a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or judicial foreclosure or other appropriate legal proceedings if reasonably necessary to effect a cure. 13.6 Estoppel Certificates. Tenant will, following any request by Landlord, promptly execute and deliver to Landlord an estoppel certificate (i) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iv) certifying such other information about this Lease as may be reasonably requested by Landlord, its Lender or prospective lenders, investor or purchaser of the Building or the Property. Tenant's failure to execute and deliver such estoppel certificate within ten days after Landlord's request therefore shall be a material default by Tenant under this Lease, and Landlord shall have all of the rights and remedies available to Landlord as Landlord would otherwise have in the case of any other material default by Tenant, including the right to terminate this Lease and sue for damages proximately caused thereby, it being agreed and understood by Tenant that Tenant's failure to so deliver such estoppel certificate in a timely manner could result in Landlord being unable to perform committed obligations to other third parties which were made by Landlord in reliance upon this covenant of Tenant. Landlord and Tenant intend that any statement delivered pursuant to this Article may be relied upon by any Lender or purchaser or prospective Lender or purchaser of the Building, the Property, or any interest herein. 13.7 Tenant's Financial Information. Tenant shall, within five business days after Landlord's request therefore deliver to Landlord a copy of a current financial statement including an income statement for the most recent twelve month period and a balance sheet and any such other information reasonably requested by Landlord regarding Tenant's financial condition. Tenant acknowledges that Landlord is relying upon the financial information provided to Landlord by Tenant prior to entering into this lease and the information to be provided to Landlord by Tenant during the term of this Lease. Landlord shall be entitled to disclose such financial statements or 23 other information to its Lender, to any present or prospective principal of or investor in Landlord, or to any prospective Lender or purchaser of the Building, the Property or any portion thereof or interest therein. Any such financial statement or other information which is marked "confidential" or "company secrets" (or is otherwise similarly marked by Tenant) shall be confidential and shall not be disclosed by Landlord to any third party except as specifically provided in this Article, unless the same becomes a part of the public domain without the fault of Landlord. 13.8 Transfer by Landlord. Landlord and its successor in interest shall have the right to transfer their interest in the Building, the Property, or any portion thereof at any time and to any person or entity. In the event of any such transfer provided that the transferee recognizes all rights of Tenant and assumes all obligations of Landlord under the Lease, the Landlord originally named herein (and in the case of any subsequent transfer, the transferor), from the date of such transfer, (i) shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer and (ii) shall be relieved of all liability for the performance of the obligations of the Landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and perform all such prior obligations of the Landlord hereunder. Tenant shall attorn to any such transferee provided the transferee recognizes all rights of Tenant and assumes obligations of Landlord under this Lease. After the date of any such transfer, the term "Landlord" as used herein shall mean the transferee of such interest in the Building or the Property. 13.9 Force Majeure. The obligations of each of the parties under this Lease (other than the obligations to pay money) shall be temporarily excused if such party is prevented or delayed in performing such obligation by reason of any strikes, lockouts or labor disputes; inability to obtain labor, materials, fuels or reasonable substitutes therefore; governmental restrictions, regulations, controls, action or inaction; civil commotion; inclement weather, fire or other acts of God; or other causes (except financial inability) beyond the reasonable control of the party obligated to perform (including acts or omissions of the other party) for a period equal to the period of any such prevention, delay or stoppage. 13.10 Notices. Any notice required to desired to be given by a party regarding this Lease shall be in writing and shall be personally served, or in lieu of personal service may be given by (i) delivery by Federal Express, United Parcel Service or similar commercial carrier, (ii) electronic fax transmission, or (iii) depositing such notice in the United States mail, postage prepaid, addressed to the other party as follows: A. If addressed to Landlord, to Landlord at its Address for Notices (as set forth in Article 1). B. If addressed to Tenant, to Tenant at its Address for Notices (as set forth in Article 1). Any notice given by registered mail shall be deemed to have been given on the third business day after its deposit in the United States mail. Any notice given by registered mail shall be deemed given on the date receipt was acknowledged to the postal authorities. Any notice given by mail other than registered or certified mail shall be deemed given only if received by other party, and then on the date of receipt. Any notice delivered by commercial carrier or by fax shall be deemed given on the date of confirmation of delivery by the carrier or by electronic confirmation. Each party may, by written notice to the other in the manner aforesaid, change the address to which notices addressed to it shall thereafter by mailed. 13.11 Attorneys' Fees. In the event any party shall bring any action, arbitration proceeding or legal proceeding alleging a breach of any provision of this Lease, to recover rent, to terminate this Lease, or to enforce, protect, determine or establish any term or covenant of this Lease or rights or duties hereunder of either party, the prevailing party shall be entitled to recover from the non-prevailing party as a part of such action or proceeding, or in a separate action for that purpose brought within one year from the determination of such proceeding, reasonable attorneys' fees, expert witness fees, court costs and other reasonable expenses incurred by the prevailing party. 13.12 Definitions. Any term that is given a special meaning by any provision in this Lease shall, unless otherwise specifically stated, have such meaning whenever used in this Lease or in any Addenda or amendment hereto. In addition to the terms defined in Article 1, the following terms shall have the following meanings: 24 A. Real Property Taxes. The term "Real Property Tax" or "Real Property Taxes" shall each mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership or new construction), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power or tax or levy assessments, which are levied or assessed for whatever reason against the Project or any portion thereof, of Landlord's interest herein, or the fixtures, equipment and other property of Landlord that is an integral part of the Project and located thereon, or Landlord's business of owning, leasing or managing the Project or the gross receipts, income or rentals from the Project; (ii) all charges, levies or fees imposed by any governmental authority against Landlord by reason of or based upon the use of or number of parking spaces within the Project, the amount of public services or public utilities used or consumed (e.g., water, gas, electricity, sewage or surface water disposal) at the Project, the number of persons employed by tenants of the Project, the size (whether measured in area, volume, number of tenants or whatever) or the value of the Project, or the type of use or uses conducted within the Project; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax but only to the extent of any such savings. If, at any time during the Lease Term, the taxation or assessment of the Project prevailing as of the Effective Date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, or imposed (whether by reason of a change in the method of taxation of assessment, creation of a new tax or charge, or any other cause) an alternate, substitute, or additional tax or charge (i) on the value, size, use or occupancy of the Project or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Project, or on Landlord's business of owning, leasing or managing the Project or (iii) computed in any manner with respect to the operation of the Project, then any such tax or charge, however designated, shall be included within the meaning of the terms "Real Property Tax" or "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is partly based upon property or rents unrelated to the Project, then only that part of such Real Property Tax that is fairly allocable to the Project shall be included within the meaning of the terms "Real Property Tax" or "Real Property Taxes." Notwithstanding the foregoing, the terms "Real Property Tax" or "Real Property Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state income tax imposed on Landlord's income from all sources. B. Landlord's Insurance Costs. The term "Landlord's Insurance Costs" shall mean the costs to Landlord to carry and maintain the policies of fire and property damage insurance including earthquake and flood for the Building and the Property and general liability insurance required, or permitted, to be carried by Landlord pursuant to Article 9, together with any deductible amounts paid by Landlord upon the occurrence of any insured casualty or loss. C. Property Maintenance Costs. The term "Property Maintenance Costs" shall mean all costs and expenses (except Landlord's Insurance Costs and Real Property Taxes) paid or incurred by Landlord in protecting, operating, maintaining, repairing and preserving the Property and all parts thereof, including without limitation, (i) professional management fees (equal to three percent of the annualized Base Monthly Rent), (ii) the amortizing portion of any costs incurred by Landlord in the making of any modifications, alterations or improvements as set forth in Article 6, which are so amortized during the Leave Term, (iii) costs of complying with governmental regulations governing Tenant's use of Hazardous Materials, and Landlord's costs of monitoring Tenant's use of Hazardous Materials including fees charged by Landlord's consultants to periodically inspect the Premises and the Property, and (iv) such other costs may be paid or incurred with respect to operating, maintaining and preserving the Property, such as repairing, replacing, and resurfacing the exterior surfaces of the buildings (including roofs), repairing replacing, and resurfacing paved areas, cleaning, maintaining, restoring and/or replacing the interior of the Leased Premises both during the term of the Lease and upon its termination, and maintaining, repairing or replacing, when necessary electrical, plumbing, sewer, drainage, heating, ventilating and air conditioning systems serving the buildings, providing utilities to the common areas, maintenance, repair, replacement or installation of lighting fixtures, directional or other signs and signals, irrigation or drainage systems, trees, shrubs, materials, maintenance of all landscaped areas, and depreciation and financing costs on maintenance and operating machinery and equipment (if owned) and rental paid for such machinery and equipment (if leased). D. Ready for Occupancy. The term "Ready for Occupancy" shall mean the date upon which (i) the Leased Premises are available for Tenant's occupancy in a broom clean condition and (ii) the improvements, if any, to be made to the Leased Premises by Landlord as a condition to Tenant's obligation to accept possession of 25 the Leased Premises have been substantially completed and the appropriate governmental building department (i.e., the City building department, if the Property is located within a City, or otherwise the County building department) shall have approved the construction of such improvements as substantially complete or is willing to so approve the construction of the improvements as substantially complete subject only to compliance with specified conditions which are the responsibility of Tenant to satisfy or is willing to allow Tenant to occupy subject to its receiving assurances that specified work will be completed. E. Property Operating Expenses. The term "Property Operating Expenses" shall mean and include the all Real Property Taxes, plus all Landlord's Insurance Costs, plus the all Property Maintenance Costs. F. Law. The term "Law" shall mean any judicial decision and any statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal, or other governmental agency or authority having jurisdiction over the parties to this Lease, the Leased Premises, the Building or the Property, or any of them in effect either at the Effective Date of this Lease or at any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g., a board of fire examiners or a public utility or special district). G. Lender. The term "Lender" shall mean the holder of any Note or other evidence of indebtedness secured by the Property or any portion thereof. H. Private Restrictions. The term "Private Restrictions" shall mean all recorded covenants, conditions and restrictions, private agreements, easements, and any other recorded instruments affecting the use of the Property, as they may exist as of the date of this Lease. I. Rent. The term "rent" shall mean collectively Base Monthly Rent and all Additional Rent. 13.13 General Waivers. One party's consent to or approval of any net by the other party requiring the first party's consent or approval shall not be deemed to waive or render unnecessary the first party's consent to or approval of any subsequent similar act by the other party. No waiver of any provision hereof or any breach of any provision hereof shall be effective unless in writing and signed by the waiving party. The receipt by Landlord of any rent or payment with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach. No waiver of any provision of this Lease shall be deemed a continuing waiver unless such waiver specifically states so in writing and is signed by both Landlord and Tenant. No delay or omission in the exercise of any right or remedy occurring to either party upon any breach by the other party under this Lease shall impair such right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other provisions herein contained. 13.14 Miscellaneous. Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Any copy of this Lease which is executed by the parties shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. The term "party" shall mean Landlord or Tenant as the context implies. If Tenant consists of more than one person or entity then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the Laws of the State in which the Leased premises are located. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. The captions used in this Lease are for convenience only and shall not be considered in the construction or interpretation of any provision hereof. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms "must," "shall," "will" and "agree" are mandatory. Term "may is permissive. When a party is required to do something by this Lease, it shall so in its sole cost and expense without right of reimbursement from the other party unless specific provision is made therefore. Where Tenant is obligated not to perform any act or is not permitted to perform any act, Tenant is also obligated to make reasonable efforts to restrain any others reasonably within its control, including agents, invitees, contractors, subcontractors and employees, from performing said act. Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of any of the provisions of this Lease. 26 ARTICLE 14 CORPORATE AUTHORITY BROKERS AND ENTIRE AGREEMENT 14.1 Brokerage Commissions. Tenant warrants that it has not had any dealings with any real estate broker(s), leasing agent(s), finder(s) or salesmen, other than those persons or entities named in Article 1 as the "Brokers" with respect to the lease by it of the Leased Premises pursuant to this Lease, and that it will indemnify, defend with competent counsel, and hold Landlord harmless from any liabilities for the payment of any real estate brokerage commissions, leasing commissions or finder's fees claimed by any other real estate broker(s), leasing agent(s), finder(s) or salesmen to be earned or due and payable by reason of Tenant's agreement or promise (implied or otherwise) to pay (or have Landlord pay) such a commission or finder's fee by reason of its leasing the Leased Premises pursuant to this Lease. The provisions of this section 14.2 shall be mutual between Landlord and Tenant. 14.2 Entire Agreement. This Lease, the Exhibits (as described in Article 1) and the Addenda (as described in Article 1), which Exhibits and Addenda are by this reference incorporated herein, constitute the entire agreement between the parties, and there are no other agreements, understandings or representations between the parties relating to the Lease by Landlord of the Leased Premises to Tenant, except as expressed herein. No subsequent changes, modifications or additions to this Lease shall be binding upon the parties unless in writing and signed by both Landlord and Tenant. 14.3 Landlord's Representations. Tenant acknowledges that neither Landlord nor any of its agents made any representations or warranties respecting the Project, the Building or the Leased Premises, upon which Tenant relied in entering into this Lease, which are not expressly set forth in this Lease. Tenant further acknowledges that neither Landlord nor any of its agents made any representations as to (i) whether the Leased Premises may be used for Tenant's intended use under existing law, or (ii) the suitability of the Leased Premises for the conduct of Tenant's business, or (iii) the exact square footage of the Leased Premises, and that Tenant relied solely upon its own investigations respecting said matters. Tenant expressly waives any and all claims for damage by reason of any statement, representation, warranty, promise or other agreement of Landlord or Landlord's agent(s), if any, not contained in this Lease or in any Addenda hereto. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the respective dates below set forth with the intent to be legally bound thereby as of the Effective Date of this Lease. AS LANDLORD: AS TENANT: Renco Equities IV, Lam Research Corporation, a California partnership a Delaware corporation William N. Neidlg, Trustee By: __________________________________ By: _______________________________ Title: _______________________________ Title: ____________________________ By: __________________________________ By: _______________________________ Title: _______________________________ Title: ____________________________ Dated: _______________________________ Dated: ____________________________ If Tenant is a CORPORATION, the authorized officers must sign on behalf of the corporation and indicate the capacity in which they are signing. This Lease must be executed by the chairman of the board, president or vice president, and the secretary, assistant secretary, the chief financial officer or assistant treasurer, unless the bylaws or a resolution of the board of directors shall otherwise provide, in which event a certified copy of the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease. 27 FIRST ADDENDUM TO LEASE THIS FIRST ADDENDUM TO LEASE ("Addendum") is made to that Industrial Space Lease dated as of September 12, 2001, (the "Lease") by and between Renco Equities IV, a California partnership (as "Landlord"), and La Research Corporation, a Delaware corporation (as "Tenant"), for the lease of space located at 47131 Bayside Parkway in Fremont California (the "Leased Premises"). The parties hereto agree that the Lease is amended, changed and modified by the following provisions, which are hereby added to the Lease: Unless otherwise expressly provided herein, all terms which are given a special definition by the Lease that are used herein are intended to be used with the definition given to them by the Lease. The provisions of the Lease shall remain in full force and effect except as specifically amended hereby. In the event of any inconsistency between the Lease and this Addendum, the terms of this Addendum shall prevail. General Provision Regarding Additional Rent: Tenant acknowledges that Landlord has used this lease form with Tenant's consent, the form having been used for other single tenant buildings occupied by Tenant. Tenant shall pay one hundred percent (100%) of all Property Operating Expenses incurred by Tenant, all Property Operating Expenses performed on the Building occupied by Tenant, and all Property Operating Expenses required as a result of any action or neglect by Tenant. Section 2.6 Sixty (60) days prior to the Lease expiration date Landlord and Tenant shall inspect the Property and prepare a list of work which is readily discoverable to be performed in connection with Tenant's obligations hereunder. Tenant shall be obligated to pay the cost or perform the work themselves to return the Building to general purpose research and development use substantially in accordance with an architectural drawing identified as sheets A-2 and A-3 prepared by LRS Associates dated February 4, 1992, as described below. Tenant's obligation shall be to pay the cost to or perform the work themselves to: (1) restore the exterior of the Building and all Common Areas or Outside Areas to the condition existing as of November 1, 1994, which includes removing all structures constructed or modified by Tenant at any time subsequent to November 1, 1994, and restoring the area to its original paved or landscaped condition, and (2) convert the interior of the building from its condition as of the expiration of the Lease to the condition described below. In this regard, Tenant's obligation shall be to pay the cost to or perform the work themselves to prepare the following described areas for the indicated uses: Building second floor, all office use with a set of men's and women's restrooms, each with five toilets and two sinks in vanity tops; board room, and supporting areas. The second floor should be suitable for executive office use to the same standard used in 1992. Building first floor, entry lobby, two sets of men's and women's restrooms, (each restroom with five toilets, one pair with three sinks in vanity tops, the other pair with two sinks in vanity tops, and one pair with two showers, each), one lunchroom approximately 2,200 square feet in size, outside patio area, employee lobbies and interior corridors as required, and supporting spaces, office use in the rectangle defined as from column line 1 to column line 3 and column B to column line H, office use in the rectangle defined as column line 3 to column line 5 and column line B to column line D, office use in the rectangle defined as column line 5 to column line 10 and column line A to column line C, laboratory use in the rectangle defined as from column line 5 to column line 10 and column line C to column line H, laboratory use in the rectangle defined as column line 3 to column line 5, and column line D to column line H, and storage use in the rectangle defined as from column line 1 to column line 10 and column line H to column line K. All "office use" areas shall have a dropped ceiling, carpet on the floor and finishes comparable or better in quality to those used by Landlord in 1992. All "laboratory use" areas shall have a dropped ceiling with a vinyl tile floor or equivalent and finishes comparable or better in quality to those used by Landlord in 1992. All "storage use" areas shall have concrete floors, no dropped ceiling required and finishes comparable or better in quality to those used by Landlord in 1992. Throughout the Building the lighting system shall be appropriate for use in the ceiling area specified. Throughout the Building the plumbing, electrical, and HVAC systems shall be comparable or better to those Landlord provided in 1992. 1 Tenant shall pay the cost to remove or convert to general purpose sue all of Tenant's specialized improvements including clean room type ceilings, tiles, and, light fixtures, and filling or removing any trenching and below grad conduits or piping, removing above ground specialized wiring, piping, and conduits, etc. and restoring the areas to the uses specified above. Tenant shall not be required to repair or replace items or systems that are properly functioning or otherwise in good working order as of the expiration date of the Lease. Upon Lease termination Tenant's obligation to repair or replace mechanical systems shall be limited to repairing or replacing the individual components of said systems rather than to replace an entire system unless the cost to replace the entire system is less than the cost to replace the required components of the system. Tenant may either perform said work itself or require Landlord to perform said work. In the event that Landlord performs the work Landlord shall do so in the shortest reasonable time period and, Tenant shall pay the reasonable cost of said work including paying Base Monthly Rent and Additional Rent until the work is completed. Section 4.7 Notwithstanding anything to the contrary contained herein, Tenant shall not be required to make or pay for (through Property Operating Expenses or otherwise) (i) structural alterations to the building or (ii) other changes which would materially interfere with Tenant's use and enjoyment of the Leased Premises and the conduct of Tenant's business in order to comply with any of the foregoing Laws and Private Restrictions. Landlord represents and warrants to the best of its knowledge that as of the Lease Commencement Date the Leased Premises, the Building, the Outside Areas and the Property comply with all Private Restrictions, laws, ordinances, orders, rules and regulations promulgated by any state, federal, municipality or other agency or body having or claiming jurisdiction thereof and Landlord shall pay for all costs (if any) required to bring the Property into compliance with all Private Restrictions, laws, ordinances, orders, rules and regulations promulgated by any state, federal, or local authorities in effect as of the Commencement Date of this Lease. This representation and warranty, and Landlord's obligations hereunder are limited to improvements constructed by Landlord, its affiliates, or contractors. Landlord hereby represents to Tenant that Landlord has received no notice from any public agency regarding any violation of any Private Restrictions, laws, ordinances, orders, rules and regulations promulgated by any state, federal, municipality or other agency or body having or claiming jurisdiction thereof and is unaware of any such violation. Section 4.8 Landlord represents and warrants to the best of its knowledge, that as of the Lease Commencement Date, the Leased Premises, Building and Property and all existing tenant improvements therein complied with the building codes of the governing authorities and with the regulations of Landlord's insurance carrier as of the date of construction was completed. This representation and warranty is limited to the improvements constructed by Landlord and its contractors. In the event that this warranty is not correct, Landlord shall correct any defect at its sole cost. Section 5.1 Landlord shall, at Landlord's cost during the term of this Lease, repair the structural portions of the building which include the footings, concrete floor, concrete walls, columns, and roof (other than routine maintenance and repair costs and other than maintenance of the waterproof membrane which are Tenant's responsibility pursuant to Section 13.12.C) (provided however that Tenant shall pay the cost to repair any damage caused by Tenant, and normal maintenance expenses such as painting). In addition, Landlord at its expense shall be obligated to repair damage attributable to "Latent Defects." A "Latent Defect" shall mean a defect in construction or operation that impairs the utility of the defective system or portion of the Building, Leased Premises, Outside Area, 2 or Property for the purpose that it was constructed, provided however, that a Latent Defect shall not include a defect which has not caused substantial and material damage to the Building, Leased Premises, Outside Area, or Property unless Tenant has notified Landlord in writing of said defect within two (2) years from the Lease Commencement Date. Tenant hereby acknowledges that it is unaware of any "latent defects" and that tenant has occupied the property since November 21, 1994 pursuant to a sublease with SEEQ Technology/LSI Logic. Notwithstanding anything to the contrary contained herein, Tenant's obligation to repair (or pay the costs thereof) shall not extent to (1) damage and repairs due to casualty which Landlord is required to insure against provided that Tenant shall pay any insurance deductible amounts as required pursuant to the terms of this Lease, (2) damage caused in whole or in part by the negligence or willful misconduct of Landlord or Landlord's agents, contractors, or employees (but only to the extent of said negligence or misconduct), (3) repairs for which Tenant has already paid as Property Maintenance Costs or repairs or costs expressly excluded from Tenant's responsibility under Section 13.12.C; (4) damage arising from Landlord's failure to comply with the provisions of this Lease including, without limitation, Landlord's repair obligations pursuant to this section; and repairs covered by valid warranties. Section 6.1 Notwithstanding anything to the contrary in this Lease, Tenant shall be permitted to construct improvements to the interior of the space without obtaining Landlord's prior written consent provided however, that such improvements shall: (i) not exceed a cost of twenty five thousand dollars ($25,000) in any calendar year, (ii) shall be interior only; (iii) shall not affect the structure of the Building, (iv) shall not involve demolition to work constructed by Landlord, and (v) Tenant shall advise Landlord of the work to be constructed and with each such improvement will provide to Landlord reproducible drawings showing the improvements to be constructed by Tenant and existing adjacent improvements. Section 7.2 Notwithstanding anything to the contrary herein above, Tenant may assign this Lease or sublet any portion thereof to any of the following: (i) any corporation or other entity which controls, is controlled by, or is under common control with Tenant; (ii) any corporation or other entity resulting from the merger or consolidation of Tenant, and (iii) any corporation, partnership, other entity or person which acquires a controlling interest in the corporate stock of Tenant or acquires substantially all of the assets of Tenant as a going concern of the business that is being conducted on the Leased premises, provided, however, that no such assignment shall reduce or alter Tenant's liability under the terms of this Lease. Section 8.2 Landlord's Indemnification of Tenant. Subject to Tenant's obligations under the terms of this Lease, Landlord shall defend, indemnify, and hold Tenant harmless from and against any and all losses, costs, expenses, liabilities, claims causes of action and damages of all kinds that may result to Tenant, including reasonable attorneys' fees and disbursements incurred by Tenant, arising from (i) the disturbance of Tenant's quiet possession by Landlord, by persons deriving title from Landlord, because of liens or encumbrances incurred or suffered by Landlord: (iv) because of title paramount to Landlord's; (ii) because of any defect in Landlord's power or authority to executed and undertake Landlord's obligations under this lease; or (iii) because of any failure by Landlord to perform any of its obligations under this Lease. Landlord's duty to indemnify Tenant under this Section 8.2 shall survive the expiration or earlier termination of this Lease. Landlord covenants with Tenant that, subject to Tenant's compliance with the terms of this Lease, Tenant shall and may peaceably and quietly have, hold, and enjoy the Leased Premises for the Term of this Lease, and any renewals, or extensions thereof, and that neither Landlord, nor any party claiming under or through Landlord, shall disturb the use or occupancy of the Leased Premises by Tenant and Landlord shall defend Tenant's right to such use and occupancy. 3 Section 9.1 In the event that Landlord desires to inspect Tenant's insurance policies, Tenant may require that Landlord or its agents agree in writing not to disclose the exact wording or form of any proprietary information to a third party. So long as Tenant maintains commercial liability insurance with an amount not less than ten million dollars ($10,000,000) and otherwise complies with the provisions of section 9.1 of the Lease (including the obligation to name Landlord as an additional insured), Tenant shall not be required to provide an endorsement specifically stating that the limits of insurance and the aggregate apply to the Premises. Tenant's insurance required pursuant to section 9.1 A. (2) shall only apply to tenant improvements that would become Landlord's property upon the expiration of the term of the Lease. Tenant's insurance required pursuant to section 9.1 A. (5) shall not apply so long as Tenant prohibits consumption of alcoholic beverages at the Premises. Section 9.1 C If Landlord's lender, insurance broker, advisor or counsel reasonably determines at any time that the form or amount of any coverages set forth in Section 9.1 (A) violates this Lease, Landlord shall provide Tenant with written notice specifying the basis for Landlord's determination. Tenant shall have fifteen (15) days to bring its insurance into compliance or object to Landlord's interpretation. In the event that Tenant objects to Landlord's determination, the parties agree to submit to binding arbitration before the American Arbitration Association. The prevailing party shall be reimbursed for the reasonable costs for the arbitration. Section 11.5 (v) the unamortized value of Tenant's leasehold interest in the Leased Premises, (vi) Tenant's improvements to the extent paid for by Tenant, (vii) any expense of Tenant reasonably attributable to said Condemnation, and (viii) any compensation payable to Tenant by reason of the payment by Tenant of rent in excess of the rent payable by Tenant under this Lease in order to obtain alternate space. Section 13.12A Notwithstanding anything to the contrary contained herein, Tenant shall not be obligated to pay (a) interest on Real Property Taxes or penalties resulting from Landlord's failure to pay Real Property Taxes provide that Tenant shall have paid said amount to Landlord prior to the delinquency date for said payments; (b) any increases in Real Property Taxes attributable to additional improvements to the Building and/or Property unless such improvements are constructed for Tenant's sole benefit. Section 13.12-C All Property Maintenance Costs that Tenant is obligated to pay pursuant to the terms of this Lease shall be reasonable and shall be directly related to operation of the Building and/or the Property. Notwithstanding anything to the contrary contained herein, Property Maintenance Costs shall not include the following: (a) advertising costs, legal fees or brokerage commissions incurred in connection with leasing except required to compensate Landlord following a default by Tenant; (b) repairs, alterations, additions, improvements or replacements made to rectify or correct any Latent Defect as defined in Section 5.1 of this Lease or which are otherwise Landlord's responsibility pursuant to Section 5.1 of this Lease; (c) omitted per original lease, (d) damage and repairs attributable to condemnation, fire or other casualty except for insurance deductibles which Tenant is obligated to pay which shall be Property Maintenance Expenses; (e) damage and repairs covered under any insurance policy carried by Landlord in connection with the Building and/or Property; (f) damage and repairs necessitated by the negligence or willful misconduct of Landlord or Landlord's employees, contractors or agents; (g) executive salaries or salaries of service personnel to the extent that such service personnel perform services other than in connection with the management, 4 operation, repair or maintenance of the Property; (h) Landlord's general overhead expenses not related to the Property; (i) payments of principal or interest on any mortgage or other encumbrance; (j) depreciation; (k) legal fees, accountants' fees and other expenses incurred in connection with disputes with the enforcement of any defense of Landlord's title to or interest in the Building or Property or any part thereof; (l) omitted per original lease; (m) costs or fines arising from Landlord's violation of any governmental rule or authority; (n) omitted per original lease; (o) the cost of any service provided to Tenant for which Landlord is entitled to be reimbursed from a third party; (p) costs exceeding those Tenant proves are obtainable through reasonably competitive bidding procedures consistent with the scope of work performed; and (q) costs covered by warranty payments from subcontractors or material suppliers or attributable to items warranties by Landlord pursuant to Section 5.1 of this Lease. At Tenant's request, Landlord shall provide a statement of Property Maintenance Costs which shall be itemized, signed and certified to be correct by Landlord. Landlord shall keep at its office for a period of at least twelve (12) months after the expiration of each calendar year, full and accurate books, records and supporting documents in connection with Landlord's statement. Tenant or Tenant's agent shall have the right at all reasonable times within said twelve (12) month period to inspect such books, records and supporting documents, to challenge the accuracy of any Property Maintenance Costs and to procure an audit. In the event an audit of the records results in a determination that the Property Maintenance costs charged to Tenant were in excess of 5% more than the actual Property Maintenance Costs, Landlord shall pay for the reasonable cost of such audit. For the Property located at 47131 Bayside Parkway known as Lam Building 10, Renco 38, and for no other property (should this lease form be used for other property), during the first eighteen (18) months of the Lease Term, and for no other time period, the "professional management fees" shall be equal to two and one half percent (2.5%) of the annualized Base Monthly Rent, after which time the professional management fees shall be equal to three percent (3%) of the annualized Base Monthly Rent. Section 14.5 Landlord's Interest Rate: Throughout the Lease where Tenant is obligated to pay interest to Landlord, Tenant shall so pay interest at an annual interest rate equal to the Wells Fargo National Bank Prime Lending Interest Rate, as determined from time to time by Wells Fargo National Bank, plus three percent (3%). In the event that such interest rate is not available. Landlord in its reasonably opinion shall select another major regional national bank which publishes a prime lending rate of interest to use as a reference rate to which three percent (3%) shall be added. Section 15 Option to Renew: Landlord hereby grants to Tenant Two (2) consecutive options to renew the Lease, each option period to be for an additional five (5) years (the first Renewal Term and the Second Renewal Term). Each of the renewal terms shall commence upon the expiration of the preceding lease term such that there shall not be a gap in the time between the Lease Term, and First Renewal Term and the Second Renewal Term. The Option to Renew is not transferable. 1. The lease of the Leased Premises for either of the Renewal Terms shall be on the same terms and conditions as set forth in the Lease, except: A. That the rental for the Leased Premises during each of the Renewal Terms shall be as set forth below in Paragraph 3, and B. That the Security Deposit shall be increased to the rental amount determined in Paragraph 3 (the "Increased Security Deposit Amount"). 2. Tenant shall notify Landlord of Tenant's exercise of its right to renew the Lease for each of the Renewal Terms only by giving to Landlord written notice no more than nine (9) months prior to the Renewal 5 Commencement Date nor fewer than eight (8) months prior to the Renewal Commencement Date (time is expressly of the essence to Landlord). Any attempted exercise of this Option made other than within the time period stated or in the manner stated shall be void and of no force or effect. In the event that Tenant does not or is not entitled to exercise its option Tenant shall have no further rights hereunder. 3. If Tenant shall have properly and timely exercised its right to extend the term of the Lease, the term of the Lease shall be so extended for the Renewal Terms on the same terms and conditions contained in the lease; provided, however, the Base Monthly Rent for each month of each of the Renewal Terms shall be calculated as follows: The new Base Monthly Rent for each of the Renewal Terms shall be the greater of: (i) the Base Monthly Rent being paid by Tenant to Landlord during the final full month of the final year of the time period prior to the commencement of the appropriate Renewal Term, or (ii) the Then Market Rental Rate for the Lease Premises. 4. The term "Then Monthly Market Rental Rate" shall be determined by mutual agreement between Landlord and Tenant or, in the event such agreement cannot be made within ten (10) days from the date Tenant shall have exercised this option, Landlord and Tenant shall each appoint a real estate appraiser with at least five (5) years full-time commercial/industrial appraisal experience in Alameda County to appraise and determine the fair market monthly rental rate of the Leased Premises, in its then existing condition for the use specified in the Lease could be leased for, on the same terms and conditions set forth in the Lease, to a qualified tenant ready, willing and able to lease the Leased Premises for a term equal to the Renewal Term. If either party does not appoint an appraiser within ten (10) days after the other party has given notice of the name of its appraiser, the other party can then apply to the President of the Alameda County Real Estate Board or the presiding Judge of the Superior Court of that County for the selection of a second appraiser who meets the qualifications stated above. The failing party shall bear the cost of appointing the second appraiser and of paying the second appraiser's fees. The two appraisers shall attempt to establish the Then Monthly Market Rental Rate for the Leased Premises. If the two appraisers are unable to agree on the Then Monthly Market Rental Rate for the Leased Premises within ten (10) days after the second appraiser has been selected or appointed, then the two appraisers shall attempt to select a third appraiser meeting the qualifications stated above. If they fail to agree on a third appraiser, either party can follow the above procedure for having an appraiser appointed by the Real Estate Board or a judiciary. Each of the parties shall bear one-half (1/2) of the cost of appointing the third appraiser and of paying the third appraiser's fee. Unless the three appraisers are able to agree on the Then Monthly Market Rental Rate for the Leased Premises within ten (10) days after the selection or appointment of the third appraiser, the two appraisal amounts being calculated most closely together, after having discarded the appraisal amount which most greatly varies from the other two appraisal amounts, shall be added together then divided by two (2). The resulting rental amount shall be defined as the Then Monthly Market Rental Rate for the Leased Premises. It is acknowledged that the Then Monthly Market Rental Rate may increase over time based upon the agreement of the parties or the decision of the arbitration (i.e., rent escalators) and/or the Then Monthly Market Rental Rate may contain a period of reduced or no Base Monthly Rent based upon the agreement of the parties or the decision of the arbitration. In no event, however, shall the resulting Then Monthly Market Rental Rate for each of the Renewal Terms be less than the Base Monthly Rent paid during the final full month of the initial Lease Term or the Prior Renewal Term as appropriate. Section 16 The Premises are hereby leased to Tenant in and "as in" condition. Section 17 Cross Default: Any default by Tenant in the payment of Base Monthly Rent and/or Additional Rent in a total amount of two hundred fifty thousand dollars ($250,000.00) or greater shall be considered to be a default by Tenant under any lease entered into by and between Tenant and Landlord or by and between Tenant and any of the following affiliates of Landlord: Renco Equities IV, a California partnership, Renco Investment company, a California partnership, Renco Bayside Investors, a California limited partnership (including any successor entities). This cross default provision shall apply to lease entered into by Tenant prior to, concurrently with, or following the date of this Lease. Further, any default by Tenant in the payment of Base Monthly Rent and/or Additional Rent in a total amount of two hundred fifty thousand dollars ($250,000.00) or greater under any other lease entered into with the above referenced entities (or their successor entities) shall be considered to be a default by Tenant under the terms of this Lease. In the event of any such default by Tenant in the payment of Base Monthly Rent and/or 6 Additional Rent in a total amount of two hundred fifty thousand dollars ($250,000.00) or greater, Landlord (and/or Landlord's affiliates identified above) may pursue the remedies permitted by law or pursuant to the terms of any such documents as if Tenant had defaulted under each of such documents. IN WITNESS WHEREOF, Landlord and Tenant have executed this First Addendum To Lease with the intent to be legally bound thereby, to be effective as of the date the second party signs this First Addendum To Lease. AS LANDLORD: AS TENANT: Renco Equities IV, Lam Research Corporation, a California partnership a Delaware corporation By: __________________________________ By: _______________________________ Title: _______________________________ Title: ____________________________ By: __________________________________ By: _______________________________ Title: _______________________________ Title: ____________________________ Dated: _______________________________ Dated: ____________________________ EX-99 5 exb99_1.txt EX 99.1 CERTIFICATION OF CEO EXHIBIT 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Mattson Technology, Inc. (the "Company") on Form 10-Q for the period ending March 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), David Dutton, as Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. May 14, 2003 /S/ DAVID DUTTON --------------------------- David Dutton Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Mattson Technology, Inc. and will be retained by Mattson Technology, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 6 exb99_2.txt EX 99.2 CERTIFICATION OF CFO EXHIBIT 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Mattson Technology, Inc. (the "Company") on Form 10-Q for the period ending March 30, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Ludger Viefhues, as Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. May 14, 2003 /S/ LUDGER VIEFHUES ---------------------------- Ludger Viefhues Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Mattson Technology, Inc. and will be retained by Mattson Technology, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 7 exb99_3.txt EX-99.3 RISK FACTORS Exhibit 99.3 RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF STOCK The Semiconductor Equipment Industry is Cyclical, is Currently Experiencing a Severe and Prolonged Downturn, and Causes Our Operating Results to Fluctuate Significantly. The semiconductor industry is highly cyclical and has historically experienced periodic downturns, whether the result of general economic changes or capacity growth temporarily exceeding growth in demand for semiconductor devices. During periods of declining demand for semiconductor manufacturing equipment, customers typically reduce purchases, delay delivery of products and/or cancel orders. Increased price competition may result, causing pressure on our net sales, gross margin and net income. We are experiencing cancellations, delays and push-outs of orders, which reduce our revenues, cause delays in our ability to recognize revenue on the orders and reduce backlog. Further order cancellations, reductions in order size or delays in orders will materially adversely affect our business and results of operations. Following the very strong year in 2000, the semiconductor industry is now, since 2001, in the midst of a significant and prolonged downturn, and we and other industry participants are experiencing lower bookings, significant push outs and cancellations of orders. The severity and duration of the downturn are unknown, but is impairing our ability to sell our systems and to operate profitably. If demand for semiconductor devices and our systems remains depressed for an extended period, it will seriously harm our business. As a result of the acquisition of the STEAG Semiconductor Division and CFM at the beginning of 2001, we grew to be a larger, more geographically diverse company, less able to react quickly to the cyclicality of the semiconductor business, particularly in Europe and other regions where restrictive laws relating to termination of employees prohibited us from quickly reducing costs in order to meet the downturn. Accordingly, during this latest downturn we have been unable to reduce our expenses quickly enough to avoid incurring a loss. For the fiscal year ended December 31, 2002 and 2001, our net loss was $94.3 million and $336.7 million, respectively, compared to net income of $1.5 million for the year ended December 31, 2000. The net loss in 2002 primarily reflected the impact of our continuing decline in net sales. Subsequent to December 31, 2002, we have sold the Wet Business to SCP, which business had originally been acquired as part of our acquisition of the STEAG Semiconductor Division and CFM. If our actions to date, including our recent sale to SCP of the Wet Business, are insufficient to effectively align our cost structure with prevailing market conditionswe may be required to undertake additional cost-cutting measures, and may be unable to continue to invest in marketing, research and development and engineering at the levels we believe are necessary to maintain our competitive position in our remaining core businesses. Our failure to make these investments could seriously harm our long-term business prospects. We are Exposed to the Risks Associated with Industry Overcapacity, Including Reduced Capital Expenditures, Decreased Demand for Our Products and the Inability of Many of Our Customers to Pay for Our Products. As a result of the recent economic downturn, inventory buildups in telecommunication products and slower than expected personal computer sales have resulted in overcapacity of semiconductor devices and has caused semiconductor manufacturers to experience cash flow problems and reduce their capital spending. As our business depends in significant part upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that open new or expand existing facilities, continued overcapacity and reductions in capital expenditures by our customers could cause further delays or decreased demand for our products. If existing fabrication facilities are not expanded or new facilities are not built, demand for our systems may not develop or increase, and we may be unable to generate significant new orders for our systems. If we are unable to develop new orders for our systems, we will not achieve anticipated net sales levels. In addition, many semiconductor manufacturers are continuing to forecast that revenues in the short-term will remain flat or lower than in previous high-demand years, and we believe that we may continue to see some customers experiencing cash flow problems. As a result, if customers are not successful generating sufficient revenue or securing alternative financing arrangements, we may be unable to close sales or collect accounts receivables from such customers or potential customers, and may be required to take additional reserves against our accounts receivables. We Are Implementing New Financial Systems, and Will Need to Continue to Improve or Implement New Systems, Procedures and Controls. We are implementing new financial systems used in the consolidation of our financial results, in order to further automate processes and align the disparate systems used by our acquired businesses. The integration of the STEAG Semiconductor Division and CFM and their operational and financial systems and controls after the merger in 2001 placed a significant strain on our management information systems and our administrative, operational and financial resources, requiring us to improve our systems and implement new operational and financial systems, procedures and controls. Since that acquisition, we have been pursuing integration of the businesses, systems and controls of the three companies, as each business historically used a different financial system. We have recently implemented new financial systems to aid in the consolidation of our financial reporting operations. These financial systems are new and not yet fully operational, and we have not had extensive experience with them. We may encounter unexpected difficulties, costs or other challenges that make implementation and use of these systems more difficult or costly than expected, may cause the consolidation and reporting of our financial results to be more time-consuming than expected, and may require additional management resources than expected before they are fully implemented and operating smoothly. In addition, the sale of our Wet Business to SCP will continue to place a significant strain on our management information systems and our administrative, operational and financial resources as we separate out the Wet Business as a discontinued operations from our core businesses. Continued improvement or implementation of new systems, procedures and controls may be required, and could cause us to incur additional costs, and place further burdens on our management and internal resources. If our new financial systems do not result in the expected improvements, or if we are unable to fully implement these systems, procedures and controls in a timely manner, our business could be harmed. In addition, as a result of new requirements proposed by the Securities and Exchange Commission, in response to the passage of the Sarbanes-Oxley Act of 2002, requiring annual review and evaluation of our internal control systems, and attestation of these systems by our independent auditors, we are currently reviewing our internal control procedures, and working with our auditors to implement any enhancements of such procedures, or further documentation of such procedures, that may be necessary. Any improvements in our internal control systems or in documentation of such internal control systems could be costly to prepare or implement, divert attention of management or finance staff, and may cause our operating expenses to increase over the ensuing year. The Sale of Our Wet Business to SCP May Fail to Result in the Benefits We Anticipate, and May Cause Us to Incur Greater Costs Than Anticipated. We may not obtain the benefits we expect as a result of the sale of the Wet Business to SCP, such as greater strategic focus on our core businesses. Our agreement with SCP may require an adjustment to the initial purchase price, if the net working capital of the Wet Business after the sale is not within a specified range, and could result in a reduction of the purchase price to us. We expect the purchase price adjustment based on the net working capital at closing to result in a payment to SCP, in an amount less than $1.0 million. We have agreed with SCP to (i) fund salary and severance costs for certain reductions in force to be implemented in Germany after the closing, (ii) assume real property leases relating to our former Pliezhausen facilities, subject to a sublease of all or a portion of such facilities to SCP, (iii) pay legal fees up to a maximum of $1 million in connection with certain pending patent litigation, and (iv) reimburse SCP for amounts to cover specified arrangements and responsibilities with customers and other costs. We expect to record reserves in the aggregate amount of approximately $14.0 million to $15.0 million to cover our potential liability under these items. However, our actual costs and expenses could be greater or lesser than expected, and if greater, could materially adversely affect our results of operation in future periods. In addition, our consolidated financial statements do not reflect what our financial position, results of operations and cash flows would have been had the Wet Business been a separate stand-alone entity during the periods presented. Therefore, we cannot predict with certainty what the effects of the divestiture might be on ongoing operations and results, and whether the expected cost savings will materialize, or whether the transaction may have a material effect on our financial position, results of operations or cash flows taken as a whole, or whether the transaction will contribute to our financial results differently from the investment community's expectations. Our divestiture of the Wet Business may also result in the cancellation of orders by customers who may be unhappy that we are discontinuing the product line, particularly if the customer has previously purchased wet processing products from us. We may lose future orders if customers are wary or unsure of our long-term plans, or become concerned that we will discontinue other product lines, or they elect to purchase products from suppliers that appear to have a broader product offering. Customers of our wet processing products may attempt to return the products if they fear that ongoing maintenance and support of the product will not be available. The divestiture may also prove more costly or difficult than expected, could cause us to lose key employees, and divert management attention and resources from our other core businesses, particularly over the next several quarters. In addition to the employees and facilities transferred to SCP as part of the divestiture, we are shutting down other facilities in the United States previously devoted largely to the Wet Business, and terminating additional employees not hired by SCP who had predominantly worked in the Wet Business. In order to achieve the desired cost savings from the divestiture, we will need to incur substantial restructuring costs, including severance costs associated with headcount reductions, and asset write-offs associated with manufacturing and facility closures. We may incur additional costs associated with the discontinued operations, and the dedication of management resources to the sale has distracted and may continue to distract attention from our remaining core businesses. We may incur additional costs associated with these activities, which could materially reduce our short term earnings. Our Results of Operations May Suffer if We Do Not Effectively Manage Our Inventory. To achieve commercial success with our product lines, we will need to manage our inventory of component parts and finished goods effectively to meet changing customer requirements. Some of our products and supplies have in the past and may in the future become obsolete while in inventory due to rapidly changing customer specifications. If we are not successfully able to manage our inventory, including our spare parts inventory, we may need to write off unsaleable or obsolete inventory, which would adversely affect our results of operations. Warranty Claims in Excess of Our Projections Could Seriously Harm Our Business. We offer a warranty on our products. The cost associated with our warranty is significant, and in the event our projections and estimates of this cost are inaccurate our financial performance could be seriously harmed. In addition, if we experienced product failures at an unexpectedly high level, our reputation in the marketplace could be damaged, customers may decline to place new or additional orders with us, and our business would suffer. We May Need Additional Capital, Which May Not Be Available and Which Could Be Dilutive to Existing Stockholders. Based on current projections, we believe that our current cash and investments along with cash generated through operations will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for the next 12 months. Management's projections are based on our ability to manage inventories and collect accounts receivable balances in this market downturn. If we are unable to manage our inventories or accounts receivable balances, or if we otherwise experience higher operating costs or lower revenue than we anticipate, we may be required to seek alternative sources of financing. We may need to raise additional funds in future periods through public or private financing or other sources to fund our operations. We may not be able to obtain adequate or favorable financing when needed. If we fail to raise capital when needed, we would be unable to continue operating our business as we plan, or at all. In addition, we may need to continue reducing costs, which could cause us to curtail research and development activities, resulting in a delay in new product introduction or enhancement. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders would be reduced. In addition, any future equity securities may have rights, preferences or privileges senior to our common stock. Furthermore, debt financing, if available, may involve restrictive covenants on our operations. Accounting Guidance Under SAB 101 May Result in Wide Fluctuation in Our Revenue. 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. Among other things, SAB 101 has resulted in a change from the established practice of recognizing revenue at the time of shipment of a system, and instead delaying revenue recognition in part or totally until the time of customer acceptance. We adopted SAB 101 effective in the fourth quarter of fiscal 2000, retroactive to January 1, 2000, with the impact recorded as a cumulative effect in the first quarter of 2000. In some situations, application of this accounting guidance delays the recognition of revenue that would otherwise have been recognized in earlier periods. As a result, our reported revenue may fluctuate more widely and reported revenue for a particular fiscal period might not meet the expectations of financial analysts or investors. A delay in recognition of revenue resulting from application of this guidance, while not affecting our cash flow, could adversely affect our results of operations, which could cause the value of our common stock to fall. We Depend on Large Purchases From a Few Customers, and Any Loss, Cancellation, Reduction or Delay in Purchases By, or Failure to Collect Receivables From, These Customers Could Harm Our Business. Currently, we derive most of our revenues from the sale of a relatively small number of systems to a relatively small number of customers, which makes our relationship with each customer critical to our business. The list prices on our systems range from $500,000 to over $2.2 million. Our lengthy sales cycle for each system, coupled with customers' capital budget considerations, make the timing of customer orders uneven and difficult to predict. In addition, our backlog at the beginning of a quarter is not expected to include all orders required to achieve our sales objectives for that quarter. As a result, our net sales and operating results for a quarter depend on our ability to ship orders as scheduled during that quarter as well as obtain new orders for systems to be shipped in that same quarter. Any delay in scheduled shipments or in acceptances of shipped products would delay our ability to recognize revenue, collect outstanding accounts receivable, and would materially adversely affect our operating results for that quarter. A delay in a shipment or customer acceptance near the end of a quarter may cause net sales in that quarter to fall below our expectations and the expectations of market analysts or investors. Our list of major customers changes substantially from year to year, and we cannot predict whether a major customer in one year will make significant purchases from us in future years. Accordingly, it is difficult for us to accurately forecast our revenues and operating results from year to year. If we are unable to collect a receivable from a large customer, our financial results will be negatively impacted. Our Quarterly Operating Results Fluctuate Significantly and Are Difficult to Predict, and May Fall Short of Anticipated Levels, Which Could Cause Our Stock Price to Decline. Our quarterly revenue and operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it difficult for us to predict our future operating results. This fluctuation is due to a number of factors, including: o cyclicality of the semiconductor industry; o delays, cancellations and push-outs of orders by our customers; o delayed product acceptance or payments of invoices by our customers; o size and timing of sales, shipments and acceptance of our products; o entry of new competitors into our market, or the announcement of new products or product enhancements by competitors; o sudden changes in component prices or availability; o variability in the mix of products sold; o manufacturing inefficiencies caused by uneven or unpredictable order patterns, reducing our gross margins; o higher fixed costs due to increased levels of research and development costs; and o successful expansion of our worldwide sales and marketing organization. A substantial percentage of our operating expenses are fixed in the short term and we may be unable to adjust spending to compensate for an unexpected shortfall in revenues. As a result, any delay in generating or recognizing revenues could cause our operating results to be below the expectations of market analysts or investors, which could cause the price of our common stock to decline. We Incurred Net Operating Losses for the Fiscal Years 1998, 1999, 2001 and 2002. We May Not Achieve or Maintain Profitability on an Annual Basis, and If We Do Not, We May Not Utilize Deferred Tax Assets. We incurred net losses of approximately $22.4 million for the year ended December 31, 1998, $0.8 million for the year ended December 31, 1999, $336.7 million for the year ended December 31, 2001 and $94.3 million for the year ended December 31, 2002. We expect to continue to incur significant research and development and selling, general and administrative expenses and may not return to profitability in 2003. We will need to generate significant increases in net sales to achieve and maintain profitability on an annual basis, and we may not be able to do so. In addition, our ability to realize our deferred tax assets in future periods will depend on our ability to achieve and maintain profitability on an annual basis. As a Result of the Industry Downturn, We Have Implemented Restructuring and Workforce Reductions, Which May Adversely Affect the Morale and Performance of our Personnel and our Ability to Hire New Personnel. In connection with our efforts to streamline operations, reduce costs and bring our staffing and structure in line with current demand for our products, during 2002 we restructured our organization and reduced our workforce by 257 positions. We have incurred costs of $3.4 million associated with the workforce reduction related to severance and other employee-related costs in 2002, and may incur further costs if additional restructuring is needed to right size our business further or bring our costs down to respond to continued industry and economic slowdowns. Our restructuring may also yield unanticipated consequences, such as attrition beyond our planned reduction in workforce and loss of employee morale and decreased performance. The effects of the restructuring may be further exacerbated by our sale of the Wet Business to SCP, which involved the transfer or termination of employment of our employees engaged in the Wet Business. In addition, the recent trading levels of our common stock have decreased the value of our stock options granted to employees pursuant to our stock option plan. As a result of these factors, our remaining personnel may seek employment with larger, more established companies or companies they perceive as having less volatile operations or stock prices. Continuity of personnel can be an important factor in the successful sales of our products and completion of our development projects in our ongoing core businesses, and ongoing turnover in our sales and research and development personnel could materially and adversely impact our sales, development and marketing efforts. We believe that hiring and retaining qualified individuals at all levels is essential to our success, and there can be no assurance that we will be successful in attracting and retaining the necessary personnel. Our Lengthy Sales Cycle Increases Our Costs and Reduces the Predictability of Our Revenue. Sales of our systems depend upon the decision of a prospective customer to increase or replace manufacturing capacity, typically involving a significant capital commitment. Accordingly, the decision to purchase our systems requires time consuming internal procedures associated with the evaluation, testing, implementation, and introduction of new technologies into our customers' manufacturing facilities. Potential new customers evaluate the need to acquire new semiconductor manufacturing equipment infrequently. Even after the customer determines that our systems meet their qualification criteria, we experience delays finalizing system sales while the customer obtains approval for the purchase and constructs new facilities or expands its existing facilities. We may expend significant sales and marketing expenses during this evaluation period. The time between our first contact with a customer regarding a specific potential purchase and the customer's placing its first order may last from nine to twelve months or longer. In this difficult economic climate, the average sales cycle has lengthened even further and is expected to continue to make it difficult to accurately forecast future sales. If sales forecasted from a specific customer for a particular quarter are not realized, we may experience an unplanned shortfall in revenues and our quarterly and annual revenue and operating results may fluctuate significantly from period to period. We Are Highly Dependent on Our International Sales, and Face Significant Economic and Regulatory Risks Because a Majority of Our Net Sales Are From Outside the United States. Asia has been a particularly important region for our business, and we anticipate that it will continue to be important as we expand our sales and marketing efforts by opening an office in China. Our sales to customers located in Taiwan, Japan, other Asian countries and recently China accounted for 47% of our total sales in 2002, 47% in 2001 and 54% in 2000. During 2001, Europe also emerged as an important region for our business. During 2002, 2001 and 2000, sales to customers in Europe accounted for 27%, 31% and 14%, respectively. Our international sales accounted for 74% of our total net sales in 2002, 78% in 2001 and 69% in 2000 and we anticipate international sales will continue to account for a significant portion of our future net sales. Because of our continuing dependence upon international sales, however, we are subject to a number of risks associated with international business activities, including: o unexpected changes in law or regulations resulting in more burdensome governmental controls, tariffs, restrictions, embargoes, or export license requirements; o exchange rate volatility; o the need to comply with a wide variety of foreign and U.S. export laws; o political and economic instability, particularly in Asia; o differing labor regulations; o reduced protection for intellectual property; o difficulties in accounts receivable collections; o difficulties in managing distributors or representatives; o difficulties in staffing and managing foreign subsidiary operations; and o changes in tariffs or taxes. In the U.S., our sales to date have been denominated primarily in U.S. dollars, while our sales in Japan are usually denominated in Japanese Yen. Our sales to date in Europe have been denominated in various currencies, currently primarily U.S. dollars and the Euro. Our sales in foreign currencies are subject to risks of currency fluctuation. For U.S. dollar sales in foreign countries, our products become less price-competitive where the local currency is declining in value compared to the dollar. This could cause us to lose sales or force us to lower our prices, which would reduce our gross margins. In addition, we are exposed to the risks of operating a global business, and maintain certain manufacturing facilities in Germany. Managing our global operations presents challenges, including varying business conditions and demands, political instability, export restrictions and fluctuations in interest and currency exchange rates. We May Not Achieve Anticipated Revenue Growth if We Are Not Selected as "Vendor Of Choice" for New or Expanded Fabrication Facilities or If Our Systems and Products Do Not Achieve Broader Market Acceptance. Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on established relationships, product compatibility, and proven financial performance. Once a semiconductor manufacturer selects a particular vendor's capital equipment, the manufacturer generally relies for a significant period of time upon equipment from this "vendor of choice" for the specific production line application. In addition, the semiconductor manufacturer frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, we may face narrow windows of opportunity to be selected as the "vendor of choice" by substantial new customers. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor's product, and we may not be successful in obtaining broader acceptance of our systems and technology. If we are unable to achieve broader market acceptance of our systems and technology, we may be unable to grow our business and our operating results and financial condition will be adversely affected. Unless We Can Continue To Develop and Introduce New Systems that Compete Effectively On the Basis of Price and Performance, We May Lose Future Sales and Customers, Our Business May Suffer, and Our Stock Price May Decline. Because of continual changes in the markets in which our customers and we compete, our future success will depend in part upon our ability to continue to improve our systems and technologies. These markets are characterized by rapidly changing technology, evolving industry standards, and continuous improvements in products and services. Due to the continual changes in these markets, our success will also depend upon our ability to develop new technologies and systems that compete effectively on the basis of price and performance and that adequately address customer requirements. In addition, we must adapt our systems and processes to support emerging target market industry standards. The success of any new systems we introduce is dependent on a number of factors, including timely completion of new system designs accepted by the market, and may be adversely affected by manufacturing inefficiencies and the challenge of producing systems in volume which meet customer requirements. We may not be able to improve our existing systems or develop new technologies or systems in a timely manner. In particular, the transition of the market to 300 mm wafers will present us with both an opportunity and a risk. To the extent that we are unable to introduce 300mm systems that meet customer requirements on a timely basis, our business could be harmed. We may exceed the budgeted cost of reaching our research, development and engineering objectives, and estimated product development schedules may require extension. Any delays or additional development costs could have a material adverse effect on our business and results of operations. Because of the complexity of our systems, significant delays can occur between the introduction of systems or system enhancements and the commencement of commercial shipments. The Timing of the Transition to 300mm Technology is Uncertain and Competition May Be Intense. We have invested, and are continuing to invest, substantial resources to develop new systems and technologies to automate the processing of 300mm wafers. However, the timing of the industry's transition to 300mm manufacturing technology is uncertain, partly as a result of the recent period of reduced demand for semiconductors. Delay in the transition to 300mm manufacturing technology could adversely affect our potential revenues and opportunities for future growth. Moreover, delay in the transition to 300mm technology could permit our competitors to introduce competing or superior 300mm products at more competitive prices, causing competition to become more vigorous. Delays or Technical and Manufacturing Difficulties Incurred in the Introduction of New Products Could Be Costly and Adversely Affect Our Customer Relationships. From time to time, we have experienced delays in the introduction of, and certain technical and manufacturing difficulties with, certain systems and enhancements, and may experience such delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. For example, our inability to overcome such difficulties, to meet the technical specifications of any new systems or enhancements, or to manufacture and ship these systems or enhancements in volume and in a timely manner, would materially adversely affect our business and results of operations, as well as our customer relationships. In addition, we may from time to time incur unanticipated costs to ensure the functionality and reliability of our products early in their life cycles, which costs can be substantial. If new products or enhancements experience reliability or quality problems, we could encounter a number of difficulties, including reduced orders, higher manufacturing costs, delays in collection of accounts receivable, and additional service and warranty expenses, all of which could materially adversely affect our business and results of operations. We May Not Be Able To Continue To Successfully Compete in the Highly Competitive Semiconductor Industry. The semiconductor equipment industry is both highly competitive and subject to rapid technological change. Significant competitive factors include the following: o system performance; o cost of ownership; o size of installed base; o breadth of product line; and o customer support. The following characteristics of our major competitors' systems may give them a competitive advantage over us: o broader product lines; o longer operating history; o greater experience with high volume manufacturing; o broader name recognition; o substantially larger customer bases; and o substantially greater financial, technical, and marketing resources. In addition, to expand our sales we must often replace the systems of our competitors or sell new systems to customers of our competitors. Our competitors may develop new or enhanced competitive products that will offer price or performance features that are superior to our systems. Our competitors may also be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion, and sale of their product lines. We may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively. We Depend Upon a Limited Number of Suppliers for Some Components and Subassemblies, and Supply Shortages or the Loss of These Suppliers Could Result In Increased Cost or Delays in Manufacture and Sale of Our Products. We rely to a substantial extent on outside vendors to manufacture many of the components and subassemblies of our systems. We obtain some of these components and subassemblies from a sole source or a limited group of suppliers. Because of our anticipated reliance on outside vendors generally, and on a sole or a limited group of suppliers in particular, we may be unable to obtain an adequate supply of required components. Although we currently experience minimal delays in receiving goods from our suppliers, when demand for semiconductor equipment is strong, as it was in 2000, our suppliers strained to provide components on a timely basis. In addition, during periods of shortages of components, we may have reduced control over pricing and timely delivery of components. We often quote prices to our customers and accept customer orders for our products prior to purchasing components and subassemblies from our suppliers. If our suppliers increase the cost of components or subassemblies, we may not have alternative sources of supply and may no longer be able to increase the cost of the system being evaluated by our customers to cover all or part of the increased cost of components. The manufacture of some of these components and subassemblies is an extremely complex process and requires long lead times. As a result, we have in the past and we may in the future experience delays or shortages. If we are unable to obtain adequate and timely deliveries of our required components or subassemblies, we may have to seek alternative sources of supply or manufacture such components internally. This could delay our ability to manufacture or timely ship our systems, causing us to lose sales, incur additional costs, delay new product introductions, and harm our reputation. We Are Highly Dependent on Our Key Personnel to Manage Our Business and Their Knowledge of Our Business, Management Skills, and Technical Expertise Would Be Difficult to Replace. Our success will depend to a large extent upon the efforts and abilities of our executive officers, our current management and our technical staff, any of whom would be difficult to replace. We have had significant turnover among our executive officers and key employees, and several have recently joined us or have assumed new responsibilities at the company. The addition, reassignment or loss of key employees could limit or delay our ability to develop new products and adapt existing products to our customers' evolving requirements and result in lost sales and diversion of management resources. Because of Competition for Additional Qualified Personnel, We May Not Be Able To Recruit or Retain Necessary Personnel, Which Could Impede Development or Sales of Our Products. Our growth will depend on our ability to attract and retain qualified, experienced employees. There is substantial competition for experienced engineering, technical, financial, sales, and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. Historically, competition for such personnel has been intense in all of our locations, but particularly in the San Francisco Bay Area where our headquarters is located. If we are unable to retain existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited due to our lack of capacity to develop and market our products to our customers, or we could fail to meet our delivery commitments or experience deterioration in service levels or decreased customer satisfaction. If the current downturn ends suddenly, we may not have enough personnel to promptly return to our previous production levels. If we are unable to expand our existing manufacturing capacity to meet demand, a customer's placement of a large order for our products during a particular period might deter other customers from placing similar orders with us for the same period. It could be difficult for us to rapidly recruit and train substantial numbers of qualified technical personnel to meet increased demand. If We Are Unable to Protect Our Intellectual Property, We May Lose a Valuable Asset, Experience Reduced Market Share, and Efforts to Protect Our Intellectual Property May Require Additional Costly Litigation. We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements, and other intellectual property protection methods to protect our proprietary technology. Despite our efforts to protect our intellectual property, our competitors may be able to legitimately ascertain the non-patented proprietary technology embedded in our systems. If this occurs, we may not be able to prevent the use of such technology. Our means of protecting our proprietary rights may not be adequate and our patents may not be sufficiently broad to protect our technology. In addition, any patents owned by us could be challenged, invalidated, or circumvented and any rights granted under any patent may not provide adequate protection to us. Furthermore, we may not have sufficient resources to protect our rights. Our competitors may independently develop similar technology, duplicate our products, or design around patents that may be issued to us. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our products in such foreign countries. As a result of these threats to our proprietary technology, we may have to resort to costly litigation to enforce our intellectual property rights. We had been litigating certain matters involving our Wet Business intellectual property, which has been sold to SCP. Although SCP has assumed the responsibility for these legal proceedings, we remain a party to these litigations, and we have agreed to reimburse SCP for the costs of such litigation up to the amount of $1 million. We Might Face Intellectual Property Infringement Claims that May Be Costly to Resolve and Could Divert Management Attention Including the Potential for Patent Infringement Litigation as a Result of Our Increased Market Strength in RTP. We may from time to time be subject to claims of infringement of other parties' proprietary rights. Competitors alleging infringement of such competitors' patents have in the past sued our acquired company, STEAG Semiconductor Division. Although all such historic lawsuits have been settled or terminated, the risk of further intellectual property litigation for us may be increased following the expansion of our business after the merger. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets, even if the claims are without merit, could be very expensive to defend and could divert the attention of our management. Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek costly licenses from third parties, and prevent us from manufacturing and selling our products. Royalty or license agreements, if required, may not be available on terms acceptable to us or at all. Any of these situations could have a material adverse effect on our business and operating results in one or more countries. Our Failure to Comply with Environmental Regulations Could Result in Substantial Liability. We are subject to a variety of federal, state, local, and foreign laws, rules, and regulations relating to environmental protection. These laws, rules, and regulations govern the use, storage, discharge, and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations. If we fail to comply with present or future regulations, we could be subject to substantial liability for clean up efforts, personal injury, and fines or suspension or cessation of our operations. We may be subject to liability if our acquired companies have past violations. Restrictions on our ability to expand or continue to operate our present locations could be imposed upon us or we could be required to acquire costly remediation equipment or incur other significant expenses. Future Sales of Shares by STEAG Could Adversely Affect the Market Price of Our Common Stock. There are approximately 44.9 million shares of our common stock outstanding as of December 31, 2002, of which approximately 13.2 million (or 29.4%) are held beneficially by STEAG. STEAG has agreed to restrictions on its ability to acquire additional shares of our stock, other than to maintain its percentage ownership in us, and from soliciting proxies and certain other standstill restrictions in connection with voting shares of our common stock, for a period of five years after its acquisition of the stock. STEAG may sell these shares in the public markets from time to time, subject to certain limitations on the timing, amount and method of such sales imposed by SEC regulations, and STEAG has the right to require us to register for resale all or a portion of the shares they hold. If STEAG were to sell a large number of shares, the market price of our common stock could decline. Moreover, the perception in the public markets that such sales by STEAG might occur could also adversely affect the market price of our common stock. The Price of Our Common Stock Has Fluctuated in the Past and May Continue to Fluctuate Significantly in the Future, Which May Lead to Losses By Investors or to Securities Litigation. The market price of our common stock has been highly volatile in the past, and our stock price may decline in the future. We believe that a number of factors could cause the price of our common stock to fluctuate, perhaps substantially, including: o general conditions in the semiconductor industry or in the worldwide economy; o announcements of developments related to our business; o fluctuations in our operating results and order levels; o announcements of technological innovations by us or by our competitors; o new products or product enhancements by us or by our competitors; o developments in patent litigation or other intellectual property rights; or o developments in our relationships with our customers, distributors, and suppliers. In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, have experienced extreme price fluctuations. These fluctuations have frequently been unrelated to the operating performance of the affected companies. Such fluctuations could adversely affect the market price of our common stock. In the past, securities class action litigation has often been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources. Any Future Business Acquisitions May Disrupt Our Business, Dilute Stockholder Value, or Distract Management Attention. As part of our ongoing business strategy, we may consider additional acquisitions of, or significant investments in, businesses that offer products, services, and technologies complementary to our own. Such acquisitions could materially adversely affect our operating results and/or the price of our common stock. Acquisitions also entail numerous risks, including: o difficulty of assimilating the operations, products, and personnel of the acquired businesses; o potential disruption of our ongoing business; o unanticipated costs associated with the acquisition; o inability of management to manage the financial and strategic position of acquired or developed products, services, and technologies; o inability to maintain uniform standards, controls, policies, and procedures; and o impairment of relationships with employees and customers that may occur as a result of integration of the acquired business. To the extent that shares of our stock or other rights to purchase stock are issued in connection with any future acquisitions, dilution to our existing stockholders will result and our earnings per share may suffer. Any future acquisitions may not generate additional revenue or provide any benefit to our business, and we may not achieve a satisfactory return on our investment in any acquired businesses. The Effect of Terrorism, the War in Iraq, and Political Instability Could Harm our Results of Operation. The threat of terrorism targeted at the regions of the world in which we do business, including the United States, increases the uncertainty in our markets and may delay any recovery in the general economy. Any delay in the recovery of the economy and the semiconductor industry could seriously impact our business. Increased international political instability, as demonstrated by the September 2001 terrorist attacks, disruption in air transportation and further enhanced security measures as a result of the terrorist attacks, and the effects of war in Iraq, may hinder our ability to do business and may increase our costs of operations. Such continuing instability could cause us to incur increased costs in transportation, make such transportation unreliable, increase our insurance costs, and cause international currency markets to fluctuate. This same instability could have the same effects on our suppliers and their ability to timely deliver their products. If this international political instability continues or increases, our business and results of operations could be harmed. -----END PRIVACY-ENHANCED MESSAGE-----