UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (Fee Required).
For the fiscal year ended May 31, 1999
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
For the transition period from ________________ to ________________
AEHR TEST SYSTEMS
(Exact name of Registrant as specified in its charter)
CALIFORNIA 94-2424084
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
1667 PLYMOUTH STREET, MOUNTAIN VIEW, CA 94043
(Address of principal executive offices) (Zip Code)
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's Common Stock, par value $.01 per share, held by non-affiliates of the Registrant, based upon the closing price of $4.25 on July 30, 1999, as reported on the Nasdaq National Market, was approximately $22,954,174. For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock (other than such persons of whom the Registrant became aware only through the filing of a Schedule 13G filed with the Securities and Exchange Commission) and shares held by officers and directors of the Registrant have been excluded because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.
The number of shares of Registrant's Common Stock, par value $.01 per share, outstanding at July 30, 1999 was 6,779,368.
Documents Incorporated By Reference
Certain information required by Items 10, 11, 12 and 13 of this report on
Form 10-K is incorporated by reference from the Registrant's proxy statement
for the Annual Meeting of Shareholders to be held on October 20, 1999 (the
"Proxy Statement"), which will be filed with the Securities and Exchange
Commission within 120 days after the close of the Registrant's fiscal year
ended May 31, 1999.
AEHR TEST SYSTEMS
FORM 10-K
FISCAL YEAR ENDED MAY 31, 1999
TABLE OF CONTENTS
PART I
Item 1. Business ................................................ 3
Item 2. Properties ............................................. 10
Item 3. Legal Proceedings ....................................... 10
Item 4. Submission of Matters to a Vote of Security Holders ..... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related
Shareholder Matters ................................... 11
Item 6. Selected Financial Data ................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................. 13
Item 7a. Quantitative and Qualitative Disclosures about
Market Risks .......................................... 26
Item 8. Financial Statements and Supplementary Data ............. 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ................... 43
PART III
Item 10. Directors and Executive Officers of the Registrant ...... 43
Item 11. Executive Compensation .................................. 43
Item 12. Security Ownership of Certain Beneficial Owners and
Management ............................................ 43
Item 13. Certain Relationships and Related Transactions .......... 44
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K .............................................. 44
Signatures .............................................. 48
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This Annual Report on Form 10-K contains forward-looking statements with respect to Aehr Test Systems ("Aehr Test" or the "Company") which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements due to a number of factors, including those described herein and the documents incorporated herein by reference, and those factors described in Part II, Item 7 under "Factors that May Affect Future Results of Operations."
PART I
Item 1. Business
THE COMPANY
Aehr Test Systems develops, manufactures and sells systems which are designed to reduce the cost of testing DRAMs and other memory devices, perform reliability screening or burn-in of complex logic and memory devices, and enable IC manufacturers to perform test and burn-in of bare die. Leveraging its expertise as a long-time leading provider of burn-in equipment, with over 2,000 systems installed worldwide, the Company has developed and introduced two innovative product families, the MTX system and the DiePak-Registered Trademark- carrier. The MTX is a massively parallel test system capable of processing thousands of memory devices simultaneously. The MTX system performs not only burn-in but also many of the tests traditionally performed in final test by lower-throughput, higher-cost memory testers. The DiePak carrier is a reusable, temporary package that enables IC manufacturers to perform cost-effective final test and burn-in of bare die.
INDUSTRY BACKGROUND
Semiconductor manufacturing is a complex, multi-step process and defects or weaknesses that may result in the failure of an IC may be introduced at any process step. Failures may occur immediately or at any time during the operating life of an IC, sometimes after several months of normal use. Semiconductor manufacturers rely on testing and reliability screening to detect failures that occur during the manufacturing process.
Testing and reliability screening involves multiple steps. The first set of tests is typically performed before the processed semiconductor wafer is cut into individual die, in order to avoid the cost of packaging defective die into their plastic or ceramic packages. After the die are packaged and before they undergo reliability screening, a short test is typically performed in order to detect packaging defects. Most leading-edge microprocessors, microcontrollers, digital signal processors, and memory ICs then undergo an extensive reliability screening and stress testing procedure known as "burn- in." The burn-in process screens for early failures by operating the IC at elevated voltages and temperatures, usually at 125 degrees Celsius (257 degrees Fahrenheit), for periods typically ranging from 12 to 48 hours. Burn- in systems can process thousands of ICs simultaneously. After burn-in, the ICs undergo a final test process using automatic test equipment ("testers"). Traditional memory testers can test up to 64 ICs simultaneously and perform a variety of tests at multiple temperatures.
PRODUCTS
The Company manufactures and markets massively parallel test systems, burn-in systems, die carriers, test fixtures and related accessories.
All of the Company's systems are modular, allowing them to be configured with optional features to meet customer requirements. Systems can be configured for use in production applications, where capacity, throughput and price are most important, or for reliability engineering and quality assurance applications, where performance and flexibility, such as extended temperature ranges, are essential.
MASSIVELY PARALLEL TEST SYSTEM
The MTX massively parallel test system is designed to reduce the cost of memory test by processing thousands of memory devices simultaneously, including DRAMs, SDRAMs, Rambus DRAMs, SRAMs and most application-specific memories. The MTX system can perform a significant number of tests usually performed by traditional memory testers, including pattern sensitivity tests, functional tests, data retention tests and refresh tests. The Company estimates that transferring these tests from traditional memory testers to the MTX system can reduce the time that a memory device
must be tested by a traditional memory tester by up to 70%, thereby reducing the required number of memory testers and, as a result, reducing capital and operating costs.
The MTX system consists of several subsystems: pattern generation and test electronics, control software, network interface, environmental chamber and automation. The MTX system has an algorithmic test pattern generator which allows it to duplicate most of the tests performed by a traditional memory tester. Pin electronics at each performance test board ("PTB") position are designed to provide accurate signals to the memory ICs being tested and detect whether a device is failing the test. An optional enhanced fault collection capability allows the MTX to identify which cells in a memory IC are failing, resulting in information which can be used to sort partially good devices, and for engineering characterization of new device types.
Devices being tested are placed on PTBs and loaded into environmental chambers which typically operate at temperatures from 25 degrees Celsius (77 degrees Fahrenheit) up to 150 degrees Celsius (302 degrees Fahrenheit) (optional chambers can produce temperatures as low as -55 degrees Celsius (-67 degrees Fahrenheit)). A single PTB can hold up to 336 64 megabit ("Mb") Rambus DRAMs, and a production chamber holds 30 PTBs, resulting in up to 10,080 devices being tested in a single system. For production environments, the system may include an automatic PTB insertion/ejection mechanism for more efficient handling of production quantities of PTBs.
BURN-IN SYSTEMS
The MAX system is designed for dynamic burn-in of memory and logic devices. The production version holds 64 burn-in boards ("BIBs"), each of which may hold 350 or more devices, resulting in a system capacity of 22,400 or more devices. The MAX system's 48-channel pin electronics and ability to run stored test patterns also allow it to be used for application-specific memory devices and many logic devices. The pin electronics are designed to provide precisely-controlled voltages and signals to the devices on the BIBs and to protect them from damage during the burn-in process. The MAX2 system features multi-tasking Windows NT-based software which includes lot tracking and reporting software that are needed for production and military applications. The MAX3 system, introduced in fiscal 1999, increases the pin electronics to 96 channels, and handles the latest low voltage ICs. The MAX2 and MAX3 also have extended stored test program capability for more complete exercise of complex logic devices such as digital signal processors.
The ATX system is designed for dynamic and monitored burn-in of high pin- count VLSI devices, including microprocessors, microcontrollers, application- specific ICs ("ASICs"), and certain memory devices. The ATX system uses much of the same software as the MAX system and contains additional features such as an interface to CAE systems for program development and output monitoring to ensure that the devices receive the specified voltages and signals. Its 256-channel pin electronics configuration allows it to handle complex logic devices, and its ability to burn-in different device types in each of the system's 32 BIB positions is useful for quality assurance applications. The Windows NT-based ATX2, introduced in fiscal 1999, includes a high current feature to allow the system to burn-in more devices, plus an extended pattern generation capability.
DIEPAK CARRIERS
The Company's DiePak product line includes a family of reusable, temporary die carriers and associated sockets which enable the test and burn-in of bare die using the same test and burn-in systems used for packaged ICs. DiePak carriers offer cost-effective solutions for providing known good die for most types of ICs, including memory, microcontroller and microprocessor devices. The DiePak carrier was introduced in fiscal 1995 following a development effort that included the Company and Nitto Denko Corporation, the manufacturer of the interconnect substrate.
The DiePak carrier consists of an interconnect substrate, which provides electrical connection between the die pads and the socket contacts, and a mechanical support system. The substrate is customized for each IC product. The DiePak carrier comes in 108, 172 and 320 pin versions to handle ICs ranging from low pin-count memories to high pin-count microprocessors. The DiePak carrier and socket feature a small footprint which reduces test and burn-in cost because more devices may be processed simultaneously on a test fixture.
TEST FIXTURES
The Company manufactures and sells custom designed test fixtures including performance test boards for use with the MTX massively parallel test system and burn-in boards for its burn-in systems. PTBs and BIBs hold the devices
undergoing test or burn-in and electrically connect the devices under test to the system electronics. The capacity of each PTB or BIB depends on the type of device being tested or burned-in, ranging from several hundred in memory production to as few as eight for high pin-count complex ASIC devices. PTBs and BIBs are sold both with new Aehr Test systems and for use with the Company's installed base of systems. Due to the advanced test requirements of the MTX system, PTBs are substantially more complex than BIBs. The Company has patented certain features of the PTB and to date has licensed one other company to supply PTBs.
CUSTOMERS
The Company markets and sells its products throughout the world to semiconductor manufacturers, semiconductor contract assemblers, electronics manufacturers and burn-in and test service companies.
Sales to the Company's five largest customers accounted for approximately 62.7%, 75.2% and 69.2% of its net sales in fiscal 1999, 1998 and 1997, respectively. During fiscal 1999, 1998 and 1997, Infineon (formerly the semiconductor group of Siemens) accounted for 21.9%, 47.0% and 55.7% of the Company's net sales, respectively. During fiscal 1999, Texas Instruments and Motorola accounted for 18.1% and 11.9% of the Company's net sales, respectively. During fiscal 1998 Motorola accounted for 12.8% of the Company's net sales. No other customers represented more than 10% of the Company's net sales for any of such periods. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from quarter to quarter. The loss or reduction or delay in orders from a significant customer, or a delay in collecting or failure to collect accounts receivable from a significant customer could adversely affect the Company's business, financial condition and operating results.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company has sales and service operations in the United States, Japan and Germany and has established a network of distributors and sales representatives in other key parts of the world.
The Company's customer service and support program includes system installation, system repair, applications engineering support, spare parts inventories, customer training, and documentation. The customer support organization has both applications engineering and field service personnel located at the corporate headquarters in Mountain View, California and at the Company's subsidiaries in Germany and Japan. The Company's distributors provide applications and field service support in other parts of the world. The Company customarily provides a warranty on its products. The Company offers service contracts on its systems directly and through its subsidiaries, distributors, and representatives.
BACKLOG
As of May 31, 1999 and 1998, the Company's backlog was $1.8 million and $4.6 million, respectively. The reduction in backlog was primarily the result of a downturn in the Company's burn-in system business. The Company's backlog consists of product orders for which confirmed purchase orders have been received and which are scheduled for shipment within 12 months. Most orders are subject to rescheduling or cancellation by the customer with limited penalties. Because of the possibility of customer changes in delivery schedules or cancellations and potential delays in product shipments, the Company's backlog as of a particular date may not be indicative of net sales for any succeeding period.
RESEARCH AND PRODUCT DEVELOPMENT
The Company historically has devoted a significant portion of its financial resources to research and development programs and expects to continue to allocate significant resources to these efforts. The Company's research and development expenses during fiscal 1999, 1998 and 1997 were approximately $4.9 million, $4.5 million and $4.5 million, respectively.
The Company conducts ongoing research and development to develop new products and to support and enhance existing product lines. The Company is currently developing capability and performance enhancements to the MTX, MAX and ATX systems for future generation ICs. The Company is also developing DiePak carriers to accommodate additional types of devices.
Building upon the expertise gained in the development of its existing products, the Company is developing a system for performing test and burn-in of entire processed wafers, rather than individual die or packaged parts. This wafer-level burn-in and test project is being financed by the Company and the Defense Advanced Research Projects Agency ("DARPA") under a cost-sharing agreement entered into in 1994. The Company has received $5.6 million from DARPA through May 31, 1999, representing less than 50% of total project spending to date. The Company has demonstrated certain key technologies required for the wafer-level burn-in and test system, and expects to demonstrate feasibility of the system design in calendar year 2000.
MANUFACTURING
The Company assembles its products from components and parts manufactured by others, including environmental chambers, power supplies, metal fabrications, printed circuit assemblies, integrated circuits, burn-in sockets and interconnect substrates. Final assembly and test are performed within the Company's facilities. The Company's strategy is to use in-house manufacturing only when necessary to protect a proprietary process or if a significant improvement in quality, cost or lead time can be achieved. The Company's principal manufacturing facility is located in Mountain View, California. The Company's Tokyo, Japan facility provides final test, limited manufacturing and product customization.
The Company relies on subcontractors to manufacture many of the components or subassemblies used in its products. The Company's MTX, MAX and ATX systems contain several components, including environmental chambers, power supplies and certain ICs, which are currently supplied by only one or a limited number of suppliers. The DiePak products include an interconnect substrate which has primarily been supplied by Nitto Denko Corporation. Nitto Denko is currently manufacturing DiePak substrates, but it has notified the Company of its intention to stop manufacturing these substrates. The Company is currently qualifying an alternate supplier for the DiePak substrate. The Company's reliance on subcontractors and single source suppliers involves a number of significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant subcontractor or single source supplier was to become unable or unwilling to continue to manufacture subassemblies, components or parts in required volumes, the Company would have to identify and qualify acceptable replacements. The process of qualifying subcontractors and suppliers could be lengthy, and no assurance can be given that any additional sources would be available to the Company on a timely basis. Any delay, interruption or termination of a supplier relationship could have a material adverse effect on the Company's business, financial condition and operating results.
COMPETITION
The semiconductor equipment industry is intensely competitive. Significant competitive factors in the semiconductor equipment market include price, technical capabilities, quality, flexibility, automation, cost of ownership, reliability, throughput, product availability and customer service. In each of the markets it serves, the Company faces competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing and marketing resources than the Company.
Because the Company's MTX system performs burn-in and many of the functional tests performed by memory testers, the Company expects that the MTX system will face intense competition from burn-in system suppliers and traditional memory tester suppliers. The market for burn-in systems is highly fragmented, with many domestic and international suppliers. Some users, such as independent test labs, build their own burn-in systems, and some other users, particularly large Japanese IC manufacturers, acquire burn-in systems from captive or affiliated suppliers. Competing suppliers of burn-in and functional test systems include Ando Corporation, Japan Engineering Company and Reliability Incorporated. In addition, suppliers of memory test equipment including Advantest Corporation and Teradyne, Inc. may seek to offer competitive parallel test systems in the future.
The Company's MAX dynamic and ATX monitored and dynamic burn-in systems increasingly have faced and are expected to continue to face severe competition, especially from local, low cost manufacturers.
The Company's DiePak products face significant competition. Texas Instruments Incorporated sells a temporary, reusable bare die carrier which is intended to enable burn-in and test of bare die, and the Company believes that several other companies have developed or are developing other such products. As the bare die market develops, the Company expects that other competitors will emerge. The DiePak products also face severe competition from other alternative test solutions. The Company expects that the primary competitive factors in this market will be cost, performance, reliability and assured supply.
The Company's test fixture products face numerous competitors. There are limited barriers to entry into the BIB market, and as a result, many companies design and manufacture BIBs, including BIBs for use with the Company's MAX and ATX systems. The Company's strategy is to provide higher performance BIBs, and the Company generally does not compete to supply lower cost, low performance BIBs. The Company has granted a royalty-bearing license to one company to make PTBs for use with its MTX systems, in order to assure customers of a second source of supply, and the Company may license others as well. Sales of PTBs by licensees result in royalties to the Company but reduce the Company's own sales of PTBs.
The Company expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. New product introductions by the Company's competitors or by new market entrants could cause a decline in sales or loss of market acceptance of the Company's products. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect the Company's business, financial condition and operating results. The Company believes that to remain competitive it must invest significant financial resources in new product development and expand its customer service and support worldwide. There can be no assurance that the Company will be able to compete successfully in the future.
PROPRIETARY RIGHTS
The Company relies primarily on the technical and creative ability of its personnel, its proprietary software, and trade secret and copyright protection, rather than on patents, to maintain its competitive position. The Company's proprietary software is copyrighted and licensed to the Company's customers. The Company currently holds four issued United States patents and has several additional United States patent applications and foreign patent applications pending. The Company has one United States trademark registration. One issued patent covers the method used to connect the PTBs with the MTX system. Another issued patent relating to the MTX includes claims covering certain details of the electronic implementation used to obtain high performance in the MTX system and also covering certain testing methods.
The Company's ability to compete successfully is dependent in part upon its ability to protect its proprietary technology and information. Although the Company attempts to protect its proprietary technology through patents, copyrights, trade secrets and other measures, there can be no assurance that these measures will be adequate or that competitors will not be able to develop similar technology independently. Further, there can be no assurance that claims allowed on any patent issued to the Company will be sufficiently broad to protect the Company's technology, that any patent will issue from any pending application or that foreign intellectual property laws will protect the Company's intellectual property. Litigation may be necessary to enforce or determine the validity and scope of the Company's proprietary rights, and there can be no assurance that the Company's intellectual property rights, if challenged, will be upheld as valid. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and operating results, regardless of the outcome of the litigation. In addition, there can be no assurance that any of the patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company.
There are no pending claims against the Company regarding infringement of any patents or other intellectual property rights of others. However, the Company may receive, in the future, communications from third parties asserting intellectual property claims against the Company. Such claims could include assertions that the Company's products infringe, or may infringe, the proprietary rights of third parties, requests for indemnification against such infringement or suggestions that the Company may be interested in acquiring a license from such third parties. There can be no assurance that any such claim made in the future will not result in litigation, which could involve significant expense to the Company, and, if the Company is required or deems it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that the Company would be able to do so on commercially reasonable terms, or at all.
EMPLOYEES
As of July 31, 1999, the Company and its two foreign subsidiaries employed 134 persons full-time, of whom 38 were engaged in research, development, and related engineering, 44 in manufacturing, 39 in marketing, sales, and customer support, and 13 in general administration and finance. 28 persons are employed by the Company's subsidiary in Japan. In addition, the Company from time to time employs a number of part-time employees and contractors, particularly in manufacturing. The Company's success is in part dependent on its ability to attract and retain highly skilled workers, who are in high demand. None of the Company's employees is represented by a union and the Company has never experienced a work stoppage. Management considers its relations with its employees to be good.
GEOGRAPHIC AREAS
The Company operates in several geographic areas. Selected financial information is included in Part II, Item 8, Note 12 "Segment Information, Foreign Operations" and certain risks related to such operations are discussed in Part II, Item 7, under the heading "Dependence on International Sales and Operations."
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The directors of the Company are elected annually. The executive officers of the Company serve with no specific term of office. The executive officers and directors of the Company are as follows:
Name of Executive Officer Age Positions with the Company
-------------------------- ---- -----------------------------------
Rhea J. Posedel............ 57 President, Chief Executive Officer and
Chairman of the Board of Directors
Gary L. Larson............. 49 Vice President of Finance and Chief
Financial Officer
William D. Barraclough..... 55 Vice President of Test Systems
Engineering
Carl N. Buck............... 47 Vice President of Marketing
Carl J. Meurell ........... 39 Vice President of Worldwide Sales
Richard F. Sette........... 61 Vice President of Operations
Raul V. Tan................ 39 Vice President of Research and
Development Engineering
Yasushi Naitoh............. 46 President, Aehr Test Systems Japan
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William W. R. Elder (1)(2). 60 Director
Mario M. Rosati (1)........ 53 Director and Secretary David Torresdal (2)........ 61 Director Mukesh Patel .............. 41 Director ------------------------ |
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
RHEA J. POSEDEL is a founder of the Company and has served as President, Chief Executive Officer and Chairman of the Board of Directors since its inception in 1977. Prior to founding the Company, Mr. Posedel held
various project engineering and engineering managerial positions at Lockheed Martin Corporation (formerly "Lockheed Missile & Space Corporation"), Ampex Corporation, and Cohu, Inc. He received a B.S. in Electrical Engineering from the University of California, Berkeley, an M.S. in Electrical Engineering from San Jose State University and an M.B.A. from Golden Gate University.
GARY L. LARSON joined the Company in April 1991 as Chief Financial Officer and was elected Vice President of Finance in February 1992. From 1986 to 1990, he served as Chief Financial Officer, and from 1988 to 1990 also as President and Chief Operating Officer, of Nanometrics Incorporated, a manufacturer of measurement and inspection equipment for the semiconductor industry. Mr. Larson received a B.S. in Mathematics/Finance from Harvey Mudd College.
WILLIAM D. BARRACLOUGH joined the Company as an Account Manager in February 1989 and held various positions until he was elected Vice President of Test Systems Engineering in August 1996. From 1984 to 1989, Mr. Barraclough served as Vice President of Marketing at Thermonics, Inc., a manufacturer of temperature control equipment for electronics devices. Mr. Barraclough received a B.S.E.E. from the University of Southern California.
CARL N. BUCK joined the Company as a Product Marketing Manager in 1983 and held various positions until he was elected Vice President of Engineering in November 1992, Vice President of Research and Development Engineering in November 1996, and Vice President of Marketing in September 1997. From 1978 to 1983, Mr. Buck served as Product Marketing Manager at Intel Corporation, an integrated circuit and microprocessor company. Mr. Buck received a B.S.E.E. from Princeton University, an M.S. in Electrical Engineering from the University of Maryland and an M.B.A. from Stanford University.
CARL J. MEURELL joined the Company as Vice President of Worldwide Sales in March 1999. From May 1996 to March 1999, Mr. Meurell served as Vice President and General Manager of the test and repair division of Photon Dynamics, a supplier of test inspection and repair systems for the flat panel display industry. From April 1995 to May 1996, he served as a director at Megatest, a division of Teradyne, Inc. From October 1993 to April 1995, he served as Vice President and General Manager of Catapult Software Training, an IBM company. From December 1980 to October 1993, he held various sales management positions at Megatest. Mr. Meurell received an M.B.A. from Union College, a B.S. in Electronic Engineering, magna cum laude, from the University of Massachusetts and an A.S. in Electrical Engineering Technology, With Distinction, from Pennsylvania State University.
RICHARD F. SETTE rejoined the Company as Vice President of Operations in January 1996, after serving in that same position from 1984 to 1987. He served as Senior Director of Operations of Northrop Grumman Corp., a manufacturer of aircraft and aircraft subsystems, from 1987 to 1993, as Vice President of Operations of Symtek, Inc., which manufactures handling equipment for the semiconductor industry, from 1993 to 1994 and as Director of Engineering at SatCom Technologies Corp., a developer of energy storage systems, from 1994 to 1995. Mr. Sette received a B.S.E.E. and an M.S.E.E. from Northeastern University.
RAUL V. TAN joined the Company as Director of Factory Automation in March 1997, and was elected Vice President of Research and Development Engineering in September 1997. Prior to joining the Company, Mr. Tan served as Director of Software at Lam Research Corporation. From 1987 to 1991, Mr. Tan held various engineering management positions with General Signal Corporation's Semiconductor Group. Mr. Tan received a Master of Engineering in Robotics from Carnegie-Mellon University and a B.S. cum laude in Mechanical Engineering from De La Salle University.
YASUSHI NAITOH joined the Company as President, Aehr Test Systems Japan K.K., the Company's Japanese subsidiary, in October 1997. He was employed at Tokyo Electron Limited, a leading worldwide semiconductor equipment manufacturer from 1983 to 1997, during which time he held various positions, including serving as Senior Department Manager of Test Systems and Senior Department Manager of Automation Systems. Mr. Naitoh graduated from Kanagawa University in Kanagawa, Japan where he majored in Mechanical Engineering.
WILLIAM W. R. ELDER has been a director of the Company since 1989. Dr. Elder was the Chief Executive Officer of Genus, Inc. ("Genus"), a semiconductor company, from his founding of Genus in 1981 to September 1996, and has been serving in that same position again since April 1998. Dr. Elder has been a director of Genus since its inception. Dr. Elder holds a B.S.I.E. and an honorary Doctorate Degree from the University of Paisley in Scotland.
MARIO M. ROSATI has served as Secretary and a director of the Company since 1977. He is a member of the law firm of Wilson Sonsini Goodrich & Rosati, which he joined in 1971. Mr. Rosati is a graduate of Boalt Hall, University of California at Berkeley. Mr. Rosati is a director of C*ATS Software Inc., Genus, Inc., Meridian Data, Inc., Ross Systems, and Sanmina Corporation, as well as several private companies.
DAVID TORRESDAL has been a director of the Company since 1977. He has been President of Davtron, Inc., a manufacturer of aircraft electronic equipment, since 1970. Mr. Torresdal received an A.A.S. in Engineering from Oregon Technical Institute.
MUKESH PATEL was appointed to the Company's Board of Directors in June 1999. Mr. Patel co-founded SMART Modular Technologies, Inc., where he has served on its Board of Directors since its inception; he acted in various executive capacities from 1989 to 1998, and in 1999 assumed his current position of Vice President, Memory Division. Mr. Patel holds a B.S. degree in Engineering with emphasis on digital electronics from Bombay University, India. Mr. Patel also serves on the Boards of Directors of Krypton Isolation, Inc. and Jedi Technologies, Inc.
DIRECTORS' COMPENSATION AND OTHER ARRANGEMENTS
Rhea J. Posedel, the only inside director of the Company, does not receive any cash compensation for his services as a member of the Board of Directors. Each outside director receives (1) an annual retainer of $5,000, (2) $1,000 for each regular board meeting he attends, and (3) $500 for each committee meeting he attends if not held in conjunction with a regular board meeting, in addition to being reimbursed for certain expenses incurred in attending Board and committee meetings. An inside director is a director who is a regular employee of the Company, whereas an outside director is not an employee of the Company. Directors are eligible to participate in the Company's stock option plans. Outside directors were granted no options in fiscal 1997 and 1998. William Elder, Mario Rosati and David Torresdal were each granted options to purchase 5,000 shares at $4.25 per share in fiscal 1999.
The Board of Directors has a Compensation Committee and an Audit Committee. The Compensation Committee makes recommendations to the Board of Directors regarding executive compensation matters, including decisions relating to salary and bonus and grants of stock options. The Audit Committee approves the appointment of the Company's independent auditors, reviews the results and scope of annual audits and other accounting related services, and reviews and evaluates the Company's internal control functions.
Item 2. Properties
The Company's principal administrative and production facilities are located in Mountain View, California, in a 61,364 square foot building. The lease on this building has been extended and expires in December 1999, after which time the Company plans to relocate its headquarters to a 51,289 square foot facility in Fremont, California. The Company also leases a sales office in Irvine, California. The Company's Japan facility is located in Tokyo in an 11,029 square foot building under a lease which expires in 2004. The Company leases a sales and support office on a month-to-month basis in Utting, Germany. The Company's and its subsidiaries' annual rental payments currently aggregate approximately $1.2 million. The Company believes that alternate facilities would be available if needed.
Item 3. Legal Proceedings
There are no pending claims against the Company regarding infringement of any patents or other intellectual property rights of others. However, the Company may receive, in the future, communications from third parties asserting intellectual property claims against the Company. Such claims could include assertions that the Company's products infringe, or may infringe, the proprietary rights of third parties, requests for indemnification against such infringement or suggestions that the Company may be interested in acquiring a license from such third parties. There can be no assurance that any such claim made in the future will not result in litigation, which could involve significant expense to the Company, and, if the Company is required or deems it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that the Company would be able to do so on commercially reasonable terms, or at all. The Company is not a party to any material pending legal proceedings, other than ordinary routine litigation incidental to the business.
Item 4. Submission of matters to a vote of security holders
None.
PART II
Item 5. Market for the registrant's common equity and related shareholder
matters
(a) The Company's Common Stock has been publicly traded on the Nasdaq National Market under the symbol "AEHR" since the Company's initial public offering ("IPO") on August 15, 1997. The initial public offering price was $12.00 per share. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock on such market.
High Low
--------- ---------
Fiscal 1998:
First quarter ended August 31, 1997
(beginning August 15, 1997) ...................... $20.25 $14.13
Second quarter ended November 30, 1997............. 25.25 9.00
Third quarter ended February 28, 1998.............. 10.00 5.75
Fourth quarter ended May 31, 1998.................. 7.19 5.75
Fiscal 1999:
First quarter ended August 31, 1998................ $ 6.44 $ 4.13
Second quarter ended November 30, 1998............. 5.50 3.19
Third quarter ended February 28, 1999.............. 7.38 4.13
Fourth quarter ended May 31, 1999.................. 6.38 3.75
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At August 12, 1999, the Company had 143 holders of record of its Common Stock. The Company estimates the number of beneficial owners of the Company's Common Stock at August 12, 1999 to be 830.
The market price of the Company's Common Stock has been volatile. For a discussion of the factors affecting the Company's stock price, see "Factors that may affect future results of operations -- possible volatility of stock price."
The Company has not paid cash dividends on its Common Stock or other securities. The Company currently anticipates that it will retain all of its future earnings for use in the expansion and operation of its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future.
(b) Use of Proceeds from the IPO:
On August 18, 1997, the Company's Registration Statement on Form S-1 covering the IPO of 3,600,000 shares of the Company's Common Stock, Commission file number 333-28987, was declared effective. The IPO closed on August 26, 1997, managed by Oppenheimer & Co., Inc. and Needham & Company, Inc. as representatives of the several underwriters named in the Registration Statement ("Underwriters").
Of the 3,600,000 shares sold pursuant to the Offering, 2,500,000 shares were sold by the Company and 1,100,000 were sold by certain selling shareholders ("Selling Shareholders"). In addition, the Underwriters exercised an over-allotment option to purchase an additional 540,000 shares of the Company's Common Stock from the Selling Shareholders. The total purchase prices to the public for the shares offered and sold by the Company and the Selling Shareholders were $30,000,000 and $19,680,000, respectively.
The amount of expenses incurred for the Company's account in connection with the IPO are as follows:
Underwriting discounts and commissions: $ 2,100,000
Finders fees None
Expenses paid to or for the Underwriters None
Other expenses 1,067,703
-----------
Total expenses $ 3,167,703
===========
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All of the foregoing expenses were direct or indirect payments to persons other than (i) directors, officers or their associates; (ii) persons owning ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates of the Company.
The net proceeds of the IPO to the Company (after deducting the foregoing expenses) were $26,832,297. From the effective date of the Registration Statement, the net proceeds have been used for the following purposes:
Purchase and installation of machinery and equipment $ 1,082,274
Repayment of indebtedness 4,455,179
Working capital 370,844
Temporary investments, including cash and cash equivalents 20,924,000
------------
Total $26,832,297
============
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All of the foregoing expenses were direct or indirect payments to persons other than (i) directors, officers or their associates; (ii) persons owning ten percent (10%) or more of the Company's Common Stock; or (iii) affiliates of the Company.
Item 6. Selected Financial Data (in thousands except per share data):
Fiscal Year Ended May 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $18,146 $40,805 $42,020 $33,234 $23,257
Cost of sales................................. 12,201 24,359 25,715 19,942 16,192
---------- ---------- ---------- ---------- ----------
Gross profit.................................. 5,945 16,446 16,305 13,292 7,065
---------- ---------- ---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 6,892 8,618 8,878 7,534 6,316
Research and development.................... 4,918 4,529 4,536 4,113 3,783
Research and development cost
reimbursement--DARPA ..................... (1,233) (900) (793) (891) (954)
---------- ---------- ---------- ---------- ----------
Total operating expenses.................. 10,577 12,247 12,621 10,756 9,145
---------- ---------- ---------- ---------- ----------
Income (loss) from operations................. (4,632) 4,199 3,684 2,536 (2,080)
Interest income (expense)..................... 1,184 904 (577) (446) (341)
Other income (expense), net................... 441 (364) (565) (559) 255
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
minority interest in subsidiary............. (3,007) 4,739 2,542 1,531 (2,166)
Income tax expense (benefit).................. (677) 2,334 (773) 130 10
Minority interest in subsidiary............... - - - (1) 189
---------- ---------- ---------- ---------- ----------
Net income (loss)............................. $(2,330) $2,405 $3,315 $1,400 $(1,987)
========== ========== ========== ========== ==========
Net income (loss) per share (basic)........... $ (0.34) $ 0.38 $ 0.77 $ 0.33 $ (0.46)
Net income (loss) per share (diluted)......... $ (0.34) $ 0.36 $ 0.74 $ 0.32 $ (0.46)
Shares used in per share calculation
Basic....................................... 6,854 6,327 4,297 4,303 4,308
Diluted..................................... 6,854 6,761 4,500 4,364 4,308
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May 31,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents..................... $ 5,336 $ 6,748 $ 1,176 $ 535 $ 598
Working capital............................... 31,016 36,885 7,895 4,799 3,564
Total assets.................................. 41,187 47,105 24,389 23,749 19,890
Long-term obligations, less current portion... 391 168 356 533 1,004
Total shareholders' equity.................... 36,678 39,964 10,070 6,789 5,544
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis section and other parts of this Annual Report on Form 10-K contain forward-looking statements within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed below and in "Business." The forward-looking statements contained herein are made as of the date hereof, and the Company assumes no obligation to update such forward-looking statements or to update reasons actual results could differ materially from those anticipated in such forward-looking statements.
OVERVIEW
The Company was founded in 1977 to develop and manufacture burn-in and test equipment for the semiconductor industry. Since its inception, the Company has sold more than 2,000 systems to semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide. The Company's principal products currently are the MTX massively parallel test system, the MAX and ATX burn-in systems, the DiePak carrier and test fixtures.
Prior to fiscal 1995, the Company primarily sold burn-in systems and related products. The Company experienced significant operating losses in fiscal 1993 through fiscal 1995 due to a decline in net sales of burn-in systems and significant investment in the development of new products. In fiscal 1993, the Company initiated development of the MTX massively parallel test system and the DiePak carrier. The Company began shipping the MTX in March 1995 and DiePak carriers in volume in fiscal 1997.
In 1994, the Company entered into a cost-sharing agreement with DARPA, a
U.S. government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The agreement
provides that (i) the Company shall retain title to all co-funded inventions,
(ii) DARPA will receive a paid-up license to use the inventions for government
purposes and (iii) DARPA can require the Company to license the inventions to
third parties on reasonable terms if the Company fails to adequately
commercialize the inventions. Payments by DARPA depend on satisfaction of
development milestones, and DARPA has the right to terminate project funding
at any time. The level of payments may vary significantly from quarter to
quarter. There can be no assurance that the Company will meet the development
milestones or that DARPA will continue funding the project. DARPA payments
are reflected as credits to research and development expenses. There also can
be no assurance that the development project will result in any marketable
products. The Company has completed certain development milestones and
received DARPA payments of $5.6 million through May 31, 1999. The remaining
funding is subject to milestones scheduled to be completed through December
1999, although the Company expects that completion of certain milestones will
be delayed beyond that date.
The Company has a wholly-owned subsidiary in Germany which performs sales and service and a 94.8% owned subsidiary in Japan, which performs sales, service and limited product engineering and manufacturing. The Company's consolidated financial statements combine the subsidiaries' financial results with those of the Company and account for the minority shareholders' interest in the Japanese subsidiary. There was no minority interest recorded in the financial statements at May 31, 1999, May 31, 1998 and May 31, 1997 due to the subsidiary's cumulative losses.
The Company's net sales consist primarily of sales of systems, die carriers, test fixtures, upgrades and spare parts and revenues from service contracts. The Company recognizes revenue upon shipment of product and records a provision for estimated future warranty costs.
A substantial portion of the Company's net sales is derived from the sale of products for overseas markets. Consequently, an increase in the value of the U.S. Dollar relative to foreign currencies would increase the cost of the Company's products compared to products sold by local companies in such markets. Although most sales to German customers are denominated in dollars, substantially all sales to Japanese customers are denominated in yen. Since the price is determined at the time a purchase order is accepted, the Company is exposed to the risks of fluctuations in the yen-dollar exchange rate during the lengthy period from purchase order to ultimate payment. The length of time between receipt of order and ultimate payment typically ranges from six to twelve months. The exchange rate risk is partially offset to the extent the Company's Japanese subsidiary incurs yen-denominated expenses. To date, the Company has not invested in instruments designed to hedge currency risks, but it may do so in the future. The Company's Japanese subsidiary typically carries debt or other obligations due to the Company that may be denominated in yen or dollars. Since the financial statements of the Japanese subsidiary are based in yen and the Company's financial
statements are based in dollars, the Japanese subsidiary and the Company recognize income or loss in any period in which the value of the yen rises or falls in relation to the dollar.
In accordance with SFAS 86, the Company capitalizes its systems software development costs incurred after a system achieves technological feasibility and before first commercial shipment. Such costs typically represent a small portion of total research and development costs. Capitalized cost, net of accumulated amortization, of approximately $57,000 was included as of May 31, 1997. System software development costs were fully amortized as of May 31, 1998, and no new systems software development costs were capitalized in fiscal 1999.
RESULTS OF OPERATIONS
The following table sets forth statements of operations data as a percentage of net sales for the periods indicated.
Year Ended May 31,
----------------------------
1999 1998 1997
--------- --------- --------
Net sales ................................ 100.0% 100.0% 100.0%
Cost of sales ............................ 67.2 59.7 61.2
--------- --------- --------
Gross profit ............................. 32.8 40.3 38.8
Operating expenses:
Selling, general and administrative .... 38.0 21.1 21.1
Research and development ............... 27.1 11.1 10.8
Research and development cost
reimbursement--DARPA ................. (6.8) (2.2) (1.9)
--------- --------- --------
Total operating expenses ............. 58.3 30.0 30.0
--------- --------- --------
Income (loss) from operations ........ (25.5) 10.3 8.8
Interest income (expense) ................ 6.5 2.2 (1.4)
Other income (expense), net .............. 2.4 (0.9) (1.3)
--------- --------- --------
Income (loss) before income taxes .... (16.6) 11.6 6.1
Income tax expense (benefit) ............. (3.8) 5.7 (1.8)
--------- --------- --------
Net income (loss) ........................ (12.8)% 5.9% 7.9%
========= ========= ========
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FISCAL YEAR ENDED MAY 31, 1999 COMPARED TO FISCAL YEAR ENDED MAY 31, 1998
NET SALES. Net sales consist primarily of sales of systems, die carriers, test fixtures, upgrades and spare parts and revenues from service contracts. The Company recognizes revenue upon shipment of product. Net sales decreased to $18.1 million in the fiscal year ended May 31, 1999 from $40.8 million in the fiscal year ended May 31, 1998, a decrease of 55.5%. The decrease in net sales in fiscal 1999 resulted primarily from reduced shipments of MTX products. The Company anticipates an increase in orders for MTX systems in the first half of fiscal 2000.
GROSS PROFIT. Gross profit consists of net sales less cost of sales. Cost of sales consists primarily of the cost of materials, assembly and test costs, and overhead from operations. Gross profit decreased to $5.9 million in the fiscal year ended May 31, 1999 from $16.4 million in the fiscal year ended May 31, 1998, a decrease of 63.9%. The decrease in gross profit was primarily due to the decrease in net sales. Gross profit margin decreased to 32.8% in the fiscal year ended May 31, 1999 from 40.3% in the fiscal year ended May 31, 1998. The decrease in gross profit margin was primarily due to excess production capacity and manufacturing overhead expenses spreading over lower shipment levels and a change in product mix toward products with somewhat higher material costs, partially offset by reductions in provisions for warranty and inventory reserves. The Company anticipates lower gross margins in the first quarter of fiscal 2000 than in the last quarter of fiscal 1999, and expects to record a net loss in the first quarter of fiscal 2000.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative ("SG&A") expenses consist primarily of salaries and related costs of employees, customer support costs, commission expenses to independent sales representatives, product promotion and other professional services. SG&A expenses decreased to $6.9 million in the fiscal year ended May 31, 1999 from $8.6 million in the fiscal year ended May 31, 1998, a decrease of 20.0%. The decrease in SG&A expenses was primarily due to decreases in employment related expenses, commissions paid to outside sales representatives, and a reduction in provision for doubtful accounts. As a percentage of net sales, SG&A expenses increased to 38.0% in the fiscal year ended May 31, 1999 from 21.1% in the fiscal year ended May 31, 1998, reflecting lower net sales. The Company anticipates higher SG&A expenses in the first quarter of fiscal 2000 than in the last quarter of fiscal 1999.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses consist primarily of salaries and related costs of employees engaged in ongoing research, design and development activities, costs of engineering materials and supplies, and professional consulting expenses. R&D expenses increased to $4.9 million in the fiscal year ended May 31, 1999 from $4.5 million in the fiscal year ended May 31, 1998, an increase of 8.6%. The increase in R&D expenses was primarily due to increases in professional consulting and employment related expenses. As a percentage of net sales, R&D expenses increased to 27.1% in the fiscal year ended May 31, 1999 from 11.1% in the fiscal year ended May 31, 1998, reflecting lower net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. Research and development cost reimbursement - DARPA ("R&D - DARPA") is a credit representing reimbursements by DARPA of costs incurred in the Company's wafer- level burn-in development project. R&D - DARPA increased to $1.2 million in the fiscal year ended May 31, 1999 from $900,000 in the fiscal year ended May 31, 1998, an increase of 37.0%. Payments by DARPA depend on satisfaction of development milestones, and the level of payments may vary significantly from fiscal year to fiscal year. As of May 31, 1999, there were no outstanding payments due from DARPA.
INTEREST INCOME (EXPENSE). Interest income, net of interest expense, increased to $1.2 million in the fiscal year ended May 31, 1999 from $904,000 in the fiscal year ended May 31, 1998, an increase of 31.0%. Interest income in both fiscal years was primarily due to investment income from the proceeds obtained from the initial public offering in August 1997; interest income in the fiscal year ended May 31, 1998 was partially offset by interest expense of the short-term domestic debt which was subsequently repaid. Interest expense was $15,000 in fiscal 1999 and $144,000 in fiscal 1998.
OTHER INCOME (EXPENSE), NET. Other income, net was $441,000 in the fiscal year ended May 31, 1999, compared with other expense, net of $364,000 in the fiscal year ended May 31, 1998. The increase in other income, net was primarily due to currency exchange gains recorded in the fiscal year ended May 31, 1999 compared with currency exchange losses recorded in the fiscal year ended May 31, 1998.
INCOME TAX EXPENSE (BENEFIT). Income tax benefit was $677,000 in the fiscal year ended May 31, 1999, compared with income tax expense of $2.3 million in the fiscal year ended May 31, 1998. The income tax benefit in the fiscal year ended May 31, 1999 was primarily due to the tax benefit recorded as a result of losses incurred in the Company's U.S. operations. Such tax benefit will be carried back to previous fiscal years in which the Company paid taxes when its U.S. operations were profitable. The Company's Japanese subsidiary experienced significant cumulative losses since fiscal 1993, and thus generated certain net operating losses available to offset future taxes payable in Japan. As a result of the subsidiary's cumulative operating losses, a valuation allowance has been established for the full amount of the subsidiary's net deferred tax assets. The income tax rate did not approximate the statutory tax rates of the jurisdictions in which the Company operates because no tax benefit was recorded for losses in the Company's Japanese subsidiary.
FISCAL YEAR ENDED MAY 31, 1998 COMPARED TO FISCAL YEAR ENDED MAY 31, 1997
NET SALES. Net sales decreased to $40.8 million in the fiscal year ended May 31, 1998 from $42.0 million in the fiscal year ended May 31, 1997, a decrease of 2.9%. The decrease in net sales in fiscal 1998 was primarily due to a decline in net sales in the Company's subsidiary in Japan, and reduced shipment of traditional burn-in products.
GROSS PROFIT. Gross profit increased to $16.4 million in the fiscal year ended May 31, 1998 from $16.3 million in the fiscal year ended May 31, 1997, an increase of 0.9%. Gross profit margin increased to 40.3% in the fiscal year ended May 31, 1998 from 38.8% in the fiscal year ended May 31, 1997. The increase in gross profit margin was primarily due to lower material costs as a percentage of net sales.
SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses decreased to $8.6 million in the fiscal year ended May 31, 1998 from $8.9 million in the fiscal year ended May 31, 1997, a decrease of 2.9%. The decrease in SG&A expenses was primarily due to a decrease in commissions paid to outside sales representatives, partially offset by an increase in warranty repair expenses and new expenses related to the Company's status of being publicly held. As a percentage of net sales, SG&A expenses were unchanged at 21.1% in the fiscal year ended May 31, 1998 and in the fiscal year ended May 31, 1997.
RESEARCH AND DEVELOPMENT. R&D expenses were unchanged at $4.5 million in the fiscal year ended May 31, 1998 and in the fiscal year ended May 31, 1997. An increase in employment related expenses was partially offset by a decrease in professional consulting expenses. As a percentage of net sales, R&D expenses increased to 11.1% in the fiscal year ended May 31, 1998 from 10.8% in the fiscal year ended May 31, 1997, reflecting lower net sales.
RESEARCH AND DEVELOPMENT COST REIMBURSEMENT - DARPA. R&D - DARPA increased to $900,000 in the fiscal year ended May 31, 1998 from $793,000 in the fiscal year ended May 31, 1997, an increase of 13.5%. Payments by DARPA depend on satisfaction of development milestones, and the level of payments may vary significantly from fiscal year to fiscal year.
INTEREST INCOME (EXPENSE). Interest income, net of interest expense, was $904,000 in the fiscal year ended May 31, 1998, as compared with interest expense, net of interest income, of $577,000 in the fiscal year ended May 31, 1997. Interest income in the fiscal year ended May 31, 1998 was primarily due to investment income from the proceeds obtained from the initial public offering in August 1997. Interest expense in the fiscal year ended May 31, 1997 was primarily related to short-term debt which was subsequently repaid. Interest expense was $144,000 in fiscal 1998 and $578,000 in fiscal 1997.
OTHER INCOME (EXPENSE), NET. Other expense, net decreased to $364,000 in the fiscal year ended May 31, 1998 from $565,000 in the fiscal year ended May 31, 1997, a decrease of 35.6%. The decrease in other expense, net was primarily due to the recognition of the Company's 25% interest in ESA Electronics Pte Ltd., a Singapore corporation, in the fiscal year ended May 31, 1998.
INCOME TAX EXPENSE (BENEFIT). Income tax expense (benefit) was an expense of $2.3 million in the fiscal year ended May 31, 1998, compared with a benefit of $773,000 in the fiscal year ended May 31, 1997. The Company recognizes deferred tax assets and liabilities for the expected future consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company's Japanese subsidiary experienced significant cumulative losses since fiscal 1993, and thus generated certain net operating losses available to offset future taxes payable. As a result of the subsidiary's cumulative operating losses, a valuation allowance has been established for the full amount of the subsidiary's net deferred tax assets. The Company recorded tax benefits totaling $1.1 million in fiscal 1997 related to recognition of its United States net deferred tax assets. The effective tax rate for the fiscal year ended May 31, 1998 more closely approximates normal operations, although it is higher than the statutory U.S. rate because no tax benefit is recorded for losses in the Company's Japanese subsidiary.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been generated from the Company's August 1997 initial public offering, which resulted in net proceeds to the Company of approximately $26.8 million. As of May 31, 1999, the Company had $20.2 million in cash and short-term investments.
Net cash provided by operating activities was approximately $342,000 for the fiscal year ended May 31, 1999, and net cash used in operating activities was $664,000 for the fiscal year ended May 31, 1998. For the fiscal year ended May 31, 1999, net cash provided by operating activities was due primarily to decrease in accounts receivable of $3.8 million and decrease in inventory of $2.7 million, partially offset by net loss of $2.3 million, increase in accrued expenses and deferred revenue of $1.9 million and decrease in accounts payable of $1.4 million. For the fiscal year ended May 31, 1998, net cash used in operating activities was due primarily to decrease in accounts payable of $1.9 million and increase in inventories of $1.6 million, partially offset by net income of $2.4 million.
Net cash used in investing activities was approximately $1.4 million and $16.8 million for the fiscal year ended May 31, 1999 and May 31, 1998, respectively. Net cash used in investing activities for the fiscal year ended May 31, 1999 was primarily due to purchase of long-term investments and acquisition of property and equipment, partially offset by sale of short-term investments. Net cash used in investing activities during the fiscal year ended May 31, 1998 was primarily due to the short-term and long-term investments made with proceeds from the Company's initial public offering in August 1997.
Financing activities used cash of approximately $356,000 in the fiscal year ended May 31, 1999 and provided cash of $22.9 million in the fiscal year ended May 31, 1998. Net cash used in financing activities for the fiscal year ended May 31, 1999 was primarily due to the Company's repurchase of 283,500 of its outstanding common shares at an average price of $4.03, partially offset by proceeds from exercise of stock options and increase in long-term debt of the Company's subsidiary in Japan. Net cash provided by financing activities for the fiscal year ended May 31, 1998 was primarily attributable to the Company's initial public offering in August 1997.
As of May 31, 1999, the Company had working capital of $31.0 million, compared with $36.9 million as of May 31, 1998. Working capital consists of cash and cash equivalents, short-term investments, accounts receivable, inventory and other current assets, less current liabilities. The decrease in working capital was primarily due to decreases in accounts receivable, inventory and short-term investments, partially offset by decreases in accrued expenses and accounts payable.
The Company announced in August 1998 that its board of directors had authorized the repurchase of up to 1,000,000 shares of its outstanding common shares. The Company may repurchase the shares in the open market or in privately negotiated transactions, from time to time, subject to market conditions. The number of shares of common stock actually acquired by the Company will depend on subsequent developments and corporate needs, and the repurchase program may be interrupted or discontinued at any time. Any such repurchase of shares, if consummated, may use a portion of the Company's working capital. As of May 31, 1999, the Company has repurchased 283,500 shares at an average price of $4.03.
From time to time, the Company evaluates potential acquisitions of businesses, products or technologies that complement the Company's business. Any such transactions, if consummated, may use a portion of the Company's working capital or require the issuance of equity. The Company has no present understandings, commitments or agreements with respect to any material acquisitions.
The Company anticipates that the existing cash balance together with cash provided by operations, if any, are adequate to meet its working capital and capital equipment requirements through fiscal 2000. After fiscal 2000, depending on its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital equipment needs. There can be no assurance that additional financing will be available when required, or if available, that such financing can be obtained on terms satisfactory to the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a significant effect on its financial condition or results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
This report on Form 10-K contains forward-looking statements within the meaning of the Securities Act of 1933, as amended and the Securities Exchange Act of 1934, as amended. The Company's future results of operations could vary significantly from the results anticipated by such forward-looking statements as a result of various factors, including those set forth as follows and elsewhere in this annual report on Form 10-K.
FLUCTUATIONS IN OPERATING RESULTS. The Company has experienced and expects to continue to experience significant fluctuations in its quarterly and annual operating results. During fiscal 1999 and 1998, quarterly net sales have been as low as $3.1 million and as high as $11.7 million, and gross margins for quarterly sales have fluctuated between 29.3% and 44.6%. The Company's future operating results will depend upon a variety of factors, including the timing of significant orders, the mix of products sold, changes in pricing by the Company, its competitors, customers or suppliers, the length of sales cycles for the Company's products, timing of new product announcements and releases by the Company and its competitors, market acceptance of new products and enhanced versions of the Company's products, capital spending patterns by customers, timing of completion and approval of DARPA development milestones, manufacturing inefficiencies associated with new product introductions by the Company, the Company's ability to produce systems and products in volume and meet customer requirements, product returns and customer acceptance of product shipments, volatility in the Company's targeted markets, political and economic
instability, natural disasters, regulatory changes, possible disruptions caused by expanding existing facilities or moving into new facilities, expenses associated with acquisitions and alliances, and various competitive factors, including price-based competition and competition from vendors employing other technologies. The Company's gross margins have varied and will continue to vary based on a variety of factors, including the mix of products sold, sales volume, and the amount of products sold under volume purchase arrangements, which tend to have lower selling prices. Accordingly, past performance may not be indicative of future performance. The Company anticipates lower gross margins in the first quarter of fiscal 2000 than in the last quarter of fiscal 1999, and expects to record a net loss in the first quarter of fiscal 2000.
DEPENDENCE ON TIMING AND SIZE OF SALES ORDERS AND SHIPMENT. The Company derives a substantial portion of its revenues from the sale of a relatively small number of systems which typically range in purchase price from approximately $100,000 to over $1.0 million. As a result, the loss or deferral of a limited number of system sales could have a material adverse effect on the Company's net sales and operating results in a particular period. All customer purchase orders are subject to cancellation or rescheduling by the customer with limited penalties, and, therefore, backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. From time to time, cancellations and reschedulings of customer orders have occurred, and delays by the Company's suppliers in providing components or subassemblies to the Company have caused delays in the Company's shipments of its own products. There can be no assurance that the Company will not be materially adversely affected by future cancellations and reschedulings. A substantial portion of net sales typically are realized near the end of each quarter. A delay or reduction in shipments near the end of a particular quarter, due, for example, to unanticipated shipment reschedulings, cancellations or deferrals by customers, customer credit issues, unexpected manufacturing difficulties experienced by the Company, or delays in deliveries by suppliers, could cause net sales in a particular quarter to fall significantly below the Company's expectations. As the Company incurs expenses in anticipation of future sales levels, the Company's results of operations may be adversely affected if such sales levels are not achieved. Requested shipment delays by certain customers have negatively impacted the Company's net sales in fiscal 1999.
RECENT OPERATING LOSSES. The Company incurred an operating loss of $4.6 million in fiscal 1999. The Company also incurred operating losses of $2.1, $4.2 and $2.4 million in fiscal 1995, 1994 and 1993, respectively. The Company operated profitably from fiscal 1996 to 1998, due to increased net sales that were substantially the result of sales of new products, particularly sales of MTX systems to Siemens (the semiconductor group of Siemens is now known as Infineon). During fiscal 1999, 1998 and 1997, Infineon accounted for 21.9%, 47.0% and 55.7% of the Company's net sales, respectively. Sales to Infineon, which include both the MTX and other products, are made pursuant to individual purchase orders. There is no long- term volume purchase commitment. In fiscal 1998, the Company began to feel the industry slowdown due to uncertainties caused primarily by the financial crisis in Asia and DRAM overcapacity and recorded an operating loss in fiscal 1999. The Company expects to record a net loss in the first quarter of fiscal 2000. There can be no assurance that the Company's net sales will soon rebound or that the Company will soon return to profitability.
DEPENDENCE ON MARKET ACCEPTANCE OF MTX SYSTEM. A principal element of the Company's strategy is to capture an increasing share of the memory test equipment market through sales of the MTX massively parallel test system. The MTX is designed to perform both burn-in and many of the final test functions currently performed by high-cost memory testers and the market for MTX systems is still in the early stages of development. The Company's strategy depends, in part, upon its ability to persuade potential customers that the MTX system can successfully perform a significant portion of such final test functions and that transferring such tests to MTX systems will reduce their overall capital and test costs. The Company experienced a decline in shipments of MTX products in fiscal 1999 compared with fiscal 1998. Although the Company expects an increase in orders for MTX systems in the first half of fiscal 2000, there can be no assurance that the Company's strategy will be successful. The failure of the MTX system to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and operating results.
Market acceptance of the MTX system is subject to a number of risks. Through the end of fiscal 1999, several companies purchased evaluation units of the MTX systems, but only Infineon purchased production quantities. Sales to Infineon, which include both the MTX and other products, are made pursuant to individual purchase orders. There is no long-term volume purchase commitment. There can be no assurance that Infineon will continue to purchase MTX systems for its production facilities. Since most potential customers have successfully relied on memory testers for many years and their personnel understand the use and maintenance of such systems, the Company anticipates that they may be reluctant to change their procedures in order to transfer test functions to the MTX system. Before a customer will transfer test functions to the MTX, the test programs must be translated for use with the MTX and lengthy correlation
tests must be performed. Correlation testing may take up to six months or more. Furthermore, MTX system sales are expected to be primarily limited to new facilities and to existing facilities being upgraded to accommodate new product generations, such as the transition to Rambus or Double Data Rate DRAMs. Construction of new facilities and upgrades of existing facilities have in some cases been delayed or canceled during this semiconductor industry downturn. Other companies have purchased MTX systems which are being used in quality assurance and engineering applications, and the Company believes that some of these companies are evaluating the MTX for use in production applications. Market acceptance of the MTX system may also be affected by a reluctance of IC manufacturers to rely on relatively small suppliers such as the Company.
The Company's future sales and operating results are also partially dependent on its sales of performance test boards for use with the MTX system. Sales of PTBs by the Company and its licensees will depend upon the number of MTX systems installed by customers.
DEPENDENCE ON DEVELOPMENT OF BARE DIE MARKET AND MARKET ACCEPTANCE OF DIEPAK CARRIER. Another element of the Company's strategy is to capture an increasing share of the bare die burn-in and test product market through sales of its DiePak carrier products. The Company developed the DiePak carrier to enable burn-in and test of bare die in order to supply known good die ("KGD") for use in applications such as multichip modules. The Company's DiePak strategy depends upon increased industry acceptance of bare die as an alternative to packaged die as well as acceptance of the Company's DiePak products. There can be no assurance that the Company's strategy will be successful. The market for carriers to produce KGD has not expanded as rapidly as expected, as some customers are adopting chip-scale packages ("CSPs"), which are smaller than traditional packages, as their next packaging strategy. Even though CSPs are relatively expensive, the Company believes that end users are expressing a preference for CSPs because they believe that CSPs are more compatible with their existing PC board assembly equipment. This has delayed the growth of the market for KGD, and therefore for the Company's DiePak carrier. The failure of the bare die market to expand or of the DiePak carrier to achieve broad market acceptance would have a material adverse effect on the Company's business, financial condition and operating results.
The emergence of the bare die market and broad acceptance of the DiePak carrier are subject to a number of risks. The Company believes that the growth of the bare die market depends largely on the relative cost and benefits to the manufacturers of PCs and other electronics products of using bare die rather than alternative IC packaging methods. There can be no assurance that electronics manufacturers will perceive that the benefits of KGD justify its potentially higher cost, and acceptance of KGD for many applications may therefore be limited. In addition, electronics manufacturers must change their manufacturing processes in order to use KGD, but electronics manufacturers typically have substantial investments in existing manufacturing technology and have historically been slow in transitioning to new technologies.
The adoption of the DiePak products by IC manufacturers and burn-in and test services companies typically will involve a lengthy qualification. Such qualification processes have delayed high volume sales of DiePak products by the Company. Motorola is the only customer to have ordered DiePak products in production quantities. Motorola accounted for approximately 54%, 87% and 48% of the Company's net sales of DiePak products in fiscal 1999, 1998 and 1997, respectively. Sales to Motorola, which include both DiePak products and other products, are made pursuant to individual purchase orders. There is no long- term volume purchase commitment. There can be no assurance that Motorola will continue to purchase DiePak products for its production facility. There can also be no assurance that the bare die market will emerge and grow as the Company anticipates, that the DiePak carrier will achieve commercial acceptance, or that the Company will not experience difficulties in ramping up production to meet any increased demand for DiePak products that may develop.
CUSTOMER CONCENTRATION. The semiconductor manufacturing industry is highly concentrated, with a relatively small number of large semiconductor manufacturers and contract assemblers accounting for a substantial portion of the purchases of semiconductor equipment. Sales to the Company's five largest customers accounted for approximately 62.7%, 75.2% and 69.2% of its net sales in fiscal 1999, 1998 and 1997, respectively. During fiscal 1999, 1998 and 1997, Infineon (formerly the semiconductor group of Siemens) accounted for 21.9%, 47.0% and 55.7% of the Company's net sales, respectively. During fiscal 1999, Texas Instruments and Motorola accounted for 18.1% and 11.9% of the Company's net sales, respectively. During fiscal 1998, Motorola accounted for 12.8% of net sales. No other customers represented more than 10% of the Company's net sales for any of such periods. The Company expects that sales of its products to a limited number of customers will continue to account for a high percentage of net sales for the foreseeable future. In addition, sales to particular customers may fluctuate significantly from quarter to quarter. The loss of or reduction or delay in orders from a significant customer, or a delay in collecting or failure to collect accounts
receivable from a significant customer could adversely affect the Company's business, financial condition and operating results.
LIMITED MARKET FOR BURN-IN SYSTEMS. Historically, a substantial portion of the Company's net sales were derived from the sale of burn-in systems. The market for burn-in systems is mature and estimated to be less than $100 million per year. In general, process control improvements in the semiconductor industry have tended to reduce burn-in times. In addition, as a given IC product generation matures and yields increase, the required burn-in time may be reduced or eliminated. Some burn-in system suppliers primarily provide "monitored" burn-in systems optimized for DRAMs. The sale of monitored burn-in products has reduced the size of the market segment addressed by the Company's dynamic burn-in systems. IC manufacturers, the Company's primary historical customer base, increasingly outsource test and burn-in to independent test labs, who often build their own systems. There can be no assurance that the market for burn-in systems will grow, and sales of the Company's burn-in products could decline.
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involve a significant commitment of capital. In view of the significant investment or strategic issues that may be involved in a decision to purchase MTX systems or DiePak carriers, the Company may experience delays following initial qualification of the Company's systems as a result of delays in a customer's approval process. Furthermore, the approval process for MTX and DiePak carrier sales may require lengthy qualification and correlation testing. For this and other reasons, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject the Company to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which the Company has little or no control. The loss of individual orders due to the lengthy sales and evaluation cycle, or delays in the sale of even a limited number of systems could have a material adverse effect on the Company's business, operating results and financial condition and, in particular, could contribute to significant fluctuations in operating results on a quarterly basis.
DEPENDENCE ON INTERNATIONAL SALES AND OPERATIONS. Approximately 72.7%, 70.5% and 92.5% of the Company's net sales for fiscal 1999, 1998 and 1997, respectively, were attributable to sales to customers for delivery outside of the United States. The Company maintains a sales, service, product engineering and manufacturing organization in Japan, and a sales and service organization in Germany. The Company expects that sales of products for delivery outside of the United States will continue to represent a substantial portion of its future revenues. The future performance of the Company will depend, in significant part, upon its ability to continue to compete in foreign markets which in turn will depend, in part, upon a continuation of current trade relations between the United States and foreign countries in which semiconductor manufacturers or assemblers have operations. A change toward more protectionist trade legislation in either the United States or such foreign countries, such as a change in the current tariff structures, export compliance or other trade policies, could adversely affect the Company's ability to sell its products in foreign markets. In addition, the Company is subject to other risks associated with doing business internationally, including longer receivable collection periods and greater difficulty in accounts receivable collection, the burden of complying with a variety of foreign laws, difficulty in staffing and managing global operations, risks of civil disturbance or other events which may limit or disrupt markets, international exchange restrictions, changing political conditions and monetary policies of foreign governments.
A substantial portion of the Company's sales has been in Asia. Turmoil in the Asian financial markets resulted, and may result in the future, in dramatic currency devaluations, stock market declines, restriction of available credit and general financial weakness. In addition, DRAM prices have fallen dramatically and will likely do so again in the future. These developments may affect the Company in several ways. Currency devaluations may make dollar-denominated goods such as the Company's more expensive for Asian clients. The Company believes that many international semiconductor manufacturers limited capital spending (including the purchase of MTXs) in fiscal 1999, and that the uncertainty of the DRAM market may cause some manufacturers to further delay capital spending plans. These circumstances may also affect the ability of the Company's customers to meet their payment obligations, resulting in the cancellations or deferrals of existing orders and the limitation of additional orders. In addition, Asian governments have subsidized some portion of fab construction. Financial turmoil may reduce these governments' willingness to continue such subsidies. Such developments could have a material adverse affect on the Company's business, financial condition and results of operations.
Because a substantial portion of the Company's net sales is from sales of products for delivery outside the United States, an increase in the value of the U.S. Dollar relative to foreign currencies would increase the cost of the Company's products compared to products sold by local companies in such markets. Approximately 81.4%, 11.9% and 6.7% of the Company's net sales for fiscal 1999 were denominated in U.S. Dollars, Japanese Yen and German Marks, respectively. Although most sales to German customers are denominated in dollars, substantially all sales to Japanese customers are denominated in Japanese Yen. Since the price is determined at the time a purchase order is accepted, the Company is exposed to the risks of fluctuations in the yen- dollar exchange rate during the lengthy period from purchase order to ultimate payment. This exchange rate risk is partially offset to the extent the Company's Japanese subsidiary incurs yen-denominated expenses. To date, the Company has not invested in instruments designed to hedge currency risks. In addition, the Company's Japanese subsidiary typically carries debt or other obligations due to the Company that may be denominated in yen or dollars. Since the financial statements of the Japanese subsidiary are based in yen and the financial statements of the Company are based in dollars, the Japanese subsidiary and the Company recognize income gain or loss in any period in which the value of the yen rises or falls in relation to the dollar. In fiscal 1999, the Company recorded foreign currency gain of $339,000, and in fiscal 1998 and 1997, the Company experienced foreign currency losses of $385,000 and $393,000, respectively.
A substantial portion of the world's manufacturers of memory devices are in Korea, Japan and Taiwan and growth in the Company's net sales depends in large part upon its ability to penetrate the Korean and Japanese markets. Both the Korean and Japanese markets are difficult for foreign companies to penetrate. The Company has served the Japanese market through its Japanese subsidiary, which has experienced limited success and incurred operating losses in recent years. Sales into Korea have not been significant in recent years. In fiscal 1999, the Company signed an agreement with a new Korean distributor. The lack of local manufacturing may impede the Company's efforts to develop the Korean market. Taiwan also represents an increasingly important portion of the memory manufacturer market. The Company relies on an independent distributor in Taiwan and does not have any direct operations in Taiwan. There can be no assurances that the Company's efforts in Japan, Korea or Taiwan will be successful or that the Company will be able to achieve and sustain significant sales to, or be able to successfully compete in, the Japanese, Korean or Taiwanese test and burn-in markets.
RAPID TECHNOLOGICAL CHANGE; IMPORTANCE OF TIMELY PRODUCT INTRODUCTION. The semiconductor equipment industry is subject to rapid technological change and new product introductions and enhancements. The Company's ability to remain competitive will depend in part upon its ability to develop new products and to introduce these products at competitive prices and on a timely and cost-effective basis. The Company's success in developing new and enhanced products depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future demand and the technology that will be available to supply that demand. Furthermore, introductions of new and complex products typically involve a period in which design, engineering and reliability issues are identified and addressed by the Company and its suppliers. This process in the past has required and in the future is likely to require the Company to incur unreimbursed engineering expenses, and from time to time to experience warranty claims or product returns. There can be no assurance that the Company will be successful in selecting, developing, manufacturing and marketing new products that satisfy market demand. Any such failure would materially adversely affect the Company's business, financial condition and results of operations.
Because of the complexity of the Company's products, significant delays can occur between a product's introduction and the commencement of volume production of such product. The Company has experienced significant delays from time to time in the introduction of, and technical and manufacturing difficulties with, certain of its products and may experience delays and technical and manufacturing difficulties in future introductions or volume production of new products, and there can be no assurance that the Company will not encounter such difficulties in the future. The Company's inability to complete product development, products or to manufacture and ship products in volume and in time to meet customer requirements would materially adversely affect the Company's business, financial condition and results of operations.
As is common with new complex and software-intensive products, the Company encountered reliability, design and manufacturing issues as it began volume production and initial installations of certain products at customer sites. The Company places a high priority on addressing these issues as they arise. Certain of these issues in the past have been related to components and subsystems supplied to the Company by third parties which have in some cases limited the ability of the Company to address such issues promptly. When the Company is in an early stage of a product's life cycle, there can be no assurance that reliability, design and manufacturing issues will not be discovered in the future or that
such issues, if they arise, can be resolved to the customers' satisfaction or that the resolution of such problems will not cause the Company to incur significant development costs or warranty expenses or to lose significant sales opportunities.
Future improvements in semiconductor design and manufacturing technology may reduce or eliminate the need for the Company's products. For example, the introduction of viable wafer-level burn-in and test systems, improvements in built-in self test ("BIST") technology, and improvements in conventional test systems, such as reduced cost or increased throughput, may significantly reduce or eliminate the market for one or more of the Company's products.
UNCERTAINTIES RELATING TO DARPA FUNDING FOR RESEARCH AND DEVELOPMENT. In
1994, the Company entered into a cost-sharing agreement with DARPA, a U.S.
government agency, under which DARPA is providing co-funding for the
development of wafer-level burn-in and test equipment. The contract provides
for potential payments by DARPA totaling up to $6.5 million. The agreement
provides that (i) the Company shall retain title to all co-funded inventions,
(ii) DARPA will receive a paid-up license to use the inventions for government
purposes and (iii) DARPA can require the Company to license the inventions to
third parties on reasonable terms if the Company fails to adequately
commercialize the inventions. Payments by DARPA depend on satisfaction of
development milestones, and DARPA has the right to terminate project funding
at any time. The level of payments may vary significantly from quarter to
quarter. There can be no assurance that the Company will meet the development
milestones or that DARPA will continue funding the project. If DARPA funding
were discontinued and the Company continued the project, the Company's
operating results would be adversely affected. There also can be no assurance
that the development project will result in any marketable products. The
Company has completed certain development milestones and received DARPA
payment of $5.6 million through May 31, 1999. The remaining funding is
subject to milestones scheduled to be completed through December 1999,
although the Company expects that completion of certain milestones will be
delayed beyond that date.
INTENSE COMPETITION. In each of the markets it serves, the Company faces competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing and marketing resources than the Company. The Company expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. In addition, continuing consolidation in the semiconductor equipment industry, and potential future consolidation, could adversely affect the ability of smaller companies such as the Company to compete with larger, integrated competitors. New product introductions by the Company's competitors or by new market entrants could cause a decline in sales or loss of market acceptance of the Company's existing products. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect the Company's business, financial condition and operating results. The Company believes that to remain competitive it must invest significant financial resources in new product development and expand its customer service and support worldwide. There can be no assurance that the Company will be able to compete successfully in the future.
The semiconductor equipment industry is intensely competitive. Significant competitive factors in the semiconductor equipment market include price, technical capabilities, quality, flexibility, automation, cost of ownership, reliability, throughput, product availability and customer service. In each of the markets it serves, the Company faces competition from established competitors and potential new entrants, many of which have greater financial, engineering, manufacturing and marketing resources than the Company.
Because the Company's MTX system performs burn-in and many of the functional tests performed by traditional memory testers, the Company expects that the MTX System will face intense competition from burn-in system suppliers and traditional memory tester suppliers. The market for burn-in systems is highly fragmented, with many domestic and international suppliers. Some users, such as independent test labs, build their own burn-in systems, and some other users, particularly large Japanese IC manufacturers, acquire burn-in systems from captive or affiliated suppliers. Competing suppliers of burn-in and functional test systems include Ando Corporation, Japan Engineering Company and Reliability Incorporated. In addition, suppliers of memory test equipment including Advantest Corporation and Teradyne, Inc. may seek to offer competitive parallel test systems in the future.
The Company's MAX dynamic and ATX monitored and dynamic burn-in systems increasingly have faced and are expected to continue to face severe competition, especially from local, low cost manufacturers. Also, the MAX dynamic burn-in system faces severe competition from manufacturers of monitored burn-in systems that perform limited functional tests, including tests designed to ensure the devices receive the specified voltages and signals.
The Company's DiePak products face significant competition. Texas Instruments Incorporated sells a temporary, reusable bare die carrier which is intended to enable burn-in and test of bare die, and the Company believes that several other companies have developed or are developing other such products. As the bare die market develops, the Company expects that other competitors will emerge. The DiePak products also face severe competition from other alternative test solutions. The Company expects that the primary competitive factors in this market will be cost, performance, reliability and assured supply.
The Company's test fixture products face numerous competitors. There are limited barriers to entry into the BIB market, and as a result, many small companies design and manufacture BIBs, including BIBs for use with the Company's MAX and ATX systems. The Company's strategy is to provide higher performance BIBs, and the Company generally does not compete to supply lower cost, low performance BIBs. The Company has granted a royalty-bearing license to one company to make PTBs for use with its MTX systems, in order to assure customers of a second source of supply, and the Company may license others as well. Sales of PTBs by licensees result in royalties to the Company but reduce the Company's own sales of PTBs.
The Company expects its competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. New product introductions by the Company's competitors or by new market entrants could cause a decline in sales or loss of market acceptance of the Company's products. Increased competitive pressure could also lead to intensified price-based competition, resulting in lower prices which could adversely affect the Company's business, financial condition and operating results. The Company believes that to remain competitive it must invest significant financial resources in new product development and expand its customer service and support worldwide. There can be no assurance that the Company will be able to compete successfully in the future.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY AND CUSTOMER PURCHASES; RISK OF CANCELLATIONS AND RESCHEDULINGS. The Company's operating results depend primarily upon the capital expenditures of semiconductor manufacturers, semiconductor contract assemblers and burn-in and test service companies worldwide, which in turn depend on the current and anticipated market demand for integrated circuits and products utilizing integrated circuits. The semiconductor and semiconductor equipment industries in general, and the market for DRAMs and other memories in particular, historically have been highly volatile and have experienced periodic downturns and slowdowns, which have had a severe negative effect on the semiconductor industry's demand for semiconductor capital equipment, including test and burn-in systems manufactured and marketed by the Company. These downturns and slowdowns have adversely affected the Company's operating results in the past and in fiscal 1998 and 1999. In addition, the purchasing patterns of the Company's customers are also highly cyclical because most customers purchase the Company's products for use in new production facilities or for upgrading existing test lines for the introduction of next generation products. Construction of new facilities and upgrades of existing facilities have in some cases been delayed or canceled during this recent semiconductor industry downturn. A large portion of the Company's net sales are attributable to a few customers and therefore a reduction in purchases by one or more customers could materially adversely affect the Company's financial results. There can be no assurance that the semiconductor industry will grow in the future at the same rates it has grown historically. Any downturn or slowdown in the semiconductor industry would have a material adverse effect on the Company's business, financial condition and operating results. In addition, the need to maintain investment in research and development and to maintain customer service and support will limit the Company's ability to reduce its expenses in response to any such downturn or slowdown period.
The semiconductor equipment manufacturing industry has historically been subject to a relatively high rate of purchase order cancellation by customers as compared to other high technology industry sectors. Manufacturing companies that are the customers of semiconductor equipment companies frequently revise, postpone and cancel capital facility expansion plans. In such cases, semiconductor equipment companies may experience a significant rate of cancellations and reschedulings of purchase orders, as was the case in the industry in late 1995, early 1996, and 1998. There can be no assurance that the Company will not be materially adversely affected by future cancellations and reschedulings.
YEAR 2000. The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The Company has recognized the Year 2000 problem and has taken steps to mitigate the situation. The Company's in-house information technology system consists primarily of hardware and software purchased from outside parties. The Company has completed vendor-provided upgrades of vendor-developed software. Although the upgrades are claimed by the vendors to be Year 2000 compliant, the Company is testing the hardware and software for Year 2000 compliance and will install vendor-provided software patches if necessary. The Company is also testing the internally developed software and hardware which is included in the products sold to customers. The Company expects such assessments and modifications to existing software and conversion to new software will be completed by October 31, 1999. If, however, such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material adverse effect on the Company's business, financial condition and results of operations.
The Company has had limited communications with its suppliers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 issue. The failure of one or more of these third parties to be Year 2000 compliant could result in a material adverse effect on the Company's business, operating results and financial position. The Company is making inquiries to certain of the key third party suppliers to assess their Year 2000 readiness, and expects that this process will be on- going through the end of 1999. However, there can be no assurance that the systems or subsystems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have material adverse effect on the Company.
The Company expects that costs to address the Year 2000 issue, directly or indirectly, will total approximately $150,000, the majority of which was spent in the fiscal 1998 and 1999, with the remainder being spent during fiscal 2000. Costs include salary and related expenses, hardware and software costs, consulting and miscellaneous expenses. To date, the Company has incurred expenses of approximately $100,000 related to the assessment of and preliminary efforts in dealing with the Year 2000 issue.
A most reasonably likely worst case Year 2000 scenario would be a temporary interruption in production or shipping resulting from unanticipated problems encountered in the information systems of the Company, or of any of the significant third parties with whom the Company does business. The pervasiveness of the Year 2000 issue makes it likely that previously unidentified issues will require remediation during the normal course of business. In such a case, the Company anticipates that transactions could be processed manually while the information system and other systems are repaired and that such interruptions would have a minor effect on the Company's operations.
The costs of the planned Year 2000 modifications, and the dates by which the Company expects to complete them, are based on management's best estimates, which were derived from numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. There can be, however, no assurance that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
DEPENDENCE ON SUBCONTRACTORS; SOLE OR LIMITED SOURCES OF SUPPLY. The Company relies on subcontractors to manufacture many of the components or subassemblies used in its products. The Company's MTX, MAX and ATX systems contain several components, including environmental chambers, power supplies and certain ICs, which are currently supplied by only one or a limited number of suppliers. The DiePak products include an interconnect substrate which has primarily been supplied by Nitto Denko Corporation. Nitto Denko is currently manufacturing DiePak substrates, but it has notified the Company of its intention to stop manufacturing these substrates. The Company is currently qualifying an alternate supplier for the DiePak substrate. The Company's reliance on subcontractors and single source suppliers involves a number of significant risks, including the loss of control over the manufacturing process, the potential absence of adequate capacity and reduced control over delivery schedules, manufacturing yields, quality and costs. In the event that any significant subcontractor or single source supplier was to become unable or unwilling to continue to manufacture subassemblies, components or parts in required volumes, the Company would have to identify and qualify acceptable replacements. The process of qualifying subcontractors and suppliers could be lengthy, and no assurance can be given that any additional sources would be available to the Company on a timely basis. Any delay, interruption or termination of a supplier relationship could have a material adverse effect on the Company's business, financial condition and operating results.
POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Company's Common Stock has been, and may continue to be, extremely volatile. The Company believes that factors such as announcements of developments related to the Company's business, fluctuations in the Company's operating results, failure to meet securities analysts' expectations, general conditions in the semiconductor and semiconductor equipment industries and the worldwide
economy, announcement of technological innovations, new systems or product enhancements by the Company or its competitors, fluctuations in the level of cooperative development funding, acquisitions, changes in governmental regulations, developments in patents or other intellectual property rights and changes in the Company's relationships with customers and suppliers could cause the price of the Company's Common Stock to fluctuate substantially. In addition, in recent years the stock market in general, and the market for small capitalization and high technology stocks in particular, has experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Such fluctuations could adversely affect the market price of the Company's Common Stock.
MANAGEMENT OF CHANGING BUSINESS. If the Company is to be successful, it must expand its operations. Such expansion will place a significant strain on the Company's administrative, operational and financial resources. Such expansion will result in a continuing increase in the responsibility placed upon management personnel and will require development or enhancement of operational, managerial and financial systems and controls. If the Company is unable to manage the expansion of its operations effectively, the Company's business, financial condition and operating results will be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL. The Company's success depends to a significant extent upon the continued service of Rhea Posedel, its President and Chief Executive Officer, as well as other executive officers and key employees. The Company does not maintain key person life insurance for its benefit on any of its personnel, and none of the Company's employees is subject to a noncompetition agreement with the Company. The loss of the services of any of its executive officers or a group of key employees could have a material adverse effect on the Company's business, financial condition and operating results. The Company's future success will depend in significant part upon its ability to attract and retain highly skilled technical, management, sales and marketing personnel. There is a limited number of personnel with the requisite skills to serve in these positions, and it has become increasingly difficult for the Company to hire such personnel. Competition for such personnel in the semiconductor equipment industry is intense, and there can be no assurance that the Company will be successful in attracting or retaining such personnel. The Company's inability to attract and retain the executive management and other key personnel it requires could have a material adverse effect on the Company's business, financial condition and operating results.
INTELLECTUAL PROPERTY PROTECTION AND INFRINGEMENT. The Company's ability to compete successfully is dependent in part upon its ability to protect its proprietary technology and information. Although the Company attempts to protect its proprietary technology through patents, copyrights, trade secrets and other measures, there can be no assurance that these measures will be adequate or that competitors will not be able to develop similar technology independently. Further, there can be no assurance that claims allowed on any patent issued to the Company will be sufficiently broad to protect the Company's technology, that any patent will issue from any pending application or that foreign intellectual property laws will protect the Company's intellectual property. Litigation may be necessary to enforce or determine the validity and scope of the Company's proprietary rights, and there can be no assurance that the Company's intellectual property rights, if challenged, will be upheld as valid. Such litigation could result in substantial costs and diversion of resources and could have a material adverse effect on the Company's business, financial condition and operating results, regardless of the outcome of the litigation. In addition, there can be no assurance that any of the patents issued to the Company will not be challenged, invalidated or circumvented or that the rights granted thereunder will provide competitive advantages to the Company.
There are no pending claims against the Company regarding infringement of any patents or other intellectual property rights of others. However, the Company may receive, in the future, communications from third parties asserting intellectual property claims against the Company. Such claims could include assertions that the Company's products infringe, or may infringe, the proprietary rights of third parties, requests for indemnification against such infringement or suggestions that the Company may be interested in acquiring a license from such third parties. There can be no assurance that any such claim made in the future will not result in litigation, which could involve significant expense to the Company, and, if the Company is required or deems it appropriate to obtain a license relating to one or more products or technologies, there can be no assurance that the Company would be able to do so on commercially reasonable terms, or at all.
ENVIRONMENTAL REGULATIONS. Federal, state and local regulations impose various controls on the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used in the Company's operations. The Company believes that its activities conform in all material respects to current environmental and land use regulations applicable to its operations and its current facilities and that it has obtained environmental permits necessary to conduct its business. Nevertheless, the failure to comply with current or future
regulations could result in substantial fines being imposed on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by the Company to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject the Company to significant liabilities.
Item 7a. Quantitative and Qualitative Disclosures about Market Risks
The Company considered the provisions of Financial Reporting Release No.
48 "Disclosures of Accounting Policies for Derivative Financial Instruments
and Derivative Commodity Instruments, and Disclosures of Quantitative and
Qualitative Information about Market Risk Inherent in Derivative Commodity
Instruments." The Company has no holdings of derivative financial or
commodity instruments at May 31, 1999.
The Company is exposed to financial market risks, including changes in interest rates and foreign currency exchange rates. To somewhat reduce these risks, the Company invests excess cash in a managed portfolio of corporate and government bond instruments with maturities of 18 months or less. The Company does not use any financial instruments for speculative or trading purposes. The Company has long-term debt that carries fixed interest rates. Fluctuations in interest rates would not have a material effect on the Company's financial position, results of operations and cash flows.
A majority of the Company's revenue and capital spending is transacted in U.S. dollars. The Company, however, enters into transactions in other currencies, primarily Japanese yen. Substantially all sales to Japanese customers are denominated in Japanese Yen. Since the price is determined at the time a purchase order is accepted, the Company is exposed to the risks of fluctuations in the yen-dollar exchange rate during the lengthy period from purchase order to ultimate payment. This exchange rate risk is partially offset to the extent that the Company's Japanese subsidiary incurs yen- denominated expenses. To date, the Company has not invested in instruments designed to hedge currency risks. In addition, the Company's Japanese subsidiary typically carries debt or other obligations due to the Company that may be denominated in yen or dollars. Since the Japanese subsidiary's financial statements are based in yen and the Company's financial statements are based in dollars, the Japanese subsidiary and the Company recognize foreign exchange gain or loss in any period in which the value of the yen rises or falls in relation to the dollar. A 10% decrease in the value of the yen as compared with the dollar would potentially result in an additional net loss of approximately $350,000.
Item 8. Financial Statements and Supplementary Data
AEHR TEST SYSTEMS AND SUBSIDIARIES
Index to Financial Statements
Report of Independent Accountants .................................. 27 Consolidated Balance Sheets at May 31, 1999 and 1998 ............... 28 Consolidated Statements of Operations for the years ended May 31, 1999, 1998 and 1997 ................................ 29 Consolidated Statements of Shareholders' Equity for the years ended May 31, 1999, 1998 and 1997 ................................ 30 Consolidated Statements of Cash Flows for the years ended May 31, 1999, 1998 and 1997 ...................................... 31 Notes to Consolidated Financial Statements ......................... 32 |
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Aehr Test Systems:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Aehr Test Systems at May 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended May 31, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Jose, California
July 2, 1999, except Note 13 as to which the date is August 3, 1999
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
May 31,
-------------------------
1999 1998
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 5,336 $ 6,748
Short-term investments ............................. 14,847 16,579
Accounts receivable, net of allowance for doubtful
accounts of $125 and $260 at May 31, 1999 and
1998, respectively ............................... 3,533 7,182
Inventories ........................................ 9,221 11,942
Deferred income taxes............................... 1,543 1,157
Prepaid expenses and other ......................... 654 250
---------- ----------
Total current assets ........................... 35,134 43,858
Property and equipment, net .......................... 1,936 1,541
Long-term investments ................................ 3,235 904
Other assets, net .................................... 882 802
---------- ----------
Total assets ................................... $41,187 $47,105
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term bank debt ............. $ 152 $ 86
Accounts payable ................................... 1,005 2,084
Accrued expenses ................................... 2,440 4,492
Deferred revenue ................................... 521 311
---------- ----------
Total current liabilities ...................... 4,118 6,973
Long-term bank debt, net of current portion .......... 391 113
Deferred lease commitment ............................ -- 55
---------- ----------
Total liabilities .............................. 4,509 7,141
---------- ----------
Commitments (Note 7).
Shareholders' equity:
Preferred stock, $.01 par value:
Authorized: 10,000 shares;
Issued and outstanding: none
Common stock, $.01 par value:
Authorized: 75,000 shares;
Issued and outstanding: 6,756 shares and 6,917
shares at May 31, 1999 and 1998, respectively... 68 69
Additional paid-in capital ......................... 34,806 35,467
Retained earnings (accumulated deficit)............. (55) 2,275
Accumulated other comprehensive income ............. 1,859 2,153
---------- ----------
Total shareholders' equity ..................... 36,678 39,964
---------- ----------
Total liabilities and shareholders' equity ..... $41,187 $47,105
========== ==========
|
The accompanying notes are an integral part of these consolidated financial statements.
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended May 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Net sales..................................... $18,146 $40,805 $42,020
Cost of sales................................. 12,201 24,359 25,715
---------- ---------- ----------
Gross profit.................................. 5,945 16,446 16,305
---------- ---------- ----------
Operating expenses:
Selling, general and administrative......... 6,892 8,618 8,878
Research and development.................... 4,918 4,529 4,536
Research and development cost
reimbursement--DARPA ..................... (1,233) (900) (793)
---------- ---------- ----------
Total operating expenses.................. 10,577 12,247 12,621
---------- ---------- ----------
Income (loss) from operations................. (4,632) 4,199 3,684
Interest income (expense)..................... 1,184 904 (577)
Other income (expense), net................... 441 (364) (565)
---------- ---------- ----------
Income (loss) before income taxes ............ (3,007) 4,739 2,542
Income tax expense (benefit).................. (677) 2,334 (773)
---------- ---------- ----------
Net income (loss)............................. $(2,330) $2,405 $3,315
---------- ---------- ----------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
(expense) ................................ (233) 81 (25)
Unrealized holding losses arising during
period ................................... (61) -- --
---------- ---------- ----------
Comprehensive income (loss) .................. $(2,624) $2,486 $3,290
========== ========== ==========
Net income (loss) per share (basic)........... $ (0.34) $ 0.38 $ 0.77
Net income (loss) per share (diluted)......... $ (0.34) $ 0.36 $ 0.74
Shares used in per share calculation
Basic....................................... 6,854 6,327 4,297
Diluted..................................... 6,854 6,761 4,500
|
The accompanying notes are an integral part of these consolidated financial statements.
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
Retained
Common Stock Additional Earnings Unrealized Cumulative
----------------- Paid-in (Accumulated Investment Translation
Shares Amount Capital Deficit) Loss Adjustment Total
------- ------- ------- ------- ------- ------- -------
Balances, June 1, 1996.............. 4,298 $43 $ 8,094 $(3,445) $ -- $2,097 $ 6,789
Repurchase of common stock........ (2) -- (9) -- -- -- (9)
Net income........................ -- -- -- 3,315 -- -- 3,315
Translation adjustment............ -- -- -- -- -- (25) (25)
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1997.............. 4,296 43 8,085 (130) -- 2,072 10,070
Issuance of common stock in initial
public offering, net of
issuance costs of $1,068 ....... 2,500 25 26,807 -- -- -- 26,832
Issuance of common stock
under employee plans ........... 121 1 576 -- -- -- 577
Repurchase of common stock........ -- -- (1) -- -- -- (1)
Net income........................ -- -- -- 2,405 -- -- 2,405
Translation adjustment............ -- -- -- -- -- 81 81
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1998.............. 6,917 69 35,467 2,275 -- 2,153 39,964
Issuance of common stock
under employee plans ........... 123 2 481 -- -- -- 483
Repurchase of common stock........ (284) (3) (1,142) -- -- -- (1,145)
Net loss ......................... -- -- -- (2,330) -- -- (2,330)
Net unrealized loss on
investments .................... -- -- -- -- (61) -- (61)
Translation adjustment............ -- -- -- -- -- (233) (233)
------- ------- ------- ------- ------- ------- -------
Balances, May 31, 1999 6,756 $68 $34,806 $ (55) $(61) $1,920 $36,678
======= ======= ======= ======= ======= ======= =======
|
The accompanying notes are an integral part of these consolidated financial statements.
AEHR TEST SYSTEMS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Year Ended May 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)............................. $(2,330) $2,405 $3,315
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Provision for doubtful accounts............. (136) 131 34
Loss (gain) on disposition of
property and equipment.................... (4) 11 9
Depreciation and amortization............... 453 479 633
Deferred income taxes....................... (456) (102) (1,055)
Changes in operating assets and liabilities:
Accounts receivable....................... 3,820 36 2,608
Inventories............................... 2,740 (1,627) (2,854)
Accounts payable.......................... (1,431) (1,871) (795)
Accrued expenses and deferred revenue..... (1,857) 143 1,180
Deferred lease commitment................. (55) (165) (167)
Other current assets...................... (402) (104) 118
--------- --------- ---------
Net cash provided by (used in)
operating activities.................. 342 (664) 3,026
--------- --------- ---------
Cash flows from investing activities:
(Increase) decrease in short-term
investments............................. 1,732 (15,323) 188
Increase in long-term investments........... (2,392) (904) --
Additions to property and equipment......... (755) (315) (647)
(Increase) decrease in other assets......... 9 (213) 246
--------- --------- ---------
Net cash used in
investing activities.................. (1,406) (16,755) (213)
--------- --------- ---------
Cash flows from financing activities:
Decrease in notes payable--banks............ -- (4,535) (1,784)
Borrowings under long-term debt............. 453 96 141
Long-term debt and capital lease
principal payments........................ (147) (111) (488)
Proceeds from issuance of common stock
and exercise of stock options............. 483 27,409 --
Repurchase of common stock.................. (1,145) (1) (9)
--------- --------- ---------
Net cash provided by (used in)
financing activities.................. (356) 22,858 (2,140)
--------- --------- ---------
Effect of exchange rates on cash................ 8 133 (32)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents...................... (1,412) 5,572 641
Cash and cash equivalents, beginning of period.. 6,748 1,176 535
--------- --------- ---------
Cash and cash equivalents, end of period........ $5,336 $6,748 $1,176
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Interest ................................. $17 $148 $522
Income taxes ............................. 152 2,281 155
|
The accompanying notes are an integral part of these consolidated financial statements.
AEHR TEST SYSTEMS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS:
Aehr Test Systems ("Company") was incorporated in California in June 1977 and primarily designs, engineers and manufactures test and burn-in equipment used in the semiconductor industry. The Company's principal products are the MTX massively parallel test system, the MAX and ATX burn-in systems, test fixtures and the DiePak carrier.
CONSOLIDATION:
The financial statements include the accounts of the Company, its wholly owned foreign sales corporation ("FSC") and both its wholly owned and majority owned foreign subsidiaries. Intercompany accounts and transactions have been eliminated. The Company's 25% interest in a Singapore company is accounted for under the equity method.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS:
Assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars from Japanese Yen and German Marks using the exchange rate in effect at the balance sheet date. Additionally, their revenues and expenses are translated using exchange rates approximating average rates prevailing during the fiscal year. Translation adjustments that arise from translating their financial statements from their local currencies to U.S. dollars are accumulated and reflected as a separate component of shareholders' equity and comprehensive income (loss).
Transaction gains and losses that arise from exchange rate changes denominated in currencies other than the local currency are included in the statements of operations as incurred.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and 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. Actual results could differ from those estimates.
CASH EQUIVALENTS AND INVESTMENTS:
Cash equivalents consist of money market instruments, commercial paper and other highly liquid investments purchased with an original maturity of three months or less. All investments are classified as available-for-sale. Investments in available-for-sale securities are reported at fair value with unrealized gains and losses, net of tax, if any, included as a component of shareholders' equity.
CONCENTRATION OF CREDIT RISK:
The Company sells its products primarily to semiconductor manufacturers in North America, the Far East, and Europe. As of May 31, 1999, approximately 48%, 18% and 34% of accounts receivable are from customers located in the United States, the Far East and Europe, respectively. As of May 31, 1998, approximately 46%, 35% and 19% of accounts receivable are from customers located in the United States, the Far East and Europe, respectively. Two customers accounted for 21% and 13% of accounts receivable at May 31, 1999, and three customers accounted for 34%, 16% and 14% of accounts receivable at May 31, 1998. Three customers accounted for 22%, 18% and 12% of net sales in fiscal 1999, respectively. Two customers accounted for 47% and 13% of net sales in fiscal 1998, respectively. One customer accounted for 56% of net sales in fiscal 1997. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company also maintains allowances for potential credit losses and such losses have been within management's expectations. The Company uses letter of credit terms for some of its international customers.
Primarily all of the Company's cash, cash equivalents and short-term cash deposits are deposited with major banks in the United States and Japan. The Company invests its excess cash in money market funds and short-term cash deposits. The money market funds and short-term cash deposits bear the risk associated with each fund. The money market funds have variable interest rates, and the short-term cash deposits have fixed rates. The Company has not experienced any losses on its money market funds or short-term cash deposits.
INVENTORIES:
Inventories are stated at the lower of standard cost (which approximates cost on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Leasehold improvements are amortized over the lesser of their estimated useful lives or the term of the related lease. Furniture, fixtures, machinery and equipment are depreciated on a straight-line basis over their estimated useful lives. The ranges of estimated useful lives for furniture, fixtures, machinery and equipment are as follows:
Leasehold improvements................................ life of the lease Furniture and fixtures................................ 2 to 15 years Machinery and equipment............................... 4 to 11 years Test equipment........................................ 4 to 11 years |
GOODWILL:
Cost in excess of the fair value of net assets of acquired companies of $956,000 is being amortized on a straight-line basis over 24.5 years and is included in other assets, net of accumulated amortization of $538,000 and $490,000 at May 31, 1999 and 1998, respectively.
REVENUE RECOGNITION:
Revenue is recognized upon shipment of product and a provision for the estimated future cost of warranty is recorded. Actual warranty costs incurred have not materially differed from those provided.
PRODUCT DEVELOPMENT COSTS AND CAPITALIZED SOFTWARE:
Costs incurred in the research and development of new products or systems are charged to operations as incurred.
Costs incurred in the development of software programs for the Company's products are charged to operations as incurred until technological feasibility of the software has been established. Generally, technological feasibility is established when the software module performs its primary functions described in its original specifications, contains features required for it to be usable in a production environment, is completely documented and the related hardware portion of the product is complete. After technological feasibility is established, any additional costs are capitalized. Capitalized costs are amortized over the estimated life of the related software product using the greater of the units of sales or straight-line methods over ten years. Capitalized cost, net of accumulated amortization, of approximately $57,000 was included in other assets at May 31, 1997. System software development costs were fully amortized at May 31, 1998, and no new systems software development costs were capitalized in fiscal 1999.
During 1994, the Company entered into a cost-sharing research agreement with the Defense Advanced Research Projects Agency ("DARPA"), a U.S. government agency, under which DARPA will provide co-funding up to a maximum amount of $6.5 million during fiscal 1994 through December 1999 for the development of a new product that will allow for burn-in at the wafer level. Payments from DARPA will be received upon DARPA's approval of the achievement by the Company of milestones as outlined in the contract. The Company recognizes such reimbursements as a reduction to research and development expenses in an amount equal to actual reimbursable project costs incurred. At May 31, 1999 and May 31, 1998, no outstanding payments were due from DARPA.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments including cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses approximate fair value due to their short maturities. Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of notes payable approximates fair value.
The Company's investments are composed primarily of government and corporate fixed income securities, certificates of deposit and commercial paper. While it is the Company's general intent to hold such securities until maturity, management will occasionally sell particular securities for cash flow purposes. Therefore, the Company's investments are classified as available-for-sale and are carried at fair value. Through May 31, 1999, no material losses had been experienced on such investments.
Unrealized gains and losses, net of losses, net of tax, are computed on the basis of specific identification and are included in shareholders' equity. Realized gains, realized losses, and declines in value, judged to be other- than-temporary, are included in other income. The cost of securities sold is based on the specific identification method and interest earned is included in other income.
CARRYING VALUE OF LONG-TERM ASSETS:
The Company writes off the carrying value of long-term assets to the extent that projected net operating income is not sufficient to recover the carrying value of these assets over their remaining useful life.
INCOME TAXES:
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to amounts expected to be realized.
STOCK-BASED COMPENSATION:
The Company accounts for its stock based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and presents disclosures required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation."
EARNINGS PER SHARE ("EPS") DISCLOSURES:
The Company has adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," and all prior periods have been restated accordingly. Basic EPS is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon exercise of stock options for all periods.
In accordance with the disclosure requirements of SFAS No. 128, a reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts):
Year Ended May 31,
--------------------------------
1999 1998 1997
---------- ---------- ----------
Numerator: Net income (loss) ............... $(2,330) $2,405 $3,315
---------- ---------- ----------
Denominator for basic income per share:
Weighted-average shares outstanding ...... 6,854 6,327 4,297
---------- ---------- ----------
Shares used in basic per share calculation.. 6,854 6,327 4,297
Effect of dilutive securities:
Employee stock options.................. -- 434 203
---------- ---------- ----------
Denominator for diluted income (loss)
per share............................... 6,854 6,761 4,500
---------- ---------- ----------
Basic income (loss) per share............... $(0.34) $0.38 $0.77
========= ========= =========
Diluted income (loss) per share............. $(0.34) $0.36 $0.74
========= ========= =========
|
Stock options to purchase 122,000 shares of common stock were outstanding in fiscal 1999 on a weighted average basis, but were not included in the computation of diluted loss per share because the inclusion of such shares would be anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the FASB issued Statement of Financial Accounting Standard No. 133, or SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. SFAS No. 133 is effective for all fiscal quarters beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a significant effect on its financial condition or results of operations.
2. INVENTORIES:
Inventories are comprised of the following (in thousands):
May 31,
-------------------------
1999 1998
------------ ------------
Raw materials and subassemblies......... $4,931 $5,688
Work in process......................... 3,876 5,173
Finished goods.......................... 414 1,081
------------ ------------
$9,221 $11,942
============ ============
|
3. PROPERTY AND EQUIPMENT:
Property and equipment comprise (in thousands):
May 31,
-------------------------
1999 1998
------------ ------------
Leasehold improvements.................. $441 $393
Furniture and fixtures.................. 3,203 2,996
Machinery and equipment................. 3,163 2,569
Test equipment.......................... 2,155 1,944
------------ ------------
8,962 7,902
Less accumulated depreciation
and amortization...................... (7,026) (6,361)
------------ ------------
$1,936 $1,541
============ ============
|
4. NOTES PAYABLE--BANKS:
The Company's majority owned Japanese subsidiary has overdraft facilities with a bank up to a limit of $216,000 against which certain time deposits and accounts receivable are pledged as collateral for the facilities. At May 31, 1999 and 1998, the Company had no borrowing under these overdraft facilities.
5. LONG-TERM BANK DEBT:
Long-term bank debt comprises (in thousands):
May 31,
------------------------
1999 1998
------------ -----------
Various notes payable to Japanese banks, denominated
in Japanese Yen, bearing interest at 1.3% to 4.0%
per annum. These notes are payable in monthly
principal installments of $1,000 to $7,000 plus
accrued interest, maturing through November 2003
and are collateralized by certain time deposits
and accounts receivable............................ $543 $199
Less current portion................................. (152) (86)
------------ -----------
$391 $113
============ ===========
|
The long-term debt agreements contain certain cross-default covenants under which outstanding borrowings would become payable on demand if the Company were to be in default of any other debt agreement and any lender were to accelerate the other debt. The Company is not in violation of any covenants at May 31, 1999.
Principal payments under long-term bank debt obligations for each of the next five fiscal years as of May 31, 1999 are as follows (in thousands):
2000................................. $152
2001................................. 127
2002................................. 125
2003................................. 98
2004................................. 41
------------
$543
============
|
6. ACCRUED EXPENSES:
Accrued expenses comprise (in thousands):
May 31,
-------------------------
1999 1998
------------ ------------
Payroll related......................... $ 804 $ 866
Commissions and bonuses................. 300 903
Warranty................................ 303 511
Deferred rent, current.................. 55 166
Other................................... 978 2,046
------------ ------------
$2,440 $4,492
============ ============
|
7. COMMITMENTS:
The Company leases most of its manufacturing and office space under operating leases. The Company entered into a noncancelable operating lease agreement for its United States manufacturing and office facilities, which commenced in October 1991 and expires in December 1999. Under the lease agreement, the Company is responsible for payments of utilities, taxes and insurance.
Minimum annual rentals payable under operating leases in each of the next five fiscal years and thereafter are as follows (in thousands):
2000.................................... $955 2001.................................... 228 2002.................................... 227 2003.................................... 214 2004 and thereafter..................... 35 |
Rent expense for the years ended May 31, 1999, 1998 and 1997 was approximately $1,029,000, $1,067,000 and $1,226,000, respectively.
At May 31, 1999, the Company has a $67,000 certificate of deposit held by a financial institution representing a security deposit for its United States manufacturing office and facilities lease.
8. CAPITAL STOCK:
PREFERRED STOCK:
The Board of Directors is authorized to determine the rights of the preferred shareholders.
STOCK OPTIONS:
The Company has reserved 1,136,716 shares of common stock for issuance to employees and consultants under its two stock option plans. Both plans provide that qualified options be granted at an exercise price equal to the fair market value at the date of grant, as determined by the Board of Directors (85% of fair market value in the case of nonstatutory options and purchase rights and 110% of fair market value in certain circumstances). Options generally expire five years from date of grant. Most options become exercisable in increments over a four-year period from the date of grant. Options to purchase approximately 568,418 shares were exercisable at May 31, 1999.
Activity under the Company's stock option plans was as follows (in thousands, except per share data):
Outstanding Options
--------------------------------------
Number
Available of
Shares Shares Price per Share Total
--------- -------- -------------------- --------
Balances, June 1, 1996........ 2 732 $3.25 -- $6.00 $2,819
Additional shares reserved.. 650 -- -- --
Options granted............. (70) 70 $4.25 -- $6.00 397
Options terminated.......... 43 (43) $3.25 -- $6.00 (167)
1986 Plan expiration........ (43) -- -- --
--------- -------- --------
Balances, May 31, 1997........ 582 759 $3.25 -- $6.00 3,049
Options granted............. (151) 151 $6.19 -- $17.00 1,429
Options terminated.......... 17 (17) $3.25 -- $7.50 (85)
Options exercised........... -- (77) $3.25 -- $6.00 (287)
1986 Plan expiration........ (8) -- -- --
--------- -------- --------
Balances, May 31, 1998........ 440 816 $3.25 -- $17.00 4,106
Options granted............. (257) 257 $4.25 -- $6.63 1,488
Options terminated.......... 103 (103) $3.25 -- $7.50 (462)
Options exercised........... -- (49) $3.25 -- $4.00 (172)
1986 Plan expiration........ (71) -- --
--------- -------- --------
Balances, May 31, 1999........ 215 921 $3.25 -- $17.00 $4,960
========= ======== ========
|
The following information concerning the Company's stock option and employee stock purchase plans is provided in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." The Company accounts for such plans in accordance with APB No. 25 and related Interpretations.
Year Ended May 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(amounts in thousands, except per share data)
Net income (loss) -- as reported.... $(2,330) $2,405 $3,315
Net income (loss) -- pro forma...... $(2,783) $2,240 $3,215
Net income (loss) per share -- as reported:
Basic............................. $(0.34) $0.38 $0.77
Diluted........................... $(0.34) $0.36 $0.74
Net income (loss) per share -- pro forma:
Basic............................. $(0.41) $0.35 $0.75
Diluted........................... $(0.41) $0.33 $0.71
|
The above pro forma effects on income (loss) may not be representative of the effects on net income (loss) for future years as option grants typically vest over several years and additional options are generally granted each year.
The fair value of each option grant has been estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants:
Year Ended May 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
Risk-free Interest Rates............. 4.40% 6.47% 6.47%
Expected Life........................ 5 years 5 years 5 years
Volatility........................... 0.70 0.94 --
Dividend Yield....................... -- -- --
|
The pro forma weighted average expected life was calculated based on the exercise behavior. The pro forma weighted average fair value of those options granted in 1999 and 1998 was $5.73 and $9.37, respectively.
The following table summarizes information with respect to stock options at May 31, 1999:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of at Contractual Exercise at Exercise
Exercise Prices May 31, 1999 Life (Years) Price May 31, 1999 Price
-------------------- ------------ ----------- ---------- ------------ ----------
$3.2500 53,000 0.20 $3.2500 53,000 $3.2500
$4.0000 364,184 1.52 $4.0000 329,817 $4.0000
$4.2500 29,000 3.75 $4.2500 15,535 $4.2500
$4.4000 70,000 1.46 $4.4000 63,958 $4.4000
$5.3750 100,000 4.81 $5.3750 4,166 $5.3750
$6.0000 48,500 2.80 $6.0000 26,319 $6.0000
$6.1250 86,000 4.03 $6.1250 19,693 $6.1250
$6.1875 13,750 3.90 $6.1875 3,720 $6.1875
$6.6250 22,750 4.66 $6.6250 1,891 $6.6250
$6.6880 38,250 3.55 $6.6880 13,417 $6.6880
$6.7375 20,000 4.03 $6.7375 4,583 $6.7375
$7.5000 27,000 3.05 $7.5000 12,932 $7.5000
$8.2500 5,000 3.05 $8.2500 2,395 $8.2500
$13.3130 20,000 3.44 $13.3130 7,500 $13.3130
$17.0000 24,000 3.38 $17.0000 9,492 $17.0000
------------ ------------
$3.2500 - 17.0000 921,434 2.50 $5.3828 568,418 $4.7043
============ ============
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9. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK BONUS PLAN:
The Company has a noncontributory, trusteed employee stock bonus plan for full-time employees who have completed three consecutive months of service and for part-time employees who have completed one year of service and have attained an age of 21. The Company can contribute either shares of the Company's stock or cash to the plan. The contribution is determined annually by the Company and cannot exceed 15% of the annual aggregate salaries of those employees eligible for participation in the plan. Individuals' account balances vest at a rate of 25% per year commencing upon completion of three years of service. Nonvested balances, which are forfeited, are allocated to the remaining employees in the plan. Contributions made to the plan during fiscal 1999, 1998 and 1997 were $60,000, $150,000 and $200,000, respectively.
401(K) PLAN:
The Company maintains a 401(k) profit-sharing plan for its full-time employees who have completed three consecutive months of service and for part- time employees who have completed one year of service and have attained an age of 21. Each participant in the plan may elect to contribute from 1% to 20% of their annual salary to the plan, subject to certain limitations. The Company, at its discretion, may make an annual contribution to the plan. The Company did not make any contributions to the plan during fiscal 1999, 1998 and 1997.
EMPLOYEE STOCK PURCHASE PLAN:
The Company's Board of Directors adopted the 1997 Employee Stock Purchase Plan in June 1997. A total of 300,000 shares of Common Stock have been reserved for issuance under the plan. The plan has consecutive, overlapping, twenty-four month offering periods. The offering periods generally begin on the first trading day on or after April 1 and October 1 each year, except that the first such offering period commences with the effectiveness of the Company's initial public offering and ends on the last trading day on or before March 31, 1999. Shares are purchased through employee payroll deductions at exercise prices equal to 85% of the lesser of the fair market value of the Company's Common Stock at either the first day of an offering period or the last day of such offering period. If a participant's rights to purchase stock under all employee stock purchase plans of the Company accrue at a rate which exceeds $25,000 worth of stock for a calendar year, such participant may not be granted an option to purchase stock under the 1997 Employee Stock Purchase Plan. To date, 68,713 shares have been issued under the plan.
10. INCOME TAXES:
Domestic and foreign components of pretax income (loss) are as follows (in thousands):
Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Domestic.......................... $(1,865) $6,526 $3,672
Foreign........................... (1,142) (1,787) (1,130)
------------ ------------ ------------
$(3,007) $4,739 $2,542
============ ============ ============
|
The provision (benefit) for income taxes consists of the following (in thousands):
Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Federal income taxes:
Current......................... $(294) $2,182 $ 150
Deferred........................ (263) (124) (910)
State income taxes:
Current......................... 33 266 15
Deferred........................ (193) 22 (145)
Foreign income taxes:
Current......................... 40 (12) 117
Deferred........................ -- -- --
------------ ------------ ------------
$(677) $2,334 $(773)
============ ============ ============
|
The components of the net deferred tax asset (liability) are as follows (in thousands):
May 31,
-------------------------
1999 1998
------------ ------------
Noncurrent assets:
Net operating losses..................... $2,285 $1,783
Credit carryforwards..................... 126 --
Depreciation and amortization............ (114) (103)
------------ ------------
2,297 1,680
Less valuation allowance................... (2,227) (1,680)
------------ ------------
70 --
------------ ------------
Current assets:
Inventory and other revenues............. 1,585 1,201
Accrued liabilities...................... 851 913
------------ ------------
2,436 2,114
Less valuation allowance................... (893) (957)
------------ ------------
1,543 1,157
------------ ------------
Net deferred tax asset..................... $1,613 $1,157
============ ============
|
The Company's effective tax rate differs from the U.S. federal statutory tax rate, as follows:
Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Maximum statutory rate.. (34.0)% 34.0% 34.0%
Net operating loss utilized....... -- -- (34.0)
Foreign taxes..................... 0.3 -- 4.6
State taxes, net of federal tax
effect.......................... (4.6) 6.9 0.6
Other............................. 2.8 (0.7) 5.9
Foreign earnings not currently
benefitted ..................... 13.0 7.2 --
Foreign Sales Corporation -- (4.7) --
Change in valuation allowances.... -- 6.6 (41.5)
------------ ------------ ------------
Effective tax rate................ (22.5)% 49.3% (30.4)%
============ ============ ============
|
Foreign net operating loss carryforwards of approximately $4.8 million are available to reduce future foreign taxable income and expire in 2003 if not utilized. A valuation allowance has been provided for the deferred tax assets of the Japanese subsidiary as management does not believe it is more likely than not the tax assets will be realized, due to the subsidiary's cumulative losses.
11. OTHER INCOME (EXPENSE), NET:
Other income (expense), net comprises the following (in thousands):
Year Ended May 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
Foreign exchange gain (loss)...... $339 $(385) $(393)
Other, net........................ 102 21 (172)
------------ ------------ ------------
$441 $(364) $(565)
============ ============ ============
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12. SEGMENT INFORMATION:
FOREIGN OPERATIONS:
The Company develops, manufactures and sells systems to semiconductor manufacturers and operates in one operating segment. The following presents information about the Company's operations in different geographic areas (in thousands):
United Adjust-
States Asia Europe ments Total
--------- --------- --------- --------- ---------
1997:
Net sales...................... $35,404 $8,718 $3,986 $(6,088) $42,020
Portion of U.S. net sales
from export sales............ 27,102 -- -- -- 27,102
Income (loss) from operations.. 3,972 (668) (32) 412 3,684
Identifiable assets............ 22,983 5,093 910 (4,597) 24,389
Long-lived assets.............. 933 661 97 -- 1,691
1998:
Net sales...................... $37,748 $3,703 $2,926 $(3,572) $40,805
Portion of U.S. net sales
from export sales............ 25,724 -- -- -- 25,724
Income (loss) from operations.. 5,511 (1,206) (53) (53) 4,199
Identifiable assets............ 50,396 2,173 1,500 (6,964) 47,105
Long-lived assets.............. 976 496 69 -- 1,541
1999:
Net sales...................... $15,233 $2,185 $3,059 $(2,331) $18,146
Portion of U.S. net sales
from export sales............ 9,531 -- -- -- 9,531
Income (loss) from operations.. (3,213) (1,484) 90 (25) (4,632)
Identifiable assets............ 45,582 1,995 1,732 (8,122) 41,187
Long-lived assets.............. 1,340 499 97 -- 1,936
|
The Company's foreign operations are primarily those of its Japanese and
German subsidiaries. Substantially all of the sales of the subsidiaries are
made to unaffiliated Japanese or European customers. Net sales and income
(loss) from operations from outside the United States include the operating
results of Aehr Test Systems Japan K.K. and Aehr Test Systems GmbH.
Adjustments consist of intercompany eliminations. Identifiable assets are all
assets identified with operations in each geographic area.
13. SUBSEQUENT EVENT:
On August 3, 1999 the Company entered into a lease agreement related to the relocation of its headquarters from Mountain View, California to a 51,289 square foot facility in Fremont, California after the current lease expires in December 1999. The operating lease is for an initial period of ten years and minimum payments due under the lease total approximately $7,436,000.
Quarterly Results (unaudited)
The following table (presented in thousands, except per share data) sets forth selected statements of operations data for each of the four quarters of the fiscal years ended May 31, 1999 and May 31, 1998. The unaudited quarterly information has been prepared on the same basis as the annual information presented elsewhere herein and, in the Company's opinion, includes all adjustments (consisting only of normal recurring entries) necessary for a fair presentation of the information for the quarters presented. The operating results for any quarter are not necessarily indicative of results for any future period.
Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
1997 1997 1998 1998
--------- --------- --------- ---------
Net sales......................... $11,665 $11,748 $11,567 $5,825
Gross profit...................... 4,604 4,582 4,660 2,600
Net income........................ $ 614 $ 908 $ 831 $ 52
Net income per share (basic)...... $ 0.13 $ 0.13 $ 0.12 $ 0.01
Net income per share (diluted).... $ 0.12 $ 0.12 $ 0.12 $ 0.01
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Three Months Ended
------------------------------------------
Aug. 31, Nov. 30, Feb. 28, May 31,
1998 1998 1999 1999
--------- --------- --------- ---------
Net sales......................... $5,430 $5,186 $ 4,414 $ 3,116
Gross profit...................... 2,144 1,531 1,294 976
Net loss.......................... $ (359) $ (492) $ (707) $ (772)
Net loss per share (basic)........ $(0.05) $(0.07) $ (0.10) $ (0.11)
Net loss per share (diluted)...... $(0.05) $(0.07) $ (0.10) $ (0.11)
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this item relating to directors is incorporated by reference to the information under the caption "Proposal 1 -- Election of Directors" in the Proxy Statement. The information required by this item relating to executive officers is incorporated by reference to the information under the caption "Management -- Executive Officers and Directors" at the end of Part I of this report on Form 10-K.
Item 11. Executive Compensation
The information required by this item is incorporated by reference to the section entitled "Compensation of Executive Officers" of the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference to the section entitled "Security Ownership of Certain Beneficial Owners, Directors and Management" of the Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference to the section entitled "Certain Relationships and Related Transactions" of the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this Report:
1. Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets at May 31, 1999 and 1998
Consolidated Statements of Operations for the years ended May 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended May 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended May 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedule
The following consolidated financial statement schedule is filed as part of this report and should be read in conjunction with the consolidated financial statements:
Schedule
II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements or notes thereto.
To the Board of Directors and Shareholders
Aehr Test Systems
Mountain View, California
Our report on the consolidated financial statements of Aehr Test Systems is included on page 27 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed on Item 14 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
PricewaterhouseCoopers LLP
San Jose, California
July 2, 1999
SCHEDULE II
AEHR TEST SYSTEMS AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Additions
Balance at Charged to Balance
beginning costs and at end
of year expenses Deductions of year
---------- ---------- ---------- ----------
Allowance for doubtful
accounts receivable:
May 31, 1999 $260 $22 $157 $125
========== ========== ========== ==========
May 31, 1998 $270 $131 $141 $260
========== ========== ========== ==========
May 31, 1997 $241 $29 $ -- $270
========== ========== ========== ==========
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(b) Reports on Form 8-K.
None
3. Exhibits
The following exhibits are filed as part of or incorporated by reference into this Report:
Exhibit
No. Description
------- ---------------------------------------------------------------
3.1+ Restated Articles of Incorporation of Registrant.
3.2+ Bylaws of Registrant.
4.1++ Form of Common Stock certificate.
10.1+ Amended 1986 Incentive Stock Plan and form of agreement thereunder.
10.2++ 1996 Stock Option Plan (as amended and restated) and forms of
Incentive Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder.
10.3++ 1997 Employee Stock Purchase Plan and form of subscription agreement
thereunder.
10.4++ Form of Indemnification Agreement entered into between Registrant and
its directors and executive officers.
10.5+ Capital Stock Purchase Agreement dated September 11, 1979 between
Registrant and certain holders of Common Stock.
10.6+ Capital Stock Investment Agreement dated April 12, 1984 between
Registrant and certain holders of Common Stock.
10.7+ Amendment dated September 17, 1985 to Capital Stock Purchase
Agreement dated April 12, 1984 between Registrant and certain holders
of Common Stock.
10.8+ Amendment dated February 26, 1990 to Capital Stock Purchase Agreement
dated April 12, 1984 between Registrant and certain holders of Common
Stock.
10.9+ Stock Purchase Agreement dated September 18, 1985 between Registrant
and certain holders of Common Stock.
10.10+ Common Stock Purchase Agreement dated February 26, 1990 between
Registrant and certain holders of Common Stock.
10.11+ Lease dated May 14, 1991 for facilities located at 1667 Plymouth
Street, Mountain View, California.
10.12 Lease dated August 3, 1999 for facilities located at Building C,
400 Kato Terrace, Fremont, California.
11.1++ Computations of Net Income (Loss) Per Share.
21.1+ Subsidiaries of the Company.
23.1 Consent of Independent Accountants.
24.1 Power of Attorney (see page 48).
27.1 Financial Data Schedule.
------------------------
|
+ Incorporated by reference to the same numbered exhibit previously filed
with the Company's Registration Statement on Form S-1 filed June 11, 1997
(File No. 333-28987)
++ Incorporated by reference to the same-numbered exhibit previously filed with Amendment No.1 to the Company's Registration Statement on Form S-1 filed July 17, 1997 (File No. 333-28987).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 26, 1999
AEHR TEST SYSTEMS
By: /s/ RHEA J. POSEDEL
----------------------------------------
Rhea J. Posedel
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD OF DIRECTORS
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Rhea J. Posedel and Gary L. Larson, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
-------------------------- ----------------------------------- -------------
/s/ RHEA J. POSEDEL President, Chief Executive August 26, 1999
--------------------------- Officer and Chairman of
Rhea J. Posedel the Board of Directors
(Principal Executive Officer)
/s/ GARY L. LARSON Vice President of Finance August 26, 1999
--------------------------- and Chief Financial Officer
Gary L. Larson (Principal Financial and
Accounting Officer)
/s/ WILLIAM W. R. ELDER Director August 26, 1999
---------------------------
William W. R. Elder
/s/ MARIO M. ROSATI Director
--------------------------- August 26, 1999
Mario M. Rosati
/s/ DAVID TORRESDAL Director
---------------------------
David Torresdal August 26, 1999
/s/ MUKESH PATEL Director
---------------------------
Mukesh Patel August 26, 1999
|
MULTI-TENANT OFFICE TRIPLE NET LEASE
SCOTT CREEK BUSINESS PARK
SCOTT CREEK THREE TRUST,
a Maryland real estate investment trust,
as Landlord,
and
AEHR TEST SYSTEMS,
a California corporation,
as Tenant.
SCOTT CREEK BUSINESS PARK
INDEX
ARTICLE SUBJECT MATTER PAGE
ARTICLE 1 PREMISES, BUILDING, PROJECT, AND COMMON AREAS 1
ARTICLE 2 LEASE TERM 4
ARTICLE 3 BASE RENT 5
ARTICLE 4 ADDITIONAL RENT 5
ARTICLE 5 USE OF PREMISES 12
ARTICLE 6 SERVICES AND UTILITIES 13
ARTICLE 7 REPAIRS 13
ARTICLE 8 ADDITIONS AND ALTERATIONS 14
ARTICLE 9 COVENANT AGAINST LIENS 16
ARTICLE 10 INSURANCE 17
ARTICLE 11 DAMAGE AND DESTRUCTION 20
ARTICLE 12 NONWAIVER 22
ARTICLE 13 CONDEMNATION 22
ARTICLE 14 ASSIGNMENT AND SUBLETTING 23
ARTICLE 15 SURRENDER OF PREMISES; OWNERSHIP AND
REMOVAL OF TRADE FIXTURES 27
ARTICLE 16 HOLDING OVER 28
ARTICLE 17 ESTOPPEL CERTIFICATES 28
ARTICLE 18 SUBORDINATION 29
ARTICLE 19 DEFAULTS; REMEDIES 30
ARTICLE 20 COVENANT OF QUIET ENJOYMENT 32
ARTICLE 21 SECURITY DEPOSIT 32
ARTICLE 22 INTENTIONALLY DELETED 34
ARTICLE 23 SIGNS 34
ARTICLE 24 COMPLIANCE WITH LAW 34
ARTICLE 25 LATE CHARGES 35
ARTICLE 26 LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT 35
ARTICLE 27 ENTRY BY LANDLORD 36
ARTICLE 28 TENANT PARKING 37
ARTICLE 29 MISCELLANEOUS PROVISIONS 37
ARTICLE 30 OPTION TO EXTEND 45
EXHIBITS
A-1 OUTLINE OF PREMISES
A-2 OUTLINE OF EXPANSION SPACE
B TENANT WORK LETTER
C FORM OF NOTICE OF LEASE TERM DATES
D RULES AND REGULATIONS
E FORM OF TENANT'S ESTOPPEL CERTIFICATE
F DIRECT EXPENSE ALLOCATION TABLE
|
SCOTT CREEK BUSINESS PARK
|
OFFICE LEASE
This Multi-Tenant Office Triple Net Lease (the "Lease"), dated as of the date set forth in Section 1 of the Summary of Basic Lease Information (the "Summary"), below, is made by and between SCOTT CREEK THREE TRUST, a Maryland real estate investment trust ("Landlord"), and AEHR TEST SYSTEMS, a California corporation ("Tenant").
SUMMARY OF BASIC LEASE INFORMATION
TERMS OF LEASE DESCRIPTION
1. Date: July __, 1999
2. Premises
(Article 1).
2.1 Building: Building C
400 Kato Terrace
Fremont, California
2.2 Premises: Approximately 51,289 rentable square
feet of space located in the Building
and commonly known as Suite __, as
further set forth in Exhibit A to the
Office Lease.
3. Lease Term
(Article 2).
3.1 Length of Term: One hundred twenty (120) months.
3.2 Lease Commencement
Date: The earlier to occur of (i) the date
upon which Tenant first commences to
conduct business in the Premises and
(ii) January 1, 2000.
3.3 Lease Expiration Date: If the Lease Commencement Date shall
be the first day of a calendar month,
then the day immediately preceding
the one hundred twenty (120) month
anniversary of the Lease Commencement
Date; or, if the Lease Commencement
Date shall be other than the first
day of a calendar month, then the
last day of the month in which the
one hundred twenty (120) month
anniversary of the Lease Commencement
Date occurs.
|
3.3 Lease Expiration Date: If the Lease Commencement Date shall
be the first day of a calendar month,
then the day immediately preceding
the one hundred twenty (120) month
anniversary of the Lease Commencement
Date; or, if the Lease Commencement
Date shall be other than the first
day of a calendar month, then the
last day of the month in which the
one hundred twenty (120) month
anniversary of the Lease Commencement
Date occurs.
|
4. Base Rent (Article 3):
Monthly
Monthly Rental Rate
Months in Annual Installment per Rentable
Lease Term Base Rent of Base Rent Square Foot
---------- --------- ------------ -----------
1-12 $633,932.04 $52,827.67 $1.030
13-24 $656,088.88 $54,674.07 $1.066
25-36 $678,861.20 $56,571.77 $1.103
37-48 $702,864.46 $58,572.04 $1.142
49-60 $727,483.18 $60,623.60 $1.182
61-72 $752,717.36 $62,726.45 $1.223
73-84 $779,182.48 $64,931.87 $1.266
85-96 $806,263.08 $67,188.59 $1.310
97-108 $834,574.61 $69,547.88 $1.356
109-120 $864,117.07 $72,009.76 $1.404
5. Intentionally Deleted.
6. Tenant's Share
(Article 4): Approximately 63.36%, calculated on a
dripline-to-dripline basis.
7. Permitted Use
(Article 5): General office, research and
development, light manufacturing and
warehouse use consistent with a
|
first-class office "flex" building.
8. Letter of Credit
(Article 21): Tenant shall be required to post a
letter of credit as security for this
Lease pursuant to the terms of
Article 21.
9. Parking Space Ratio
(Article 28): Four (4) unreserved parking spaces
for every 1,000 rentable square feet
of the Premises.
10. Address of Tenant
(Section 29.18): Aehr Test Systems
1667 Plymouth St.
Mountain View, CA 94043
Attn: Richard F. Sette
Telephone: (650) 691-9400
Facsimile: (650) __________
(Prior to Lease Commencement Date)
and
Aehr Test Systems
400 Kato Terrace
Fremont, California 94539
Attention: Richard F. Sette
Telephone: ()
Fax: ( ) __________
(After Lease Commencement Date)
11. Address of Landlord
(Section 29.18): See Section 29.18 of the Lease.
12. Broker(s)
(Section 29.24): CB Richard Ellis, Inc. for Landlord
Cushman & Wakefield for Tenant
13. Guarantor (Section 29.35): None.
14. Tenant Improvement Allowance
(Exhibit B): $1,282,225.00 (i.e. $25.00 per
rentable square foot of the Premises)
|
ARTICLE 1
PREMISES, BUILDING, PROJECT, AND COMMON AREAS
1.1 Premises, Building, Project and Common Areas.
1.1.1 The Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the premises set forth in Section 2.2 of the Summary (the "Premises"). The outline of the Premises is set forth in Exhibit A-1 attached hereto and each floor or floors of the Premises has the number of rentable square feet as set forth in Section 2.2 of the Summary. The parties hereto agree that the lease of the Premises is upon and subject to the terms, covenants and conditions herein set forth, and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of such terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. The parties hereto hereby acknowledge that the purpose of Exhibits A-1 and A-2 is to show the approximate location of the Premises and the Expansion Space, if any, leased by Tenant in the "Building," as that term is defined in Section 1.1.2, below, only, and such Exhibit is not meant to constitute an agreement, representation or warranty as to the construction of the Premises, the precise area thereof or the specific location of the "Common Areas," as that term is defined in Section 1.1.3, below, or the elements thereof or of the accessways to the Premises or the "Project," as that term is defined in Section 1.1.2, below. Except as specifically set forth in this Lease and in the Tenant Work Letter attached hereto as Exhibit B (the "Tenant Work Letter"), Landlord shall not be obligated to provide or pay for any improvement work or services related to the improvement of the Premises. Tenant also acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty regarding the condition of the Premises, the Building or the Project or with respect to the suitability of any of the foregoing for the conduct of Tenant's business, except as specifically set forth in this Lease and the Tenant Work Letter. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were at such time in good and sanitary order, condition and repair.
1.1.2 The Building and The Project. The Premises are a part of the building set forth in Section 2.1 of the Summary (the "Building"). The Building is part of an office "flex" project known as "Scott Creek Business Park" The term "Project," as used in this Lease, shall mean (i) the Building and the Common Areas, (ii) the land (which is improved with landscaping, and other improvements) upon which the Building and the Common Areas are located, and (iii) at Landlord's discretion, any additional real property, areas, land, buildings or other improvements added thereto inside or outside of the Project.
1.1.3 Common Areas. Tenant shall have the non-exclusive right to use in common with other tenants in the Project, and subject to the rules and regulations referred to in Article 5 of this Lease, those portions of the Project which are provided, from time to time, for use in common by Landlord, Tenant and any other tenants of the Project (such areas, together with such other portions of the Project designated by Landlord, in its discretion, including certain areas designated for the exclusive use of certain tenants, or to be shared by Landlord and certain tenants, are collectively referred to herein as the "Common Areas"). The Common Areas shall consist of the "Project Common Areas" and the "Building Common Areas." The term "Project Common Areas," as used in this Lease, shall mean the portion of the Project designated as such by Landlord. The term "Building Common Areas," as used in this Lease, shall mean the portions of the Common Areas located within the Building designated as such by Landlord. The manner in which the Common Areas are maintained and operated shall be at the sole discretion of Landlord, provided that Landlord shall maintain and operate the same in a manner consistent with that of other first-class, office "flex" buildings in the vicinity of the Project, which buildings have a rental area of greater than 50,000 rentable square feet, and are comparable in quality of appearance, services and amenities to the Building (the "Comparable Buildings"), and the use thereof shall be subject to such rules, regulations and restrictions as Landlord may make from time to time. Landlord reserves the right to close temporarily, make alterations or additions to, or change the location of elements of the Project and the Common Areas.
1.2 Expansion Space. From the Effective Date until September 1, 2000 (the "Expansion Window"), Tenant shall, subject to availability, have the right to lease the remaining portion of the Building consisting of approximately 29,659 rentable square feet of space as more particularly shown on Exhibit A-2 attached hereto (the "Expansion Space"), at the times and in the manner set forth below in this Section 1.2 (the "Expansion Option").
1.2.1 Method of Exercise. During the Expansion Window, Tenant
may inquire in writing (the "Request Notice") of Landlord from time to time
as to the availability of the Expansion Space for lease. Within ten (10)
business days following Landlord's receipt of the Request Notice, Landlord
shall inform Tenant in writing ("Landlord's Availability Notice") (i)
whether the Expansion Space is or is not available for lease, and (ii) if
the Expansion Space is available for lease by Tenant, the anticipated
delivery date of the Expansion Space to Tenant for the commencement of
construction of tenant improvements therein. In the event Landlord notifies
Tenant that the Expansion Space is available for lease, Tenant shall
exercise its Expansion Option by delivering written notice of such exercise
to Landlord within ten (10) days of receipt of Landlord's Availability
Notice. Tenant's failure to exercise its Expansion Option within such ten
(10) day period shall be deemed as Tenant's decision not to lease the
Expansion Space and Tenant shall have no further rights under this Section
1.2 for the remainder of the Lease Term.
1.2.2 Expansion Rent. From and after the Expansion Commencement
Date (as that term is defined in Section 1.2.4 below), Tenant shall pay base
rent for the Expansion Space (the "Expansion Rent") in accordance with
Section 3 of this Lease pursuant to the following schedule:
Monthly Monthly Rental Rate
Months in Annual Installment per Rentable
Lease Term Base Rent of Base Rent Square Foot
---------- --------- ------------ -----------
1-9 N/A $20,761.30 $0.700
10-12 N/A $30,904.68 $1.042
13-24 $383,668.82 $31,972.40 $1.078
25-36 $397,193.32 $33,099.44 $1.116
37-48 $411,073.74 $34,256.15 $1.155
49-60 $427,089.60 $35,590.80 $1.200
61-72 $442,037.73 $36,836.48 $1.242
73-84 $457,341.78 $38,111.82 $1.285
85-96 $476,560.81 $39,713.40 $1.339
97-108 $493,288.48 $41,107.37 $1.386
109-120 $510,727.98 $42,560.67 $1.435
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1.2.3 Construction in Expansion Space. Tenant shall take the
Expansion Space in its "as is" condition as of the date of delivery of such
space, and the construction of improvements in the Expansion Space shall be
Tenant's sole responsibility, with any such construction to comply with the
terms the Tenant Work Letter, attached hereto as Exhibit B, except that (i)
the term "Premises" shall mean the Expansion Space, and (ii) Tenant shall
not be entitled to any "Additional Allowance" for the Expansion Space;
provided, however, that upon Tenant's request, Landlord shall provide Tenant
with (y) a tenant improvement allowance for the Expansion Space (the
"Expansion Space Improvement Allowance") in an amount of up to, but not
exceeding twenty-five and no/100 dollars ($25.00) for each rentable square
foot of the Expansion Space. In addition, Landlord shall provide Tenant
with an additional tenant improvement allowance for the Expansion Space
("Expansion Space Additional Allowance") in an amount of up to, but not
exceeding twelve and no/100 dollars ($12.00) for each rentable square foot
of the Expansion Space, which Expansion Space Additional Allowance shall be
amortized and paid by Tenant in accordance with the terms and conditions of
Section 2.1.2 of the Tenant Work Letter attached hereto (the Expansion Space
Improvement Allowance and the Expansion Space Additional Allowance shall
sometimes herein be collectively referred to as the "Expansion Space
Allowances"). The Expansion Space Allowances shall be disbursed by Landlord
to Tenant pursuant to the terms and conditions of the Tenant Work Letter.
1.2.4 Amendment to Lease. If Tenant timely exercises Tenant's right to lease the Expansion Space as set forth herein, Landlord and Tenant shall within fifteen (15) days thereafter execute an amendment to this Lease memorializing Tenant's lease for such Expansion
Space upon the terms and conditions set forth in this Section 1.2. Tenant shall commence payment of Rent for the Expansion Space, and the term of the Expansion Space shall commence upon the date which the Expansion Space is delivered to Tenant by Landlord (the "Expansion Commencement Date") and terminate coterminous with the termination of the Lease Term, as such may be extended pursuant to Section 2.2 of this Lease. Upon the Expansion Commencement Date, Tenant's Share shall be increased to take into account the addition of the Expansion Space to the Premises and the "Premises" shall mean the Premises and the Expansion Space, unless otherwise specified herein. Notwithstanding the foregoing, in no event shall the Expansion Space Commencement Date occur before the Lease Commencement Date.
1.2.5 Termination of Expansion Rights. Notwithstanding anything to the contrary contained in this Section 1.2, the rights to lease the Expansion Space contained in this Section 1.2 shall be personal to the original Tenant named in the Lease Summary (the "Original Tenant") and any assignee (including any Permitted Affiliate) to which Tenant's entire interest in this Lease has been assigned pursuant to Article 14 below, and may only be exercised by the Original Tenant or such assignee, as the case may be (but not by any sublessee or other transferee of Tenant's interest in this Lease or the Premises) if the Original Tenant or such assignee, as the case may be, occupies at least ninety percent (90%) of the Premises as of the date Tenant purports to exercise the right to lease the Expansion Space. In addition, Tenant shall not have the right to lease the Expansion Space, as provided in this Section 1.2, if, as of the date of the attempted exercise of the expansion right by Tenant, or as of the scheduled date of delivery of such Expansion Space to Tenant, Tenant is in default under this Lease beyond any applicable notice and cure periods.
1.3 Condition of Building Systems. As of the Lease Commencement Date the electrical, mechanical, plumbing, and elevator (collectively the "Building Systems") servicing the Premises shall be in good working order.
ARTICLE 2
LEASE TERM
The terms and provisions of this Lease shall be effective as of the date
of this Lease. The term of this Lease (the "Lease Term") shall be as set
forth in Section 3.1 of the Summary, shall commence on the date set forth in
Section 3.2 of the Summary (the "Lease Commencement Date"), and shall
terminate on the date set forth in Section 3.3 of the Summary (the "Lease
Expiration Date") unless this Lease is sooner terminated as hereinafter
provided. For purposes of this Lease, the term "Lease Year" shall mean each
consecutive twelve (12) month period during the Lease Term. At any time
during the Lease Term, Landlord may deliver to Tenant a notice in the form
as set forth in Exhibit C, attached hereto, as a confirmation only of the
information set forth therein, which Tenant shall execute and return to
Landlord within five (5) days of receipt thereof.
ARTICLE 3
BASE RENT
Tenant shall pay, without prior notice or demand, to Landlord or
Landlord's agent in c/o CB Richard Ellis, 5677B Gibraltar Drive, Pleasanton,
California 94588, or, at Landlord's option, at such other place as Landlord
may from time to time designate in writing, by a check for currency which,
at the time of payment, is legal tender for private or public debts in the
United States of America, base rent ("Base Rent") as set forth in
Section 4 of the Summary, payable in equal monthly installments as set forth
in Section 4 of the Summary in advance on or before the first day of each
and every calendar month during the Lease Term, without any setoff or
deduction whatsoever. The Base Rent for the first full month of the Lease
Term which occurs after the expiration of any free rent period shall be paid
at the time of Tenant's execution of this Lease. If any Rent payment date
(including the Lease Commencement Date) falls on a day of the month other
than the first day of such month or if any payment of Rent is for a period
which is shorter than one month, the Rent for any fractional month shall
accrue on a daily basis for the period from the date such payment is due to
the end of such calendar month or to the end of the Lease Term at a rate per
day which is equal to 1/365 of the applicable annual Rent. All other
payments or adjustments required to be made under the terms of this Lease
that require proration on a time basis shall be prorated on the same basis.
ARTICLE 4
ADDITIONAL RENT
4.1 General Terms. In addition to paying the Base Rent specified in Article 3 of this Lease, Tenant shall pay "Tenant's Share" of the annual "Building Direct Expenses," as those terms are defined in Sections 4.2.8 and 4.2.1 of this Lease. Such payments by Tenant, together with any and all other amounts payable by Tenant to Landlord pursuant to the terms of this Lease, are hereinafter collectively referred to as the "Additional Rent", and the Base Rent and the Additional Rent are herein collectively referred to as "Rent" All amounts due under this Article 4 as Additional Rent shall be payable for the same periods and in the same manner as the Base Rent. Without limitation on other obligations of Tenant which survive the expiration of the Lease Term, the obligations of Tenant to pay the Additional Rent provided for in this Article 4 shall survive the expiration of the Lease Term.
4.2 Definitions of Key Terms Relating to Additional Rent. As used in this Article 4, the following terms shall have the meanings hereinafter set forth:
4.2.1 "Building Direct Expenses" shall mean "Building Operating Expenses" and "Building Tax Expenses", as those terms are defined in Sections 4.2.2 and 4.2.3, below, respectively.
4.2.2 "Building Operating Expenses" shall mean the portion of "Operating Expenses," as that term is defined in Section 4.2.6 below, allocated to the tenants of the Building pursuant to the terms of Section 4.3.1 below.
4.2.3 "Building Tax Expenses" shall mean that portion of "Tax Expenses", as that term is defined in Section 4.2.7 below, allocated to the tenants of the Building pursuant to the terms of Section 4.3.1 below.
4.2.4 "Direct Expenses" shall mean "Operating Expenses" and "Tax
Expenses."
4.2.5 "Expense Year" shall mean each calendar year in which any
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portion of the Lease Term falls, through and including the calendar year in which the Lease Term expires, provided that Landlord, upon notice to Tenant, may change the Expense Year from time to time to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant's Share of Building Direct Expenses shall be equitably adjusted for any Expense Year involved in any such change.
4.2.6 "Operating Expenses" shall mean all expenses, costs and
amounts of every kind and nature which Landlord pays or accrues during any
Expense Year because of or in connection with the ownership, management,
maintenance, security, repair, replacement, restoration or operation of the
Project, or any portion thereof. Without limiting the generality of the
foregoing, Operating Expenses shall specifically include any and all of the
following: (i) the cost of supplying all utilities, the cost of operating,
repairing, maintaining, and renovating the utility, telephone, mechanical,
sanitary, storm drainage, and the cost of maintenance and service
contracts in connection therewith (to the extent not separately metered and
paid directly by Tenant or another tenant of the Building pursuant to
Article 6 below); (ii) the cost of licenses, certificates, permits and
inspections and the cost of contesting any governmental enactments which may
affect Operating Expenses, and the costs incurred in connection with a
governmentally mandated transportation system management program or similar
program; (iii) the cost of all insurance carried by Landlord in connection
with the Project as reasonably determined by Landlord; (iv) the cost of
landscaping, relamping, and all supplies, tools, equipment and materials
used in the operation, repair and maintenance of the Project, or any portion
thereof; (v) the cost of parking area repair, restoration, and maintenance;
(vi) fees and other costs, including reasonable management fees, consulting
fees, legal fees and accounting fees, of all contractors and consultants in
connection with the management, operation, maintenance and repair of the
Project; (vii) payments under any equipment rental agreements and the fair
rental value of any management office space; (viii) subject to item (f),
below, wages, salaries and other compensation and benefits, including taxes
levied thereon, of all persons engaged in the operation, maintenance and
security of the Project; (ix) costs under any instrument pertaining to the
sharing of costs by the Project; (x) operation, repair, maintenance and
replacement of all systems and equipment and components thereof of the
Project; (xi) the cost of, alarm, security and other services, ceiling tiles
and fixtures in the Common Areas, maintenance and replacement of curbs and
walkways, repair to roofs and re-roofing; (xii) amortization (including
interest on the unamortized cost) over the useful life as Landlord
shall reasonably determine, of the cost of acquiring or the rental expense
of personal property used in the maintenance, operation and repair of the
Project, or any portion thereof; (xiii) the cost of capital improvements or
other costs incurred in connection with the Project (A) which are intended
to effect economies in the operation or maintenance of the Project, or any
portion thereof, (B) that are required to comply with present or anticipated
conservation programs, (C) which are replacements or modifications of
nonstructural items located in the Common Areas required to keep the Common
Areas in good order or condition, or (D) that are required under any
governmental law or regulation; provided, however, that any capital
expenditure shall be amortized (including interest on the amortized cost)
over its useful life as Landlord shall reasonably determine; and (xiv)
costs, fees, charges or assessments imposed by, or resulting from any
mandate imposed on Landlord by, any federal, state or local government for
fire and police protection, trash removal, community services, or other
services which do not constitute "Tax Expenses" as that term is defined in
Section 4.2.7, below and (xv) payments under any easement, license,
operating agreement, declaration, restrictive covenant, or instrument
pertaining to the sharing of costs by the Building. Notwithstanding the
foregoing, for purposes of this Lease, Operating Expenses shall not,
however, include (a) repairs to the extent covered by insurance proceeds, or
paid by Tenant or other third parties; (b) alterations solely attributable
to tenants of the Project other than Tenant; or (c) any utilities separately
metered or directly paid by any tenant of the Project; (c) fees payable by
Landlord for management of the Project in excess of the management fee
charged be professional management service companies in the vicinity of the
Project; (d) the cost of any service sold to any tenant (including Tenant)
or other occupant of the Building for which Landlord is entitled to
reimbursed as an additional charge or rental over and above the basic rent
and operating expenses payable under the lease with such tenant; (e) costs
of a capital nature, including but not limited to capital improvements and
alterations, capital repairs, capital equipment, and capital tools as
determined in accordance with GAAP, except as otherwise permitted by Section
4.2.6(xiii) above; (f) any depreciation on any building in the Project; (g)
expenses in connection with services or other benefits of a type that are
not provided to Tenant but which are provided another tenant or occupant of
the Building or Project; (h) overhead profit increments paid to Landlord's
subsidiaries or affiliates for management or other services on or to the
Project or for supplies or other materials to the extent that the cost of
the services, supplies, or materials exceeds the cost that would have been
paid had the services, supplies, or materials been provided by unaffiliated
parties on a competitive basis; (i) all interest, loan fees, and other
carrying costs related to any mortgage or deed of trust or related to any
capital item, and all rental and other payments due under any ground or
underlying lease; (j) any compensation paid to clerks, attendants, or other
persons in commercial concessions operated by Landlord; (k) advertising and
promotional expenditures; (l) except for any deductibles payable under
Landlord's insurance, costs of repairs and other work occasioned by fire,
windstorm, or other casualty of an insurable nature; (m) any costs, fines,
or penalties incurred due to violations by Landlord of any governmental rule
or authority, this Lease or any other lease in the Building or Project, or
due to Landlord's gross negligence or willful misconduct; (n) costs for
sculpture, paintings, or other objects of art (nor insurance thereon or
extraordinary security in connection therewith); and (o) costs incurred to
remove, remedy, contain, or treat hazardous materials, which (i) were in
existence in the Building prior to the Lease Commencement Date, or (ii) are
brought into the Building prior to or after the Lease Commencement Date by Landlord or Landlord's employees, agents, contractors or other tenants and which are of such a nature, at the time of such introduction, that a federal, state or municipal governmental authority, if it had then had knowledge of such hazardous materials would have then required the removal of such hazardous materials or other remedial or containment action with respect thereto.
If Landlord is not furnishing any particular work or service (the cost of which, if performed by Landlord, would be included in Operating Expenses) to a tenant who has undertaken to perform such work or service in lieu of the performance thereof by Landlord, Operating Expenses shall be deemed to be increased by an amount equal to the additional Operating Expenses which would reasonably have been incurred during such period by Landlord if it had at its own expense furnished such work or service to such tenant. If the Project is not at least ninety-five percent (95%) occupied during all or a portion of any Expense Year, Landlord shall make an appropriate adjustment to the components of Operating Expenses for such year to determine the amount of Operating Expenses that would have been incurred had the Project been ninety-five percent (95%) occupied; and the amount so determined shall be deemed to have been the amount of Operating Expenses for such year. A summary of the allocations of some of the Direct Expense payments between Landlord and Tenant is attached hereto as Exhibit E.
Notwithstanding anything to the contrary set forth in this Section 4.2, the amount of Direct Expenses payable by Tenant for the first (1st) Expense Year following the Lease Commencement Date, shall not exceed One Hundred Twenty Nine Thousand Two Hundred Forty-Eight and 28/100 Dollars ($129,248.28).
4.2.7 Taxes.
4.2.7.1 "Tax Expenses" shall mean all federal, state, county, or local governmental or municipal taxes, fees, charges or other impositions of every kind and nature, whether general, special, ordinary or extraordinary, (including, without limitation, real estate taxes, general and special assessments, transit taxes, leasehold taxes or taxes based upon the receipt of rent, including gross receipts or sales taxes applicable to the receipt of rent, unless required to be paid by Tenant, personal property taxes imposed upon the fixtures, machinery, equipment, apparatus, systems and equipment, appurtenances, furniture and other personal property used in connection with the Project, or any portion thereof), which shall be paid or accrued during any Expense Year (without regard to any different fiscal year used by such governmental or municipal authority) because of or in connection with the ownership, leasing and operation of the Project, or any portion thereof.
4.2.7.2 Tax Expenses shall include, without limitation:
(i) Any tax on the rent, right to rent or other income from the Project, or
any portion thereof, or as against the business of leasing the Project, or
any portion thereof; (ii) Any assessment, tax, fee, levy or charge in
addition to, or in substitution, partially or totally, of any assessment,
tax, fee, levy or charge previously included within the definition of real
property tax, it being acknowledged by Tenant and Landlord that Proposition
13 was adopted by the voters of the State of California in
the June 1978 election ("Proposition 13") and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such services as fire protection, street, sidewalk and road maintenance, refuse removal and for other governmental services formerly provided without charge to property owners or occupants, and, in further recognition of the decrease in the level and quality of governmental services and amenities as a result of Proposition 13, Tax Expenses shall also include any governmental or private assessments or the Project's contribution towards a governmental or private cost-sharing agreement for the purpose of augmenting or improving the quality of services and amenities normally provided by governmental agencies; (iii) Any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the Rent payable hereunder, including, without limitation, any business or gross income tax or excise tax with respect to the receipt of such rent, or upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy by Tenant of the Premises, or any portion thereof; (iv) Any assessment, tax, fee, levy or charge, upon this transaction or any document to which Tenant is a party, creating or transferring an interest or an estate in the Premises; and (v) All of the real estate taxes and assessments imposed upon or with respect to the Building and all of the real estate taxes and assessments imposed on the land and improvements comprising the Project.
4.2.7.3 Any costs and expenses (including, without limitation, reasonable attorneys' and consultants' fees) incurred in attempting to protest, reduce or minimize Tax Expenses shall be included in Tax Expenses in the Expense Year such expenses are incurred. If Tax Expenses for any period during the Lease Term or any extension thereof are increased after payment thereof for any reason, including, without limitation, error or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord upon demand Tenant's Share of any such increased Tax Expenses included by Landlord as Building Tax Expenses pursuant to the terms of this Lease or Landlord shall apply a credit to Tenant's next payment of such Tenant's Share, as the case may be. Notwithstanding anything to the contrary contained in this Section 4.2.7, there shall be excluded from Tax Expenses (i) all profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and other taxes to the extent applicable to Landlord's general or net income (as opposed to rents, receipts or income attributable to operations at the Project), (ii) any items included as Operating Expenses, and (iii) any items paid by Tenant under Section 4.5 of this Lease.
4.2.8 "Tenant's Share" shall mean the percentage set forth in
Section 6 of the Summary. Tenant's Share was calculated by dividing the
number of rentable square feet of the Premises, as set forth in Section 2.2
of the Summary, by the total number of rentable square feet in the Building.
The rentable square feet in the Premises and Building is measured on a
dripline-to-dripline basis, provided that the rentable square footage of the
Building shall include all of, and the rentable square footage of the
Premises therefore shall include a portion of, the square footage of the
common area and occupied space of the portion of the Building or Project,
dedicated to the service of the Building. In the event either the rentable
square feet of the Premises and/or the total rentable square feet of the
Building is remeasured, Tenant's Share shall
be appropriately adjusted, and, as to the Expense Year in which such change occurs, Tenant's Share for such Expense Year shall be determined on the basis of the number of days during such Expense Year that each such Tenant's Share was in effect.
4.3 Allocation of Direct Expenses.
4.3.1 Method of Allocation. Landlord and Tenant acknowledge that the Building is a part of a multi-building project and that the costs and expenses incurred in connection with the Project (the "Direct Expenses") should be shared between the tenants of the Building and the tenants of the other buildings in the Project; provided, however, Landlord may, at its election, require that Tenant pay any increase in the assessed value of the Project based upon the value of the Tenant Improvements (as defined in the Work Letter), if any, relative to the value of the other improvements on or to the other buildings in the Project, as reasonably determined by Landlord. Accordingly, as set forth in Section 4.2 above, Direct Expenses (which consists of Operating Expenses and Tax Expenses) are determined annually for the Project as a whole, and a portion of the Direct Expenses, which portion shall be determined by Landlord on an equitable basis, shall be allocated to the tenants of the Building (as opposed to the tenants of any other buildings in the Project) and such portion shall be the Building Direct Expenses for purposes of this Lease. Such portion of Direct Expenses allocated to the tenants of the Building shall include all Direct Expenses attributable solely to the Building and an equitable portion of the Direct Expenses attributable to the Project as a whole. Notwithstanding the foregoing, all costs Landlord incurs that are solely attributable to the Premises shall be borne by Tenant, such that Tenant shall reimburse Landlord for one hundred percent (100%) of same as Additional Rent.
4.3.2 Cost Pools. Landlord shall have the right, from time to time, to equitably allocate some or all of the Direct Expenses for the Project among different portions or occupants of the Project (the "Cost Pools"), in Landlord's reasonable discretion. Such Cost Pools may include, but shall not be limited to, the office space tenants of a building of the Project or of the Project, and the retail space tenants of a building of the Project or of the Project. The Direct Expenses within each such Cost Pool shall be allocated and charged to the tenants within such Cost Pool in an equitable manner.
4.4 Calculation and Payment of Additional Rent. Tenant shall pay to Landlord, in the manner set forth in Section 4.4.1, below, and as Additional Rent, an amount equal to Tenant's Share of Building Direct Expenses for each Expense Year (the "Tenant's Expenses").
4.4.1 Statement of Actual Building Direct Expenses and Payment by Tenant. Landlord shall give to Tenant following the end of each Expense Year, a statement (the "Statement") which shall state the Building Direct Expenses incurred or accrued for such preceding Expense Year, and which shall indicate the amount of Tenant's Expenses. Upon receipt of the Statement for each Expense Year commencing or ending during the Lease Term, Tenant shall pay, with its next installment of Base Rent due, the full amount of Tenant's Expenses for such Expense Year, less the amounts, if any, paid during such Expense Year as
"Estimated Expenses," as that term is defined in Section 4.4.2, below, and if Tenant paid more as Estimated Expenses than the actual Tenant's Expenses as set forth on the Statement, Tenant shall receive a credit in the amount of Tenant's overpayment against Additional Rent next due under this Lease. The failure of Landlord to timely furnish the Statement for any Expense Year shall not prejudice Landlord or Tenant from enforcing its rights under this Article 4. Even though the Lease Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant's Share of Building Direct Expenses for the Expense Year in which this Lease terminates, if any Tenant Expenses are present, Tenant shall immediately pay to Landlord such amount, and if Tenant paid more as Estimated Expenses than the actual Tenant Expenses shown on the Statement for such Expense Year, Landlord shall, within thirty (30) days, deliver a check payable to Tenant in the amount of the overpayment. The provisions of this Section 4.4.1 shall survive the expiration or earlier termination of the Lease Term.
4.4.2 Statement of Estimated Building Direct Expenses. In addition, Landlord shall give Tenant a yearly expense estimate statement (the "Estimate Statement") which shall set forth Landlord's reasonable estimate (the "Estimate") of what the total amount of Building Direct Expenses for the then-current Expense Year shall be and the estimated amount of Tenant's Share of such Building Direct Expenses (the "Estimated Expenses"). The failure of Landlord to timely furnish the Estimate Statement for any Expense Year shall not preclude Landlord from enforcing its rights to collect any Estimated Expenses under this Article 4, nor shall Landlord be prohibited from revising any Estimate Statement or Estimated Expenses theretofore delivered to the extent necessary. Thereafter, Tenant shall pay, with its next installment of Base Rent due, a fraction of the Estimated Expenses for the then-current Expense Year (reduced by any amounts paid pursuant to the last sentence of this Section 4.4.2). Such fraction shall have as its numerator the number of months which have elapsed in such current Expense Year, including the month of such payment, and twelve (12) as its denominator. Until a new Estimate Statement is furnished (which Landlord shall have the right to deliver to Tenant at any time), Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the total Estimated Expenses set forth in the previous Estimate Statement delivered by Landlord to Tenant.
4.5 Taxes and Other Charges for Which Tenant Is Directly Responsible.
4.5.1 Tenant shall be liable for and shall pay ten (10) days before delinquency, taxes levied against Tenant's equipment, furniture, fixtures and any other personal property located in or about the Premises. If any such taxes on Tenant's equipment, furniture, fixtures and any other personal property are levied against Landlord or Landlord's property or if the assessed value of Landlord's property is increased by the inclusion therein of a value placed upon such equipment, furniture, fixtures or any other personal property and if Landlord pays the taxes based upon such increased assessment, which Landlord shall have the right to do regardless of the validity thereof but only under proper protest if requested by Tenant, Tenant shall upon demand repay to Landlord the taxes so levied against Landlord or the proportion of such taxes resulting from such increase in the assessment, as the case may be.
4.5.2 If the tenant improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which tenant improvements conforming to Landlord's "building standard" in other space in the Building are assessed, then the Tax Expenses levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of Section 4.5.1, above.
4.5.3 Notwithstanding any contrary provision herein, Tenant shall
pay prior to delinquency any (i) rent tax or sales tax, service tax,
transfer tax or value added tax, or any other applicable tax on the rent or
services herein or otherwise respecting this Lease, (ii) taxes assessed upon
or with respect to the possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises
or any portion of the Project, including the Project parking facility; or
(iii) taxes assessed upon this transaction or any document to which Tenant
is a party creating or transferring an interest or an estate in the
Premises.
ARTICLE 5
USE OF PREMISES
5.1 Permitted Use. Tenant shall use the Premises solely for the Permitted Use set forth in Section 7 of the Summary and Tenant shall not use or permit the Premises or the Project to be used for any other purpose or purposes whatsoever without the prior written consent of Landlord, which may be withheld in Landlord's sole discretion.
5.2 Prohibited Uses. Tenant further covenants and agrees that Tenant shall not use, or suffer or permit any person or persons to use, the Premises or any part thereof for any use or purpose contrary to the provisions of the Rules and Regulations set forth in Exhibit D, attached hereto, or in violation of the laws of the United States of America, the State of California, or the ordinances, regulations or requirements of the local municipal or county governing body or other lawful authorities having jurisdiction over the Project, including, without limitation, any such laws, ordinances, regulations or requirements relating to hazardous materials or substances, as those terms are defined by applicable laws now or hereafter in effect. Tenant shall not do or permit anything to be done in or about the Premises which will in any way damage the reputation of the Project or obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy them or use or allow the Premises to be used for any improper, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall comply with, and Tenant's rights and obligations under the Lease and Tenant's use of the Premises shall be subject and subordinate to, all recorded easements, covenants, conditions, and restrictions now or hereafter affecting the Project.
ARTICLE 6
SERVICES AND UTILITIES
Landlord shall provide the utility service connections into the Premises as required in the Construction Drawings as part of the construction of the Tenant Improvements]. Tenant shall pay all charges for heat, water, gas, electricity, telephone and any other utilities used on or provided to the Premises. Landlord shall not be liable to Tenant for interruption in or curtailment of any utility service, nor shall any such interruption or curtailment constitute constructive eviction or grounds for rental abatement. In the event the Premises are not separately metered, Tenant shall have the option, subject to Landlord's prior written consent and the terms of this Lease, to cause the Premises to be separately metered at Tenant's cost and expense. If Tenant does not elect to cause the Premises to be separately metered, Tenant shall pay a reasonable proration of utilities, as determined by Landlord.
ARTICLE 7
REPAIRS
7.1 Landlord's Repairs. Landlord shall maintain and repair (i) the structural portions of the Building, including the foundation, floor/ceiling slabs, roof, curtain wall and mullions, columns, beams, shafts (including elevator shafts), stairwells, elevator cabs, and Building mechanical, electrical and telephone closets (collectively, "Building Structure"), (ii) the Common Areas. Notwithstanding anything in this Lease to the contrary, Tenant shall be required to pay for the cost of repairs to the Building Structure, and/or the Common Areas to the extent required because of (1) Tenant's use of the Premises for other than normal and customary business office operations, and/or (2) Tenant's Alterations (as defined in Section 8.1 below). Tenant hereby waives and releases its right to make repairs at Landlord's expense under Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect.
7.2 Tenant's Repairs. Subject to Landlord's repair obligations pursuant to Section 7.1 above, Tenant shall, at Tenant's own expense, keep the Premises (interior and exterior), including all improvements, fixtures, equipment and furnishings therein, the subfloors and floors, loading docks, doors and ramps, floor coverings, walls and wall coverings, doors, windows, glass, plate glass, ceilings, skylights, lighting systems, interior plumbing, electrical and mechanical systems and wiring appliances and devices using or containing refrigerants in good order, repair and condition and replace and/or repair any and all of the foregoing in a clean and safe manner at all times during the Lease Term. In addition, Tenant shall, at Tenant's own expense, but under the supervision and subject to the prior approval of Landlord and Section 10.5 herein, and within any reasonable period of time specified by Landlord, promptly and adequately repair all damage to the Premises and replace or repair all damaged, broken, or worn fixtures and appurtenances, except for damage caused by ordinary wear and tear or beyond the reasonable control of Tenant; provided however, that, at Landlord's option, or if Tenant fails
to make such repairs, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord the cost thereof, including a percentage of the cost thereof (to be uniformly established for the Building and/or the Project) sufficient to reimburse Landlord for all overhead, general conditions, fees and other costs or expenses arising from Landlord's involvement with such repairs and replacements forthwith upon being billed for same. Notwithstanding the foregoing, Landlord shall be responsible for repairs to the structural portions of the exterior walls (excluding wall coverings, paintings, glass and doors), foundation and roof of the Building, except to the extent that such repairs are required due to the negligence or willful misconduct of Tenant; provided, however, that if such repairs are due to the negligence or willful misconduct of Tenant, Landlord shall nevertheless make such repairs at Tenant's expense. Landlord may, but shall not be required to, enter the Premises at all reasonable times to make such repairs, alterations, improvements or additions to the Premises or to the Project or to any equipment located in the Project as Landlord shall desire or deem necessary or as Landlord may be required to do by governmental or quasi-governmental authority or court order or decree. Tenant hereby waives any and all rights under and benefits of subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code or under any similar law, statute, or ordinance now or hereafter in effect.
ARTICLE 8
ADDITIONS AND ALTERATIONS
8.1 Landlord's Consent to Alterations. Tenant may not make any improvements, alterations, additions or changes to the Premises or any mechanical, plumbing or HVAC facilities or systems pertaining to the Premises (collectively, the "Alterations") without first procuring the prior written consent of Landlord to such Alterations, which consent shall be requested by Tenant not less than thirty (30) days prior to the commencement thereof, and which consent shall not be unreasonably withheld by Landlord, provided it shall be deemed reasonable for Landlord to withhold its consent to any Alteration which adversely affects the structural portions or the systems or equipment of the Building or is visible from the exterior of the Building. The construction of the initial improvements to the Premises shall be governed by the terms of the Tenant Work Letter and not the terms of this Article 8. Notwithstanding the foregoing, Tenant may make non- structural changes to the Premises (such non-structural changes to be referred to hereafter collectively as the "Acceptable Changes") without Landlord's prior consent provided (i) Tenant delivers to Landlord written notice of such Acceptable Changes at least fifteen (15) days prior to the commencement thereof, (ii) such Acceptable Changes will not involve the expenditure of more than $20,000.00 in the aggregate during any consecutive 12-month period, (iii) such Acceptable Changes do not affect the exterior appearance of the Building or Common Areas, the structural aspects of the Building, or the Building systems and equipment of the Premises or Building, and (iv) Tenant obtains and delivers to Landlord prior to commencement of construction of such Acceptable Changes, all permits and approvals required by any local, state or federal authorities for such Acceptable Changes.
8.2 Manner of Construction. Landlord may impose, as a condition of its consent to any and all Alterations or repairs of the Premises or about the Premises, such requirements as Landlord in its discretion may deem desirable, including, but not limited to, the requirement that Tenant utilize for such purposes only contractors, subcontractors, materials, mechanics and materialmen approved by Landlord, the requirement that upon Landlord's request, Tenant shall, at Tenant's expense, remove such Alterations upon the expiration or any early termination of the Lease Term. Tenant shall construct such Alterations and perform such repairs in a good and workmanlike manner, in conformance with any and all applicable federal, state, county or municipal laws, rules and regulations and pursuant to a valid building permit, issued by the city in which the Project is located, all in conformance with Landlord's construction rules and regulations; provided, however, that prior to commencing to construct any Alteration, Tenant shall meet with Landlord to discuss Landlord's design parameters and code compliance issues. In the event Tenant performs any Alterations in the Premises which require or give rise to governmentally required changes to the "Base and Shell," as that term is defined below, then Landlord shall, at Tenant's expense, make such changes to the Base and Shell. The "Base and Shell" shall include the structural portions of the Building, and the public restrooms, exit stairwells and the systems and equipment located in the internal core of the Building on the floor or floors on which the Premises are located. In performing the work of any such Alterations, Tenant shall have the work performed in such manner so as not to obstruct access to the Project or any portion thereof, by any other tenant of the Project, and so as not to obstruct the business of Landlord or other tenants in the Project. In addition to Tenant's obligations under Article 9 of this Lease, upon completion of any Alterations, Tenant agrees to cause a Notice of Completion to be recorded in the office of the Recorder of the County in which the Project is located in accordance with Section 3093 of the Civil Code of the State of California or any successor statute, and Tenant shall deliver to the Project construction manager a reproducible copy of the "as built" drawings of the Alterations as well as all permits, approvals and other documents issued by any governmental agency in connection with the Alterations.
8.3 Payment for Improvements. If payment is made directly to contractors, Tenant shall (i) comply with Landlord's requirements for final lien releases and waivers in connection with Tenant's payment for work to contractors, and (ii) sign Landlord's standard contractor's rules and regulations. If Tenant orders any work directly from Landlord and Landlord hires a third party to supervise such work, Tenant shall pay to Landlord an amount not to exceed five percent of the cost of such work to compensate Landlord (and any third party hired by Landlord) for all overhead, general conditions, fees and other costs and expenses arising from Landlord's involvement with such work. If Tenant does not order any work directly from Landlord, Tenant shall reimburse Landlord for Landlord's reasonable, actual, out-of-pocket costs and expenses actually incurred in connection with Landlord's review of such work.
8.4 Construction Insurance. In addition to the requirements of Article 10 of this Lease, in the event that Tenant makes any Alterations, prior to the commencement of such Alterations, Tenant shall provide Landlord with evidence that Tenant carries "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of such Alterations, and
such other insurance as Landlord may reasonably require, it being understood and agreed that all of such Alterations shall be insured by Tenant pursuant to Article 10 of this Lease immediately upon completion thereof. In addition, Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of such Alterations and naming Landlord as a co-obligee.
8.5 Landlord's Property. All Alterations, improvements, fixtures, equipment and/or appurtenances (but not including Tenant's personal property or trade fixtures) which may be installed or placed in or about the Premises, from time to time, shall be at the sole cost of Tenant and shall be and become the property of Landlord, except that Tenant may remove any Alterations, improvements, fixtures and/or equipment which Tenant can substantiate to Landlord have not been paid for with any Tenant improvement allowance funds provided to Tenant by Landlord, provided Tenant repairs any damage to the Premises and Building caused by such removal and returns the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord. Furthermore, Landlord may, by written notice to Tenant given at the time Tenant requests Landlord's consent to any Alteration, require Tenant, at Tenant's expense, upon the expiration or earlier termination of the Lease term, to remove any Alterations or improvements and to repair any damage to the Premises and Building caused by such removal and return the affected portion of the Premises to a building standard tenant improved condition as determined by Landlord. If Tenant fails to complete such removal and/or to repair any damage caused by the removal of any Alterations or improvements in the Premises and return the affected portion of the Premises to a building standard tenant improved condition as reasonably determined by Landlord, Landlord may do so and may charge the cost thereof to Tenant. Tenant hereby protects, defends, indemnifies and holds Landlord harmless from any liability, cost, obligation, expense or claim of lien in any manner relating to the installation, placement, removal or financing of any such Alterations, improvements, fixtures and/or equipment in, on or about the Premises, which obligations of Tenant shall survive the expiration or earlier termination of this Lease.
ARTICLE 9
COVENANT AGAINST LIENS
Tenant shall keep the Project and Premises free from any liens or
encumbrances arising out of the work performed, materials furnished or
obligations incurred by or on behalf of Tenant, and shall protect, defend,
indemnify and hold Landlord harmless from and against any claims,
liabilities, judgments or costs (including, without limitation, reasonable
attorneys' fees and costs) arising out of same or in connection therewith.
Tenant shall give Landlord notice at least twenty (20) days prior to the
commencement of any such work on the Premises (or such additional time as
may be necessary under applicable laws) to afford Landlord the opportunity
of posting and recording appropriate notices of non-responsibility. Tenant
shall remove any such lien or encumbrance by bond or otherwise within ten
(10) business days after notice by Landlord, and if
Tenant shall fail to do so, Landlord may pay the amount necessary to remove such lien or encumbrance, without being responsible for investigating the validity thereof. The amount so paid shall be deemed Additional Rent under this Lease payable upon demand, without limitation as to other remedies available to Landlord under this Lease. Nothing contained in this Lease shall authorize Tenant to do any act which shall subject Landlord's title to the Building or Premises to any liens or encumbrances whether claimed by operation of law or express or implied contract. Any claim to a lien or encumbrance upon the Building or Premises arising in connection with any such work or respecting the Premises not performed by or at the request of Landlord shall be null and void, or at Landlord's option shall attach only against Tenant's interest in the Premises and shall in all respects be subordinate to Landlord's title to the Project, Building and Premises.
ARTICLE 10
INSURANCE
10.1 Indemnification and Waiver. Tenant hereby assumes all risk of damage to property or injury to persons in, upon or about the Premises from any cause whatsoever (including, but not limited to, any personal injuries resulting from a slip and fall in, upon or about the Premises) and agrees that Landlord, its partners, subpartners and their respective officers, agents, servants, employees, and independent contractors (collectively, "Landlord Parties") shall not be liable for, and are hereby released from any responsibility for, any damage either to person or property or resulting from the loss of use thereof, which damage is sustained by Tenant or by other persons claiming through Tenant. Tenant shall indemnify, defend, protect, and hold harmless the Landlord Parties from any and all loss, cost, damage, expense and liability (including without limitation court costs and reasonable attorneys' fees) incurred in connection with or arising from any cause in, on or about the Premises (including, but not limited to, a slip and fall), any acts, omissions or negligence of Tenant or of any person claiming by, through or under Tenant, or of the contractors, agents, servants, employees, invitees, guests or licensees of Tenant or any such person, in, on or about the Project or any breach of the terms of this Lease, either prior to, during, or after the expiration of the Lease Term, provided that the terms of the foregoing indemnity shall not apply to the negligence or willful misconduct of Landlord. Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy of the Premises, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including without limitation, its actual professional fees such as reasonable appraisers', accountants' and attorneys' fees. The provisions of this Section 10.1 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability arising in connection with any event occurring prior to such expiration or termination. Notwithstanding anything to the contrary contained in this Lease, nothing in this Lease shall impose any obligations on Tenant or Landlord to be responsible or liable for, and each hereby releases the other from all liability for, consequential damages other than those consequential damages incurred by Landlord in connection with a holdover of the Premises by Tenant after the expiration or earlier termination of this Lease or incurred by Landlord in connection with any
repair, physical construction or improvement work performed by or on behalf of Tenant in the Project, but Tenant shall not be responsible for any direct or consequential damages resulting from Landlord's or contractor's acts in connection with the completion by Landlord of the tenant improvements in the Premises pursuant to the Tenant Work Letter).
10.2 Landlord's Insurance.
10.2.1 Property and Liability Insurance. Landlord shall procure and maintain during the term of this Lease, physical damage insurance covering the base Building and common areas (excluding at Landlord's option, any items Tenant is required to insure pursuant to Section 10.3) and general liability insurance, with the cost of such insurance to be passed through to the tenants of the Project as Direct Expenses. Such coverages shall be in such amounts, from such companies, and on such other terms and conditions as Landlord may from time to time reasonably determine; provided, however, the amounts of insurance carried by Landlord in connection with the Building shall at a minimum be comparable to the coverage and amounts of insurance that are carried by reasonably prudent institutional owners of comparable buildings located in the vicinity of the Building and Workers' Compensation coverage as required by applicable law (except that Landlord shall have the right, but not the obligation, to carry earthquake and/or flood insurance).
10.2.2 Tenant's Compliance With Landlord's Fire and Casualty Insurance. Tenant shall, at Tenant's expense, comply with all insurance company requirements pertaining to the use of the Premises. If Tenant's conduct or use of the Premises causes any increase in the premium for such insurance policies then Tenant shall reimburse Landlord for any such increase. Tenant, at Tenant's expense, shall comply with all rules, orders, regulations or requirements of the American Insurance Association (formerly the National Board of Fire Underwriters) and with any similar body.
10.3 Tenant's Insurance. Tenant shall maintain the following coverages in the following amounts.
10.3.1 Comprehensive General Liability Insurance covering the insured against claims of bodily injury, personal injury and property damage (including loss of use thereof) arising out of Tenant's operations, and contractual liabilities (covering the performance by Tenant of its indemnity agreements) including coverage for the performance by Tenant of the indemnity agreements set forth in Section 10.1 of this Lease, for limits of liability not less than:
Bodily Injury and $3,000,000 each occurrence
Property Damage Liability $3,000,000 annual aggregate
Personal Injury Liability $3,000,000 each occurrence
$3,000,000 annual aggregate
0% Insured's participation
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10.3.2 Special Form Insurance covering (i) all office furniture, business and trade fixtures, office equipment, free-standing cabinet work, movable partitions, merchandise and all other items of Tenant's property on the Premises installed by, for, or at the expense of Tenant, (ii) the "Tenant Improvements," as that term is defined in the Tenant Work Letter, and (iii) all other improvements, alterations and additions to the Premises. Such insurance shall be written on an "all risks" of physical loss or damage basis, for the full replacement cost value (subject to reasonable deductible amounts) new without deduction for depreciation of the covered items and in amounts that meet any co-insurance clauses of the policies of insurance and shall include coverage for damage or other loss caused by fire or other peril including, but not limited to, vandalism and malicious mischief, theft, water damage of any type, including sprinkler leakage, bursting or stoppage of pipes, and explosion, and providing business interruption coverage for a period of one year.
10.3.3 Worker's Compensation and Employer's Liability or other similar insurance pursuant to all applicable state and local statutes and regulations.
10.4 Form of Policies. The minimum limits of policies of insurance
required of Tenant under this Lease shall in no event limit the liability of
Tenant under this Lease. Such insurance shall (i) name Landlord, and any
other party the Landlord so specifies, as an additional insured, including
Landlord's managing agent, if any; (ii) specifically cover the liability
assumed by Tenant under this Lease, including, but not limited to, Tenant's
obligations under Section 10.1 of this Lease; (iii) be issued by an
insurance company having a rating of not less than A-X in Best's Insurance
Guide or which is otherwise acceptable to Landlord and licensed to do
business in the State of California; (iv) be primary insurance as to all
claims thereunder and provide that any insurance carried by Landlord is
excess and is non-contributing with any insurance requirement of Tenant;
(v) be in form and content reasonably acceptable to Landlord; and
(vi) provide that said insurance shall not be canceled or coverage changed
unless thirty (30) days' prior written notice shall have been given to
Landlord and any mortgagee of Landlord. Tenant shall deliver said policy or
policies or certificates thereof to Landlord on or before the Lease
Commencement Date and at least thirty (30) days before the expiration dates
thereof. In the event Tenant shall fail to procure such insurance, or to
deliver such policies or certificate, Landlord may, at its option, procure
such policies for the account of Tenant, and the cost thereof shall be paid
to Landlord within five (5) days after delivery to Tenant of bills therefor.
10.5 Subrogation. Notwithstanding anything the contrary herein, Landlord and Tenant intend that their respective property loss risks shall be borne by reasonable insurance carriers to the extent above provided, and Landlord and Tenant hereby agree to look solely to, and seek recovery only from, their respective insurance carriers in the event of a property loss to the extent that such coverage is agreed to be provided hereunder and actually insured against. The parties each hereby waive all rights and claims against each other for such losses, and waive all rights of subrogation of their respective insurers, provided such waiver of subrogation shall not affect the right to the insured to recover thereunder. The parties agree that their respective insurance policies are now, or shall be, endorsed such that the waiver of subrogation shall not
affect the right of the insured to recover thereunder, so long as no material additional premium is charged therefor.
ARTICLE 11
DAMAGE AND DESTRUCTION
11.1 Repair of Damage to Premises by Landlord. Tenant shall promptly
notify Landlord of any damage to the Premises resulting from fire or any
other casualty. If the Premises or any Common Areas serving or providing
access to the Premises shall be damaged by fire or other casualty, Landlord
shall promptly and diligently, subject to reasonable delays for insurance
adjustment or other matters beyond Landlord's reasonable control, and
subject to all other terms of this Article 11, restore the Base Building and
such Common Areas. Such restoration shall be to substantially the same
condition of the Base Building and the Common Areas prior to the casualty,
except for modifications required by zoning and building codes and other
laws or by the holder of a mortgage on the Building or Project or any other
modifications to the Common Areas deemed desirable by Landlord, which are
consistent with the character of the Project, provided that access to the
Premises and any common restrooms serving the Premises shall not be
materially impaired. Upon the occurrence of any damage to the Premises,
upon notice (the "Landlord Repair Notice") to Tenant from Landlord, Tenant
shall assign to Landlord (or to any party designated by Landlord) all
insurance proceeds payable to Tenant under Tenant's insurance required under
Section 10.3 of this Lease, and Landlord shall repair any injury or damage
to the Tenant Improvements and the Original Improvements installed in the
Premises and shall return such Tenant Improvements and Original Improvements
to their original condition; provided that if the cost of such repair by
Landlord exceeds the amount of insurance proceeds received by Landlord from
Tenant's insurance carrier, as assigned by Tenant, the cost of such repairs
shall be paid by Tenant to Landlord prior to Landlord's commencement of
repair of the damage. In the event that Landlord does not deliver the
Landlord Repair Notice within sixty (60) days following the date the
casualty becomes known to Landlord, Tenant shall, at its sole cost and
expense, repair any injury or damage to the Tenant Improvements installed in
the Premises and shall return such Tenant Improvements to their original
condition. Whether or not Landlord delivers a Landlord Repair Notice, prior
to the commencement of construction, Tenant shall submit to Landlord, for
Landlord's review and approval, all plans, specifications and working
drawings relating thereto, and Landlord shall select the contractors to
perform such improvement work. Landlord shall not be liable for any
inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's
business resulting in any way from such damage or the repair thereof;
provided however, that if such fire or other casualty shall have damaged the
Premises or Common Areas necessary to Tenant's occupancy, and the Premises
are not occupied by Tenant as a result thereof, then during the time and to
the extent the Premises are unfit for occupancy, the Rent shall be abated in
proportion to the ratio that the amount of rentable square feet of the
Premises which is unfit for occupancy for the purposes permitted under this
Lease bears to the total rentable square feet of the Premises. In the event
that Landlord shall not deliver the Landlord Repair Notice, Tenant's right
to rent abatement pursuant to the preceding sentence shall
terminate as of the date which is reasonably determined by Landlord to be the date Tenant should have completed repairs to the Premises assuming Tenant used reasonable due diligence in connection therewith.
11.2 Landlord's Option to Repair. Notwithstanding the terms of
Section 11.1 of this Lease, Landlord may elect not to rebuild and/or restore
the Premises, Building and/or Project, and instead terminate this Lease, by
notifying Tenant in writing of such termination within sixty (60) days after
the date of discovery of the damage, such notice to include a termination
date giving Tenant sixty (60) days to vacate the Premises, but Landlord may
so elect only if the Building or Project shall be damaged by fire or other
casualty or cause, whether or not the Premises are affected, and one or more
of the following conditions is present: (i) in Landlord's reasonable
judgment, repairs cannot reasonably be completed within one hundred eighty
(180) days after the date of discovery of the damage (when such repairs are
made without the payment of overtime or other premiums); (ii) the holder of
any mortgage on the Building or Project or ground lessor with respect to the
Building or Project shall require that the insurance proceeds or any portion
thereof be used to retire the mortgage debt, or shall terminate the ground
lease, as the case may be; (iii) the damage is not fully covered by
Landlord's insurance policies; (iv) Landlord decides to rebuild the Building
or Common Areas so that they will be substantially different structurally or
architecturally; (v) the damage occurs during the last twelve (12) months of
the Lease Term; or (vi) any owner of any other portion of the Project, other
than Landlord, does not intend to repair the damage to such portion of the
Project Notwithstanding the provisions of this Section 11.2, Tenant shall
have the right to terminate this Lease under this Section 11.2 only if each
of the following conditions is satisfied: (a) the damage to the Project by
fire or other casualty was not caused by the gross negligence or intentional
act of Tenant or its partners or subpartners and their respective officers,
agents, servants, employees, and independent contractors; (b) Tenant is not
then in default under this Lease; (c) as a result of the damage, Tenant
cannot reasonably conduct business from the Premises; and, (d) as a result
of the damage to the Project, Tenant does not occupy or use the Premises at
all.
11.3 Waiver of Statutory Provisions. The provisions of this Lease, including this Article 11, constitute an express agreement between Landlord and Tenant with respect to any and all damage to, or destruction of, all or any part of the Premises, the Building or the Project, and any statute or regulation of the State of California, including, without limitation, Sections 1932(2) and 1933(4) of the California Civil Code, with respect to any rights or obligations concerning damage or destruction in the absence of an express agreement between the parties, and any other statute or regulation, now or hereafter in effect, shall have no application to this Lease or any damage or destruction to all or any part of the Premises, the Building or the Project.
ARTICLE 12
NONWAIVER
No provision of this Lease shall be deemed waived by either party hereto unless expressly waived in a writing signed thereby. The waiver by either party hereto of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No acceptance of a lesser amount than the Rent herein stipulated shall be deemed a waiver of Landlord's right to receive the full amount due, nor shall any endorsement or statement on any check or payment or any letter accompanying such check or payment be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the full amount due. No receipt of monies by Landlord from Tenant after the termination of this Lease shall in any way alter the length of the Lease Term or of Tenant's right of possession hereunder, or after the giving of any notice shall reinstate, continue or extend the Lease Term or affect any notice given Tenant prior to the receipt of such monies, it being agreed that after the service of notice or the commencement of a suit, or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment.
ARTICLE 13
CONDEMNATION
If the whole or any part of the Premises, Building or Project shall be taken by power of eminent domain or condemned by any competent authority for any public or quasi-public use or purpose, or if any adjacent property or street shall be so taken or condemned, or reconfigured or vacated by such authority in such manner as to require the use, reconstruction or remodeling of any part of the Premises, Building or Project, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. If more than twenty-five percent (25%) of the rentable square feet of the Premises is taken, or if access to the Premises is substantially impaired, in each case for a period in excess of one hundred eighty (180) days, Tenant shall have the option to terminate this Lease effective as of the date possession is required to be surrendered to the authority. Tenant shall not because of such taking assert any claim against Landlord or the authority for any compensation because of such taking and Landlord shall be entitled to the entire award or payment in connection therewith, except that Tenant shall have the right to file any separate claim available to Tenant for any taking of Tenant's personal property and fixtures belonging to Tenant and removable by
Tenant upon expiration of the Lease Term pursuant to the terms of this
Lease, and for moving expenses, so long as such claims do not diminish the
award available to Landlord, its ground lessor with respect to the Building
or Project or its mortgagee, and such claim is payable separately to Tenant.
All Rent shall be apportioned as of the date of such termination. If any
part of the Premises shall be taken, and this Lease shall not be so
terminated, the Rent shall be proportionately abated. Tenant hereby waives
any and all rights it might otherwise have pursuant to Section 1265.130 of
The California Code of Civil Procedure. Notwithstanding anything to the
contrary contained in this Article 13, in the event of a temporary taking of
all or any portion of the Premises for a period of one hundred and eighty
(180) days or less, then this Lease shall not terminate but the Base Rent
and the Additional Rent shall be abated for the period of such taking in
proportion to the ratio that the amount of rentable square feet of the
Premises taken bears to the total rentable square feet of the Premises.
Landlord shall be entitled to receive the entire award made in connection
with any such temporary taking.
ARTICLE 14
ASSIGNMENT AND SUBLETTING
14.1 Transfers. Tenant shall not, without the prior written consent of
Landlord, which consent shall not be unreasonably withheld or delayed,
assign, mortgage, pledge, hypothecate, encumber, or permit any lien to
attach to, or otherwise transfer, this Lease or any interest hereunder,
permit any assignment, or other transfer of this Lease or any interest
hereunder by operation of law, sublet the Premises or any part thereof, or
enter into any license or concession agreements or otherwise permit the
occupancy or use of the Premises or any part thereof by any persons other
than Tenant and its employees and contractors (all of the foregoing are
hereinafter sometimes referred to collectively as "Transfers" and any person
to whom any Transfer is made or sought to be made is hereinafter sometimes
referred to as a "Transferee"). If Tenant desires Landlord's consent to any
Transfer, Tenant shall notify Landlord in writing, which notice (the
"Transfer Notice") shall include (i) the proposed effective date of the
Transfer, which shall not be less than thirty (30) days nor more than one
hundred eighty (180) days after the date of delivery of the Transfer Notice,
(ii) a description of the portion of the Premises to be transferred (the
"Subject Space"), (iii) all of the terms of the proposed Transfer and the
consideration therefor, including calculation of the "Transfer Premium", as
that term is defined in Section 14.3 below, in connection with such
Transfer, the name and address of the proposed Transferee, and a copy of all
existing executed and/or proposed documentation pertaining to the proposed
Transfer, including all existing operative documents to be executed to
evidence such Transfer or the agreements incidental or related to such
Transfer, and (iv) current financial statements of the proposed Transferee
certified by an officer, partner or owner thereof, business credit and
personal references and history of the proposed Transferee and any other
information reasonably required by Landlord which will enable Landlord to
determine the financial responsibility, character, and reputation of the
proposed Transferee, nature of such Transferee's business and proposed use
of the Subject Space. Any Transfer made without Landlord's prior written
consent shall, at Landlord's option, be null, void and of no effect, and
shall, at Landlord's option,
constitute a default by Tenant under this Lease. Whether or not Landlord consents to any proposed Transfer, Tenant shall pay Landlord's reasonable review and processing fees, not to exceed $2,500.00 for any one Transfer, as well as any reasonable professional fees (including, without limitation, attorneys', accountants', architects', engineers' and consultants' fees) incurred by Landlord, within thirty (30) days after written request by Landlord.
14.2 Landlord's Consent. Landlord shall not unreasonably withhold or delay its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in the Transfer Notice. Without limitation as to other reasonable grounds for withholding consent, the parties hereby agree that it shall be reasonable under this Lease and under any applicable law for Landlord to withhold consent to any proposed Transfer where one or more of the following apply:
14.2.1 The Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Building or the Project;
14.2.2 The Transferee intends to use the Subject Space for purposes which are not permitted under this Lease;
14.2.3 The Transferee is either a governmental agency or instrumentality thereof;
14.2.4 The Transferee is not a party of reasonable financial worth and/or financial stability in light of the responsibilities to be undertaken in connection with the Transfer on the date consent is requested;
14.2.5 The proposed Transfer would cause a violation of another lease for space in the Project, or would give an occupant of the Project a right to cancel its lease; or
14.2.6 Either the proposed Transferee, or any person or entity which directly or indirectly, controls, is controlled by, or is under common control with, the proposed Transferee, (i) occupies space in the Project at the time of the request for consent, or (ii) is negotiating with Landlord or has negotiated with Landlord during the six (6) month period immediately preceding the date Landlord receives the Transfer Notice, to lease space in the Project.
If Landlord consents to any Transfer pursuant to the terms of this
Section 14.2 (and does not exercise any recapture rights Landlord may have
under Section 14.4 of this Lease), Tenant may within six (6) months after
Landlord's consent, but not later than the expiration of said six-month
period, enter into such Transfer of the Premises or portion thereof, upon
substantially the same terms and conditions as are set forth in the Transfer
Notice furnished by Tenant to Landlord pursuant to Section 14.1 of this
Lease, provided that if there are any changes in the terms and conditions
from those specified in the Transfer Notice (i) such that Landlord would
initially have been entitled to refuse its consent to such Transfer under
this Section 14.2, or (ii) which would cause the proposed Transfer to be
more favorable to the Transferee than the terms set forth in Tenant's
original Transfer Notice, Tenant shall again submit the Transfer to
Landlord for its approval and other action under this Article 14 (including Landlord's right of recapture, if any, under Section 14.4 of this Lease). Notwithstanding anything to the contrary in this Lease, if Tenant or any proposed Transferee claims that Landlord has unreasonably withheld or delayed its consent under Section 14.2 or otherwise has breached or acted unreasonably under this Article 14, their sole remedies shall be a declaratory judgment and an injunction for the relief sought, and Tenant hereby waives all other remedies, including, without limitation, any right at law or equity to terminate this Lease, on its own behalf and, to the extent permitted under all applicable laws, on behalf of the proposed Transferee.
14.3 Transfer Premium. If Landlord consents to a Transfer, as a condition thereto which the parties hereby agree is reasonable, Tenant shall pay to Landlord fifty percent (50%) of any "Transfer Premium," as that term is defined in this Section 14.3, received by Tenant from such Transferee. "Transfer Premium" shall mean all rent, additional rent or other consideration payable by such Transferee in connection with the Transfer in excess of the Rent and Additional Rent payable by Tenant under this Lease during the term of the Transfer on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the Transfer, (ii) any free base rent reasonably provided to the Transferee in connection with the Transfer, and (iii) any brokerage commissions and reasonable legal fees in connection with the Transfer (collectively, "Tenant's Transfer Costs"). "Transfer Premium" shall also include, but not be limited to, key money, bonus money or other cash consideration paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to Transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to Transferee in connection with such Transfer. The determination of the amount of Landlord's applicable share of the Transfer Premium shall be made on a monthly basis as rent or other consideration is received by Tenant under the Transfer. For purposes of calculating the Transfer Premium on a monthly basis, (i) Tenant's Transfer Costs shall be deemed to be expended by Tenant in equal monthly amounts over the entire term of the Transfer and (ii) the Rent paid for the Subject Space by Tenant shall be computed after adjusting such rent to the actual effective rent to be paid, taking into consideration any and all leasehold concessions granted in connection therewith, including, but not limited to, any rent credit and tenant improvement allowance. For purposes of calculating any such effective rent all such concessions shall be amortized on a straight-line basis over the relevant term.
14.4 Landlord's Option as to Subject Space. Notwithstanding anything to the contrary contained in this Article 14, Landlord shall have the option, by giving written notice to Tenant within thirty (30) days after receipt of any Transfer Notice involving greater than fifty percent (50%) or more of the Premises or Tenant's interest in the Lease, to recapture the Subject Space. Such recapture shall cancel and terminate this Lease with respect to the Subject Space until the last day of the term of the Transfer as set forth in the Transfer Notice. In the event of a recapture by Landlord, if this Lease shall be canceled with respect to less than the entire Premises, the Rent reserved herein shall be prorated on the basis of the number of rentable square feet retained by Tenant in proportion to the number of rentable square feet contained in
the Premises, and this Lease as so amended shall continue thereafter in full
force and effect, and upon request of either party, the parties shall
execute written confirmation of the same. If Landlord declines, or fails to
elect in a timely manner, to recapture the Subject Space under this
Section 14.4, then,
14.5 Effect of Transfer. If Landlord consents to a Transfer, (i) the terms and conditions of this Lease shall in no way be deemed to have been waived or modified, (ii) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (iii) Tenant shall deliver to Landlord, promptly after execution, an original executed copy of all documentation pertaining to the Transfer in form reasonably acceptable to Landlord, (iv) Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant, or Tenant's chief financial officer, setting forth in detail the computation of any Transfer Premium Tenant has derived and shall derive from such Transfer, and (v) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord's consent, shall relieve Tenant or any guarantor of the Lease from any liability under this Lease, including, without limitation, in connection with the Subject Space. Landlord or its authorized representatives shall have the right at all reasonable times to audit the books, records and papers of Tenant relating to any Transfer, and shall have the right to make copies thereof. If the Transfer Premium respecting any Transfer shall be found understated, Tenant shall, within thirty (30) days after demand, pay the deficiency, and if understated by more than two percent (2%), Tenant shall pay Landlord's costs of such audit.
14.6 Occurrence of Default. Any Transfer hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any Transfer, Landlord shall have the right to: (i) treat such Transfer as canceled and repossess the Subject Space by any lawful means, or (ii) require that such Transferee attorn to and recognize Landlord as its landlord under any such Transfer. If Tenant shall be in default under this Lease, Landlord is hereby irrevocably authorized, as Tenant's agent and attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. Such Transferee shall rely on any representation by Landlord that Tenant is in default hereunder, without any need for confirmation thereof by Tenant. Upon any assignment, the assignee shall assume in writing all obligations and covenants of Tenant thereafter to be performed or observed under this Lease. No collection or acceptance of rent by Landlord from any Transferee shall be deemed a waiver of any provision of this Article 14 or the approval of any Transferee or a release of Tenant from any obligation under this Lease, whether theretofore or thereafter accruing. In no event shall Landlord's enforcement of any provision of this Lease against any Transferee be deemed a waiver of Landlord's right to enforce any term of this Lease against Tenant or any other person. If Tenant's obligations hereunder have been guaranteed, Landlord's consent to any Transfer shall not be effective unless the guarantor also consents to such Transfer.
14.7 Non-Transfers. Notwithstanding anything to the contrary contained in Article 14 of this Lease, an assignment or subletting by Tenant of all or a portion of the Premises or this Lease to (i) a parent or subsidiary of Tenant, or (ii) any person or entity which controls, is controlled by or under common control with Tenant, or (iii) any entity which purchases all or substantially all of the stock or assets of Tenant, (iv) any entity into which Tenant is merged or consolidated (all such persons or entities described in (i), (ii), (iii) and (iv) being sometimes hereinafter referred to as "Affiliates"), shall not require Landlord's consent and shall not be deemed a Transfer under Article 14 of this Lease, provided that (a) any such Affiliate was not formed as a subterfuge to avoid the obligations of Article 14 of this Lease; (b) Tenant gives Landlord at least ten (10) days' prior notice of any such assignment or sublease to an Affiliate; (c) such Affiliate shall have, as of the effective date of any such assignment or sublease, a tangible net worth, computed in accordance with generally accepted accounting principles (but excluding goodwill as an asset), which is sufficient to meet the obligations of Tenant under this Lease and is equal to or greater than the net worth of Tenant as of the date of the Transfer; (d) any such assignment or sublease shall be subject and subordinate to all of the terms and provisions of this Lease, and such Affiliate shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon or prior to the effective date of such assignment or sublease, all the obligations of Tenant under this Lease with respect to the portion of the Premises which is the subject of such assignment or sublease (other than the amount of Base Rent payable by Tenant with respect to a sublease); and (e) Tenant and any guarantor shall remain fully liable for all obligations to be performed by Tenant under this Lease.
ARTICLE 15
SURRENDER OF PREMISES; OWNERSHIP AND
REMOVAL OF TRADE FIXTURES
15.1 Surrender of Premises. No act or thing done by Landlord or any agent or employee of Landlord during the Lease Term shall be deemed to constitute an acceptance by Landlord of a surrender of the Premises unless such intent is specifically acknowledged in writing by Landlord. The delivery of keys to the Premises to Landlord or any agent or employee of Landlord shall not constitute a surrender of the Premises or effect a termination of this Lease, whether or not the keys are thereafter retained by Landlord, and notwithstanding such delivery Tenant shall be entitled to the return of such keys at any reasonable time upon request until this Lease shall have been properly terminated. The voluntary or other surrender of this Lease by Tenant, whether accepted by Landlord or not, or a mutual termination hereof, shall not work a merger, and at the option of Landlord shall operate as an assignment to Landlord of all subleases or subtenancies affecting the Premises or terminate any or all such sublessees or subtenancies.
15.2 Removal of Tenant Property by Tenant. Upon the expiration of the Lease Term, or upon any earlier termination of this Lease, Tenant shall, subject to the provisions of this Article 15, quit and surrender possession of the Premises to Landlord in as good order and
condition as when Tenant took possession and as thereafter improved by Landlord and/or Tenant, reasonable wear and tear, casualty and condemnation and repairs which are specifically made the responsibility of Landlord hereunder excepted. Upon such expiration or termination, Tenant shall, without expense to Landlord, remove or cause to be removed from the Premises all debris and rubbish, and such items of furniture, equipment, business and trade fixtures, free-standing cabinet work, movable partitions and other articles of personal property owned by Tenant or installed or placed by Tenant at its expense in the Premises, and such similar articles of any other persons claiming under Tenant, as Landlord may, in its sole discretion, require to be removed, and Tenant shall repair at its own expense all damage to the Premises and Building resulting from such removal.
ARTICLE 16
HOLDING OVER
If Tenant holds over after the expiration of the Lease Term or earlier termination thereof, with or without the express or implied consent of Landlord, such tenancy shall be from month-to-month only, and shall not constitute a renewal hereof or an extension for any further term, and in such case Rent shall be payable at a monthly rate equal to one hundred fifty percent (150%) of the Rent applicable during the last rental period of the Lease Term under this Lease. Such month-to-month tenancy shall be subject to every other applicable term, covenant and agreement contained herein. Nothing contained in this Article 16 shall be construed as consent by Landlord to any holding over by Tenant, and Landlord expressly reserves the right to require Tenant to surrender possession of the Premises to Landlord as provided in this Lease upon the expiration or other termination of this Lease. The provisions of this Article 16 shall not be deemed to limit or constitute a waiver of any other rights or remedies of Landlord provided herein or at law. If Tenant fails to surrender the Premises upon the termination or expiration of this Lease, in addition to any other liabilities to Landlord accruing therefrom, Tenant shall protect, defend, indemnify and hold Landlord harmless from all loss, costs (including reasonable attorneys' fees) and liability resulting from such failure, including, without limiting the generality of the foregoing, any claims made by any succeeding tenant founded upon such failure to surrender and any lost profits to Landlord resulting therefrom.
ARTICLE 17
ESTOPPEL CERTIFICATES
Within ten (10) days following a request in writing by Landlord, Tenant shall execute, acknowledge and deliver to Landlord an estoppel certificate, which, as submitted by Landlord, shall be substantially in the form of Exhibit E, attached hereto (or such other form as may be required by any prospective mortgagee or purchaser of the Project, or any portion thereof), indicating therein any exceptions thereto that may exist at that time, and shall also contain any other information reasonably requested by Landlord or Landlord's mortgagee or prospective mortgagee. Any such certificate may be relied upon by any prospective mortgagee or purchaser
of all or any portion of the Project. Tenant shall execute and deliver whatever other instruments may be reasonably required for such purposes. At any time during the Lease Term, Landlord may require Tenant to provide Landlord with a current financial statement and financial statements of the two (2) years prior to the current financial statement year. Such statements shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant. Failure of Tenant to timely execute, acknowledge and deliver such estoppel certificate or other instruments shall constitute an acceptance of the Premises and an acknowledgment by Tenant that statements included in the estoppel certificate are true and correct, without exception.
ARTICLE 18
SUBORDINATION
18.1 Subordination. This Lease shall be subject and subordinate to all present and future ground or underlying leases of the Building or Project and to the lien of any mortgage, trust deed or other encumbrances now or hereafter in force against the Building or Project or any part thereof, if any, and to all renewals, extensions, modifications, consolidations and replacements thereof, and to all advances made or hereafter to be made upon the security of such mortgages or trust deeds, unless the holders of such mortgages, trust deeds or other encumbrances, or the lessors under such ground lease or underlying leases, require in writing that this Lease be superior thereto. Tenant covenants and agrees in the event any proceedings are brought for the foreclosure of any such mortgage or deed in lieu thereof (or if any ground lease is terminated), to attorn, without any deductions or set-offs whatsoever, to the lienholder or purchaser or any successors thereto upon any such foreclosure sale or deed in lieu thereof (or to the ground lessor), if so requested to do so by such purchaser or lienholder or ground lessor, and to recognize such purchaser or lienholder or ground lessor as the lessor under this Lease, provided such lienholder or purchaser or ground lessor shall agree to accept this Lease and not disturb Tenant's occupancy, so long as Tenant timely pays the rent and observes and performs the terms, covenants and conditions of this Lease to be observed and performed by Tenant. Landlord's interest herein may be assigned as security at any time to any lienholder. Tenant shall, within ten (10) days of request by Landlord, execute such further instruments or assurances as Landlord may reasonably deem necessary to evidence or confirm the subordination or superiority of this Lease to any such mortgages, trust deeds, ground leases or underlying leases. Tenant waives the provisions of any current or future statute, rule or law which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect this Lease and the obligations of the Tenant hereunder in the event of any foreclosure proceeding or sale.
18.2 Non-Disturbance Agreement From Existing Lender. In the event that as of the date of execution of this Lease, there exists any deed of trust encumbering the Project which is not terminated, released or reconveyed within sixty (60) days thereafter, then Landlord shall use commercially reasonable efforts obtain and deliver to Tenant a commercially reasonable non-disturbance agreement from the beneficiary under such deed of trust. Tenant shall execute and
return such non-disturbance agreement to Landlord within thirty (30) days after Tenant's receipt thereof.
ARTICLE 19
DEFAULTS; REMEDIES
19.1 Events of Default. The occurrence of any of the following shall constitute a default of this Lease by Tenant:
19.1.1 Any failure by Tenant to pay any Rent or any other charge required to be paid under this Lease, or any part thereof, when due unless such failure is cured within three (3) days after written notice; or
19.1.2 Except where a specific time period is otherwise set forth
for Tenant's performance in this Lease, in which event the failure to
perform by Tenant within such time period shall be a default by Tenant under
this Section 19.1.2, any failure by Tenant to observe or perform any other
provision, covenant or condition of this Lease to be observed or performed
by Tenant where such failure continues for thirty (30) days after written
notice thereof from Landlord to Tenant; provided that if the nature of such
default is such that the same cannot reasonably be cured within a thirty
(30) day period, Tenant shall not be deemed to be in default if it
diligently commences such cure within such period and thereafter diligently
proceeds to rectify and cure such default; or
19.1.3 Abandonment of the Premises by Tenant; or
19.1.4 The failure by Tenant to observe or perform according to the provisions of Articles 5, 14, 17 or 18 of this Lease where such failure continues for more than two (2) business days after notice from Landlord.
The notice periods provided herein are in lieu of, and not in addition to, any notice periods provided by law.
19.2 Remedies Upon Default. Upon the occurrence of any event of default by Tenant, Landlord shall have, in addition to any other remedies available to Landlord at law or in equity (all of which remedies shall be distinct, separate and cumulative), the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever.
19.2.1 Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in rent, enter upon and take possession of the Premises and expel or remove Tenant and any other person who may be occupying the Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following:
(i) The worth at the time of award of any unpaid rent which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, specifically including but not limited to, brokerage commissions and advertising expenses incurred, expenses of remodeling the Premises or any portion thereof for a new tenant, whether for the same or a different use, and any special concessions made to obtain a new tenant; and
(v) At Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law.
The term "rent" as used in this Section 19.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in Sections 19.2.1(i) and (ii), above, the "worth at the time of award" shall be computed by allowing interest at the rate set forth in Article 25 of this Lease, but in no case greater than the maximum amount of such interest permitted by law. As used in Section 19.2.1(iii) above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%).
19.2.2 Landlord shall have the remedy described in California Civil Code Section 1951.4 (lessor may continue lease in effect after lessee's breach and abandonment and recover rent as it becomes due, if lessee has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due.
19.2.3 Landlord shall at all times have the rights and remedies (which shall be cumulative with each other and cumulative and in addition to those rights and remedies available under Sections 19.2.1 and 19.2.2, above, or any law or other provision of this Lease), without prior demand or notice except as required by applicable law, to seek any declaratory, injunctive
or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof.
19.3 Subleases of Tenant. Whether or not Landlord elects to terminate this Lease on account of any default by Tenant, as set forth in this Article 19, Landlord shall have the right to terminate any and all subleases, licenses, concessions or other consensual arrangements for possession entered into by Tenant and affecting the Premises or may, in Landlord's sole discretion, succeed to Tenant's interest in such subleases, licenses, concessions or arrangements. In the event of Landlord's election to succeed to Tenant's interest in any such subleases, licenses, concessions or arrangements following Tenant's defaults, Tenant shall, as of the date of notice by Landlord of such election, have no further right to or interest in the rent or other consideration receivable thereunder.
19.4 Efforts to Relet. No re-entry or repossession, repairs, maintenance, changes, alterations and additions, reletting, appointment of a receiver to protect Landlord's interests hereunder, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, or to accept a surrender of the Premises, nor shall same operate to release Tenant in whole or in part from any of Tenant's obligations hereunder, unless express written notice of such intention is sent by Landlord to Tenant. Tenant hereby irrevocably waives any right otherwise available under any law to redeem or reinstate this Lease.
ARTICLE 20
COVENANT OF QUIET ENJOYMENT
Landlord covenants that Tenant, on paying the Rent, charges for services and other payments herein reserved and on keeping, observing and performing all the other terms, covenants, conditions, provisions and agreements herein contained on the part of Tenant to be kept, observed and performed, shall, during the Lease Term, peaceably and quietly have, hold and enjoy the Premises subject to the terms, covenants, conditions, provisions and agreements hereof without interference by any persons lawfully claiming by or through Landlord. The foregoing covenant is in lieu of any other covenant express or implied.
ARTICLE 21
SECURITY DEPOSIT
21. Letter of Credit. Concurrently with Tenant's execution of this Lease, Tenant shall deliver to Landlord an irrevocable standby letter of credit in the amount of $50,000 ("Letter of Credit") as additional security for the faithful performance by Tenant of its obligations under this Lease. The Letter of Credit shall be upon the terms and subject to the following provisions of this Section 21.1.
21.1 Application of Letter of Credit. If Tenant defaults with respect to any provision of this Lease during the Lease Term, in addition to any other rights held by Landlord, Landlord may draw upon and apply all or any part of the Letter of Credit to the payment of any Rent or other sum in default, the repair of any damage to the Premises which has been identified in this Lease as Tenant's obligation to maintain, the payment of any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default, and/or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default, to the full extent permitted by law and contemplated by this Lease. If any portion of the Letter of Credit is so applied, Tenant shall, within ten (10) business days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Letter of Credit to its then required amount or provide a replacement letter of credit to bring the face amount of the then available letter of credit to its then required amount, and Tenant's failure to do so shall be a non-curable default under this Lease.
21.2 Terms of Letter of Credit. The Letter of Credit shall have a term commencing upon the date of execution of this Lease, and continuing until the expiration of the initial Lease Term. The Letter of Credit shall be (i) issued by Silicon Valley Bank ("Bank") and "callable" by Landlord through a branch office of the Bank located in Santa Clara County, and (ii) in a form containing the required provisions set forth in Sections 21.2.1 through 21.2.4 below. The premium or purchase price of, or any other Bank fees associated with, such Letter of Credit shall be paid by Tenant. The Letter of Credit shall, without limiting the foregoing, provide that:
21.2.1 Such Letter of Credit shall be transferable, irrevocable and unconditional, so that Landlord, or its successor(s) in interest, may at any time "call" for any portion of the then uncalled upon amount thereof without regard to and without the Bank inquiring as to the right or lack of right of the holder of said letter of credit to effect such calls or the existence or lack of existence of any defenses by Tenant with respect thereto;
21.2.2 Landlord agrees not to draw upon the Letter of Credit unless Landlord claims default by Tenant under the Lease after giving notice thereof to Tenant in accordance with the terms of this Lease and the expiration of any applicable cure period set forth in this Lease, but if Landlord does effect such a "draw," such "draw" amount may, at Landlord's option, be in the full amount of the Letter of Credit or a partial draw as necessary to compensate Landlord for such default.
21.2.3 Any failure or delay of Landlord to "draw" any portion of the Letter of Credit shall not act as a waiver of Landlord's right to do so at any time thereafter or constitute a waiver of any default with respect to the Lease.
21.2.4 Tenant agrees not to interfere in any way with payment to Landlord of the proceeds of the Letter of Credit, either prior to or following a "draw" by Landlord of any portion of the Letter of Credit, regardless of whether any dispute exists between Tenant and Landlord as to Landlord's right to "draw" from the Letter of Credit. No condition or
term of this Lease shall be deemed to render the Letter of Credit conditional upon this Lease or to justify the issuer of the Letter of Credit in failing to honor a draw upon such Letter of Credit in a timely manner. In the event Landlord is determined through any dispute resolution procedure agreed upon by the parties or by a court of competent jurisdiction to have improperly drawn on the Letter of Credit, then Tenant shall be entitled to receive a prompt refund of such amount from Landlord. Tenant hereby waives the provisions of Section 1950.7 of the California Civil Code, and all other provisions of law, now or hereafter in force, which provide that Landlord may claim from a security deposit (including the Letter of Credit) only those sums reasonably necessary to remedy defaults in the payment of rent, to repair damage caused by Tenant or to clean the Premises, it being agreed that Landlord may, in addition, claim those sums reasonably necessary to compensate Landlord for any other loss or damage, foreseeable or unforeseeable, caused by the act or omission of Tenant or any officer, employee, agent or invitee of Tenant.
22.1.5 Tenant shall be solely responsible for any costs and expenses charged by the Bank in connection with the transfer of the letter of credit from Landlord to any successor or assign of Landlord.
ARTICLE 22
INTENTIONALLY DELETED
ARTICLE 23
SIGNS
All signs and graphics of every kind visible in or from public view or corridors, the Common Areas or the exterior of the Premises shall be subject to Landlord's prior written approval and shall be subject to any applicable governmental laws, ordinances, and regulations and in compliance with Landlord's signage program. Tenant shall remove all such signs and graphics prior to the termination of this Lease. Such installations and removals shall be made in such manner as to avoid injury or defacement of the Premises; and Tenant shall repair any injury or defacement, including without limitation, discoloration caused by such installation or removal. Any signs, notices, logos, pictures, names or advertisements which are installed and that have not been separately approved by Landlord may be removed without notice by Landlord at the sole expense of Tenant.
ARTICLE 24
COMPLIANCE WITH LAW
Tenant shall not do anything or suffer anything to be done in or about the Premises or the Project which will in any way conflict with any law, statute, ordinance or other governmental rule, regulation or requirement now in force or which may hereafter be enacted or promulgated. At its sole cost and expense, Tenant shall promptly comply with all such governmental measures.
Should any standard or regulation now or hereafter be imposed on Landlord or Tenant by a state, federal or local governmental body charged with the establishment, regulation and enforcement of occupational, health or safety standards for employers, employees, landlords or tenants, then Tenant agrees, at its sole cost and expense, to comply promptly with such standards or regulations. Tenant shall be responsible, at its sole cost and expense, to make all alterations to the Premises as are required to comply with the governmental rules, regulations, requirements or standards described in this Article 24; provided that Landlord shall comply with any standards or regulations which relate to the Common Areas, Building Structure and those portion of the Building Systems located outside the Premises, unless such compliance obligations are directly related to and result from Tenant's particular manner of use of the Premises or the tenant improvements (including the initial Tenant Improvements constructed pursuant to the Tenant Work Letter) or the Alterations installed in or to the Premises after the date hereof, in which event such compliance obligations shall be at Tenant's sole cost and expense.. The judgment of any court of competent jurisdiction or the admission of Tenant in any judicial action, regardless of whether Landlord is a party thereto, that Tenant has violated any of said governmental measures, shall be conclusive of that fact as between Landlord and Tenant.
ARTICLE 25
LATE CHARGES
If any installment of Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within five (5) days after said amount is due (provided Tenant shall be entitled to one (1) late payment each Lease Year without incurring a late charge), then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the overdue amount plus any reasonable attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder. The late charge shall be deemed Additional Rent and the right to require it shall be in addition to all of Landlord's other rights and remedies hereunder or at law and shall not be construed as liquidated damages or as limiting Landlord's remedies in any manner. In addition to the late charge described above, any Rent or other amounts owing hereunder which are not paid within fifteen (15) days after the date they are due shall bear interest from the date when due until paid at a rate per annum equal to the lesser of (i) the annual "Bank Prime Loan" rate cited in the Federal Reserve Statistical Release Publication G.13(415), published on the first Tuesday of each calendar month (or such other comparable index as Landlord and Tenant shall reasonably agree upon if such rate ceases to be published) plus two (2) percentage points, and (ii) the highest rate permitted by applicable law (the "Interest Rate").
ARTICLE 26
LANDLORD'S RIGHT TO CURE DEFAULT; PAYMENTS BY TENANT
26.1 Landlord's Cure. All covenants and agreements to be kept or performed by Tenant under this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any reduction of Rent, except to the extent, if any, otherwise expressly provided herein.
If Tenant shall fail to perform any obligation under this Lease, and such failure shall continue in excess of the time allowed under Section 19.1.2, above, unless a specific time period is otherwise stated in this Lease, Landlord may, but shall not be obligated to, make any such payment or perform any such act on Tenant's part without waiving its rights based upon any default of Tenant and without releasing Tenant from any obligations hereunder.
26.2 Tenant's Reimbursement. Except as may be specifically provided to
the contrary in this Lease, Tenant shall pay to Landlord, upon delivery by
Landlord to Tenant of statements therefor: (i) sums equal to expenditures
reasonably made and obligations incurred by Landlord in connection with the
remedying by Landlord of Tenant's defaults pursuant to the provisions of
Section 26.1; (ii) sums equal to all losses, costs, liabilities, damages and
expenses referred to in Article 10 of this Lease; and (iii) sums equal to
all expenditures made and obligations incurred by Landlord in collecting or
attempting to collect the Rent or in enforcing or attempting to enforce any
rights of Landlord under this Lease or pursuant to law, including, without
limitation, all reasonable legal fees and other amounts so expended.
Tenant's obligations under this Section 26.2 shall survive the expiration or
sooner termination of the Lease Term.
ARTICLE 27
ENTRY BY LANDLORD
Landlord reserves the right at all reasonable times and upon at least 24 hours prior notice to or verbal authorization by Tenant (except in the case of an emergency) to enter the Premises to (i) inspect them; (ii) show the Premises to (x) prospective purchasers, (y) prospective tenants during the last six (6) months of the Lease Term, or (z) current or prospective mortgagees, ground or underlying lessors or insurers; (iii) post notices of nonresponsibility; or (iv) alter, improve or repair the Premises or the Building, or for structural alterations, repairs or improvements to the Building or the Building's systems and equipment. Notwithstanding anything to the contrary contained in this Article 27, Landlord may enter the Premises at any time to (A) perform services required of Landlord, including janitorial service; (B) take possession due to any breach of this Lease in the manner provided herein; and (C) perform any covenants of Tenant which Tenant fails to perform. Landlord may make any such entries without the abatement of Rent, except as otherwise provided in this Lease, and may take such reasonable steps as required to accomplish the stated purposes. Tenant hereby waives any claims for damages or for any injuries or inconvenience to or interference with Tenant's business, lost profits, any loss of occupancy or quiet enjoyment of the Premises, and any other loss occasioned thereby. For each of the above purposes, Landlord shall at all times have a key with which to unlock all the doors in the Premises, excluding Tenant's vaults, safes and special security areas designated in advance by Tenant. In an emergency, Landlord shall have the right to use any means that Landlord may deem proper to open the doors in and to the Premises. Any entry into the Premises by Landlord in the manner hereinbefore described shall not be deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an actual or constructive eviction of Tenant from any portion of the Premises. No provision of this Lease shall be
construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly agreed to be performed by Landlord herein.
ARTICLE 28
TENANT PARKING
Landlord shall provide, for the initial term of the Lease, a minimum of four (4) parking spaces per each one thousand (1,000) rentable square feet of the Premises, which, based upon the initial rentable square feet of the Premises, is equal to two hundred (200) parking spaces. There shall be no charge for parking during the initial Lease Term. Tenant's continued right to use the parking spaces is conditioned upon Tenant abiding by all rules and regulations which are prescribed from time to time for the orderly operation and use of the parking facility where the parking spaces are located, including any sticker or other identification system established by Landlord, Tenant's cooperation in seeing that Tenant's employees and visitors also comply with such rules and regulations and Tenant not being in default under this Lease. Landlord specifically reserves the right to change the size, configuration, design, layout and all other aspects of the Project parking facility at any time and Tenant acknowledges and agrees that Landlord may, without incurring any liability to Tenant and without any abatement of Rent under this Lease, from time to time, close-off or restrict access to the Project parking facility for purposes of permitting or facilitating any such construction, alteration or improvements. Landlord may delegate its responsibilities hereunder to a parking operator in which case such parking operator shall have all the rights of control attributed hereby to the Landlord. The parking spaces available to Tenant pursuant to this Article 28 are provided to Tenant solely for use by Tenant's own personnel and such right to such spaces may not be transferred, assigned, subleased or otherwise alienated by Tenant without Landlord's prior approval.
ARTICLE 29
MISCELLANEOUS PROVISIONS
29.1 Terms; Captions. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. The necessary grammatical changes required to make the provisions hereof apply either to corporations or partnerships or individuals, men or women, as the case may require, shall in all cases be assumed as though in each case fully expressed. The captions of Articles and Sections are for convenience only and shall not be deemed to limit, construe, affect or alter the meaning of such Articles and Sections.
29.2 Binding Effect. Subject to all other provisions of this Lease, each of the covenants, conditions and provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit not only of Landlord and of Tenant, but also of their respective heirs, personal representatives, successors or assigns, provided this clause shall not permit any assignment by Tenant contrary to the provisions of Article 14 of this Lease.
29.3 No Air Rights. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Project, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease.
29.4 Modification of Lease. Should any current or prospective mortgagee or ground lessor for the Building or Project require a modification of this Lease, which modification will not cause an increased cost or expense to Tenant or in any other way materially and adversely change the rights and obligations of Tenant hereunder, then and in such event, Tenant agrees that this Lease may be so modified and agrees to execute whatever documents are reasonably required therefor and to deliver the same to Landlord within ten (10) business days following a request therefor. At the request of Landlord or any mortgagee or ground lessor, Tenant agrees to execute a short form of Lease and deliver the same to Landlord within ten (10) business days following the request therefor.
29.5 Transfer of Landlord's Interest. Tenant acknowledges that Landlord has the right to transfer all or any portion of its interest in the Project or Building and in this Lease, and Tenant agrees that in the event of any such transfer, Landlord shall automatically be released from all liability under this Lease and Tenant agrees to look solely to such transferee for the performance of Landlord's obligations hereunder after the date of transfer and such transferee shall be deemed to have fully assumed and be liable for all obligations of this Lease to be performed by Landlord, including the return of any Security Deposit to the extent actually transferred or credited to such transferee, and Tenant shall attorn to such transferee.
29.6 Prohibition Against Recording. Except as provided in Section 29.4 of this Lease, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by anyone acting through, under or on behalf of Tenant.
29.7 Landlord's Title. Landlord's title is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord.
29.8 Relationship of Parties. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party to create the relationship of principal and agent, partnership, joint venturer or any association between Landlord and Tenant.
29.9 Application of Payments. Landlord shall have the right to apply payments received from Tenant pursuant to this Lease, regardless of Tenant's designation of such payments, to satisfy any obligations of Tenant hereunder, in such order and amounts as Landlord, in its sole discretion, subject to the terms of this Lease, may elect.
29.10 Time of Essence. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor.
29.11 Partial Invalidity. If any term, provision or condition contained in this Lease shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term, provision or condition to persons or circumstances other than those with respect to which it is invalid or unenforceable, shall not be affected thereby, and each and every other term, provision and condition of this Lease shall be valid and enforceable to the fullest extent possible permitted by law.
29.12 No Warranty. In executing and delivering this Lease, Tenant has not relied on any representations, including, but not limited to, any representation as to the amount of any item comprising Additional Rent or the amount of the Additional Rent in the aggregate or that Landlord is furnishing the same services to other tenants, at all, on the same level or on the same basis, or any warranty or any statement of Landlord which is not set forth herein or in one or more of the exhibits attached hereto.
29.13 Landlord Exculpation. The liability of Landlord or the Landlord
Parties to Tenant for any default by Landlord under this Lease or arising in
connection herewith or with Landlord's operation, management, leasing,
repair, renovation, alteration or any other matter relating to the Project
or the Premises shall be limited solely and exclusively to an amount which
is equal to the lesser of (a) the interest of Landlord in the Building or
(b) the equity interest Landlord would have in the Building if the Building
were encumbered by third-party debt in an amount equal to eighty percent
(80%) of the value of the Building (as such value is determined by
Landlord), provided that in no event shall such liability extend to any
sales or insurance proceeds received by Landlord or the Landlord Parties in
connection with the Project, Building or Premises. Neither Landlord, nor
any of the Landlord Parties shall have any personal liability therefor, and
Tenant hereby expressly waives and releases such personal liability on
behalf of itself and all persons claiming by, through or under Tenant. The
limitations of liability contained in this Section 29.13 shall inure to the
benefit of Landlord's and the Landlord Parties' present and future partners,
beneficiaries, officers, directors, trustees, shareholders, agents and
employees, and their respective partners, heirs, successors and assigns.
Under no circumstances shall any present or future partner of Landlord (if
Landlord is a partnership), or trustee or beneficiary (if Landlord or any
partner of Landlord is a trust), have any liability for the performance of
Landlord's obligations under this Lease. Notwithstanding any contrary
provision herein, neither Landlord nor the Landlord Parties shall be liable
under any circumstances for injury or damage to, or interference with,
Tenant's business, including but not limited to, loss of profits, loss of
rents or other revenues, loss of business opportunity, loss of goodwill or
loss of use, in each case, however occurring.
29.14 Entire Agreement. It is understood and acknowledged that there are no oral agreements between the parties hereto affecting this Lease and this Lease constitutes the parties' entire agreement with respect to the leasing of the Premises and supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understandings, if any,
between the parties hereto or displayed by Landlord to Tenant with respect to the subject matter thereof, and none thereof shall be used to interpret or construe this Lease. None of the terms, covenants, conditions or provisions of this Lease can be modified, deleted or added to except in writing signed by the parties hereto.
29.15 Right to Lease. Landlord reserves the absolute right to effect such other tenancies in the Project as Landlord in the exercise of its sole business judgment shall determine to best promote the interests of the Building or Project. Tenant does not rely on the fact, nor does Landlord represent, that any specific tenant or type or number of tenants shall, during the Lease Term, occupy any space in the Building or Project.
29.16 Force Majeure. Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease, as modified by Article 11 hereof (collectively, a "Force Majeure"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure.
29.17 Waiver of Redemption by Tenant. Tenant hereby waives, for Tenant and for all those claiming under Tenant, any and all rights now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease.
29.18 Notices. All notices, demands, statements, designations,
approvals or other communications (collectively, "Notices") given or
required to be given by either party to the other hereunder or by law shall
be in writing, shall be (A) sent by United States certified or registered
mail, postage prepaid, return receipt requested ("Mail"), (B) transmitted by
telecopy, if such telecopy is promptly followed by a Notice sent by Mail,
(C) delivered by a nationally recognized overnight courier, or (D) delivered
personally. Any Notice shall be sent, transmitted, or delivered, as the
case may be, to Tenant at the appropriate address set forth in Section 10 of
the Summary, or to such other place as Tenant may from time to time
designate in a Notice to Landlord, or to Landlord at the addresses set forth
below, or to such other places as Landlord may from time to time designate
in a Notice to Tenant. Any Notice will be deemed given (i) three (3) days
after the date it is posted if sent by Mail, (ii) the date the telecopy is
transmitted, (iii) the date the overnight courier delivery is made, or
(iv) the date personal delivery is made. As of the date of this Lease, any
Notices to Landlord must be sent, transmitted, or delivered, as the case may
be, to the following addresses:
Carlyle Realty
4675 MacArthur Court
Newport Beach, California 94660
Attention: Allen L. Cashion
Telephone: (949) 757-9535
Fax: (949) 757-0720
and
ZKS Real Estate Partners
3697 Mt. Diablo Boulevard, Suite 100
Lafayette, California 94549
Attention: David A. Kingery
Telephone: (925) 283-8280
Fax: (925) 283-7638
and
Allen, Matkins, Leck, Gamble & Mallory
333 Bush Street, Suite 1700
San Francisco, California 94104
Attention: Richard C. Mallory, Esq.
Telephone: (415) 837-1515
Fax: (415) 837-1516
29.19 Joint and Several. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease shall be joint and several.
29.20 Authority. If Tenant is a corporation, trust or partnership, each individual executing this Lease on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Lease and that each person signing on behalf of Tenant is authorized to do so. In such event, Tenant shall, within ten (10) days after execution of this Lease, deliver to Landlord satisfactory evidence of such authority and, if a corporation, upon demand by Landlord, also deliver to Landlord satisfactory evidence of (i) good standing in
Tenant's state of incorporation and (ii) qualification to do business in California.
29.21 Attorneys' Fees. In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease or for any other relief against the other, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment.
29.22 Governing Law; WAIVER OF TRIAL BY JURY. This Lease shall be construed and enforced in accordance with the laws of the State of California. IN ANY ACTION OR PROCEEDING ARISING HEREFROM, LANDLORD AND TENANT HEREBY CONSENT TO (I) THE JURISDICTION OF ANY COMPETENT COURT WITHIN THE STATE OF CALIFORNIA, COUNTY OF ALAMEDA (II) SERVICE OF PROCESS BY ANY MEANS AUTHORIZED BY CALIFORNIA LAW, AND (III) IN THE INTEREST OF SAVING TIME AND EXPENSE, TRIAL WITHOUT A JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER OR THEIR SUCCESSORS IN RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS LEASE, THE RELATIONSHIP OF LANDLORD AND TENANT, TENANT'S USE OR OCCUPANCY OF THE PREMISES, AND/OR ANY CLAIM FOR INJURY OR DAMAGE, OR ANY EMERGENCY OR STATUTORY REMEDY. IN THE EVENT LANDLORD COMMENCES ANY SUMMARY PROCEEDINGS OR ACTION FOR NONPAYMENT OF BASE RENT OR ADDITIONAL RENT, TENANT SHALL NOT INTERPOSE ANY COUNTERCLAIM OF ANY NATURE OR DESCRIPTION (UNLESS SUCH COUNTERCLAIM SHALL BE MANDATORY) IN ANY SUCH PROCEEDING OR ACTION, BUT SHALL BE RELEGATED TO AN INDEPENDENT ACTION AT LAW.
29.23 Submission of Lease. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of, option for or option to lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant.
29.24 Brokers. Landlord and Tenant hereby warrant to each other that they have had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, excepting only the real estate brokers or agents specified in Section 12 of the Summary (the "Brokers"), and that they know of no other real estate broker or agent who is entitled to a commission in connection with this Lease. Each party agrees to indemnify and defend the other party against and hold the other party harmless from any and all claims, demands, losses, liabilities, lawsuits, judgments, costs and expenses (including without limitation reasonable attorneys' fees) with respect to any leasing commission or equivalent compensation alleged to be owing on account of any dealings with any real estate broker or agent, other than the Brokers, occurring by, through, or under the indemnifying party.
29.25 Independent Covenants. This Lease shall be construed as though the covenants herein between Landlord and Tenant are independent and not dependent and Tenant hereby expressly waives the benefit of any statute to the contrary and agrees that if Landlord fails to perform its obligations set forth herein, Tenant shall not be entitled to make any repairs or perform any acts hereunder at Landlord's expense or to any setoff of the Rent or other amounts owing hereunder against Landlord.
29.26 Project or Building Name and Signage. Landlord shall have the right at any time to change the name of the Project or Building and to install, affix and maintain any and all signs on the exterior and on the interior of the Project or Building as Landlord may, in Landlord's
sole discretion, desire. Tenant shall not use the words "Scott Creek Business Park" or the name of the Project or Building or use pictures or illustrations of the Project or Building in advertising or other publicity or for any purpose other than as the address of the business to be conducted by Tenant in the Premises, without the prior written consent of Landlord.
29.27 Counterparts. This Lease may be executed in counterparts with the same effect as if both parties hereto had executed the same document. Both counterparts shall be construed together and shall constitute a single lease.
29.28 Confidentiality. Each party hereto acknowledges that the content of this Lease and any related documents are confidential information. Landlord and Tenant shall keep such confidential information strictly confidential and shall not disclose such confidential information to any person or entity other than their respective financial, legal, and space planning consultants except as otherwise required by law.
29.29 Development of the Project.
29.29.1 Subdivision. Landlord reserves the right to further subdivide all or a portion of the Project. Tenant agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, any additional documents needed to conform this Lease to the circumstances resulting from such subdivision.
29.29.2 The Other Improvements. If portions of the Project or property adjacent to the Project (collectively, the "Other Improvements") are owned by an entity other than Landlord, Landlord, at its option, may enter into an agreement with the owner or owners of any or all of the Other Improvements to provide (i) for reciprocal rights of access and/or use of the Project and the Other Improvements, (ii) for the common management, operation, maintenance, improvement and/or repair of all or any portion of the Project and the Other Improvements, (iii) for the allocation of a portion of the Direct Expenses to the Other Improvements and the operating expenses and taxes for the Other Improvements to the Project, and (iv) for the use or improvement of the Other Improvements and/or the Project in connection with the improvement, construction, and/or excavation of the Other Improvements and/or the Project. Nothing contained herein shall be deemed or construed to limit or otherwise affect Landlord's right to convey all or any portion of the Project or any other of Landlord's rights described in this Lease.
29.29.3 Construction of Project and Other Improvements. Tenant acknowledges that portions of the Project and/or the Other Improvements may be under construction following Tenant's occupancy of the Premises, and that such construction may result in levels of noise, dust, obstruction of access, etc. which are in excess of that present in a fully constructed project. Tenant hereby waives any and all rent offsets or claims of constructive eviction which may arise in connection with such construction; provided that Landlord shall use commercially reasonable efforts to minimize any unreasonable interference or disturbance such construction causes to Tenant's use and occupancy of the Premises.
29.30 Building Renovations. It is specifically understood and agreed that Landlord has no obligation and has made no promises to alter, remodel, improve, renovate, repair or decorate the Premises, Building, or any part thereof and that no representations respecting the condition of the Premises or the Building have been made by Landlord to Tenant except as specifically set forth herein or in the Tenant Work Letter. However, Tenant hereby acknowledges that Landlord is currently renovating or may during the Lease Term renovate, improve, alter, or modify (collectively, the "Renovations") the Project, the Building and/or the Premises. Tenant hereby agrees that such Renovations shall in no way constitute a constructive eviction of Tenant nor entitle Tenant to any abatement of Rent. Landlord shall have no responsibility and shall not be liable to Tenant for any injury to or interference with Tenant's business arising from the Renovations, nor shall Tenant be entitled to any compensation or damages from Landlord for loss of the use of the whole or any part of the Premises or of Tenant's personal property or improvements resulting from the Renovations, or for any inconvenience or annoyance occasioned by such Renovations.
29.31 No Violation. Tenant hereby warrants and represents that neither its execution of nor performance under this Lease shall cause Tenant to be in violation of any agreement, instrument, contract, law, rule or regulation by which Tenant is bound, and Tenant shall protect, defend, indemnify and hold Landlord harmless against any claims, demands, losses, damages, liabilities, costs and expenses, including, without limitation, reasonable attorneys' fees and costs, arising from Tenant's breach of this warranty and representation.
29.32 Communications and Computer Lines. Tenant may install, maintain,
replace, remove or use any communications or computer wires and cables
(collectively, the "Lines") at the Project in or serving the Premises,
provided that (i) Tenant shall obtain Landlord's prior written consent, use
an experienced and qualified contractor approved in writing by Landlord, and
comply with all of the other provisions of Articles 7 and 8 of this Lease,
(ii) an acceptable number of spare Lines and space for additional Lines
shall be maintained for existing and future occupants of the Project, as
determined in Landlord's reasonable opinion, (iii) the Lines therefor
(including riser cables) shall be appropriately insulated to prevent
excessive electromagnetic fields or radiation, and shall be surrounded by a
protective conduit reasonably acceptable to Landlord, (iv) any new or
existing Lines servicing the Premises shall comply with all applicable
governmental laws and regulations, (v) as a condition to permitting the
installation of new Lines, Landlord may require that Tenant remove existing
Lines located in or serving the Premises and repair any damage in connection
with such removal, and (vi) Tenant shall pay all costs in connection
therewith. Landlord reserves the right to require that Tenant remove any
Lines located in or serving the Premises which are installed in violation of
these provisions, or which are at any time in violation of any laws or
represent a dangerous or potentially dangerous condition.
29.33 No Discrimination. There shall be no discrimination against, or segregation of, any person or persons on account of sex, marital status, race, color, religion, creed, national origin or ancestry in the Transfer of the Premises, or any portion thereof, nor shall the Tenant
itself, or any person claiming under or through it, establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees, or vendees of the Premises, or any portion thereof.
29.34 Security Measures. Tenant hereby acknowledges that Landlord shall have no obligation to provide a guard service or other security measures whatsoever. Tenant assumes all responsibility for the protection of the Premises, Tenant, its agents and invitees and their property from the acts of third parties.
ARTICLE 30
OPTION TO EXTEND
30.1 Option Right. Landlord hereby grants Tenant one (1) option to
extend the initial Lease Term for the entire Premises for a period of five
(5) years (the "Option Term"), which option shall be exercisable only by
written Exercise Notice (as defined below) delivered by Tenant to Landlord
as provided below, provided that, as of the date of delivery of such
Exercise Notice, Tenant is not in a state of uncured monetary or other
default following the expiration of the applicable cure periods under the
Lease and Tenant has not been in default beyond the expiration of any
applicable notice and cure period more than twice in any one Lease Year.
Upon the proper exercise of such option to extend, and provided that, as of
the end of the initial Lease Term, Tenant is not in default, as described
above, under the Lease, the initial Lease Term shall be extended for the
Option Term. The rights contained in this Article 30 shall be personal to
the original Tenant executing the Lease and any Affiliate and may only be
exercised by the original Tenant or Affiliate, as the case may be, (and not
any other assignee, sublessee or other transferee of Tenant's interest in
the Lease) if the original Tenant or Affiliate, as the case may be, occupies
the entire Premises as of the date of the Exercise Notice.
30.2 Option Rent. The annual base rent payable by Tenant during the
Option Term (the "Option Rent") shall be equal to the greater of (i) the
Base Rent being paid by Tenant immediately prior to the Option Term, and
(ii) ninety-five percent (95%) of the "Fair Market Rent" which for purposes
hereof means the annual basic rent, taking into account whether the then
current market is using leases based on a base year, an expense stop, or a
triple net, at which tenants, as of the commencement of the Option Term, are
leasing non-sublease space comparable in size, location and quality to the
Premises (and including comparable tenant improvements therein) for a
comparable term, located in comparable first-class office "flex" buildings
with prudent ownership (with management practices comparable with
institutional ownership), in the vicinity of the Project (the "Project
Area"), taking into consideration all concessions and inducements generally
being granted at such time. All other terms and conditions of the Lease
shall apply throughout the Option Term; however, any obligation of Landlord
to construct tenant improvements or provide an allowance shall not apply
during the Option Term, except to the extent such provisions are included in
the definition of Fair Market Rent, and Tenant shall, in no
event, have the option to extend the initial Lease Term beyond the Option Term described in Section 30.1 above.
30.3 Exercise of Options. The option contained in this Article 30 shall be exercised by Tenant, if at all, on or before the date (the "Exercise Date") which is at least nine (9) months prior to the expiration of the initial Lease Term by delivering written notice ("Exercise Notice") thereof to Landlord. Tenant may notify Landlord earlier than the Exercise Date of its intent to exercise its option and Landlord will work with Tenant to establish the Fair Market Rent at that time. After the Exercise Date, the parties shall follow the procedure and the Fair Market Rent shall be determined as set forth in Section 30.4 below. Tenant's failure to deliver the Exercise Notice on or before the Exercise Date shall be deemed to constitute Tenant's waiver of its extension right hereunder.
30.4 Determination of Option Rent. Landlord and Tenant shall attempt
to agree upon the Fair Market Rent, using their best good-faith efforts. If
Landlord and Tenant fail to reach agreement upon Fair Market Rent within
fifteen (15) business days following Tenant's delivery of the Exercise
Notice (the "Outside Agreement Date"), then each party shall submit to the
other party a separate written determination of the Fair Market Rent within
fifteen (15) business days after the Outside Agreement Date, and such
determinations shall be submitted to arbitration in accordance with
Sections 30.4.1 through 30.4.7 below. Failure of Tenant or Landlord to
submit a written determination of the Fair Market Rent within such fifteen
(15) business day period shall conclusively be deemed to be the non-
determining party's approval of the Fair Market Rent submitted within such
fifteen (15) business day period by the other party.
30.4.1 Landlord and Tenant shall each appoint one arbitrator who shall by profession be an independent real estate broker who shall individually have no ongoing business relationship with Tenant or Landlord and who shall have been active over the eight (8) year period ending on the date of such appointment in the leasing of first-class office "flex" buildings in the Project Area. The determination of the arbitrators shall be limited solely to the issue of whether Landlord's or Tenant's submitted Fair Market Rent is the closest to the actual Fair Market Rent as determined by the arbitrators, taking into account the requirements of Section 30.2. Each such arbitrator shall be appointed within thirty (30) days after the Outside Agreement Date.
30.4.2 The two (2) arbitrators so appointed shall within ten (10) business days of the date of the appointment of the last appointed arbitrator agree upon and appoint a third arbitrator who shall be qualified under the same criteria as set forth hereinabove for qualification of the initial two (2) arbitrators.
30.4.3 The three (3) arbitrators shall within thirty (30) days after the appointment of the third arbitrator reach a decision as to whether Landlord's or Tenant's submitted Fair Market Rent is the closest to the actual Fair Market Rent, and shall use the closest of Landlord's or Tenant's submitted Fair Market Rent as the Fair Market Rent for purposes of calculating the Option Rent, and shall notify Landlord and Tenant thereof.
30.4.4 The decision of the majority of the three (3) arbitrators shall be binding upon Landlord and Tenant.
30.4.5 If either Landlord or Tenant fails to appoint an arbitrator within thirty (30) days after the Outside Agreement Date, the arbitrator appointed by one of them shall reach a decision, notify Landlord and Tenant thereof, and such arbitrator's decision shall be binding upon Landlord and Tenant.
30.4.6 If the two (2) arbitrators fail to agree upon and appoint
a third arbitrator within the time period provided in Section 30.2 above,
then the parties shall mutually select the third arbitrator, who shall be
qualified under the same criteria as set forth in Section 30.4.1 above. If
Landlord and Tenant are unable to agree upon the third arbitrator within ten
(10) days, then either party may, upon at least five (5) days' prior written
notice to the other party, request the Presiding Judge of the Alameda County
Superior Court, acting in his private and nonjudicial capacity, to appoint
the third arbitrator who shall be qualified under the same criteria as set
forth in Section 30.4.1. Following the appointment of the third arbitrator,
the panel of arbitrators shall within thirty (30) days thereafter reach a
decision as to whether Landlord's or Tenant's submitted Fair Market Rent
shall be used and shall notify Landlord and Tenant thereof.
30.4.7 The cost of the arbitrators and the arbitration proceeding shall be paid by the non-prevailing party.
IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease to be executed the day and date first above written.
"Landlord":
SCOTT CREEK THREE TRUST,
a Maryland real estate investment trust
By: /s/ Gary E. Block Name: Gary E. Block Its: Vice President |
"Tenant":
AEHR TEST SYSTEMS,
a California corporation,
By: /s/ Richard F. Sette Name: Richard F. Sette Its: VP of Operations Date: 8/3/99 By: /s/ Rhea J. Posedel Name: Rhea J. Posedel Its: CEO & President Date: 8/3/99 |
EXHIBIT A-1
SCOTT CREEK BUSINESS PARK
OUTLINE OF PREMISES
[ DIAGRAM SHOWING AREA OF PREMISE LEASED BY TENANT ]
EXHIBIT A-2
SCOTT CREEK BUSINESS PARK
[ DIAGRAM SHOWING SCOTT CREEK BUSINESS PARK ]
EXHIBIT B
SCOTT CREEK BUSINESS PARK
TENANT WORK LETTER
This Tenant Work Letter shall set forth the terms and conditions relating to the construction of the Premises. This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the Premises, in sequence, as such issues will arise during the actual construction of the Premises. All references in this Tenant Work Letter to Articles or Sections of "this Lease" shall mean the relevant portions of the Multi-Tenant Office Triple Net Lease between SCOTT CREEK THREE TRUST, a Maryland real estate investment trust, as Landlord, and AEHR TEST SYSTEMS, a California corporation, as Tenant, dated August ___, 1999 to which this Tenant Work Letter is attached as Exhibit B, and all references in this Tenant Work Letter to Sections of "this Tenant Work Letter" shall mean the relevant portions of Sections 1 through 5 of this Tenant Work Letter.
SECTION 1
DELIVERY OF THE PREMISES AND BASE BUILDING
1.1 Base Building as Constructed by Landlord. Upon the full execution and delivery of this Lease by Landlord and Tenant, Landlord shall deliver the Premises and "Base Building," as that term is defined below, to Tenant, and Tenant shall accept the Premises and Base Building from Landlord in their presently existing, "as-is" condition. Tenant shall accept the Base Building in its presently existing, as is condition, which Base Building shall include only the following items:
1.1.1 Concrete tilt-up.
1.1.2 Slab on grade.
1.1.3 Building standard heating, ventilating and air conditioning
in its "AS-IS" condition) and air-conditioning service ["HVAC"]).
1.1.4 Building, closed and weathered-proof.
1.1.5 Utilities, stubbed at the meters.
1.1.6 Ceiling tiles in their "AS-IS" condition.
1.1.7 Building standard lighting in its "AS-IS" condition
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EXHIBIT B
SECTION 2
TENANT IMPROVEMENTS
2.1 Improvement Allowances.
2.1.1 Tenant Improvement Allowance. Tenant shall be entitled to
a one-time tenant improvement allowance (the "Tenant Improvement Allowance")
in the amount of in the amount of One Million Two Hundred Eighty Two
Thousand Two Hundred Twenty Five Dollars ($1,282,225.00) (which is equal to
Twenty-Five Dollars ($25.00) per rentable square foot of the Premises) for
the costs relating to the initial design and construction of Tenant's
improvements, which are permanently affixed to the Premises (the "Tenant
Improvements"). In no event shall Landlord be obligated to make
disbursements pursuant to this Tenant Work Letter in a total amount which
exceeds the Tenant Improvement Allowance (except as provided in
Section 2.1.2 below regarding the Additional Allowance). The Tenant
Improvement Allowance and any such Additional Allowance provided by Landlord
to Tenant shall be sometimes collectively referred to herein as the
"Allowances."
2.1.2 Additional Allowance. If the cost of the Tenant
Improvement Allowance Items exceeds the Tenant Improvement Allowance, then
Landlord shall make available to Tenant, at Tenant's sole option, an
"Additional Allowance" in the amount of up to, but not exceeding Six Hundred
Fifteen Thousand Four Hundred Sixty Eight and No/100 Dollars ($615,468.00)
(which is Twelve Dollars ($12.00) per rentable square foot of the Premises)
(the "Additional Allowance"). Tenant shall notify Landlord of Tenant's
election to receive the Additional Allowance on or before the date Tenant
commences construction of the Tenant Improvements. If Tenant elects to
receive all or any portion of the Additional Allowance, then Tenant shall,
during the initial Lease Term, pay to Landlord the "Amortization Rent",
which shall be that amount which will fully amortize, over the initial Lease
Term, together with interest at the rate of ten percent (10%) per annum, the
portion of the Additional Allowance utilized by Tenant to pay for the cost
of the Tenant Improvement Allowance Items which exceeds the Tenant
Improvement Allowance. Each such monthly payment of the Amortization Rent
shall be paid by Tenant to Landlord or Landlord's agent at the management
office of the Building or such other place as Landlord may from time to time
designate in writing, in lawful money of the United States of America,
without notice or demand, on the first day of each month during the
Amortization Period. In the event that the Lease shall terminate for any
reason prior to the expiration of the initial Lease Term including, without
limitation, as a result of a default by Tenant under the Lease, Tenant shall
pay to Landlord (which payment shall be part of the damages which Landlord
is entitled to recover as a result of any default by Tenant under the Lease)
the unamortized balanced of the Amortization Rent (i.e., the unamortized
balance of the Additional Allowance provided to Tenant set forth
hereinabove) which has not been paid by Tenant to Landlord as of the date of
such termination pursuant to the foregoing provisions of this Section 2.1.2.
In addition, notwithstanding any of the provisions of the Lease to the
contrary, in no event shall the Amortization Rent be abated or offset for
any reason whatsoever.
EXHIBIT B
2.2 Disbursement of the Allowances.
2.2.1 Tenant Improvement Allowance Items. Except as otherwise set forth in this Tenant Work Letter, the Allowances shall be disbursed by Landlord only for the following items and costs (collectively the "Tenant Improvement Allowance Items"):
2.2.1.1 Payment of the fees of the "Architect", and the "Engineers," as those terms are defined in Section 3.1 of this Tenant Work Letter and the "Project Manager" (as defined in Section 4.2.2.1 below), which fees shall, notwithstanding anything to the contrary contained in this Tenant Work Letter, not exceed an aggregate amount equal to $3.50 per usable square foot of the Premises, and payment of the fees incurred by, and the cost of documents and materials supplied by, Landlord and Landlord's consultants in connection with the preparation and review of the "Construction Drawings," as that term is defined in Section 3.1 of this Tenant Work Letter;
2.2.1.2 The payment of plan check, permit and license fees relating to construction of the Tenant Improvements;
2.2.1.3 The cost of construction of the Tenant Improvements, including, without limitation, testing and inspection costs, freight elevator usage, hoisting and trash removal costs, and contractors' fees and general conditions;
2.2.1.4 The cost of any changes in the Base Building when such changes are required by the Construction Drawings (including if such changes are due to the fact that such work is prepared on an unoccupied basis), such cost to include all direct architectural and/or engineering fees and expenses incurred in connection therewith;
2.2.1.5 The cost of any changes to the Construction Drawings or Tenant Improvements required by all applicable building codes (the "Code");
2.2.1.6 The cost of the "Coordination Fee," as that term is defined in Section 4.2.2 of this Tenant Work Letter;
2.2.1.7 Sales and use taxes and Title 24 fees; and
2.2.1.8 All other costs to be expended by Landlord in connection with the construction of the Tenant Improvements.
2.2.2 Disbursement of the Allowances. During the construction of the Tenant Improvements, Landlord shall make monthly disbursements of the Allowances for Tenant Improvement Allowance Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows.
2.2.2.1 Monthly Disbursements. On or before the fifth (5th) day of each calendar month during the construction of the Tenant Improvements (or such other date as
EXHIBIT B
Landlord may designate), Tenant shall deliver to Landlord: (i) a request
for payment of the "Contractor," as that term is defined in Section 4.1 of
this Tenant Work Letter, approved by Tenant, in a form to be provided by
Landlord, showing the schedule, by trade, of percentage of completion of the
Tenant Improvements in the Premises, detailing the portion of the work
completed and the portion not completed; (ii) invoices from all of "Tenant's
Agents," as that term is defined in Section 4.1.2 of this Tenant Work
Letter, for labor rendered and materials delivered to the Premises; (iii)
executed mechanic's lien releases from all of Tenant's Agents which shall
comply with the appropriate provisions, as reasonably determined by
Landlord, of California Civil Code Section 3262(d); and (iv) all other
information reasonably requested by Landlord. Tenant's request for payment
shall be deemed Tenant's acceptance and approval of the work furnished
and/or the materials supplied as set forth in Tenant's payment request.
Thereafter, Landlord shall deliver a check to Tenant made jointly payable to
Contractor and Tenant in payment of the lesser of: (A) the amounts so
requested by Tenant, as set forth in this Section 2.2.2.1, above, less a ten
percent (10%) retention (the aggregate amount of such retentions to be known
as the "Final Retention"), and (B) the balance of any remaining available
portion of the Allowances (not including the Final Retention), provided that
Landlord does not dispute any request for payment based on non-compliance of
any work with the "Approved Working Drawings," as that term is defined in
Section 3.4 of this Tenant Work Letter, below, or due to any substandard
work, or for any other reason. Landlord's payment of such amounts shall not
be deemed Landlord's approval or acceptance of the work furnished or
materials supplied as set forth in Tenant's payment request.
2.2.2.2 Final Retention. Subject to the provisions of this
Tenant Work Letter, a check for the Final Retention payable jointly to
Tenant and Contractor shall be delivered by Landlord to Tenant following the
completion of construction of the Premises, provided that (i) Tenant
delivers to Landlord properly executed mechanics lien releases in compliance
with both California Civil Code Section 3262(d)(2) and either
Section 3262(d)(3) or Section 3262(d)(4), (ii) Landlord has determined that
no substandard work exists which adversely affects the mechanical,
electrical, plumbing, heating, ventilating and air conditioning, life-safety
or other systems of the Building, the curtain wall of the Building, the
structure or exterior appearance of the Building, or any other tenant's use
of such other tenant's leased premises in the Building and (iii) Architect
delivers to Landlord a certificate, in a form reasonably acceptable to
Landlord, certifying that the construction of the Tenant Improvements in the
Premises has been substantially completed.
2.2.2.3 Other Terms. Landlord shall only be obligated to make disbursements from the Allowances to the extent costs are incurred by Tenant for Tenant Improvement Allowance Items. All Tenant Improvement Allowance Items for which the Allowances has been made available shall be deemed Landlord's property under the terms of this Lease.
2.3 Standard Tenant Improvement Package. Landlord has established specifications (the "Specifications") for the Building standard components to be used in the construction of the
EXHIBIT B
Tenant Improvements in the Premises (collectively, the "Standard Improvement Package"), which Specifications are attached hereto as Schedule "1". Unless otherwise approved in writing by Landlord, the quality of Tenant Improvements shall be equal to or of greater quality than the quality of the Specifications, provided that the Tenant Improvements shall comply with certain Specifications as designated by Landlord. Landlord may make changes to the Specifications for the Standard Improvement Package from time to time.
SECTION 3
CONSTRUCTION DRAWINGS
3.1 Selection of Architect/Construction Drawings. Tenant shall retain the architect/space planner as reasonably approved by Landlord (the "Architect") to prepare the "Construction Drawings," as that term is defined in this Section 3.1. Tenant shall retain an engineering consultant reasonably approved by Landlord (provided Tenant shall use the engineering firm of C Plus D Engineers for all structural work on the Building) (the "Engineers") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC, lifesafety, and sprinkler work in the Premises, which work is not part of the Base Building. The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the "Construction Drawings." All Construction Drawings shall comply with the drawing format and specifications determined by Landlord, and shall be subject to Landlord's approval. Tenant and Architect shall verify, in the field, the dimensions and conditions as shown on the relevant portions of the base building plans, and Tenant and Architect shall be solely responsible for the same, and Landlord shall have no responsibility in connection therewith. Landlord's review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord's review of the same, or obligate Landlord to review the same, for quality, design, Code compliance or other like matters. Accordingly, notwithstanding that any Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Tenant by Landlord or Landlord's space planner, architect, engineers, and consultants, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings, and Tenant's waiver and indemnity set forth in this Lease shall specifically apply to the Construction Drawings.
3.2 Final Space Plan. Tenant shall supply Landlord with four (4) copies signed by Tenant of its final space plan for the Premises before any architectural working drawings or engineering drawings have been commenced. The final space plan (the "Final Space Plan") shall include a layout and designation of all offices, rooms and other partitioning, their intended use, and equipment to be contained therein. Landlord may request clarification or more specific drawings for special use items not included in the Final Space Plan. Landlord shall advise Tenant within five (5) business days after Landlord's receipt of the Final Space Plan for the Premises if the same is unsatisfactory or incomplete in any respect. If Tenant is so advised,
EXHIBIT B
Tenant shall promptly cause the Final Space Plan to be revised to correct any deficiencies or other matters Landlord may reasonably require.
3.3 Final Working Drawings. After the Final Space Plan has been
approved by Landlord, Tenant shall supply the Engineers with a complete
listing of standard and non-standard equipment and specifications,
including, without limitation, B.T.U. calculations, electrical requirements
and special electrical receptacle requirements for the Premises, to enable
the Engineers and the Architect to complete the "Final Working Drawings" (as
that term is defined below) in the manner as set forth below. Upon the
approval of the Final Space Plan by Landlord and Tenant, Tenant shall
promptly cause the Architect and the Engineers to complete the architectural
and engineering drawings for the Premises, and Architect shall compile a
fully coordinated set of architectural, structural, mechanical, electrical
and plumbing working drawings in a form which is complete to allow
subcontractors to bid on the work and to obtain all applicable permits
(collectively, the "Final Working Drawings") and shall submit the same to
Landlord for Landlord's approval. Tenant shall supply Landlord with four
(4) copies signed by Tenant of such Final Working Drawings. Landlord shall
advise Tenant within five (5) business days after Landlord's receipt of the
Final Working Drawings for the Premises if the same is unsatisfactory or
incomplete in any respect. If Tenant is so advised, Tenant shall
immediately revise the Final Working Drawings in accordance with such review
and any disapproval of Landlord in connection therewith.
3.4 Approved Working Drawings. The Final Working Drawings shall be approved by Landlord (the "Approved Working Drawings") prior to the commencement of construction of the Premises by Tenant. After approval by Landlord of the Final Working Drawings, Tenant may submit the same to the appropriate municipal authorities for all applicable building permits. Tenant hereby agrees that neither Landlord nor Landlord's consultants shall be responsible for obtaining any building permit or certificate of occupancy for the Premises and that obtaining the same shall be Tenant's responsibility; provided, however, that Landlord shall cooperate with Tenant in executing permit applications and performing other ministerial acts reasonably necessary to enable Tenant to obtain any such permit or certificate of occupancy. No changes, modifications or alterations in the Approved Working Drawings may be made without the prior written consent of Landlord, which consent may not be unreasonably withheld.
SECTION 4
CONSTRUCTION OF THE TENANT IMPROVEMENTS
4.1 Tenant's Selection of Contractors.
4.1.1 The Contractor. A general contractor shall be retained by Tenant to construct the Tenant Improvements. Such general contractor ("Contractor") shall be selected by Tenant from a list of general contractors supplied by Landlord, and Tenant shall deliver to Landlord notice of its selection of the Contractor upon such selection.
EXHIBIT B
4.1.2 Tenant's Agents. All subcontractors, laborers, materialmen, and suppliers used by Tenant (such subcontractors, laborers, materialmen, and suppliers, and the Contractor to be known collectively as "Tenant's Agents") must be approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed. If Landlord does not approve any of Tenant's proposed subcontractors, laborers, materialmen or suppliers, Tenant shall submit other proposed subcontractors, laborers, materialmen or suppliers for Landlord's written approval.
4.2 Construction of Tenant Improvements by Tenant's Agents.
4.2.1 Construction Contract; Cost Budget. Prior to Tenant's
execution of the construction contract and general conditions with
Contractor (the "Contract"), Tenant shall submit the Contract to Landlord
for its approval, which approval shall not be unreasonably withheld or
delayed. Prior to the commencement of the construction of the Tenant
Improvements, and after Tenant has accepted all bids for the Tenant
Improvements, Tenant shall provide Landlord with a detailed breakdown, by
trade, of the final costs to be incurred or which have been incurred, as set
forth more particularly in Sections 2.2.1.1 through 2.2.1.8 of this Tenant
Work Letter, above, in connection with the design and construction of the
Tenant Improvements to be performed by or at the direction of Tenant or the
Contractor, which costs form a basis for the amount of the Contract (the
"Final Costs"). Prior to the commencement of construction of the Tenant
Improvements, Tenant shall supply Landlord with cash in an amount (the
"Over-Allowance Amount") equal to the difference between the Final Costs
exceed the sum of (i) the Tenant Improvement Allowance, plus (ii) any
Additional Allowance elected to be received by Tenant pursuant to
Section 2.1.2 above). The Over-Allowance Amount shall be disbursed by
Landlord prior to the disbursement of any of the then remaining portion of
the Allowances, and such disbursement shall be pursuant to the same
procedure as the Allowances. In the event that, after the Final Costs have
been delivered by Tenant to Landlord, the costs relating to the design and
construction of the Tenant Improvements shall change, any additional costs
necessary to such design and construction in excess of the Final Costs,
shall be paid by Tenant to Landlord immediately as an addition to the Over-
Allowance Amount or at Landlord's option, Tenant shall make payments for
such additional costs out of its own funds, but Tenant shall continue to
provide Landlord with the documents described in Sections 2.2.2.1 (i), (ii),
(iii) and (iv) of this Tenant Work Letter, above, for Landlord's approval,
prior to Tenant paying such costs.
4.2.2 Tenant's Agents.
4.2.2.1 Landlord's General Conditions for Tenant's Agents and Tenant Improvement Work. Tenant's and Tenant's Agent's construction of the Tenant Improvements shall comply with the following: (i) the Tenant Improvements shall be constructed in strict accordance with the Approved Working Drawings; (ii) Tenant's Agents shall submit schedules of all work relating to the Tenant's Improvements to Contractor and Contractor shall, within five (5) business days of receipt thereof, inform Tenant's Agents of any changes which are necessary thereto, and Tenant's Agents shall adhere to such corrected schedule; and (iii) Tenant shall abide
EXHIBIT B
by all rules made by Landlord's Building manager with respect to the use of
freight, loading dock and service elevators, storage of materials,
coordination of work with the contractors of other tenants, and any other
matter in connection with this Tenant Work Letter, including, without
limitation, the construction of the Tenant Improvements. Tenant shall pay a
logistical coordination fee (the "Coordination Fee") to Landlord or
Landlord's designated Project Manager (the "Project Manager") in an amount
equal to the product of (i) two percent (2%) and (ii) the sum of the Tenant
Improvement Allowance, any Additional Allowance drawn by Tenant pursuant to
Section 2.2.1 above, the Over-Allowance Amount, as such amount may be
increased hereunder, and any other amounts expended by Tenant in connection
with the design and construction of the Tenant Improvements, which
Coordination Fee shall be for services relating to the coordination of the
construction of the Tenant Improvements.
4.2.2.2 Indemnity. Tenant's indemnity of Landlord as set forth in this Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Tenant or Tenant's Agents, or anyone directly or indirectly employed by any of them, or in connection with Tenant's non-payment of any amount arising out of the Tenant Improvements and/or Tenant's disapproval of all or any portion of any request for payment. Such indemnity by Tenant, as set forth in this Lease, shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to Landlord's performance of any ministerial acts reasonably necessary (i) to permit Tenant to complete the Tenant Improvements, and (ii) to enable Tenant to obtain any building permit or certificate of occupancy for the Premises.
4.2.2.3 Requirements of Tenant's Agents. Each of Tenant's
Agents shall guarantee to Tenant and for the benefit of Landlord that the
portion of the Tenant Improvements for which it is responsible shall be free
from any defects in workmanship and materials for a period of not less than
one (1) year from the date of completion thereof. Each of Tenant's Agents
shall be responsible for the replacement or repair, without additional
charge, of all work done or furnished in accordance with its contract that
shall become defective within one (1) year after the later to occur of (i)
completion of the work performed by such contractor or subcontractors and
(ii) the Lease Commencement Date. The correction of such work shall
include, without additional charge, all additional expenses and damages
incurred in connection with such removal or replacement of all or any part
of the Tenant Improvements, and/or the Building and/or common areas that may
be damaged or disturbed thereby. All such warranties or guarantees as to
materials or workmanship of or with respect to the Tenant Improvements shall
be contained in the Contract or subcontract and shall be written such that
such guarantees or warranties shall inure to the benefit of both Landlord
and Tenant, as their respective interests may appear, and can be directly
enforced by either. Tenant covenants to give to Landlord any assignment or
other assurances which may be necessary to effect such right of direct
enforcement.
4.2.2.4 Insurance Requirements.
EXHIBIT B
4.2.2.4.1 General Coverages. All of Tenant's Agents shall carry worker's compensation insurance covering all of their respective employees, and shall also carry public liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in this Lease.
4.2.2.4.2 Special Coverages. Tenant shall carry or cause to be carried "Builder's All Risk" insurance in an amount approved by Landlord covering the construction of the Tenant Improvements, and such other insurance as Landlord may require, it being understood and agreed that the Tenant Improvements shall be insured by Tenant pursuant to this Lease immediately upon completion thereof. Such insurance shall be in amounts and shall include such extended coverage endorsements as may be reasonably required by Landlord including, but not limited to, the requirement that all of Tenant's Agents shall carry excess liability and Products and Completed Operation Coverage insurance, each in amounts not less than $500,000 per incident, $1,000,000 in aggregate, and in form and with companies as are required to be carried by Tenant as set forth in this Lease.
4.2.2.4.3 General Terms. Certificates for all insurance carried pursuant to this Section 4.2.2.4 shall be delivered to Landlord before the commencement of construction of the Tenant Improvements and before the Contractor's equipment is moved onto the site. All such policies of insurance must contain a provision that the company writing said policy will give Landlord thirty (30) days prior written notice of any cancellation or lapse of the effective date or any reduction in the amounts of such insurance. In the event that the Tenant Improvements are damaged by any cause during the course of the construction thereof, Tenant shall immediately repair the same at Tenant's sole cost and expense. Tenant's Agents shall maintain all of the foregoing insurance coverage in force until the Tenant Improvements are fully completed and accepted by Landlord, except for any Products and Completed Operation Coverage insurance required by Landlord, which is to be maintained for ten (10) years following completion of the work and acceptance by Landlord and Tenant. All policies carried under this Section 4.2.2.4 shall insure Landlord and Tenant, as their interests may appear, as well as Contractor and Tenant's Agents. All insurance, except Workers' Compensation, maintained by Tenant's Agents shall preclude subrogation claims by the insurer against anyone insured thereunder. Such insurance shall provide that it is primary insurance as respects the owner and that any other insurance maintained by owner is excess and noncontributing with the insurance required hereunder. The requirements for the foregoing insurance shall not derogate from the provisions for indemnification of Landlord by Tenant under Section 4.2.2.2 of this Tenant Work Letter. Landlord may, in its discretion, require Tenant to obtain a lien and completion bond or some alternate form of security satisfactory to Landlord in an amount sufficient to ensure the lien-free completion of the Tenant Improvements and naming Landlord as a co-obligee.
4.2.3 Governmental Compliance. The Tenant Improvements shall comply in all respects with the following: (i) the Code and other state, federal, city or quasi-governmental laws, codes, ordinances and regulations, as each may apply according to the rulings of the controlling public official, agent or other person; (ii) applicable standards of the American
EXHIBIT B
Insurance Association (formerly, the National Board of Fire Underwriters) and the National Electrical Code; and (iii) building material manufacturer's specifications.
4.2.4 Inspection by Landlord. Landlord shall have the right to inspect the Tenant Improvements at all times, provided however, that Landlord's failure to inspect the Tenant Improvements shall in no event constitute a waiver of any of Landlord's rights hereunder nor shall Landlord's inspection of the Tenant Improvements constitute Landlord's approval of the same. Should Landlord disapprove any portion of the Tenant Improvements, Landlord shall notify Tenant in writing of such disapproval and shall specify the items disapproved. Any defects or deviations in, and/or disapproval by Landlord of, the Tenant Improvements shall be rectified by Tenant at no expense to Landlord, provided however, that in the event Landlord determines that a defect or deviation exists or disapproves of any matter in connection with any portion of the Tenant Improvements and such defect, deviation or matter might adversely affect the mechanical, electrical, plumbing, heating, ventilating and air conditioning or life- safety systems of the Building, the structure or exterior appearance of the Building or any other tenant's use of such other tenant's leased premises, Landlord may, take such action as Landlord deems necessary, at Tenant's expense and without incurring any liability on Landlord's part, to correct any such defect, deviation and/or matter, including, without limitation, causing the cessation of performance of the construction of the Tenant Improvements until such time as the defect, deviation and/or matter is corrected to Landlord's satisfaction.
4.2.5 Meetings. Commencing upon the execution of this Lease, Tenant shall hold weekly meetings at a reasonable time, with the Architect and the Contractor regarding the progress of the preparation of Construction Drawings and the construction of the Tenant Improvements, which meetings shall be held at a location designated by Landlord, and Landlord and/or its agents shall receive prior notice of, and shall have the right to attend, all such meetings, and, upon Landlord's request, certain of Tenant's Agents shall attend such meetings. In addition, minutes shall be taken at all such meetings, a copy of which minutes shall be promptly delivered to Landlord. One such meeting each month shall include the review of Contractor's current request for payment.
4.3 Notice of Completion; Copy of Record Set of Plans. Within ten (10)
days after completion of construction of the Tenant Improvements, Tenant
shall cause a Notice of Completion to be recorded in the office of the
Recorder of the county in which the Building is located in accordance with
Section 3093 of the Civil Code of the State of California or any successor
statute, and shall furnish a copy thereof to Landlord upon such recordation.
If Tenant fails to do so, Landlord may execute and file the same on behalf
of Tenant as Tenant's agent for such purpose, at Tenant's sole cost and
expense. At the conclusion of construction, (i) Tenant shall cause the
Architect and Contractor (A) to update the Approved Working Drawings as
necessary to reflect all changes made to the Approved Working Drawings
during the course of construction, (B) to certify to the best of their
knowledge that the "record-set" of as-built drawings are true and correct,
which certification shall survive the expiration or termination of this
Lease, and (C) to deliver to Landlord two (2) sets of copies of such record
set of drawings
EXHIBIT B
within ninety (90) days following issuance of a certificate of occupancy for the Premises, and (ii) Tenant shall deliver to Landlord a copy of all warranties, guaranties, and operating manuals and information relating to the improvements, equipment, and systems in the Premises.
SECTION 5
MISCELLANEOUS
5.1 Tenant's Representative. Tenant has designated Steve Callagher Cushman & Wakefield as its sole representative with respect to the matters set forth in this Tenant Work Letter, who shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter.
5.2 Landlord's Representative. Landlord has designated Julie Remy as its sole representatives with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant, shall have full authority and responsibility to act on behalf of the Landlord as required in this Tenant Work Letter.
5.3 Time of the Essence in This Tenant Work Letter. Unless otherwise indicated, all references herein to a "number of days" shall mean and refer to calendar days. If any item requiring approval is timely disapproved by Landlord, the procedure for preparation of the document and approval thereof shall be repeated until the document is approved by Landlord.
5.4 Tenant's Lease Default. Notwithstanding any provision to the contrary contained in this Lease, if an event of default as described in the Lease or this Tenant Work Letter has occurred at any time on or before the Substantial Completion of the Premises, then (i) in addition to all other rights and remedies granted to Landlord pursuant to this Lease, Landlord shall have the right to withhold payment of all or any portion of the Allowances and/or Landlord may cause Contractor to cease the construction of the Premises (in which case, Tenant shall be responsible for any delay in the substantial completion of the Premises caused by such work stoppage), and (ii) all other obligations of Landlord under the terms of this Tenant Work Letter shall be forgiven until such time as such default is cured pursuant to the terms of this Lease (in which case, Tenant shall be responsible for any delay in the substantial completion of the Premises caused by such inaction by Landlord).
EXHIBIT B
EXHIBIT C
SCOTT CREEK BUSINESS PARK
NOTICE OF LEASE TERM DATES
Re: Multi-Tenant Office Triple Net Lease dated August ___, 1999
between SCOTT CREEK THREE TRUST, a Maryland real estate investment trust
("Landlord"), and AEHR TEST SYSTEMS, a California corporation ("Tenant")
concerning Suite __ in the building located at 400 Kato Terrace, Fremont,
California.
Ladies and Gentlemen:
In accordance with the Office Lease (the "Lease"), we wish to advise you and/or confirm as follows:
1. The Lease Term shall commence on or has commenced on __________ for a term of _____________ ending on _______________.
2. Rent commenced to accrue on ___________, in the amount of __________.
3. If the Lease Commencement Date is other than the first day of the month, the first billing will contain a pro rata adjustment. Each billing thereafter, with the exception of the final billing, shall be for the full amount of the monthly installment as provided for in the Lease.
4. Your rent checks should be made payable to ____________ at __________.
5. The exact number of rentable square feet within the Premises is __________ square feet.
6. Tenant's Share as adjusted based upon the exact number of usable square feet within the Premises is _____________%.
EXHIBIT C
"Landlord":
SCOTT CREEK THREE TRUST,
a Maryland real estate investment trust
By: ________________________
Its: ____________________
Agreed to and Accepted as
of _____________, 19__.
"Tenant":
AEHR TEST SYSTEMS,
a California corporation
By: ______________________
Its: ___________________
EXHIBIT C
EXHIBIT D
SCOTT CREEK BUSINESS PARK
RULES AND REGULATIONS
Tenant shall faithfully observe and comply with the following Rules and Regulations. Landlord shall not be responsible to Tenant for the nonperformance of any of said Rules and Regulations by or otherwise with respect to the acts or omissions of any other tenants or occupants of the Project. In the event of any conflict between the Rules and Regulations and the other provisions of this Lease, the latter shall control.
1. Tenant shall not alter any lock or install any new or additional locks or bolts on any doors or windows of the Premises without obtaining Landlord's prior written consent. Tenant shall bear the cost of any lock changes or repairs required by Tenant. Two keys will be furnished by Landlord for the Premises, and any additional keys required by Tenant must be obtained from Landlord at a reasonable cost to be established by Landlord. Upon the termination of this Lease, Tenant shall restore to Landlord all keys of stores, offices, and toilet rooms, either furnished to, or otherwise procured by, Tenant and in the event of the loss of keys so furnished, Tenant shall pay to Landlord the cost of replacing same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such changes.
2. Tenant, its employees and agents must be sure that the doors to the Building are securely closed and locked when leaving the Premises if it is after the normal hours of business for the Building. In case of invasion, mob, riot, public excitement, or other commotion, Landlord reserves the right to prevent access to the Building or the Project during the continuance thereof by any means it deems appropriate for the safety and protection of life and property.
3. The requirements of Tenant will be attended to only upon application at the management office for the Project or at such office location designated by Landlord. Employees of Landlord shall not perform any work or do anything outside their regular duties unless under special instructions from Landlord.
4. No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or affixed by Tenant on any part of the Premises or the Building without the prior written consent of the Landlord. Tenant shall not disturb, solicit, peddle, or canvass any occupant of the Project and shall cooperate with Landlord and its agents of Landlord to prevent same.
5. The toilet rooms, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage
EXHIBIT D
resulting from the violation of this rule shall be borne by the tenant who, or whose servants, employees, agents, visitors or licensees shall have caused same.
6. Except for vending machines intended for the sole use of Tenant's employees and invitees, no vending machine or machines other than fractional horsepower office machines shall be installed, maintained or operated upon the Premises without the written consent of Landlord.
7. Tenant shall not use or keep in or on the Premises, the Building, or the Project any kerosene, gasoline or other inflammable or combustible fluid, chemical, substance or material.
8. Tenant shall not use, keep or permit to be used or kept, any foul or noxious gas or substance in or on the Premises, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Project by reason of noise, odors, or vibrations, or interfere with other tenants or those having business therein, whether by the use of any musical instrument, radio, phonograph, or in any other way. Tenant shall not throw anything out of doors, windows or skylights or down passageways.
9. Tenant shall not bring into or keep within the Project, the Building or the Premises any animals, birds, aquariums, or, except in areas designated by Landlord, bicycles or other vehicles.
10. No cooking shall be done or permitted on the Premises, nor shall the Premises shall not be used for the storage of merchandise, for lodging or for any improper, objectionable or immoral purposes. Notwithstanding the foregoing, Underwriters' laboratory-approved equipment, a residential type stove, and microwave ovens may be used in the Premises for preparing lunch hot meals, heating food and brewing coffee, tea, hot chocolate and similar beverages for employees and visitors, provided that such use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations.
11. Tenant shall not occupy or permit any portion of the Premises to be occupied as an office for a messenger-type operation or dispatch office, public stenographer or typist, or for the manufacture or sale of liquor, narcotics, or tobacco in any form, or as a medical office, or as a barber or manicure shop, or as an employment bureau without the express prior written consent of Landlord. Tenant shall not engage or pay any employees on the Premises except those actually working for such tenant on the Premises nor advertise for laborers giving an address at the Premises.
12. Landlord reserves the right to exclude or expel from the Project any person who, in the judgment of Landlord, is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of these Rules and Regulations.
13. Tenant, its employees and agents shall not loiter in or on the entrances, corridors, halls, vestibules or any interior Common Areas for the purpose of smoking tobacco products
EXHIBIT D
or for any other purpose, nor in any way obstruct such areas, and shall use them only as a means of ingress and egress for the Premises.
14. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to ensure the most effective operation of the Building's heating and air conditioning system, and shall refrain from attempting to adjust any controls.
15. Tenant shall store all its trash and garbage within the interior of the Premises or in trash enclosures. No material shall be placed in the trash boxes or receptacles if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing of trash and garbage in the city in which the Project is located without violation of any law or ordinance governing such disposal. All trash, garbage and refuse disposal shall be made only through entry-ways provided for such purposes at such times as Landlord shall designate.
16. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency.
17. No awnings or other projection shall be attached to the outside walls of the Building without the prior written consent of Landlord, and no curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Premises other than Landlord standard drapes. All electrical ceiling fixtures hung in the Premises or spaces along the perimeter of the Building must be fluorescent and/or of a quality, type, design and a warm white bulb color approved in advance in writing by Landlord. Neither the interior nor exterior of any windows shall be coated or otherwise sunscreened without the prior written consent of Landlord. Tenant shall abide by Landlord's regulations concerning the opening and closing of window coverings which are attached to the windows in the Premises, if any, which have a view of any interior portion of the Building or Building Common Areas.
18. The sashes, sash doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed by Tenant, nor shall any bottles, parcels or other articles be placed on the windowsills.
19. Tenant must comply with requests by the Landlord concerning the informing of their employees of items of importance to the Landlord.
20. Tenant must comply with any non-smoking ordinance adopted by any applicable governmental authority.
21. Tenant hereby acknowledges that Landlord shall have no obligation to provide guard service or other security measures for the benefit of the Premises, the Building or the Project. Tenant hereby assumes all responsibility for the protection of Tenant and its agents, employees, contractors, invitees and guests, and the property thereof, from acts of third parties, including keeping doors locked and other means of entry to the Premises closed, whether or not
EXHIBIT D
Landlord, at its option, elects to provide security protection for the Project or any portion thereof. Tenant further assumes the risk that any safety and security devices, services and programs which Landlord elects, in its sole discretion, to provide may not be effective, or may malfunction or be circumvented by an unauthorized third party, and Tenant shall, in addition to its other insurance obligations under this Lease, obtain its own insurance coverage to the extent Tenant desires protection against losses related to such occurrences. Tenant shall cooperate in any reasonable safety or security program developed by Landlord or required by law.
22. Tenant shall not use in any space or in the public halls of the Building, any hand trucks except those equipped with rubber tires and rubber side guards.
23. No auction, liquidation, fire sale, going-out-of-business or bankruptcy sale shall be conducted in the Premises without the prior written consent of Landlord.
24. No tenant shall use or permit the use of any portion of the Premises for living quarters, sleeping apartments or lodging rooms.
Landlord reserves the right at any time to change or rescind any one or more of these Rules and Regulations, or to make such other and further reasonable Rules and Regulations as in Landlord's judgment may from time to time be necessary for the management, safety, care and cleanliness of the Premises, Building, the Common Areas and the Project, and for the preservation of good order therein, as well as for the convenience of other occupants and tenants therein. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenants, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant, nor prevent Landlord from thereafter enforcing any such Rules or Regulations against any or all tenants of the Project. Tenant shall be deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition of its occupancy of the Premises.
EXHIBIT D
EXHIBIT E
SCOTT CREEK BUSINESS PARK
FORM OF TENANT'S ESTOPPEL CERTIFICATE
The undersigned, as Tenant under that certain Multi-Tenant Office Triple Net Lease (the "Lease") made and entered into as of August __, 1999 by and between SCOTT CREEK THREE TRUST, a Maryland real estate investment trust, as Landlord, and the undersigned as Tenant, for Premises in the building located at 400 Kato Terrace, Fremont, California, certifies as follows:
1. Attached hereto as Exhibit A is a true and correct copy of the Lease and all amendments and modifications thereto. The documents contained in Exhibit A represent the entire agreement between the parties as to the Premises.
2. The undersigned currently occupies the Premises described in the Lease, the Lease Term commenced on __________, and the Lease Term expires on ___________, and the undersigned has no option to terminate or cancel the Lease or to purchase all or any part of the Premises, the Building and/or the Project.
3. Base Rent became payable on ____________.
4. The Lease is in full force and effect and has not been modified, supplemented or amended in any way except as provided in Exhibit A.
5. Tenant has not transferred, assigned, or sublet any portion of the Premises nor entered into any license or concession agreements with respect thereto except as follows:
6. Tenant shall not modify the documents contained in Exhibit A without the prior written consent of Landlord's mortgagee.
7. All monthly installments of Base Rent, all Additional Rent and all monthly installments of estimated Additional Rent have been paid when due through ___________. The current monthly installment of Base Rent is $_____________________.
8. All conditions of the Lease to be performed by Landlord necessary to the enforceability of the Lease have been satisfied and Landlord is not in default thereunder, except for ____________________. In addition, the undersigned has not delivered any notice to Landlord regarding a default by Landlord thereunder, except for ____________________.
9. No rental has been paid more than thirty (30) days in advance and no security has been deposited with Landlord except as provided in the Lease.
EXHIBIT E
10. As of the date hereof, there are no existing defenses or offsets, or, to the undersigned's knowledge, claims or any basis for a claim, that the undersigned has against Landlord except for ___________________.
11. If Tenant is a corporation or partnership, each individual executing this Estoppel Certificate on behalf of Tenant hereby represents and warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has full right and authority to execute and deliver this Estoppel Certificate and that each person signing on behalf of Tenant is authorized to do so.
12. There are no actions pending against the undersigned under the bankruptcy or similar laws of the United States or any state.
13. Other than in compliance with all applicable laws and incidental to the ordinary course of the use of the Premises, the undersigned has not used or stored any hazardous substances in the Premises.
14. To the undersigned's knowledge, except for ____________________, all tenant improvement work to be performed by Landlord under the Lease has been completed in accordance with the Lease and has been accepted by the undersigned and all reimbursements and allowances due to the undersigned under the Lease in connection with any tenant improvement work have been paid in full.
EXHIBIT E
The undersigned acknowledges that this Estoppel Certificate may be delivered to Landlord or to a prospective mortgagee or prospective purchaser, and acknowledges that said prospective mortgagee or prospective purchaser will be relying upon the statements contained herein in making the loan or acquiring the property of which the Premises are a part and that receipt by it of this certificate is a condition of making such loan or acquiring such property.
Executed at ______________ on the ____ day of ___________, 19 .
"Tenant":
AEHR TEST SYSTEMS,
a California corporation,
By: ___________________
Its: _________________
By: ___________________
Its: _________________
EXHIBIT E
EXHIBIT F
DIRECT EXPENSE ALLOCATION SCHEDULE
ITEM HOW MEASURED RESPONSIBILITY WHO PAYS?
---- ------------ -------------- ---------
1. Electricity Separate Meter Tenant Tenant
2. Water Separate Meter Tenant Tenant
3. Gas Separate Meter Tenant Tenant
4. Security System Tenant Tenant
5. Phone System Tenant Tenant
6. Cleaning and
Maintenance of Tenant Tenant
Interior Rented
Space
7. Maintenance of Based on (Rented Landlord Tenant
Basic Structural Space/Total Building
Elements, Exterior Space)%
Walls, Roof, Roof
Drainage System,
etc.
8. Liability For the Rented Space Tenant Tenant
Insurance Adjacent Sidewalks
and Parking Area
9. Liability For the Basic Landlord Landlord
Insurance Structure, Roof
and Exterior
10. Landscaping Based on (Rented Landlord Tenant
Maintenance Space/Total Building
Space)%
|
EXHIBIT F - Page 1
11. Property Taxes Based on (Rented Landlord Tenant
Space/Total Building
Space) %
12. Equipment and Tenant Tenant
Personal Property
Taxes
13. Common Area Based on (Rented Landlord Tenant
Parking Lot,
Lighting
Maintenance With
Tenant's Prior
Approval
14. Maintenance of Tenant Tenant
Landlord Approved
ATS Signs
|
EXHIBIT F
Exhibit 23.1
We consent to the incorporation by reference in the Registration Statement of Aehr Test Systems on Form S-8 (File No. 333-28987) of our reports dated July 2, 1999 on our audits of the consolidated financial statements and financial statement schedule of Aehr Test Systems and Subsidiaries as of May 31, 1999 and 1998, and for each of the three years in the period ended May 31, 1999, which reports are included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
August 30, 1999
| ARTICLE 5 |
| This schedule contains summary financial information extracted from the Balance Sheets and Statements of Operations included in the Company's Form 10-K for the year ended May 31, 1999 and is qualified in its entirety by reference to such Financial Statements. |
| MULTIPLIER:1000 |
| FISCAL YEAR END | May 31 1999 | May 31 1998 | May 31 1997 |
| PERIOD START | Jun 01 1998 | Jun 01 1997 | Jun 01 1996 |
| PERIOD END | May 31 1999 | May 31 1998 | May 31 1997 |
| PERIOD TYPE | 12 MOS | 12 MOS | 12 MOS |
| CASH | 5,336 | 6,748 | 1,176 |
| SECURITIES | 14,847 | 16,579 | 1,614 |
| RECEIVABLES | 3,658 | 7,442 | 7,785 |
| ALLOWANCES | 125 | 260 | 270 |
| INVENTORY | 9,221 | 11,942 | 10,498 |
| CURRENT ASSETS | 35,134 | 43,858 | 21,858 |
| PP&E | 8,962 | 7,902 | 9,547 |
| DEPRECIATION | 7,026 | 6,361 | 7,856 |
| TOTAL ASSETS | 41,187 | 47,105 | 24,389 |
| CURRENT LIABILITIES | 4,118 | 6,973 | 13,963 |
| BONDS | 0 | 0 | 0 |
| PREFERRED MANDATORY | 0 | 0 | 0 |
| PREFERRED | 0 | 0 | 0 |
| COMMON | 68 | 69 | 43 |
| OTHER SE | 36,610 | 39,895 | 10,027 |
| TOTAL LIABILITY AND EQUITY | 41,187 | 47,105 | 24,389 |
| SALES | 18,146 | 40,805 | 42,020 |
| TOTAL REVENUES | 18,146 | 40,805 | 42,020 |
| CGS | 12,201 | 24,359 | 25,715 |
| TOTAL COSTS | 12,201 | 24,359 | 25,715 |
| OTHER EXPENSES | 10,577 | 12,247 | 12,621 |
| LOSS PROVISION | 0 | 0 | 0 |
| INTEREST EXPENSE | (1,184) | (904) | 577 |
| INCOME PRETAX | (3,007) | 4,739 | 2,542 |
| INCOME TAX | (677) | 2,334 | (773) |
| INCOME CONTINUING | (2,330) | 2,405 | 3,315 |
| DISCONTINUED | 0 | 0 | 0 |
| EXTRAORDINARY | 0 | 0 | 0 |
| CHANGES | 0 | 0 | 0 |
| NET INCOME | (2,330) | 2,405 | 3,315 |
| EPS BASIC | $(0.34) | $0.38 | $0.77 |
| EPS DILUTED | $(0.34) | $0.36 | $0.74 |