-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RGyJFkcBuy2k8PZoKU8xXC0kCf0Kyycc+EpXnaDeUEeMeko4A+Rb+qRa4e0ZOZ0k FO/qtZbGBUNq0eSCQdQlgg== 0001010410-98-000010.txt : 19980129 0001010410-98-000010.hdr.sgml : 19980129 ACCESSION NUMBER: 0001010410-98-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971031 FILED AS OF DATE: 19980128 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000849323 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 232298698 STATE OF INCORPORATION: PA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27498 FILM NUMBER: 98515510 BUSINESS ADDRESS: STREET 1: 1336 ENTERPRISE DRIVE CITY: WEST CHESTER STATE: PA ZIP: 19380 BUSINESS PHONE: 6106968300 MAIL ADDRESS: STREET 1: 1336 ENTERPRISE DRIVE CITY: WEST CHESTER STATE: PA ZIP: 19380 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [ X ] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended OCTOBER 31, 1997. or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from __________________ to ___________________ Commission File No. 0-27498 CFM TECHNOLOGIES, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2298698 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 1336 ENTERPRISE DRIVE, WEST CHESTER, PENNSYLVANIA 19380 ------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (610) 696-8300 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, NO PAR VALUE -------------------------- Title of Class Indicate by check mark whether the Registrant (1) has filed all reports 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 checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _X_ The number of outstanding shares of the Registrant's Common Stock, no par value per share, on January 20, 1998 was 7,913,588. In making such calculation, Registrant is not making a determination of the affiliate or non-affiliate status of any holders of shares of Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Registrant (computed by reference to the closing price of such stock on The Nasdaq Stock Market on January 20, 1998 of $17.4375) was approximately $108,282,000. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Proxy Statements for the Annual Meeting of Shareholders to be held in March 1998 are incorporated herein by reference in Part III, Items 10,11,12 and 13. TABLE OF CONTENTS ITEM NO. PAGE - -------- ---- PART I 1. Business ............................................................... 3 2. Properties .............................................................29 3. Legal Proceedings ......................................................30 4. Submission of Matters to a Vote of Security Holders ....................30 Executive Officers of the Registrant....................................31 PART II 5. Markets for Registrant's Common Equity and Related Stockholder Matters ..............................................................33 6. Selected Financial Data ................................................34 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ................................................36 8. Financial Statements and Supplementary Data ............................43 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................................................43 PART III 10. Directors and Executive Officers of the Registrant ....................44 11. Executive Compensation ................................................44 12. Security Ownership of Certain Beneficial Owners and Management ..........................................................44 13. Certain Relationships and Related Transactions.........................44 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K .........................................................45 Signatures ............................................................... F-23 Exhibits Index .......................................................... E-1 PART I ITEM 1. BUSINESS CFM Technologies, Inc. and subsidiaries ("CFM" or the "Company") designs, manufactures and markets advanced wet processing equipment for sale to the worldwide semiconductor and flat panel display ("FPD") industries. The Company believes that its patented Full-Flow(TM) enclosed processing and Direct-Displacement(TM) drying technologies enable it to provide wet processing systems that address a variety of limitations inherent in conventional systems, including wet benches and spray tools, resulting in significantly lower cost of ownership ("COO") for the Company's Full-Flow systems. The Company's customers include: GEC Plessey, LG International (America) and related entities ("LG"), Motorola, National Semiconductor, Samsung, SGS-Thomson, Siemens, Texas Instruments, Tower Semiconductor, and International Business Machines ("IBM"). INDUSTRY BACKGROUND Market Overview Over the past two decades, increasing demand for integrated circuits ("ICs") has resulted primarily from the growth of the personal computer and data communication markets, as well as the emergence of new markets such as wireless communications, mobile computing and multimedia and the addition of microprocessor control to many common consumer products such as automobiles, kitchen appliances and audio/video equipment. In large part, this demand has been driven by the semiconductor industry's ability to provide increasingly more complex, higher performance ICs while steadily reducing the cost per function with lower power consumption. These improvements in the ratio of price to performance have been driven by advancements in semiconductor process technology, which have enabled the cost-effective production of high density ICs with linewidth below 0.5 micron. As demand for ICs has grown, semiconductor and FPD manufacturers have increased capacity by expanding and updating existing fabrication facilities ("fabs") and constructing new fabs. This expansion has historically exhibited strong cyclical characteristics, and continues to do so. For example, beginning in late 1995 and during 1996, many semiconductor manufacturers experienced a reduction in order growth and, in a few instances, a reduction in overall orders. These events caused certain semiconductor manufacturers to postpone or cancel equipment deliveries to previously planned expansion or new fab construction projects, providing evidence of the continuing cyclical nature of the industry. Demand for semiconductor devices stabilized early in 1997. Recent evidence of excess semiconductor device production capacity, especially in dynamic random access memory ("DRAM") chips, may mark another period of reduced demand for semiconductor capital equipment. However, according to VLSI Research Inc. ("VLSI"), the semiconductor capital equipment market has grown through these periodic cycles from an estimated $2.2 billion in 1980 to $37.6 billion in 1997. 3 The increasing complexity of ICs has resulted in an increase in both the number and cost of process tools (such as steppers, etchers, furnaces and wet processors) required to manufacture semiconductors. In a typical fab in the 1980s, the cost of equipment represented approximately 50-55% of the total facility costs. Today, the total cost of an advanced fab can substantially exceed $1 billion, of which equipment costs can account for over 80%. Semiconductor manufacturers place great pressure on process equipment manufacturers to decrease the COO of their products. The principal elements of COO are yield, throughput, capital costs and direct costs. Yield is primarily determined by contamination levels and process uniformity. Throughput is primarily a function of the time required to complete a process cycle and the handling time between process steps. Capital costs include the cost of acquisition and installation of the process equipment. Direct costs primarily include consumables used in the manufacturing process and costs of cleanroom space occupied by the equipment. Semiconductor device manufacturers must also address environmental costs such as water usage and costs related to the control and disposal of chemical waste and emissions associated with operating a fab. Measuring and maintaining an acceptable level of COO becomes increasingly challenging as manufacturing processes become more complex and process tolerances narrow. The market for FPDs has grown significantly in recent years as the result of the increasing popularity of portable computers and other electronic devices which utilize screens and other types of displays to provide information in digital format and graphical displays, to the end user. As consumers demand increasingly smaller and lighter electronic devices with improved functionality, the demand for FPDs continues to increase due to inherent advantages over cathode ray tubes ("CRTs") with respect to size, weight and power consumption. As the cost of FPDs declines, the uses of FPDs are expected to increase. Computer applications accounted for over half of the total number of FPDs sold in 1995. According to Dataquest, Inc., a market research company, the overall market for FPDs is projected to increase from $4.7 billion in 1995 to $15.6 billion in 1998. Users of displays require high resolution which translates to increased device density on the back of the thin glass screen. In order to support the required device density and still allow substantial light transmission through the screen (brightness), significant reductions in feature size will be required. The Company believes that the superior etch uniformity and cleaning performance possible using a Full-Flow system may enable manufacturers to meet the combined goal of device density and brightness. Wet Processing in Semiconductor Manufacturing The manufacture of semiconductors requires a large number of complex process steps during which layers of electrically insulating or conducting materials are created or deposited on the surface of a silicon wafer. Before and after many of these steps, it is necessary to clean, etch, strip or otherwise condition the surface of the wafer in order to remove unwanted material or surface contamination in preparation for a subsequent process step. SEMATECH, a consortium of semiconductor manufacturers, has estimated that over 300 fabrication steps are required to manufacture advanced logic ICs, and that approximately 55 of these steps are accomplished by wet processing. The following table identifies the typical wet processing steps in semiconductor manufacturing. CRITICAL CLEANING CRITICAL ETCHING PHOTORESIST STRIP APPLICATIONS APPLICATIONS APPLICATIONS ------------ ------------ ------------ Initial wafer clean Silicon oxide etch Aqueous chemistry resist Pre-diffusion clean Polysilicon etch strip/post-ash clean Pre-oxidation clean Silicon nitride etch Solvent chemistry resist Pre-thin films strip/post-ash clean deposition clean (back end) 4 Post-CMP clean Solvent chemistry clean (back end) The above wet processing steps have traditionally been accomplished using wet benches and spray tools. Advanced wet benches utilize a succession of open chemical baths and extensive robotic automation to move wafers from one chemical or rinse bath to the next. Spray tools subject wafers to sequential spray applications of chemicals as the wafers are spun inside an enclosed chamber. Like semiconductors, FPDs are manufactured using numerous process steps, including photolithography, deposition, etching and cleaning. However, unlike semiconductor wafers, each of which may contain several hundred individual ICs, a single FPD substrate may contain a few as two laptop computer displays. Therefore, defects in the manufacturing process tend to have a much greater impact on FPD yields than on semiconductor yields. The Company believes that these conventional wet processing methods are subject to a number of inherent limitations, including: Particle Contamination. Submicron ICs and FPD substrates are extremely sensitive to small amounts of particle contamination which can result in poor device performance or even failure. As device geometries become smaller, the reduction of particle contamination has become an increasingly critical factor in maximizing yield. Open-bath wet benches are exposed to the cleanroom environment and therefore are susceptible to external contamination. Since particles tend to reside on the surfaces of liquids due to surface tension, the movement of wafers in and out of liquids can result in the transfer of particles to the wafer surfaces through a "skimming" effect. The tendency to add particles from air-liquid transitions is inherent in wet benches due to multiple immersions and withdrawals and in spray processing where each spray droplet striking the wafer surface can act as a separate miniature immersion and withdrawal. 5 Watermark Defects and Native Oxide Growth. Both wet benches and spray tools subject the surface of wafers or substrates to repeated wetting and evaporative drying, creating watermark defects on the surface that can significantly impact device or FPD performance and interfere with subsequent process steps. Process Control Limitations. Process liquids in wet benches and spray tools are subject to evaporation and absorption of atmospheric gases. As a result, it is difficult to achieve precise repeatability of process results. Additionally, wafers and FPD substrates in a wet bench must be robotically transferred from bath to bath through the cleanroom atmosphere. This gap in processing during transport adds variability due to the effects of wafer and substrate exposure to the cleanroom atmosphere. Large Physical Size. The cost of cleanroom space is a significant component in the overall COO calculation for a specific piece of equipment. Wet benches configured for the multiple-step wet processes required by many manufacturers can be up to 30 feet in length. Increases in process complexity or in wafer or FPD substrate size will likely require even larger wet benches. Environmental Impact. Due to the large volume of the open baths which comprise a wet bench and the need for multiple wet processing steps to manufacture increasingly complex ICs, wet benches typically consume large quantities of water during processing. Water costs represent a significant portion of the total cost of cleaning. Additionally, in many wet bench processes, large amounts of chemicals are utilized. The open nature of the baths in a typical wet bench necessitates expensive ventilation and air filtration systems in order to remediate chemical fume emissions. As a result, municipalities and environmental authorities are increasingly concerned by water consumption and chemical fume emissions by fabs. Due to the continuing reduction of semiconductor device geometries and the escalating cost of leading edge fabs, the Company believes that semiconductor and FPD manufacturers are becoming increasingly sensitive to the foregoing limitations inherent in conventional wet processing methods. THE CFM SOLUTION The Company's systems are based on its proprietary Full-Flow wet processing technology and are used to perform various cleaning, stripping and etching process steps in the manufacture of semiconductors and FPDs. In the Company's Full-Flow wet processing system, up to 150 wafers or 50 substrates automatically load into a fully-enclosed, flow-optimized vessel that has a lower fluid inlet and an upper fluid outlet. The Full-Flow system requires different vessel sizes depending upon whether wafers or FPD substrates are being processed. Once a selected process is begun, the vessel is completely filled with fluid at all times, with fluids flowing through the vessel one directly after another without exposing the wafers or substrates to air. 6 The Company believes that its patented Full-Flow enclosed processing and Direct-Displacement drying technologies result in superior process performance and lower COO by offering the following advantages over conventional wet processing systems: Reduced Particle Contamination. Full-Flow processing takes place in a fully-enclosed processing vessel which isolates the wafers or substrates from the external cleanroom environment and associated contaminants. Additionally, particle contamination through particle skimming is substantially reduced. Since a Full-Flow system is capable of directly displacing one chemical or rinse step with the next without draining the vessel, it can eliminate the air-liquid interfaces (where particles tend to reside) that normally occur in wet benches and spray tools. The wafers or substrates are kept completely immersed in fluid until they are ready to be dried using the Company's patented in situ Direct-Displacement drying technology. Substantial Elimination of Watermark Defects and Native Oxide Growth. The formation of watermarks is substantially eliminated through the prevention of water evaporation from the wafer or substrate surface. Once the chemical treatment of the wafers or substrates is completed, drying is accomplished using CFM's patented Direct-Displacement drying technology. With this technique, the final rinse water is directly displaced with highly purified isopropyl alcohol ("IPA") vapor and substantially all water is forced off the surface of the wafer before it is exposed to an air environment. Additionally, native oxide growth is suppressed by degassifying the water immediately before it enters the vessel. Since the vessel itself is totally enclosed, the ultra pure water in the vessel is not able to absorb oxygen, carbon dioxide and other gases from the cleanroom environment. As a result, the gas content of the water at the surface of the wafers or substrates is much lower than that typically found in a wet bench or spray tool. Tight Process Control. Process precision and repeatability result in large part from the ability to control accurately the physical and chemical properties of the processing liquids as well as transitions between process steps. Full-Flow processing is performed in a completely enclosed vessel, thereby substantially reducing variability of the processing liquids such as water and chemical evaporation and absorption of atmospheric gases. Additionally, because one process liquid directly displaces the previous one, there is no exposure to the cleanroom atmosphere between process steps. Cleanroom Space Savings. The Full-Flow system has been designed to consume a minimum amount of cleanroom space. System support modules can be located outside the cleanroom and away from the vessel module. In many fabs, this means that these support modules can be located in the basement, further reducing the amount of square footage that is required on the main floor of the fab where space is at a premium. A dual vessel Full-Flow system capable of processing 150 8-inch wafers in each of two vessels requires only 13 linear feet of cleanroom wall space and no direct usage of cleanroom floor space when flush-mounted. This is significantly less than the space requirements of a wet bench with 7 lesser processing capacity, which the Company believes can require up to 350 square feet of total cleanroom floor space and approximately 35 linear feet of cleanroom wall space. Environmental Advantages. The Company believes that the Full-Flow system utilizes less than one-half of the water required by traditional wet bench systems performing similar processing steps. Additionally, most of the water in wet bench systems flows around the wafer carrier rather than across the surface of the wafers. In the Company's flow-optimized Full-Flow systems, substantially less water is lost as bypass flow. The fully-enclosed Full-Flow system also reduces the amount of process chemicals consumed and the equipment and related costs of remediation of chemical fume emissions associated with traditional wet processing. STRATEGY The Company's objective is to become a leading supplier of advanced wet processing equipment to the worldwide semiconductor and FPD industries. The Company intends to achieve this objective by focusing on the following key elements of its strategy. Increase Current Market Share. The Company seeks to continue to expand its share of the semiconductor critical cleaning and etching wet processing market through significant expansion of its sales and marketing and customer satisfaction efforts. The Company also intends to continually improve its existing Full-Flow platform in order to offer enhanced technical capabilities and lower COO benefits for currently served critical wet processing applications. For example, in April 1996, the Company shipped a new version of its Full-Flow system that doubled the throughput and capital productivity of its predecessor system by enabling the processing of up to 100 8-inch wafers in a single vessel. Subsequently, in July 1996, the Company shipped the first fully-automated Full-Flow system capable of processing 370mm X 470mm FPD substrates to a customer in East Asia. In November of 1996, the Company shipped an enhanced version of its Full-Flow 8100 wet processing system designed specifically for high throughput resist stripping applications. In May of 1997 the Company shipped the first fully-automated Full-Flow system capable of processing 590mm X 670mm FPD substrates to a customer in East Asia. Broaden Semiconductor Market Penetration. The Company intends to leverage its Full-Flow platform to address additional wet processing applications in the semiconductor manufacturing process where it believes its proprietary Full-Flow technology can provide important benefits over competing wet processing technologies. By basing new process applications on this platform, the Company is able to focus primarily on the development and optimization of each application's process recipes. The Company believes this approach significantly reduces the time and cost associated with entering new wet processing market segments. Additional semiconductor wet processing applications identified by the Company include solvent-based cleaning and photoresist 8 stripping, in which CFM's fully-enclosed Full-Flow processing vessel would provide the important benefit of controlling chemical fume emissions. Further Penetrate FPD Market. The Company believes that its Full-Flow platform is particularly well-suited for cleaning and precise etching applications in the manufacture of FPDs due to its advanced process capabilities, its significantly lower use of water and chemicals relative to comparable wet bench processes, its ability to successfully process very large substrates and its substantially smaller footprint which saves increasingly valuable cleanroom floor space. The Company believes that the FPD market represents an opportunity for increasing sales of its systems. Focus on Customer Satisfaction. The Company believes that its commitment to customer satisfaction has been a critical factor in its success to date. To ensure a high level of customer satisfaction, the Company provides comprehensive customer service and support, thorough customer training and ongoing process consultation. The Company has already developed a comprehensive customer service and support organization, and has invested in this area by locating direct sales and service staff in Europe in 1996 and in East Asia in 1997. The Company also intends to continue to increase the utilization of its applications laboratory to design and test new processes and equipment features. Finally, the Company has provided a Full-Flow system completely dedicated to training the Company's customers and employees at its West Chester headquarters. Continue Commitment to Worldwide Markets. The Company believes that its long-term success is substantially dependent on its ability to compete on a worldwide basis. As such, the Company intends to continue to focus on expending its sales activities in each of the primary worldwide markets for semiconductor and FPD capital equipment. To date, the Company has achieved considerable success in selling to customers outside the United States, with international sales accounting for over 60% of total sales in the previous two fiscal years. PRODUCTS The Company's systems are based on its proprietary Full-Flow wet processing technology and are used to perform various cleaning and etching process steps in the manufacture of semiconductors and FPDs. The Full-Flow Product Platform. The Company's proprietary Direct-Displacement drying technology is embodied in its Full-Flow platform, which principally consists of a fully-enclosed processing vessel incorporating megasonic technology and associated systems software, hardware and control electronics. Megasonic technology utilizes high frequency sonic energy to enhance particle removal from the surface of semiconductor wafers and FPD substrates during wet processing, enabling a quicker process cycle and a significant reduction in the quantity of process chemicals used. The Company believes that its Full-Flow platform offers significant improvements in process performance and a lower COO relative to competing technologies. Conventional wet bench 9 processes used for many wet processing applications rely on a succession of open chemical baths and extensive robotic automation to move semiconductor wafers or FPD substrates from one chemical bath to the next, which exposes them to contamination. In the Company's Full-Flow system, wafers or FPD substrates are loaded automatically into a fully-enclosed flow-optimized processing vessel that has a lower fluid inlet and an upper fluid outlet. They are completely isolated from cleanroom air and accompanying contaminants as a succession of process fluids are introduced into the processing vessel one directly after another, flowing over the wafers or FPD substrates to complete the desired process application. Once processing is completed, wafers or FPD substrates are dried in situ using the Company's patented Direct-Displacement drying process. With this technique, the final rinse water is directly displaced with highly purified IPA vapor and substantially all water is forced off the surface of the wafers or substrates before they are exposed to an air environment. This process substantially eliminates evaporative drying defects such as watermarks, inhibits native oxide growth and significantly reduces particle contamination. In competing technologies, wafers or substrates are exposed to intermediate evaporative drying within the cleanroom atmosphere prior to the completion of the final drying process. The optimized flow characteristics of the Full-Flow processing vessel and the advanced process control and monitoring capabilities of the Full-Flow platform provide process uniformity and repeatability. Also, the Company's Full-Flow systems can be flush-mounted in the cleanroom wall, with the majority of the floor space needed by the system components located outside the cleanroom environment. Due to this flush-mounting and the Full-Flow system's comparatively smaller size, it requires significantly less expensive cleanroom floor space than competing wet bench systems. The Company's Full-Flow systems are based on a modular design and can be configured to accomplish a broad range of wet processing applications using a variety of process and support modules offered by the Company. By basing new process applications on its proprietary Full-Flow platform, the Company can focus primarily on the development and optimization of each application's process recipes. The Company believes this approach significantly reduces the time and cost associated with developing new products to address additional market opportunities. The following tables list the Company's product offerings. CFM FULL-FLOW PLATFORM CONFIGURATIONS FULL-FLOW MARKETS CONFIGURATION CAPACITY LIST PRICE RANGE - ----------------- ------------- -------- ---------------- Semiconductor .......... Single vessel 50 wafer $1.2 - 1.5 million Single vessel 100 wafer $1.4 - 1.7 million Dual vessel 100 wafer $1.8 - 2.3 million Dual vessel 200 wafer $2.2 - 2.7 million Flat panel display ..... Single vessel 50 panel $1.5 - 2.8 million Dual vessel 100 panel $2.3 - 4.1 million 10 Semiconductor Manufacturing Applications The Company first introduced its Full-Flow systems for use in semiconductor manufacturing research and development facilities in 1988, and shipped its first system for use in semiconductor production lines in 1990. To date, the Company has sold over 120 Full-Flow systems to more than 30 manufacturers. Full-Flow systems can currently be configured with either one or two vessels, each of which can be designed to accommodate 5-inch, 6-inch or 8-inch wafers. A flush-mounted Full-Flow system configured with dual processing vessels requires approximately 170 square feet of total floor space and approximately 13 linear feet of cleanroom wall space. Assuming similar throughput capabilities and the same wet process, the Company believes that a competing wet bench system can require up to 350 square feet of total cleanroom floor space and approximately 35 linear feet of cleanroom wall space. Additionally, the Company believes that its Full-Flow systems can typically achieve a greater than 50% reduction in the usage of water and chemicals compared to wet benches performing similar applications. List prices for the Company's Full-Flow systems offered for sale to the semiconductor industry range from $1.2 million to over $2.7 million. Automation options and custom system configurations are provided at additional cost. SEMATECH has estimated that up to 300 fabrication steps are required to manufacture advanced logic ICs and that approximately 50 of these steps are accomplished by wet processing. The following table identifies the typical wet processing steps in semiconductor manufacturing and indicates those performed by the Company's Full-Flow systems (in capitals). CRITICAL CLEANING CRITICAL ETCHING PHOTORESIST STRIP APPLICATIONS APPLICATIONS APPLICATIONS ------------ ------------ ------------ INITIAL WAFER CLEAN SILICON OXIDE ETCH AQUEOUS CHEMISTRY RESIST PRE-DIFFUSION CLEAN POLYSILICON ETCH STRIP/POST-ASH CLEAN PRE-OXIDATION CLEAN Silicon nitride (FRONT-END) etch PRE-THIN FILMS DEPOSITION Solvent chemistry resist CLEAN strip/post-ash clean Post-CMP clean (back end) Solvent chemistry clean (back end) For classification purposes, the process to fabricate a semiconductor die (without testing or packaging) is divided into two major phases referred to as "front-end" and "back-end." Front-end steps are those that are performed to fabricate individual components within an IC such as transistors. Back-end steps are those that involve the creation of metal patterns on the wafers in order to connect these individual components to create the IC. For a high-performance logic IC, approximately 60% of the wet processing steps are front-end and the balance are back-end. 11 Critical Cleaning Applications. Critical cleans are those wet processing steps that are performed in the front-end to remove surface contamination prior to performing highly sensitive fabrication steps such as gate oxidation or diffusion. The Company believes that approximately 40% of the wet processing operations in the front-end fall into this category. To date, most of the Company's Full-Flow systems have been purchased by semiconductor manufacturers for use in these applications. Critical Etching Applications. Wet processing is also commonly used in the front-end to etch the surface of the wafer to remove silicon dioxide or other surface material. It is generally important to tightly control the exact amount of material removed and the uniformity of the etch. The Company believes that approximately 20% of the wet processing steps in the front-end involve etching. These etching steps are often performed as part of a wet clean rather than as stand-alone operations, and as such, most of the Full-Flow systems sold by the Company to date are also performing critical etching applications. Photoresist Strip Applications. Photoresist stripping operations involve the removal of either virgin or ashed photoresist from the surface of wafers after a patterning step has been completed. Resist stripping is performed in both the front-end and the back-end, and the Company believes that this process represents approximately 40% of the wet processing operations in each area. Front-end cleans and resist strips are generally performed with aqueous chemistries. However, back-end cleans and resist strips must be accomplished with different chemistries that utilize solvents, since front-end water-based chemistries are incompatible with the metal present on wafers in the back-end. In both cases, resist stripping operations are driven as much by cost as by process performance. Production shipments of the Company's enhanced throughput Full-Flow system, the Full-Flow 8100, capable of processing up to 100 8-inch wafers per vessel, began in April 1996. For a nominally higher system sales price, this system provides all the advantages of Full-Flow technology with double the throughput of its predecessor. Since the Full-Flow system already utilizes the chemistries required for front-end stripping, the Company believes that the throughput and other COO advantages provided by this enhanced system make it attractive for use in front-end resist strip applications. In 1996 and 1997, the Company delivered such systems for use in front-end applications including resist stripping. In October 1997, the Company announced the Full-Flow 8150, capable of processing 150 eight inch wafers in a single enclosed vessel. A dual vessel version is expected to be available in the near future. These systems have the same footprint, and water and chemical comsumption as a Full-Flow 8100, offering customers a significant increase in productivity with little or no increase in operating costs. Future Applications. Approximately 40% of semiconductor wet processing operations are performed in the back-end and are comprised primarily of solvent-based cleans and solvent-based resist strips. The Company believes that its Full-Flow systems offer a range of attractive 12 benefits for these applications as process requirements become more demanding and regulatory restrictions on the release of chemical fumes become more stringent. Furthermore, the Company believes that its proprietary Direct-Displacement drying method is well suited for drying wafers with complex topographies that often exist in the back-end. FPD Manufacturing Applications. The Company believes that its Full-Flow platform is particularly well-suited for cleaning and etching applications in the manufacture of FPDs due to its advanced process capabilities, its significantly lower use of water and chemicals relative to competing wet bench systems and its substantially smaller footprint. To address the rapidly increasing demand for FPDs, the Company developed a high-throughput FPD processing system based on it Full-Flow platform. This Full-Flow FPD system, which was first shipped in April 1996, has been designed to process up to 50 FPD substrates per vessel. The system is available in a dual vessel configuration capable of processing up to 100 substrates simultaneously. In fiscal 1996, four dual-vessel systems were delivered to an FPD manufacturer in Korea. An order from this customer for six additional systems in an increased substrate size were delivered during fiscal 1997. List prices for the Company's Full-Flow FPD products range from $1.5 million to $4.1 million depending on system configuration. CUSTOMERS The Company sells its systems to leading semiconductor manufacturers located in the United States, Europe and East Asia. Sales to LG, Siemens, Anam Semiconductor Company, IBM and ProMOS Technology accounted for approximately 21.3%, 11.3%, 8.9%, 7.9% and 7.5%, respectively, of net sales in fiscal 1997. The Company expects a significant portion of its future sales to remain concentrated within a limited number of customers. The Company's results of operations could be materially adversely affected by any loss of business from, the cancellation of orders by, or decreases in prices of systems sold to, any of its major customers. The Company's arrangements with its customers are generally on a purchase order basis and not pursuant to long term contracts. A reduction or delay in orders from any of the Company's significant customers, including reductions or delays due to market, economic or competitive conditions in the semiconductor or FPD industries, or the loss of any such customers, could have a material adverse effect upon the Company's results of operations. While the Company actively pursues new customers, there can be no assurance that the Company will be successful in its efforts, and any significant weakening in customer demand would have a material adverse effect on the Company. See Note 14 to the Consolidated Financial Statements. 13 SALES AND MARKETING The Company sells its systems through a combination of a direct sales force, manufacturers' sales representatives, and East Asian sales representatives. The Company's field service personnel support its sales force. In North America, the Company utilizes a combination of a direct sales force and manufacturers' sales representatives. In addition to the direct sales force at the Company's headquarters in West Chester, Pennsylvania, the Company has direct sales personnel located in Marietta, Georgia, Austin, Texas, San Jose, California and Phoenix, Arizona. The Company employs a direct salesperson in Paris, France and also supports the European market through its North American direct sales force. The Company covers the Asian market with a director of sales and marketing for Asian semiconductor sales and a direct salesperson based in Singapore. The Company signed agreements with ANAM S & T Co. Ltd.("ANAM") in 1991, which markets in Korea, Innotech Corporation ("Innotech") in 1992, the Company's agent in Japan, Ampoc Far East Company Limited ("AMPOC") in 1996, a sales agent in Taiwan, Silicon Inernational Ltd ("Silicon International") in 1997, a sales agent in the Peoples Republic of China, and Aneric Enterprise Pte Ltd. ("Aneric") in 1997, a sales agent in southeast Asia. The Company also employs a direct salesperson to manage worldwide FPD equipment sales. See Item 13 - "Certain Relationships and Related Transactions." Although the Company believes that it has good relationships with its manufacturers' sales representatives, sales agents and distributors, there can be no assurance that these relationships will continue. In the event of a termination of any of the Company's existing representation, agency or distribution arrangements, the Company's strategy of worldwide expansion could be adversely affected. CUSTOMER SATISFACTION The Company believes that high quality customer support, customer training and process consultation are key elements in the creation of customer satisfaction. The Company also believes that product reliability, as it is perceived by the individual customer technician, manager and executive, is strongly correlated with customer satisfaction and the resulting decisions to select the Company's technology and its products for broad application within that individual customer's area of personal authority. The Company has made substantial investments in its customer support, customer training, customer communication and reliability engineering and testing programs and intends to continue to make such investments in the future. The Company's customer satisfaction organization is headquartered in West Chester, Pennsylvania, with additional employees and consultants located in Arizona, California, Colorado, New York, New Mexico, Oregon, Texas, Vermont, France, Taiwan and the United Kingdom. The Company uses local support personnel where there are multiple installed systems. Innotech, ANAM and AMPOC provide service to customers located in Japan, Korea and Taiwan, respectively. The Company's support personnel generally have prior technical backgrounds in the mechanical, electronic or chemical processing industries and prior experience or training in semiconductor manufacturing processes. These field personnel are supported by the Company's manufacturing and engineering personnel during system installation and initial process validation. Field support personnel also perform warranty and after-warranty service and sales support. The Company's products are typically sold with a 12 month warranty covering all parts and labor, which commences upon completion of installation and final acceptance. BACKLOG The Company manages its production forecast using both backlog and 14 projected system orders. The Company includes in backlog only customer purchase orders which have been accepted by the Company and for which shipment dates have been assigned within the following 12 months. Orders are generally subject to delay without penalty, but may contain cancellation penalties. As of October 31, 1997 the Company's backlog was approximately $21.8 million. The backlog is for both semiconductor and FPD equipment and comprises approximately 65% of international orders. As of October 31, 1996 the Company's backlog was approximately $18.5 million. It has been the experience of the Company that neither the backlog nor the pattern of receipt of orders is necessarily indicative of future orders or revenues. RESEARCH, DEVELOPMENT AND ENGINEERING CFM maintains an applications and component testing laboratory in West Chester, Pennsylvania to test new equipment and processes, design new features and train customer and Company personnel. By basing new applications on its proprietary Full-Flow platform, the Company can reduce substantially the time and cost required to develop new process applications by focusing primarily on the optimization of the applications' process recipes. The Company is currently focusing its research, development and engineering efforts on equipment to support additional wet process applications, to extend the productivity of the current platform, to improve system reliability and to extend the Full-Flow platform to larger substrate sizes. The Full-Flow 8100HT, which began shipping early in 1997, has increased the productivity of the base Full-Flow 8100. The Company recently introduced the 8150, which increases system throughput by an additional 50%. The Company's 300mm Full-Flow system is presently under development and is based on the 8100 platform. See "--Forward Looking Statements--Dependence Upon Product Development." The markets in which the Company and its customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Because of continual changes in these markets, the Company believes that its future success will depend, in part, upon its ability to continue to improve its systems and its process technologies and to develop new system applications which compete effectively on the basis of COO, 15 including yield, throughput, capital and direct costs and system performance. In addition, the Company must adapt its systems and processes to technological changes to support the standards required by emerging target markets. The success of new system introductions is dependent on a number of factors, including timely completion of new system designs, ultimate system performance achieved by those designs and market acceptance. There can be no assurance that the Company will be able to improve its existing systems and process technologies or develop new system applications. The Company's research, development and engineering expenses for the 1995, 1996 and 1997 fiscal years were $1.7 million, $4.4 million and $9.3 million, respectively, representing 7.3%, 10.0% and 12.3% of net sales, respectively. Research, development and engineering expenses were net of reimbursements of $232,000, $1,592,000 and $890,000, respectively, for the 1995, 1996 and 1997 fiscal years. COMPETITION The Company faces substantial competition in its market segments from both established competitors and potential new entrants. The Company believes that the primary competitive factors in the markets in which it competes are yield, throughput, capital and direct costs, system performance, size of installed base, breadth of product line and customer satisfaction. The Company believes that it competes favorably with respect to each of these factors. The Company also faces the challenge posed by semiconductor and FPD manufacturers' commitment to competing technologies. Most of the Company's competitors have been in business longer than the Company, offer traditional wet processing technology, and have broader product lines, more experience with high volume manufacturing, broader name recognition, substantially larger installed bases and significantly greater financial, technical and marketing resources than the Company. In the semiconductor wet processing market, the Company competes primarily with Dainippon Screen, FSI International, SCP Global Technologies, Steag MicroTech, Sugai Corporation, SubMicron Systems, Tokyo Electron Limited and Verteq. In the FPD wet processing market, the Company competes primarily with Dainippon Screen, Shimada and Shibaura. There can be no assurance that these competitors will not also develop enhancements to or future generations of competitive products that will offer price or performance features that are superior to the Company's systems or that the Company will gain market acceptance. The Company believes that in order to remain competitive, it must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide. In marketing its products, the Company will face competition from suppliers employing new technologies in order to extend the capabilities of competitive products beyond their current limits or increase their productivity. Once a manufacturer has selected a particular vendor's capital equipment, the Company believes that the manufacturer generally relies upon that equipment for a specific production line application and frequently will attempt to consolidate related capital equipment requirements with the same vendor, to the 16 degree that such consolidation is possible. In addition, increased competitive pressure could lead to intensified price-based competition, resulting in lower prices and margins, which would materially adversely affect the Company's business and results of operations. MANUFACTURING The Company's manufacturing operations are based in West Chester, Pennsylvania and consist of procurement, assembly and test engineering. During fiscal 1996, the Company completed an expansion of its manufacturing operations, which resulted in a 150% increase in production capacity. An additional expansion took place in fiscal 1997 in a separate building within the same industrial park in West Chester and resulted in a further 50% increase in production capacity. The Company's Full-Flow systems are based upon a common set of modules, enabling the Company to reduce manufacturing costs by using a large number of common subassemblies and components. Many of the major subassemblies are purchased complete from outside sources. The Company focuses its manufacturing efforts on carefully documented assembly and integration activities which the Company has determined to be critical to the successful operation of its products. In 1994, as a result of adoption of SEMATECH measurement and improvement methodologies, the Company began a concerted effort to meet the requirements of ISO 9001, the international standard for quality systems. In February 1997, the Company received ISO 9001 certification. Certain of the Company's components and subassemblies are obtained from sole suppliers or limited groups of suppliers, which are often small, independent companies. Moreover, the Company believes that certain of these components and subassemblies can only be obtained from its current suppliers. The Company generally acquires such components on a purchase order basis and has supply contracts of up to one year in duration. The Company's reliance on outside vendors generally, and on sole suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing, timely delivery and quality of components. The Company has experienced and continues to experience some reliability and quality problems with certain key components and subassemblies provided by single source suppliers. Because the manufacture of certain of these components and subassemblies is a complex process and can require long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur. Historically the Company has not experienced any significant delays in manufacturing due to an inability to obtain components, and the Company is not currently aware of any specific problems regarding the availability of components which might significantly delay the manufacturing of its systems in the future. However, any inability to obtain adequate deliveries or any other circumstance that would require the Company to seek alternative sources of supply or, if possible, to manufacture such components internally could delay the Company's ability to ship its systems and could have a material adverse effect on the Company. See "-Forward Looking Statements - Sole or Limited Sources of Supply." 17 The Company is subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used in its research, development and engineering activities. The Company believes that it is currently in compliance in all material respects with such laws, rules and regulations. However, failure to so comply could result in substantial liability to the Company, suspension or cessation of the Company's operations, restrictions on the Company's ability to expand at its present location or requirements for the acquisition of additional equipment or other significant expense. To date, the cost of compliance with environmental rules and regulations has not had a material effect on the Company's operations. INTELLECTUAL PROPERTY The Company relies on a combination of patent, copyright, trademark and trade secret laws, non-disclosure agreements and other forms of intellectual property protection to protect its proprietary technology. The Company currently holds twelve patents in the United States, six patents in Japan, one patent in Korea and fourteen patents in various European countries. The Company also has multiple patent applications pending in the United States and various foreign jurisdictions. The technology covered in the existing patents includes the Company's Full-Flow process and Direct-Displace drying technologies upon which the Company's current product offerings are based. While the Company recognizes that these patents have significant value, the Company also believes that the innovative skills, technical expertise and know-how of its personnel in applying the art reflected in these patents would be difficult, costly and time consuming to reproduce. The Company has brought suit to enforce its patent rights against Steag MicroTech, Inc. ("Steag") in an action commenced in July 1995 in the United States District Court for the District of Delaware. Similarly, the Company took action against Yieldup International Corporation ("YieldUp") in September 1995. The Company's complaints in these actions allege infringement, inducement of infringement and contributory infringement of one of the Company's patents. The Company seeks damages and permanent injunctions to prevent further infringement. The defendants have denied infringement and have asserted, among other things, that the subject patent is invalid and unenforceable. There can be no assurance that when these litigations are final any of the claims of the patent in issue will be found to encompass use of the competitors' products or that the subject patent will not be found to be unenforceable or invalid. A finding of invalidity or unenforceability could result in the Company's competitors being able to develop products using the Company's proprietary technology, which in turn could have a material adverse effect on the Company. Further there can be no assurance that any rights granted under any of the Company's patents will provide adequate protection to the Company, or that the Company will have sufficient resources to continue to prosecute its rights in the current actions or others. 18 The suit against Steag was tried to a jury in December 1997. The jury found that Steag did willfully infringe the Company's patent and that the Company's patent is not invalid, and it awarded damages in excess of $3 million. Post-trial motions are pending and final judgment in this case is not anticipated before April 1998. In the YieldUp action, the district court entered an order on October 14, 1997 granting summary judgment in favor of YieldUp on the defense of noninfringement and dismissing YieldUp's counterclaim for declaratory judgment as moot. The Company has filed a motion for reargument and that motion is still pending. In March 1997, Dainippon Screen Mfg. Co. Ltd. and DNS Electronics LLC (collectively "DNS") filed an action against the Company in the United States District Court for the Northern District of California. In this action, DNS requested the court to declare that DNS does not infringe one of the Company's patents and that the patent is invalid and unenforceable, and asserted claims for monetary damages and injunctive relief for alleged violations of the Lanham Act, unfair competition, tortious interference with prospective economic advantage and unfair advertising. This action was dismissed on the grounds of lack of personal jurisdiction and lack of indispensable party. DNS has appealed this ruling. This ruling, even if affirmed, will not prevent DNS from pursuing its claims in a court in which jurisdiction is proper. Although there are no pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights or any claims that the Company is infringing intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted by third parties in the future. Also, there can be no assurance in the event of such claims of infringement that the Company will be able to obtain licenses on reasonable terms. The Company's involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could result in a material adverse effect on the Company's business. Adverse determinations in the current litigation or any other litigation in which the Company may become involved could subject the Company to significant liabilities to third parties, require the Company to grant licenses to or seek licenses from third parties, and prevent the Company from manufacturing and selling its products. Any of these situations could have a material adverse effect on the Company. EMPLOYEES As of October 31, 1997, the Company had 406 employees, of which 372 were full-time and the balance temporary employees. There were 165 employees in manufacturing operations, 95 in research, development and engineering, 25 in sales and marketing, 80 in customer satisfaction and 19 field support and 41 in general administrative and finance positions. Of the 372 total full-time employees, 8 were located in Asia and 15 were located in Europe. The Company plans to hire additional personnel during the next 12 months. While the Company has generally been able to find qualified candidates to fill new positions, substantial growth throughout the semiconductor capital equipment industry has made it more difficult to recruit qualified candidates for certain positions in design, field support, testing and process engineering. Once recruited, the Company then faces the task of training and integrating new employees quickly enough to keep pace with its rapid growth. There can be no assurance that the Company will be successful in retaining or recruiting, training and integrating the necessary key personnel to support its anticipated growth, and any failure to expand these areas in an efficient manner could have a material effect on the Company's results of operations. None of the Company's employees is represented by a labor union and the Company has never experienced a work stoppage, slowdown or strike. The Company considers its relationships with its employees to be good. FORWARD LOOKING STATEMENTS Statements in this Annual Report on Form 10-K, including those concerning the Company's expectations of future sales, gross profits, research, development and engineering expenses, selling, general and administrative expenses, product introductions and cash requirements, include certain forward-looking statements. As such, actual results may vary materially from such expectations. Factors which could cause actual results to differ from expectations include variations in the level of orders which can be affected by general economic conditions and growth rates in the semiconductor and FPD manufacturing industries and in the markets served by the Company's customers, the international economic and political climates, difficulties or delays in product functionality or performance, the delivery performance of sole source vendors, the timing of future product releases, failure to respond adequately to either changes in technology or customer preferences, changes in pricing by the Company or its competitors, ability to manage growth, risk of nonpayment of accounts receivable, changes in budgeted costs or failure to realize a successful outcome to pending patent litigation, all of which constitute significant risks. For a description of additional risks, see below. There can be no assurance that the Company's results of operations will not be adversely affected by one or more of these factors. Fluctuations in Operating Results. The Company has derived substantially all of its net sales from the sale of a limited number of wet processing systems which typically have list prices, before automation options and custom configurations, ranging from $1.2 million to $2.7 million per system. Systems with automation options and custom configurations can be priced in excess of $4.1 million per system. At the Company's current revenue level, each sale or failure to make a sale can have a material effect on the Company. A cancellation, rescheduling or delay in a shipment near the end of a particular quarter may cause net sales in that quarter to fall significantly below the Company's expectations and thus may materially adversely affect the Company's operating results for such quarter. Other factors which may lead to fluctuations in the Company's quarterly and 20 annual operating results include: market acceptance of the Company's systems and its customers' products; the number of systems being manufactured during any particular period; the geographic mix of sales; the mix of sales by distribution channel; the timing of announcement and introduction of new systems by the Company and its competitors; a downturn in the market for personal computers or other products incorporating semiconductors and FPDs; variations in the types of systems sold; product discounts and changes in pricing; delays in deliveries from suppliers; delays in orders due to customers' financial difficulties; and volatility in the semiconductor and FPD industries and the markets served by the Company's customers. Also, customers may face competing capital budget considerations, thus making the timing of customer orders uneven and difficult to predict. Many of the factors listed above are beyond the control of the Company. In addition, continued investments in research, development and engineering and the development of a worldwide sales, marketing and customer satisfaction organization will result in significantly higher fixed costs. There can be no assurance that the Company will be able to achieve a rate of growth or level of sales in any future period commensurate with its level of expenses. The impact of these and other factors on the Company's operating results in any future period cannot be forecast with any degree of certainty. Due to the foregoing factors, it is likely that in some future quarter or quarters the Company's operating results may be below the expectations of analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. See Item 7 and "-Business-Industry Background." Acceptance by Customers of New Technology. The Company's products all rely upon proprietary technology to accomplish wet chemical processing during semiconductor or FPD manufacturing, which technology is significantly different from the technological approaches in current usage for these processes. Most of the Company's competitors make use of established technology with competitive product variations. The semiconductor industry is especially resistant to the introduction of changes in process or approach in a manufacturing cycle which is quite long (up to twelve weeks), consists of many separate process events (up to 300 or more) and suffers from limited control measurement points during the overall fabrication process. Accordingly, managers of semiconductor fabs have exhibited a strong resistance to changing equipment and have been reluctant to embrace new technology, including the Company's Full-Flow systems. Because a substantial investment is required by semiconductor manufacturers to install and integrate capital equipment into a semiconductor production line, these manufacturers will tend to choose semiconductor equipment suppliers based on past relationships, product compatibility and proven operating performance. Once a manufacturer has selected a particular vendor's capital equipment, the Company believes that the manufacturer generally relies upon that equipment for a specific production line application and frequently will attempt to consolidate related capital equipment purchases with the same vendor, to the degree that such consolidation is possible. Many semiconductor and FPD manufacturers continue to extract marginal improvements from existing wet processing technology in order to address issues such as increases in feature density, reductions in line width and planned increases in wafer size. There can be no assurance that the Company's products will achieve broad market acceptance. See "-Business-Industry Background" and "-Business-Products." 21 Customer Concentration. Historically, relatively few customers have accounted for a substantial portion of the Company's net sales. Sales to LG and Siemens accounted for approximately 21.3% and 11.3%, respectively, of net sales in fiscal 1997. The Company expects a significant portion of its future sales to remain concentrated within a limited number of customers. The Company's arrangements with its customers are generally on a purchase order basis and not pursuant to long-term contracts. There can be no assurance that the Company will be able to retain its major customers or that such customers will not cancel or reschedule orders or that canceled orders will be replaced by other sales. A reduction or delay in orders from any of the Company's significant customers, including reductions or delays due to market, economic or competitive conditions in the semiconductor or FPD industries, or the loss of any such customers, could have a material adverse effect upon the Company's results of operations. See "-Business-Customers." Sole or Limited Sources of Supply. The Company relies to a substantial extent on outside vendors to manufacture and supply many of the components and subassemblies used in the Company's systems. Certain of these components and subassemblies are obtained from a sole supplier or a limited group of suppliers, many of which are small, independent companies. Moreover, the Company believes that certain of these components and subassemblies can only be obtained from its current suppliers. The Company's reliance on outside vendors generally and a sole or a limited group of suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing, timely delivery and quality of components. The Company has experienced and continues to experience some reliability and quality problems with certain key components and subassemblies provided by single source suppliers. Because the manufacture of certain of these components and subassemblies is a complex process and requires long lead times, there can be no assurance that delays or shortages caused by suppliers will not occur. The process of obtaining and qualifying replacement 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 inability to obtain adequate deliveries of components and subassemblies which conform to the Company's reliability and quality requirements or any other circumstance that would require the Company to 22 seek alternate sources of supply or, if possible, to manufacture such components internally could delay the Company's ability to ship its systems and could have a material adverse effect on the Company. See "-Business-Manufacturing." Dependence on Limited Product Offerings. To date, the Company's net sales have consisted primarily of sales to the semiconductor industry, although the Company has developed and is now selling a version of its Full-Flow system for use in FPD manufacturing. The ability of the Company to diversify its operations through the introduction and sale of system enhancements with new applications is dependent upon the success of the Company's continuing research, development and engineering activities, as well as its marketing efforts. The Company's continued sales growth will depend upon achieving market acceptance of its Full-Flow systems and future products. There can be no assurance that the Company will be able to develop, introduce or market new systems or system enhancements in a timely or cost-effective manner or that any such systems or enhancements will achieve market acceptance. See "-Business-Products." Dependence upon Product Development. The markets in which the Company and its customers compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. In order to remain competitive in the future, the Company will need to develop and commercialize additional cleaning and etching processes based on its Full-Flow platform. Further, the Company will need to develop new products which are capable of supporting customers' increasingly complex process requirements and which compete effectively on the basis of overall COO, including process performance and capital productivity. The market for FPD manufacturing equipment presents an additional challenge as the technology is at an earlier stage and subject to more rapid evolution. The success of new system introductions is dependent on a number of factors, including timely completion of new system designs, system performance and market acceptance, and may be adversely affected by manufacturing inefficiencies associated with the start up of such new introductions and the challenge of producing systems in volume which meet customer requirements. Because it is generally not possible to predict the time required and costs involved in reaching certain research, development and engineering objectives, actual development costs could exceed budgeted amounts and estimated product development schedules may require extension. Any delays or additional development costs could have a material adverse effect on the Company's business and results of operations. There can be no assurance that the Company will successfully develop and introduce new products or enhancements to its existing products on a timely basis or in a manner which satisfies potential customers or achieves widespread market acceptance. 23 Because of the large number of components in, and the complexity of, the Company's systems, significant delays can occur between the introduction of systems or system enhancements and the commencement of commercial shipments. The Company has from time to time experienced delays in the introduction of, and certain technical and manufacturing difficulties with, certain of its systems and enhancements, and may experience such delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements. The Company's inability to overcome such difficulties, to meet the technical specifications of any new systems or enhancements, or to manufacture and ship these systems or enhancements in volume and in a timely manner, would materially adversely affect the Company's business and results of operations, as well as its customer relationships. In addition, the Company from time to time incurs unanticipated costs to ensure the functionality and reliability of its products early in their life cycles, which costs can be substantial. If new products or enhancements experience reliability or quality problems, the Company could encounter a number of difficulties, including reduced orders, higher manufacturing costs, delays in collection of accounts receivable and additional service and warranty expenses, all of which could materially adversely affect the Company's business and results of operations. See "-Business-Products and - -Business-Research, Development and Engineering." Management of Growth. The Company is currently undergoing a period of rapid growth. To accommodate this growth, the Company faces the task of identifying, recruiting, training and integrating new employees quickly enough to keep pace with its rapid growth. Many of the positions which are critical to supporting the Company's growth require experience with semiconductor and FPD capital equipment. The continuing growth of the semiconductor and FPD capital equipment industries has made the recruitment of such experienced personnel difficult. The Company's growth may also strain the Company's management, manufacturing, financial and other resources. Any failure to expand these areas in an efficient manner could have a material adverse effect on the Company. The Company has recently leased additional facilities and may be required to secure other additional facilities in the future. The need to acquire additional remote facilities could be disruptive and could have a material adverse effect on the Company. See "-Business-Employees" and Item 2-"Properties." Dependence upon Personnel. The success of the Company depends to a large extent upon the efforts of key managerial and technical employees. The loss of services of any of these persons could have a material adverse effect on the Company. The Company has not entered into written employment agreements with any of its executive officers other than its chief financial officer, nor does the Company maintain key man life insurance on any of its personnel. 24 In addition, the success of the Company will also depend upon its ability to attract and retain qualified employees, particularly highly skilled design and process engineers involved in the manufacture of existing systems, the development of new applications and systems and the installation, training and maintenance related to those systems already installed at customer sites. There can be no assurance that the Company will be successful in retaining or recruiting, training and integrating the necessary personnel to support its anticipated growth, which could have a material adverse effect on the Company's results of operations. See "-Business-Employees," and "-Executive Officers of the Registrant." Lengthy Sales Cycle. Sales of the Company's systems depend upon the decision of a prospective customer to increase manufacturing capacity. These decisions typically involve significant capital commitments or a change in process approach, which may require the approval of senior management. The amount of time from the initial contact with the customer to the first order is typically one to two years. The Company's ability to obtain orders from potential customers has depended in the past and may continue to depend in the future upon customers purchasing a new system in order to evaluate Full-Flow and Direct-Displacement drying technologies as an alternative to existing wet processing technologies. For many potential customers, decisions to undertake such evaluations occur infrequently. The Company often experiences delays in finalizing further system sales while the customer evaluates and receives approvals for the purchase of additional systems. Such delays may include the time necessary to plan, design or complete a new or expanded fab. Due to these factors, the Company's systems typically have a lengthy sales cycle during which the Company may expend substantial funds and management effort. There can be no assurance that any of these expenditures or efforts on the part of the Company will result in sales. See "-Business-Products" and "-Business-Competition." Volatility of the Semiconductor Industry. The Company's business depends, in significant part, upon capital expenditures by manufacturers of semiconductor devices, which in turn depend upon the current and anticipated market demand for such devices and the products utilizing such devices. The semiconductor industry has been highly volatile and historically has experienced periods of oversupply, resulting in significantly reduced demand for capital equipment, including wet processing systems. Recently, a number of semiconductor manufacturers have experienced a reduction in order growth and, in a few instances, a reduction in overall orders. These events have caused certain semiconductor manufacturers to postpone or cancel equipment deliveries to previously planned expansions or new fab construction projects. In addition, certain market analysts project limited growth in expenditures for semiconductor capital equipment in 1998. Historically, a significant portion of the Company's sales have been to Asian companies. The recent economic crisis in Asia could have a material adverse effect on the Company's operating results. There can 25 be no assurance that further order cancellations or reductions in order growth or overall orders for semiconductors will not have a material adverse effect upon the Company's business or results of operations. The Company believes that the FPD market may be similarly volatile. The need for continued investment in research, development and engineering, marketing and customer satisfaction activities may limit the Company's ability to reduce expenses in response to future downturns in the semiconductor or FPD industries. The Company's net sales and results of operations could be materially adversely affected if downturns or slowdowns in the semiconductor or FPD markets occur in the future. International Sales. Sales to customers located outside the United States accounted for approximately 65% of the Company's net sales in fiscal 1997. The Company anticipates that such international sales are subject to numerous risks, including United States and international regulatory requirements and policy changes, political and economic instability, increased installation costs, difficulties in accounts receivable collection, exchange rates, tariffs and other barriers, extended payment terms, difficulty in staffing and managing international operations, dependence on and difficulties in managing international distributors or representatives and potentially adverse tax consequences. Furthermore, although the Company endeavors to meet technical standards established by foreign regulatory bodies, there can be no assurance that the Company will be able to comply with such standards in the future. In addition, the laws of certain other countries may not protect the Company's intellectual property to the same extent as the laws of the United States. As part of its efforts to penetrate the East Asia market, the Company entered into its first distributor agreement with ANAM in Korea in 1991, a distribution agreement with Innotech in Japan in 1992, a sales agent agreement with AMPOC in Taiwan in 1996, a sales representation agreement with Aneric in southeast Asia in 1997 and a sales agency agreement with Silicon International in the Peoples Republic of China in 1997. Although management believes that it maintains good relationships with ANAM, Innotech, AMPOC, Silicon International and Aneric, there can be no assurance that these relationships will continue. In the event of a termination of any of the Company's existing representation, agency or distribution arrangements, the Company's international sales could be adversely affected. Although the Company's sales are predominantly denominated in United States dollars, to the extent that the Company expands its international operations or changes its pricing practices to denominate prices in international currencies, the Company will be exposed to increased risks of currency fluctuation. Historically, a significant portion of the Company's sales have been to Asian companies. The recent economic crisis in Asia could have a material adverse effect on the Company's operating results. Additionally, a strengthening in the value of the United States dollar in relation to international currencies may adversely affect the Company's future sales to international customers. There can be no assurance that any of these factors will not have a material adverse effect on the Company. See "Business-Sales and Marketing" and Item 7 "-Overview." 26 Highly Competitive Industry. The Company faces substantial competition in its market segments from both established competitors and potential new entrants. The Company believes that the primary competitive factors in the markets in which the Company competes are yield, throughput, capital and direct costs, system performance, size of installed base, breadth of product line and customer satisfaction, as well as customer commitment to competing technologies. Most of the Company's competitors have been in business longer than the Company, offer traditional wet processing technology, and have broader product lines, more experience with high volume manufacturing, broader name recognition, substantially larger installed bases and significantly greater financial, technical and marketing resources than the Company. In the semiconductor wet processing market, the Company competes primarily with Dainippon Screen, FSI International, Santa Clara Plastics, Steag MicroTech, SubMicron Systems, Tokyo Electron Limited and Verteq. In the FPD wet processing market, the Company competes primarily with Dainippon Screen, Shimada and Shibaura. There can be no assurance that the Company will overcome the established positions of these competitors or that the Company's competitors will not develop enhancements to or future generations of competitive products that will offer price and performance features that are superior to the Company's systems. The Company believes that in order to remain competitive, it must invest significant financial resources in developing new product features and enhancements and in maintaining customer satisfaction worldwide. In marketing its products, the Company will face competition from suppliers employing new technologies in order to extend the capabilities of competitive products beyond their current limits or increase their productivity. In addition, increased competitive pressure could lead to intensified price-based competition, resulting in lower prices and margins, which would materially adversely affect the Company's business and results of operations. See "-Business-Competition." Intellectual Property Rights The Company relies on a combination of patents, copyrights, trademarks and trade secrets, non-disclosure agreements and other forms of intellectual property protection to defend its proprietary technology. Although the Company believes that its patents and trademarks may have value, the Company recognizes that its future success will depend primarily on the innovation, technical expertise and marketing abilities of its personnel. The Company currently holds 12 patents in the United States and 21 international patents and has patent applications pending or under evaluation in the United States and various foreign jurisdictions. The Company is currently asserting its patent rights in litigation against two defendants, alleging infringement, inducement of infringement and contributory infringement of one of the Company's patents. The defendants have denied infringement and have asserted, among other things, that the patent at issue is invalid and unenforceable. One case was tried to a jury in December 1997. The jury 27 found that the Company's patent was willfully infringed by the defendant and that it was not invalid, and it awarded damages in excess of $3 million. Post-trial motions are pending and final judgment is not anticipated before April 1998. The defendant is expected to appeal any adverse judgment. In the second action brought by the Company, summary judgment was granted by the court in October 1997 holding that the defendant's process does not infringe the Company's patent. The Company is seeking reargument in this case. In addition to the two suits initiated by the Company, a third competitor filed a suit against the Company in March 1997. In this action filed in the United States District Court for the Northern District of California, the competitor seeks a declaration that it does not infringe one of the Company's patents and that the patent is invalid and unenforceable, and asserts claims for monetary damages and injunctive relief for alleged violations of the Lanham Act, unfair competition, tortious interference with prospective economic advantage. This case was dismissed for lack of jurisdiction and an appeal by the competitor is pending. In all of these cases, there can be no assurance that any claim of the subject patent will be finally adjudged to encompass use of the competitors' product or that the subject patent will not be found to be unenforceable or invalid during prosecution of the actions. A finding of invalidity or unenforceability could result in the Company's competitors developing products using the Company's propriety technology, which in turn could have a material adverse effect on the Company. The Company believes that these actions, even if completely successful, will be costly to the Company in terms of both financial and management resources. There can be no assurance that additional patents will be issued on the Company's pending applications or that competitors legitimately will not be able to ascertain proprietary information embedded in the Company's products which is not covered by patent or copyright. In such case, the Company may be precluded from preventing its competitors from making use of such information. There are no pending lawsuits or claims against the Company regarding infringement of any existing patents or other intellectual property rights of others. There can be no assurance, however, that such infringement clams will not be asserted in the future, nor can there be any assurance, if such clams are made, that the Company will be able to defend such claims successfully or, if necessary, obtain licenses on reasonable terms. Adverse determinations in any litigation naming the Company could subject the Company to significant liabilities to third parties, require the Company to seek licenses from third parties, and prevent the Company from manufacturing and selling its systems. Any of these events could have a material adverse effect on the Company. Environmental Regulation. The Company is subject to a variety of federal, state and local laws, rules and regulations relating to the use, storage, discharge and disposal of hazardous chemicals used during its research, development 28 and engineering activities. The Company believes that it is currently in compliance in all material respects with such laws, rules and regulations. However, failure to so comply could result in substantial liability to the Company, suspension or cessation of the Company's operations, restrictions on the Company's ability to expand its operations or requirements for the acquisition of additional equipment or other significant expense, any of which could have a material adverse effect on the Company. See "-Business-Manufacturing." Volatility of Stock Price. The Company believes that a variety of factors could cause the price of the Company's Common Stock to fluctuate, perhaps substantially, including: announcements of developments related to the Company's business; quarterly fluctuations in the Company's actual or anticipated operating results and order levels; general conditions in the semiconductor and FPD industries or the worldwide economy; announcements of technological innovations; new products or product enhancements by the Company or its competitors; developments in patents or other intellectual property rights and litigation; and developments in the Company's relationships with its customers, distributors and suppliers. In addition, in recent years the stock market in general and the market for shares of small capitalization and semiconductor industry-related stocks in particular have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies. Any such fluctuations in the future could adversely affect the market price of the Company's Common Stock. There can be no assurance that the market price of the Common Stock of the Company will not decline. ITEM 2. PROPERTIES The Company conducts its manufacturing in a 26,000 square foot facility which it owns in West Chester, Pennsylvania and a 13,941 square foot facility that it leases across the street from the main manufacturing facility. The lease on the 13,941 square foot facility expires in June 1998. The Company also leases an 11,000 square foot facility nearby the industrial park for storage purposes and a 32,000 square foot prototype laboratory and storage facility in another nearby industrial park. The storage facility lease expires in October 1998 and the prototype facility lease expires in June 1999. In January 1996 the Company commenced occupancy of a 38,400 square foot leased office building located in the same industrial park as its manufacturing facility to serve as the new location for its engineering, sales and marketing and administration activities. The lease expires in November 2000. In April 1997, the Company leased an 8,023 square foot facility in the same industrial park as its manufacturing facility for its customer satisfaction staff. The lease on this facility expires in December 1998. 29 In fiscal 1997, the Company entered into a non-cancelable agreement to lease a 60,000 square foot production facility and an 80,000 square foot office facility to be built for the Company in Exton, Pennsylvania. The Company plans to move all of its manufacturing, engineering, sales and marketing, customer satisfaction and administrative functions to these two new facilities once they are completed. Occupancy is expected to be in two phases in late 1998 and early 1999. The Company intends to maintain the building that it owns as a research and development facility. See Note 16 of the Notes to Consolidated Financial Statements. The Company believes that suitable additional space, if ultimately needed, will be available on terms acceptable to the Company. ITEM 3. LEGAL PROCEEDINGS The Company has asserted certain of its patent rights against two defendants and is the defendant in another matter seeking a declaratory judgment of patent noninfringement and invalidity, each matter pertaining to U.S. Letters Patent No. 4,911,761. The United States District Court for the District of Delaware granted a summary judgment in one matter wherein the Company is the plaintiff and the Company has filed for reargument. On December 12, 1997 a jury, following trial in the United States District Court for the District of Delaware, found the subject patent valid and enforceable on all asserted claims and found the defendant to have willfully infringed on all asserted claims. Post-trial motions by both parties are being considered by the court at the date of this filing. Some of the claims in the matter seeking declaratory judgment have been dismissed for lack of jurisdiction, a finding which is under appeal. Although management believes that the ultimate resolution of these matters will not have a material adverse impact on the Company's financial position or results of operations, there can be no assurance in that regard. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 30 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the Company's executive officers and key employees: NAME AGE POSITION ---- --- -------- Christpher F. McConnell 44 Chairman of the Board of Directors Roger A. Carolin 42 President, Chief Executive Officer and Director Lorin J. Randall 54 Vice President-Finance, Chief Financial Officer, Secretary and Treasurer Joseph E. Berger 39 Vice President-Worldwide Sales and Marketing David L. deLesdernier 48 Vice President-Engineering Garry M. Mayers 44 Vice President-Customer Service John L. Posta 56 Vice President-Manufacturing Steven T. Bay 41 Chief Technical Officer Heinrich S. Erhardt 53 Vice President-Product Development Steven Verhaverbeke 32 Director of Process Technology Alan E. Walter 43 Senior Vice President, Business Development - ---------- CHRISTOPHER F. MCCONNELL founded the Company in May 1984 and served as President and Chief Executive Officer until October 1990 when he was named Chairman of the Board of Directors. Prior to forming the Company, Mr. McConnell held various technical and marketing positions with Dow Chemical. Mr. McConnell received his BS and MS degrees in Chemical Engineering from Dartmouth College and Purdue University, respectively, and his MBA from Harvard Business School. Mr. McConnell is a named inventor on all of the Company's patents. ROGER A. CAROLIN has served the Company as a director since its inception in 1984 and as President and Chief Executive Officer since April 1991. From October 1990 to April 1991, he served as a marketing and sales consultant to the Company. From June 1984 to October 1990 Mr. Carolin was Senior Vice President of The Mills Group, Inc., a real estate development firm. Previously, Mr. Carolin was with The General Electric Company and Honeywell, Inc. in a variety of technical positions. Mr. Carolin received his BS in Electrical Engineering from Duke University and his MBA from Harvard Business School. LORIN J. RANDALL joined the Company in January 1995 as Vice President-Finance, Chief Financial Officer, Secretary and Treasurer. From May 1994 to June 1995, Mr. Randall served as the President and Chief Executive Officer of Greenwich Pharmaceuticals Incorporated, a drug development company where from September 1991 to May 1994, he served as Vice President-Finance and Chief Financial Officer. Mr. Randall received his BS in Accounting from The Pennsylvania State University and his MBA from Northeastern University. Mr. Randall is a director of Quad Systems Corporation. 31 JOSEPH E. BERGER joined the Company in June 1993 and has served as Vice President-Worldwide Sales and Marketing from December 1995. Mr. Berger served as the Company's Director of Sales and Marketing from June 1995 to December 1995, and as Program Director from June 1993 to June 1995. Mr. Berger served as Director of Sales for A.E. Staley Manufacturing Co., a manufacturer of corn sweetners and starches, from 1990 until May 1993. Mr. Berger received his BS in Chemical Engineering from the University of Virginia and MBA from Harvard Business School. DAVID L. DELESDERNIER joined the Company in September 1996 and currently serves as Vice President-Engineering. From August 1995 until August 1996, Mr. deLesdernier was Vice President-Technology for IPEC/Clean, a manufacturer of sulfuric acid reprocessing systems for the semiconductor industry. From 1977 to June 1995 Mr. deLesdernier was Corporate Vice President-Commercial and International for Systems Applications International Corp., a defense contractor. Mr. deLesdernier received his BS and MS from the Georgia Institute of Technology and his MBA from San Diego State University. GARRY M. MAYERS joined the Company in October 1996 and currently serves as Vice President-Customer Service. From April 1991 until October 1996, Mr. Mayers was Director of World Wide Customer Service at ADE Corporation, a manufacturer of chemical vapor deposition and ion implant equipment for semiconductor devices. Mr. Mayers attended Northeastern University, majoring in electrical engineering. JOHN L. POSTA joined the Company in October 1993 as Vice President-Manufacturing. Mr. Posta served as a consulting engineer to the Company from August 1993 to October 1993 and as a manufacturing consultant from August 1989 to October 1993. Mr. Posta received his BS in Industrial Management from Fairleigh Dickinson University. STEVEN T. BAY joined the Company in April 1992 as Director of Technology and Marketing/Far East, and has served as Chief Technical Officer since September 1994. From 1990 until April 1992, Mr. Bay was employed by Bridgetek, Inc. of San Jose, California, which was the manufacturer's representative for the Company in California and the Pacific Northwest. Mr. Bay received his BA in Chemistry from St. Louis University. HEINRICH S. ERHARDT joined the Company in January 1992 and is currently Vice President-Product Development. From January 1992 to September 1996 he served as Vice President-Engineering. Prior to joining the Company, Mr. Erhardt served as Vice President of Operations for Image Storage/Retrieval Systems, a supplier of high-density data storage systems, from January to December 1991. Mr. Erhardt received his BS in Mechanical Engineering from City University of New York and his MS in Engineering Science from The Pennsylvania State University. 32 STEVEN VERHAVERBEKE joined the Company in February 1995 and has served as Director of Process Technology since that time. Dr. Verhaverbeke was employed by IMEC of Leuven, Belgium, a microelectronics research institute, as a senior researcher from August 1994 to January 1995 and as a doctoral researcher from September 1988 to July 1993. Dr. Verhaverbeke also served as a researcher at Tohoku University in Sendai, Japan from August 1993 to August 1994. Dr. Verhaverbeke received his Ph.D. in Chemical Engineering from K. U. Leuven, Belgium. ALAN E. WALTER co-founded the Company in 1984 and currently serves as Senior Vice President-Business Development, with primary responsibility for the Company's marketing efforts in the FPD industry. Prior to joining the Company, he was with the Cochrane Division of Crane Company, a producer of ultra-high purity water systems. Mr. Walter received his BS in Chemical Engineering from the University of Delaware. He is a named inventor on ten of the Company's patents. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded in The Nasdaq Stock Market under the symbol CFMT. The range of high and low closing prices for the Common Stock as reported by the National Association of Securities Dealers, Inc. for the periods indicated below is as follows: Fiscal 1997 HIGH LOW - ----------- ---- --- 1st Quarter.................................... $37.75 $ 8.25 2nd Quarter ................................... 41.75 25.00 3rd Quarter ................................... 37.75 25.25 4th Quarter ................................... 40.88 14.00 Fiscal 1996 - ----------- 3rd Quarter(1)................................. $11.00 $8.25 4th Quarter ................................... 13.50 7.75 - ---------- (1) Commencing June 21, 1996, the day on which trading commenced following the effectiveness of the Company's initial public offering. These prices reflect inter-dealer quotations, without retail mark-ups, mark-downs or other fees or commissions, and may not necessarily represent actual transactions. As of January 20, 1998, the closing quotation for the Common Stock was $17.4375. As of January 20, 1998, there were approximately 160 holders of record and the Company believes that there were approximately 4000 beneficial owners of the Company's Common Stock. 33 The Company has never declared or paid a cash dividend on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain its earnings, if any, for the development of its business. The declaration of any future dividends by CFM is within the discretion of its Board of Directors and will be dependent on the earnings, financial condition and capital requirements of CFM as well as any other factors deemed relevant by its Board of Directors. ITEM 6. SELECTED FINANCIAL DATA. The following table contains certain selected consolidated financial data of the Company and is qualified by the more detailed Consolidated Financial Statements and Notes thereto included elsewhere in this report. The consolidated statement of income data for the fiscal years ended October 31, 1995, 1996 and 1997 and the consolidated balance sheet data as of October 31, 1996 and 1997 have been derived from the Consolidated Financial Statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report included elsewhere herein. The consolidated statement of income data for the fiscal years ended October 31, 1993 and 1994 and the consolidated balance sheet data as of October 31, 1994 and 1995 have been derived from the Consolidated Financial Statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports not included herein. The consolidated balance sheet data as of October 31, 1993 has been derived from unaudited financial statements. The unaudited financial statements include all adjustments, consisting only of normal adjustments, that the Company considers necessary for a fair presentation of the results of operations for such periods. This data should be read in conjunction with the Consolidated Financial Statements and Notes thereto and Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. 34 FISCAL YEAR ENDED OCTOBER 31, --------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF INCOME DATA: Net sales ................... $11,840 $15,937 $23,430 $44,013 $75,772 Cost of sales ............... 6,752 9,114 13,463 23,317 40,072 ------- ------- ------- ------- ------- Gross profit ............. 5,088 6,823 9,967 20,696 35,700 ------- ------- ------- ------- ------- Operating Expenses: Research, development and Engineering ............ 720 2,100 1,717 4,375 9,334 Selling, general and administrative ......... 2,273 3,150 5,972 11,679 19,360 ------- ------- ------- ------- ------- Total operating expenses 2,993 5,250 7,689 16,054 28,694 ------- ------- ------- ------- ------- Operating income ............ 2,095 1,573 2,278 4,642 7,006 Interest (income) ........... (7) (31) (72) (271) (2,163) Interest expense ............ 762 828 245 428 281 ------- ------- ------- ------- ------- Income before income taxes .. 1,340 776 2,105 4,485 8,888 Income taxes................. 457 238 703 1,525 2,666 ------- ------- ------- ------- ------- Net income................... $ 883 $ 538 $ 1,402 $ 2,960 $ 6,222 ======= ======= ======= ======= ======= Net income per share(1) ..... $ 0.35 $ 0.61 $ 0.80 ======= ======= ======= Weighted average common and common equivalent shares (1) 3,994 4,832 7,764 35 OCTOBER 31, -------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and short-term investments ... $ 112 $ 1,106 $ 408 $12,254 $ 46,181 Working capital ............ 3,118 7,177 8,136 27,525 81,796 Total assets ............... 9,332 16,689 18,454 44,251 109,496 Long-term debt, less current portion .................. 5,610 7,820 3,005 2,525 2,571 Shareholders' equity ....... 237 5,109 9,775 32,711 89,868 - ---------- (1) See Note 2 of the Notes to Consolidated Financial Statements for an explanation of the computation of net income per share. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW CFM Technologies, Inc. designs, manufactures and markets advanced wet processing equipment for sale to the worldwide semiconductor and flat panel display ("FPD") manufacturing industries. The Company was founded in 1984 and began commercial operations in 1990 following a period of technology and product development, during which time the Company's patented Full-Flow enclosed processing and Direct-Displace drying technologies were developed. The Company has derived substantially all of its revenues from the sale of a relatively small number of its systems, recent sales of which have ranged in price from approximately $1.3 million to $2.7 million. As of October 31, 1997, the Company has shipped over 120 systems to more than 30 semiconductor and FPD manufacturers worldwide. The Company has been undergoing a period of rapid growth with net sales during fiscal 1997 increasing by 72% over net sales for fiscal 1996. Net sales of Full-Flow systems to companies in the FPD manufacturing industry represented 24% and 20% of total net sales in fiscal 1997 and 1996, respectively. The Company believes that capital expenditures in the FPD manufacturing industry are subject to significant variations and expects that its FPD sales as a percentage of total sales will fluctuate as the Company attempts to penetrate new accounts. Sales of FPD Full-Flow systems to LG represented 88% of all FPD sales during fiscal 1997. The Company believes that FPD Full-Flow system sales will represent a smaller portion of total sales during fiscal 1998. The Company sells its systems worldwide and records a significant portion of its sales to customers outside the United States. In fiscal 1997, international sales constituted 65% of net sales, including sales to customers in Korea and Taiwan which represented 30% and 17% of total sales, respectively. In the fall of 1997, the currencies and economies of certain Asian countries, including Korea, came under pressure. Some of these Asian countries subsequently experienced currency devaluation, received external financial support and agreed to certain economic 36 reorganization programs anticipated to reduce growth and credit demand. In December 1997, the Company received notification of an order cancellation as a result of these events. Adjusted for that cancellation, orders scheduled for shipment to Korea and Taiwan in the Company's backlog as of October 31, 1997 represented 22% and 32% of the total backlog, respectively. The Company was informed by a customer in Taiwan that the customer could not take delivery of an order scheduled to be shipped in October 1997 because of a fire in the customer's factory. This action caused a reduction of net sales for the fourth quarter of fiscal 1997 from the level previously anticipated by the Company. There can be no assurance that the recent economic events in Korea, Taiwan and other Asian countries will not continue to affect the Company's net sales. Cancellation of additional orders could have a material adverse effect on the Company. The Company has significantly increased its operations to support increased revenues, including the hiring of additional personnel, and has made and expects to continue to make substantial investments in research, engineering and development to support product development as well as sales and marketing to promote its products. In addition, the Company entered into several leases to allow it to expand its manufacturing capacity. There can be no assurance that the Company will be able to achieve a rate of growth or level of sales in any future period commensurate with its recent growth and its level of expenses. Future results will depend upon a variety of factors, including the timing of significant orders, the ability of the Company to bring new systems to market, the timing of new product releases by the Company's competitors, patterns of capital spending by the Company's customers, the impact of economic controls in countries where the Company does business, market acceptance of new or enhanced versions of the Company's systems, changes in pricing by the Company or its competitors and the volatility of the semiconductor and FPD industries and of the markets served by the Company's customers. The Company's gross margin has been and will continue to be affected by a variety of factors including the mix and average selling prices of systems and the mix of sales to domestic and international markets. The Company pays significant commissions to agents on sales in East Asia. As a result, gross margin and selling, general and administrative expenses as a percentage of net sales have in the past and will continue in the future to fluctuate based to a large extent on changes in proportion of net sales in East Asia. 37 RESULTS OF OPERATIONS The following table sets forth the components of the Company's statements of income for the fiscal years ended October 31, 1997, 1996 and 1995, expressed as a percentage of net sales: FISCAL YEAR ENDED OCTOBER 31, --------------------------------- 1997 1996 1995 ---- ---- ---- Net sales .............................. 100.0% 100.0% 100.0% Cost of sales .......................... 52.9 53.0 57.5 ----- ----- ----- Gross profit ................... 47.1 47.0 42.5 ----- ----- ----- Operating expenses: Research, development and engineering ..................... 12.3 10.0 7.3 Selling, general and administrative .................. 25.6 26.5 25.5 ----- ----- ----- Total operating expenses ...... 37.9 36.5 32.8 ----- ----- ----- Operating income ....................... 9.2 10.5 9.7 Interest (income) expense, net ......... (2.5) 0.3 0.7 ----- ----- ----- Income before income taxes ............. 11.7 10.2 9.0 Income taxes ........................... 3.5 3.5 3.0 ----- ----- ----- Net income ............................. 8.2% 6.7% 6.0% ===== ===== ===== Net Sales. Net sales increased 88% from $23.4 million in fiscal 1995 to $44.0 million in fiscal 1996 and 72% to $75.8 million in fiscal 1997. In fiscal 1996 and fiscal 1997, these increases resulted primarily from increased demand for the Company's Full-Flow systems by companies in the semiconductor and FPD industries as the Company's customers equipped new facilities or expanded facilities, resulting in multiple systems purchases by some of the Company's major customers, and initial sales to new customers. Net sales for fiscal 1996 and fiscal 1997 included sales of Full-Flow systems to companies in the FPD manufacturing industry representing approximately 20% and 24% of net sales, respectively. The Company believes that capital expenditures in the FPD manufacturing industry are subject to significant variations and expects that its FPD sales as a percentage of total sales will fluctuate as the Company attempts to penetrate new accounts. Sales of FPD Full-Flow systems to LG Semiconductor, a manufacturer located in Korea, represented 88% of all FPD sales during fiscal 1997. The Company believes that FPD Full-Flow system sales will represent a smaller portion of net sales during fiscal 1998. International sales represented 52%, 63% and 65% of total net sales, in fiscal 1995, 1996 and 1997, respectively. The number of international customers receiving shipments of the Company's systems increased in both fiscal 1996 and 1997. The Company expects international sales to continue to represent a significant portion of its net sales as a result of continuing expansion of its international sales, service and support organization. For a description of recent economic events in Korea, Taiwan and other Asian countries and their effects on the Company, see "Overview". 38 Gross Profit. Gross profit as a percentage of net sales increased to 47.0% in fiscal 1996 from 42.5% in fiscal 1995 due to increases in manufacturing and procurement efficiencies because of increased volume. Gross margin in fiscal 1997 remained substantially constant at 47.1%. The level of gross profit in fiscal 1996 and fiscal 1997 can be attributed to a mix of increases in sales prices, changes in product mix, reductions in the cost of component parts due to volume and manufacturing efficiencies resulting from increased volume and the expansion of the Company's manufacturing facilities. Research, Development and Engineering. Research, development and engineering expenses increased from $1.7 million or 7.3% of net sales in fiscal 1995 to $4.4 million or 10.0% of net sales in fiscal 1996 and further increased to $9.3 million or 12.3% of net sales in fiscal 1997. The substantial increase in research, development and engineering spending in fiscal 1996 is attributable to the Company's completion in March 1996 of development of a Full-Flow system configured to process 100 wafers per vessel and the release of this system's design to the Company's manufacturing division. In addition, during fiscal 1996 the Company incurred substantial research, development and engineering expenses in support of the development of its first Full-Flow system for use in manufacturing flat panel displays. The further significant increase in research, development and engineering spending which occurred in fiscal 1997 is attributable to the development of a much larger Full-Flow FPD system which was first delivered in June 1997. Additionally, the Full-Flow 8150, capable of processing 150 wafers in a single vessel, was introduced in October 1997. The Company is developing a version of the Full-Flow platform to process 300mm semiconductor wafers and anticipates that production systems will be available for shipment in the first half of fiscal 1998. The Company believes that a substantial investment in research, development and engineering is critical to maintaining a strong technological position and accordingly expects such expenses in fiscal 1998 will increase over the 1997 level. Selling, General and Administrative. Selling, general and administrative expenses increased from $6.0 million or 25.5% of net sales in fiscal 1995 to $11.7 million or 26.5% of net sales in fiscal 1996 and to $19.4 million or 25.6% of net sales in fiscal 1997. The increases in fiscal 1996 and 1997 resulted primarily from increases in sales and marketing costs related to increased customer support and increased international sales, and legal expenses related to litigation undertaken to protect one of the Company's patents. The Company believes that selling, general and administrative expenses will increase in fiscal 1998 and beyond, as increased personnel and sales and support expenses are anticipated in connection with the Company's efforts to increase its net sales and as the Company continues to invest in developing and protecting its patents and other intellectual property rights. 39 Interest (Income) Expense, Net. Interest expense, net of interest income, of $0.2 million in fiscal 1995 and 1996 represented 0.7% and 0.3% of net sales, respectively. In fiscal 1997, interest income, net of interest expense, was $1.9 million or 2.5% of net sales. The Company incurred interest expenses due to intra-period borrowings on its revolving line of credit during fiscal 1995 and 1996 which borrowings were utilized to support the Company's increased working capital requirements. In fiscal 1997, net interest income was earned as a result of the investment of funds not immediately required for the Company's operations which were available as a result of the Company's initial public offering in June 1996 and a follow-on offering in February 1997. Income Taxes. The Company's effective tax rate increased from 33.4% in fiscal 1995 to 34.0% in fiscal 1996 and decreased to 30.0% in fiscal 1997. The rate for fiscal 1995 reflects a reduction in the research and development tax credit because of lower research, development and engineering expenses. The rate for fiscal 1996 reflects the unavailability of the research and development tax credit during the majority of the year. In contrast, the rate for fiscal 1997 reflects tax benefits from the research and development tax credit along with significant tax benefits from the Company's Foreign Sales Corporation as a result of the Company's export sales. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has funded its capital requirements through funding from two research and development limited partnerships, the sale of private equity securities, the Company's initial public offering of Common Stock completed in June 1996, a follow-on offering of Common Stock completed in February 1997 and, to a lesser extent, bank borrowings and equipment leases. As of October 31, 1997, the Company had $46.2 million in cash, cash equivalents and short-term investments and $81.8 million in working capital. Net cash used in operating activities was $0.4 million, $3.6 million and $12.1 million for fiscal 1995, 1996 and 1997, respectively. Increases in accounts receivable and inventories were $6.2 million and $4.3 million, respectively, in fiscal 1996 and $18.3 million and $8.0 million, respectively, in fiscal 1997. During fiscal 1997, accounts receivable increased due to higher revenues and customer payment delays due to added review on initial sales of production systems by customer production personnel prior to receivable payment. This review is sometimes time consuming and precedes receipt of the final payment amount negotiated as a part of the original purchase agreement. Subsequent deliveries of similar products usually result in significantly more rapid collection of final amounts owed. A similar situation can occur with initial installations at new customer sites as personnel unfamiliar with Full-Flow systems receive training. Accounts receivable balances are expected to continue to fluctuate with the volume of shipments of certain products and of products to new customer sites. 40 Purchases of property, plant and equipment were $2.9 million and $4.3 million in fiscal 1996 and 1997, respectively. These expenditures were primarily related to fit-up of the Company's new leased office facility and acquisition of an advanced three-dimensional computer-aided design system for use in the Company's research, development and engineering activities in fiscal 1996 and for improvements in information systems infrastructure, expansion of the Company's applications laboratory, additional customer and employee training facilities and expanded production capacity in fiscal 1997. During fiscal 1997, the Company leased an additional 22,000 square feet of space in a facility in the same industrial park as its owned manufacturing and leased administrative facilities to house a portion of the Company's production operations and its customer satisfaction function. The Company also entered into a lease with a minimum term of 20 years for two facilities, a 60,000 square foot production facility and a 80,000 square foot office facility, to be built in Exton, Pennsylvania, approximately 7 miles from the site of the Company's current operations. The Company intends to retain its owned facility in West Chester, Pennsylvania for use in manufacturing, customer and employee training and research and development while moving all other functions to Exton late in the fall of 1998. The Company has a relationship with a commercial bank which includes a mortgage on the Company's manufacturing facility in the amount of $0.9 million and a $7.5 million revolving demand line of credit. The mortgage bears interest at an annual rate of 8.9%. The line of credit is unsecured and borrowings are at an interest rate equal to such bank's prime rate. There were no borrowings at October 31, 1997. The Company also has mortgage notes payable to the Pennsylvania Industrial Development Authority in the amount of $0.6 million bearing interest at 2.0% and to the Chester County Development Council in the amount of $0.1 million bearing interest at 5.0%. In addition, the Company has outstanding capital lease obligations in the amount of $1.6 million bearing interest at rates ranging from 7% to 12% per annum. The Company had outstanding accounts receivable of approximately $15.1 million and $33.4 million as of October 31, 1996 and 1997, respectively. No allowance for doubtful accounts receivable has been recorded as the Company believes that all such accounts receivable are fully realizable. The Company believes that existing cash balances and its available line of credit will be sufficient to meet the Company's cash requirements through the next 12 months. However, depending upon its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital expenditure needs. There can be no assurance that additional financing, if needed, will be available when required, or, if available, will be on terms satisfactory to the Company. 41 The discussions above regarding the Company's expectations of future sales, gross profits, research, development and engineering expenses, selling, general and administrative expenses, product introductions and cash requirements include certain forward-looking statements on these subjects. As such, actual results may vary materially from such expectations. Factors which could cause actual results to differ from expectations include variations in the level of orders, which can be affected by general economic conditions and growth rates in specific geographic areas where the Company may have a concentration of business, in the semiconductor and FPD manufacturing industries and in the markets served by the Company's customers, the international economic and political climates, difficulties or delays in product functionality or performance, the delivery performance of sole source vendors, the timing of future product releases, failure to respond adequately to either changes in technology or customer preferences, changes in pricing by the Company or its competitors, ability to manage growth, risks of non-payment of accounts receivable, changes in budgeted costs or failure to realize a successful outcome to pending patent litigation, all of which constitute significant risks. There can be no assurance that the Company's results of operations will not be adversely affected by one of more of these factors. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS During fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " (SFAS No. 121) which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets where disposal is expected. The adoption of SFAS No. 121 did not have any impact on the Company's financial position or results of operations. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.128). SFAS No. 128 is effective for fiscal years beginning after December 15, 1997. SFAS No. 128 simplifies the earnings per share (EPS) calculation by replacing primary EPS with basic EPS and replacing fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported earnings available to common shareholders by the weighted average shares outstanding. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. Early application is prohibited, although footnote disclosure of pro forma EPS amounts are required. Pro forma basic EPS and diluted EPS would have been as follows: 42 Year Ended October 31, --------------------------- 1997 1996 1995 ---- ---- ---- Pro forma basic earnings per share ............ $ .85 $ .64 $ .37 Pro forma diluted earnings per share .......... $ .80 $ .61 $ .35 Weighted average common shares outstanding used for pro forma basic earnings per share (000) 7,318 4,624 3,802 Dilutive effect of common stock options outstanding (000) ........................... 446 207 192 Weighted average common and common equivalent shares outstanding used for pro forma diluted earnings per share (000) ............ 7,764 4,831 3,994 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, " Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income in a set of financial statements. Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Management believes that the adoption of SFAS No. 130 will not have a material impact on the Company's financial statements. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 applies to all public companies and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. Management believes the adoption of SFAS No. 131 will not have a material impact on the Company's financial statements. EFFECTS OF INFLATION Inflation has not been a material factor affecting the Company's business. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The audited financial statements of the Company appear beginning on Page F-1 of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 43 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item will be set forth in the Company's definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item will be set forth in the Company's definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item will be set forth in the Company's definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item will be set forth in the Company's definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated by reference to the Proxy Statement. 44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. FINANCIAL STATEMENTS The financial statements and financial statement information required by this Item are included on pages F-1 through F-22 of this report. The Report of Independent Public Accountants appears on page F-2 of this report. All other schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the financial statements or notes thereto. EXHIBITS The following is a list of exhibits. Where so indicated by footnote, exhibits which were previously filed are incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses. EXHIBIT NUMBER - ------ 3.1 Articles of Incorporation of CFM Technologies, Inc., as amended* 3.1.1 Amendment to Articles of Incorporation.** 3.2 By-Laws of CFM Technologies, Inc.* 4.1 Form of Common Stock Certificate.* 4.2 Statement with Respect to Shares filed with the Pennsylvania Department of State on May 1, 1997. 10.1 Employment Agreement dated as of January 9, 1995 by and between CFM Technologies, Inc. and Lorin Jeffry Randall.* 10.2 Stock Option Agreement dated March 18, 1991 between CFM Technologies, Inc. and Burton McGillivray, as extended and amended on June 11,1993 and as amended on September 25, 1994.* 10.3 Stock Option Agreement dated as of December 9, 1994 by and between CFM Technologies,Inc. and Milton Stearns, as amended on November 3, 1995.* 10.4 CFM Technologies, Inc. Annual Profit Sharing Plan.* 10.4.1 Amendment to CFM Technologies, Inc. Annual Profit Sharing Plan.*** 10.5 CFM Technologies, Inc. 1992 Employee Stock Option Plan.* 10.6 Amended and Restated CFM Technologies, Inc. 1995 Incentive Plan.**** 10.7 Amended and Restated CFM Technologies, Inc. Non-Employee Directors' Stock Option Plan.**** 10.8 CFM Technologies, Inc. Employee Stock Purchase Plan.* 10.9 Rights Agreement dated as of April 24, 1997 between CFM Technologies, Inc. and American Stock Transfer and Trust Co., as Rights Agent.***** 45 10.10 Distributor Agreement dated November 28, 1991 by and between ANAM Semiconductor Design Co., Ltd. and CFM Technologies, Incorporated, and supplement to the Distributor Agreement dated August 26,1994.* 10.11 Distributor Agreement dated March 3, 1992 by and between Innotech Corporation and CFM Technologies, Inc., as modified on June 15,1994.* 10.12 Lease Agreement dated October 10, 1995 by and between Hough/Loew Construction, Inc. and CFM Technologies. Inc. and Addendum to Lease Agreement dated October 10,1995.* 10.12.1 Amendment Number Two to Lease Agreement dated April 30, 1996 by and between and CFM Technologies. Inc. Hough/Loew Construction, Inc.*** 10.13 Commercial Lease Agreement dated December 16, 1996 between CFM Technologies, Inc. and Devereau Properties, Inc.*** 10.13.1 First Amendment to Commercial Lease Agreement dated August 22, 1997 between CFM Technologies, Inc. and Devereau Properties, Inc. 10.14 Loan Agreement dated July 27, 1994 by and between Chester County Development Council("CCDC") and CFM Technologies, Incorporated.* 10.15 $100,000 Mortgage dated as of July 27, 1994, CFM Technologies, Incorporated to CCDC.* 10.16 Guaranties dated October 13, 1995 executed by CFMT, Inc. and CFM International Corp. in favor of Corestates Bank, N.A. ("CoreStates").* 10.17 Mortgage dated February 16, 1994 between CFM Technologies, Incorporated and Corestates.* 10.18 $150,000 Commercial Promissory Note dated September 28, 1994 from CFM Technologies, Incorporated to Corestates.* 10.19 $100,000 Commercial Promissory Note dated August 11, 1994 from CFM Technologies, Incorporated to Corestates.* 10.20 Assignment of Leases, Rents, Agreements of Sale, Licenses and Permits dated February 16, 1994 by CFM Technologies, Inc. to CoreStates.* 10.21 Agent Agreement dated December 16, 1996 between CFM Technologies, Inc. and Ampoc Far East Company Limited.*** 10.22 Letter Agreement dated March 25, 1996 between CoreStates and CFM Technologies, Inc. and $7,500,000 Master Demand Note dated April 1, 1996 from CFM Technologies, Inc. to CoreStates.* 10.23 Lease Agreement dated July 16, 1997 between CFM Technologies, Inc. and CFM Partners (No relationship with CFM Technologies, Inc.). 10.24 Agent Agreement dated April 15, 1997 by and between Aneric Enterprise PTE Limited and CFM Technologies, Inc. 10.25 Agent Agreement dated October 29, 1997 by and between Silicon International Ltd. and CFM Technologies, Inc. 11 Statement re computation of per share earnings. 21 Subsidiaries of the Registrant. 46 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. - ----------- * Incorporated by reference to the Registrant's Registration Statement Form S-1 (Registration No. 33-80359) declared effective on June 18, 1996. ** Incorporated by reference to the Registrant's definitive Proxy Statement dated and filed on February 13, 1997. *** Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 333-20325), filed on January 24, 1996, and the Amendment No. 1 to such Registration Statement filed on January 27, 1996. **** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997. ***** Incorporated by reference to the Registrant's Registration Statement on Form 8-A filed on April 24, 1997. REPORTS ON FORM 8-K The Company filed no reports on Form 8-K during the quarter ended October 31, 1997. 47 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants ................................F-2 Consolidated Balance Sheets as of October 31, 1997 and 1996 .............F-3 Consolidated Statements of Income for the years ended October 31, 1997, 1996 and 1995 ...................................F-4 Consolidated Statements of Shareholders' Equity for the years ended October 31, 1997, 1996 and 1995....................................F-5 Consolidated Statements of Cash Flows for the years ended October 31, 1997, 1996 and 1995 ...................................F-6 Notes to Consolidated Financial Statements ..............................F-7 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CFM Technologies, Inc.: We have audited the accompanying consolidated balance sheets of CFM Technologies, Inc. (a Pennsylvania corporation) and subsidiaries as of October 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CFM Technologies, Inc. and subsidiaries as of October 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Philadelphia, Pa., December 12, 1997 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS OCTOBER 31, OCTOBER 31, 1997 1996 ---- ---- (IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents .................. $ 26,865 $ 9,308 Short-term investments ..................... 19,316 2,946 Accounts receivable ........................ 33,392 15,090 Inventories ................................ 16,081 8,047 Prepaid expenses and other ................. 1,709 362 Deferred income taxes ...................... 1,371 641 --------- --------- Total current assets .................... 98,734 36,394 --------- --------- PROPERTY, PLANT AND EQUIPMENT: Land ....................................... 540 540 Building and improvements .................. 3,782 3,180 Machinery and equipment .................... 8,106 4,075 Furniture and fixtures ..................... 1,337 934 --------- --------- 13,765 8,729 Less - Accumulated depreciation and amortization ............................ (3,562) (1,268) --------- --------- Net property, plant and equipment ..... 10,203 7,461 --------- --------- OTHER ASSETS ................................... 559 396 --------- --------- $ 109,496 $ 44,251 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt .......... $ 617 $ 489 Accounts payable ........................... 7,709 4,929 Accrued expenses ........................... 8,612 3,451 --------- --------- Total current liabilities .............. 16,938 8,869 --------- --------- LONG-TERM DEBT ................................. 2,571 2,525 --------- --------- DEFERRED INCOME TAXES .......................... 119 146 --------- --------- COMMITMENTS AND CONTINGENCIES (Note 16) SHAREHOLDERS' EQUITY: Preferred stock, no par value; 1,000,000 authorized shares; no shares issued or outstanding .............................. -- -- Common stock, no par value; 30,000,000 authorized shares; 7,913,588 and 6,052,924 shares issued and outstanding ............ 80,762 29,592 Deferred compensation ...................... (235) -- Retained earnings .......................... 9,341 3,119 --------- --------- Total shareholders' equity ............. 89,868 32,711 --------- --------- $ 109,496 $ 44,251 ========= ========= The accompanying notes are an integral part of these financial statements. F-3 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED OCTOBER 31, ------------------------------------- 1997 1996 1995 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES ........................ $ 75,772 $ 44,013 $ 23,430 COST OF SALES .................... 40,072 23,317 13,463 -------- -------- -------- Gross profit ................ 35,700 20,696 9,967 -------- -------- -------- OPERATING EXPENSES: Research, development and engineering .................. 9,334 4,375 1,717 Selling, general and administrative ............... 19,360 11,679 5,972 -------- -------- -------- Total operating expenses .... 28,694 16,054 7,689 -------- -------- -------- Operating income ............ 7,006 4,642 2,278 INTEREST (INCOME) ................ (2,163) (271) (72) INTEREST EXPENSE ................. 281 428 245 -------- -------- -------- Income before income taxes ..... 8,888 4,485 2,105 INCOME TAXES ..................... 2,666 1,525 703 -------- -------- -------- NET INCOME ....................... $ 6,222 $ 2,960 $ 1,402 ======== ======== ======== NET INCOME PER SHARE ............. $ 0.80 $ 0.61 $ 0.35 ======== ======== ======== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES .............. 7,764 4,831 3,994 ======== ======== ======== The accompanying notes are an integral part of these financial statements. F-4 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
DEFERRED RETAINED COMMON STOCK COMPEN- EARNINGS SHARES AMOUNT SATION (DEFICIT) TOTAL ------ ------ ------ --------- ----- (IN THOUSANDS) BALANCE, OCTOBER 31, 1994 .......... 3,393 $ 6,352 $ -- $(1,243) $ 5,109 Common stock issued for services . 2 15 -- -- 15 Exchange of common stock for Partnership Interests .......... 408 3,249 -- -- 3,249 Net income ....................... -- -- -- 1,402 1,402 ----- ------- ------- ------- ------- BALANCE, OCTOBER 31, 1995 .......... 3,803 9,616 -- 159 9,775 Proceeds from sale of common 2,250 19,976 -- -- 19,976 stock, net Net income ....................... -- -- -- 2,960 2,960 ----- ------- ------- ------- ------- BALANCE, OCTOBER 31, 1996 .......... 6,053 29,592 -- 3,119 32,711 Proceeds from sale of common stock, net ..................... 1,751 49,288 -- -- 49,288 Proceeds from exercise of stock options................... 96 545 -- -- 545 Tax benefit from exercise of stock options ........................ -- 764 -- -- 764 Deferred compensation charge ..... -- 317 (317) -- -- Amortization of deferred compensation..................... -- -- 82 -- 82 Common stock issued under Employee Stock Purchase Plan ... 14 256 -- -- 256 Net income ....................... -- -- -- 6,222 6,222 ----- ------- ------- ------- ------- BALANCE, OCTOBER 31, 1997 .......... 7,914 $80,762 $ (235) $ 9,341 $89,868 ===== ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements. F-5 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended October 31, ---------------------------------------- 1997 1996 1995 ---- ---- ---- (In thousands) OPERATING ACTIVITIES: Net income ..................................... $ 6,222 $ 2,960 $ 1,402 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization ................ 2,317 881 224 Deferred compensation ........................ 82 -- -- Deferred income tax benefit .................. (757) (41) (251) (Increase) in: Accounts receivable ........................ (18,302) (6,204) (2,887) Inventories ................................ (8,034) (4,347) (358) Prepaid expenses and other ................. (1,347) (178) (12) Other assets ............................... (186) (59) (94) Increase in: Accounts payable ........................... 2,780 2,392 1,044 Accrued expenses ........................... 5,161 963 567 -------- -------- -------- Net cash used in operating activities .... (12,064) (3,633) (365) -------- -------- -------- INVESTING ACTIVITIES: Purchases of short-term investments ............ (44,245) (4,366) -- Proceeds from short-term investments ........... 27,875 1,420 -- Purchases of property, plant and equipment ..... (4,286) (2,891) (1,311) -------- -------- -------- Net cash used in investing activities .... (20,656) (5,837) (1,311) -------- -------- -------- FINANCING ACTIVITIES: Payments on long-term debt ..................... (576) (1,606) (388) Proceeds from long-term debt ................... -- -- 1,241 Proceeds from sale of common stock, net ........ 49,544 19,976 125 Proceeds from exercise of stock options ........ 545 -- -- Tax benefits from exercise of stock options .... 764 -- -- -------- -------- -------- Net cash provided by financing activities .. 50,277 18,370 978 -------- -------- -------- NET INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS ............................. 17,557 8,900 (698) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..... 9,308 408 1,106 -------- -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ........... $ 26,865 $ 9,308 $ 408 ======== ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest expense ................. $ 284 $ 444 $ 197 Cash received for interest income .............. 1,975 251 72 Cash paid for income taxes ..................... 2,031 1,949 730 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Machinery acquired under capital leases ....... $ 750 $ 1,041 $ 398 Common stock issued for Partnership interests . -- -- 3,249 Common stock issued for services .............. -- -- 15
The accompanying notes are an integral part of these financial statements. F-6 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DESCRIPTION OF BUSINESS: CFM Technologies, Inc. (the Company) designs, manufactures and markets advanced wet processing equipment for sale to the worldwide semiconductor and flat panel display industries. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. 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 amounts could differ from those estimates. Cash, Cash Equivalents and Short-Term Investments The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Short-term investments are carried at amortized cost which equals market value. The investments have various maturity dates which do not exceed one year. All of the Company's short-term investments are classified as available for sale pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). Therefore any unrealized holding gains or losses would be presented as a separate component of shareholders' equity. At October 31, 1997 and 1996, there were no material unrealized holding gains or losses. The gross proceeds from sales and maturities of investments were $27,875,000 and $1,420,000 for the years ended October 31, 1997 and 1996. Gross realized gains and losses for the years ended October 31, 1997 and 1996 were not material. For the purpose of determining gross realized gains and losses, the cost of securities sold is based upon specific identification. F-7 Cash and cash equivalents and short-term investments consisted of the following: October 31, ---------------------------- 1997 1996 ---- ---- Cash and cash equivalents: Municipal and government securities. $17,402,000 $ -- Money market funds and demand accounts ........................ -- 4,257,000 Commercial paper ................... 5,283,000 495,000 Repurchase agreements .............. 4,180,000 4,556,000 ----------- ----------- $26,865,000 $ 9,308,000 =========== =========== Short-term investments: Municipal and government securities $15,684,000 $ -- Commercial paper .................. 3,632,000 1,472,000 Mortgage-backed government securities ...................... -- 1,474,000 ----------- ----------- $19,316,000 $ 2,946,000 =========== =========== Inventories Inventories are valued at the lower of first-in, first-out cost or market. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Significant improvements are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Upon the sale or retirement of these assets, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in income. Depreciation and amortization are provided using the straight-line method based on the estimated useful lives of the assets as follows: Building and improvements .................. 5-40 years Machinery and equipment .................... 3-10 years Furniture and fixtures ..................... 5-10 years Depreciation and amortization expense was $2,294,000, $862,000 and $207,000 in fiscal 1997, 1996 and 1995, respectively. Revenue Recognition Net sales are generally recognized upon shipment of the system and, if recognized prior to shipment, upon completion of customer inspection or acceptance where risk of loss is transferred to the customer. The estimated costs of system installation and warranty are accrued when the related sale is recognized. F-8 Research, Development and Engineering Expenses Research, development and engineering expenses are charged to expense as incurred. Research, development and engineering expenses were net of reimbursement of $890,000, $1,592,000 and $232,000 in fiscal 1997, 1996 and 1995, respectively. Engineering expenses consist of personnel and material costs related to the development of new products and the integration of existing products into application-specific systems. Income Taxes The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109 requires the liability method of accounting for deferred income taxes. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities at the end of each period are determined using the tax rate expected to be in effect when taxes are actually paid or recovered. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk are accounts receivable. The Company's customer base principally comprises companies within the semiconductor industry, which historically has been volatile. The Company does not require collateral from its customers. Fair Value of Financial Instruments The Company's financial instruments consist primarily of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, accrued expenses and debt instruments. The book values of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued expenses are considered to be representative of their respective fair values. None of the Company's debt instruments that are outstanding as of October 31, 1997 have readily ascertainable market values; however, the carrying values are considered to approximate their respective fair values. See Note 7 for the terms and carrying values of the Company's various debt instruments. Net Income Per Share Net income per common share was calculated by dividing net income by the weighted average number of common shares outstanding for the respective period adjusted for the dilutive effect of common stock equivalents, which consist of stock options using the treasury stock method. Pursuant to the requirements of the Securities and Exchange Commission, common stock issued by the Company during the twelve months immediately preceding the initial public offering in June 1996, plus the number of common equivalent shares which became issuable during the same period pursuant to the grant of common stock options, have F-9 been included in the calculation of the shares used in computing net income per share for fiscal 1996 and 1995 as if they were outstanding for all periods presented (using the treasury stock method and the initial public offering price of $10.00 per share). New Accounting Pronouncements During fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of "(SFAS No. 121) which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets where disposal is expected. The adoption of SFAS No. 121 did not have any impact on the Company's financial position or results of operations. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No.128). SFAS No. 128 is effective for fiscal years beginning after December 15, 1997. SFAS No. 128 simplifies the earnings per share (EPS) calculation by replacing primary EPS with basic EPS and replacing fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported earnings available to common shareholders by the weighted average shares outstanding. Diluted EPS reflects the potential dilution from the exercise or conversion of securities into common stock, such as stock options. Early application is prohibited, although footnote disclosure of pro forma EPS amounts are required. Pro forma basic EPS and diluted EPS would have been as follows: Year Ended October 31, ---------------------------- 1997 1996 1995 ---- ---- ---- Pro forma basic earnings per share ............ $ .85 $ .64 $ .37 Pro forma diluted earnings per share .......... $ .80 $ .61 $ .35 Weighted average common shares outstanding used for pro forma basic earnings per share (000) 7,318 4,624 3,802 Dilutive effect of common stock options outstanding (000) ........................... 446 207 192 Weighted average common and common equivalent shares outstanding used for pro forma diluted earnings per share (000) .................... 7,764 4,831 3,994 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 " Reporting Comprehensive Income" (SFAS No. 130). SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income in a set of financial statements. Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions generated from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Management believes that the adoption of SFAS No. 130 will not have a material impact on the financial statements. F-10 In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 applies to all public companies and is effective for fiscal years beginning after December 15, 1997. SFAS No. 131 requires that business segment financial information be reported in the financial statements utilizing the management approach. The management approach is defined as the manner in which management organizes the segments within the enterprise for making operating decisions and assessing performance. Management believes that the adoption of SFAS No. 131 will not have a material impact on the financial statements. Reclassifications Certain reclassifications of previously reported balances have been made to conform with the current year classification of such balances. 3. ACCOUNTS RECEIVABLE: October 31, ---------------------------- 1997 1996 ---- ---- Billed........................................... $21,944,000 $10,558,000 Unbilled......................................... 11,448,000 4,532,000 ----------- ----------- $33,392,000 $15,090,000 =========== =========== Unbilled receivables represent final retainage amounts to be billed upon completion of the installation process. As of October 31, 1997 the Company had outstanding accounts receivable totaling $10,939,000 from one customer who purchased several of the Company's systems for Korean installations. No allowance for doubtful accounts receivable has been recorded because the Company believes that all such accounts receivable are fully realizable. F-11 4. INVENTORIES: October 31, --------------------------- 1997 1996 ---- ---- Raw material..................................... $ 8,373,000 $4,267,000 Work in progress................................. 7,708,000 3,780,000 ----------- ---------- $16,081,000 $8,047,000 =========== ========== 5. LINE OF CREDIT: The Company has a $7,500,000 unsecured demand line of credit with a bank. The line of credit agreement does not have a stated maturity or expiration date; however, outstanding borrowings are due upon demand by the bank. Interest is charged at the bank's prime rate and was 8.25% and 8.75% at October 31, 1997 and 1996, respectively. The line also provides for the issuance of letters of credit. As of October 31, 1997 and 1996, the Company had no borrowings on the line. The line of credit requires the Company to maintain certain financial and other covenants, including a minimum tangible net worth and minimum cash flow to debt service coverage ratio. 6. ACCRUED EXPENSES: October 31, ------------------------ 1997 1996 ---- ---- Warranty and installation costs.............. $2,277,000 $1,069,000 Payroll and payroll related.................. 1,932,000 1,010,000 Accrued commissions ......................... 3,080,000 1,004,000 Other.......................................... 1,323,000 368,000 ---------- ---------- $8,612,000 $3,451,000 ========== ========== F-12 7. LONG-TERM DEBT:
October 31, ---------------------------- 1997 1996 ---- ---- Mortgage note payable to bank, payable in monthly installments of $6,250 plus interest at 8.9% through February 2009, collateralized by land and building ...................................................... $ 850,000 $ 925,000 Mortgage note payable to Pennsylvania Industrial Development Authority (PIDA), payable in monthly installments of $4,363 including interest at 2% through August 2009, collateralized by land and building....... 551,000 592,000 Mortgage note payable to Chester County Development Council, payable in monthly installments of $1,067 including interest at 5% through August 2004, collateralized by land and building..................... 74,000 82,000 Term notes payable to bank, payable in monthly installments of $5,834 plus interest at the bank's prime rate plus 1% through August 1999, collateralized by certain assets..................................... 123,000 194,000 Capitalized lease obligations, lease periods expiring at various dates through 2002, interest rates range from 7% to 12%, collateralized by the leased assets.................................................... 1,590,000 1,221,000 ----------- ---------- 33,188,000 3,014,000 Less - Current portion ................................................ (617,000) (489,000) ------------ ---------- $ 2,571,000 $2,525,000 =========== ==========
F-13 Maturities of long-term debt as of October 31, 1997 are as follows: FISCAL YEAR ----------- 1998.......................$ 617,000 1999 ...................... 610,000 2000 ...................... 534,000 2001 ...................... 422,000 2002 ...................... 159,000 2003 and therefter ........ 846,000 ---------- $3,188,000 ========== The mortgage note due to PIDA contains certain financial covenants, the most restrictive of which requires minimum levels of shareholders' equity. The Company leases machinery and equipment and furniture and fixtures under capital leases expiring in various years through 2002. The assets and liabilities under these leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the asset. The assets are depreciated over their estimated useful lives since ownership will transfer upon lease expiration. The net book value of equipment under capitalized lease obligations as of October 31, 1997 is $1,494,000. The minimum lease payments, including interest, under the capital lease obligations as of October 31, 1997 are $545,000, $496,000, $437,000, $292,000 and $16,000 for fiscal 1998, 1999, 2000, 2001 and 2002, respectively. 8. RESEARCH AND DEVELOPMENT LIMITED PARTNERSHIPS: In 1984 and 1985, the Company entered into research and development agreements with two related party limited partnerships (the Partnerships), in which the Company was the general partner. A significant number of the individuals who were limited partners were also significant shareholders of the Company. Due to this related party relationship, the cash that was paid by the Partnerships to the Company was recorded as an obligation due to the Partnerships and interest was accrued thereon. In April 1987 and September 1988, the Company exercised its purchase options to acquire the Partnerships' technologies, which resulted in an aggregate liability of $2,184,000. The obligation due to the Partnerships increased by scheduled amounts which aggregated $5,030,000 through October 31, 1994 and were recorded as interest expense. In fiscal 1994, $728,000 of interest expense was recorded. The Company made payments to the Partnerships of $1,612,000 on a cumulative basis through October 31, 1994. As of October 31, 1994, deferred taxes of $2,353,000 were recorded for differences in financial statement and income tax reporting with respect to this obligation. On November 1, 1994, the Company exchanged 408,339 shares of its common stock for the assets of the Partnerships, which consisted primarily of the Company's obligation to the Partnerships. The fair value of these common shares approximated the obligation due to the Partnerships, net of tax. Accordingly, no gain or loss was recognized as a result of this transaction. F-14 9. SHAREHOLDERS' EQUITY: On April 17, 1997, the Company's Board of Directors adopted a Shareholder Rights Plan designed to protect the Company's shareholders in the event of an attempt to acquire control of the Company on terms which do not deal fairly with all of the Company's shareholders. Terms of the Rights Plan provide for a dividend distribution of one right for each share of Common Stock to holders of record at the close of business on May 9, 1997. The rights will become exercisable only in the event, with certain exceptions, an acquiring party accumulates, or announces an offer to acquire, 20% or more of the Company's Common Stock. The rights will expire on April 24, 2007. Each right will entitle the holder to buy one one-hundredth of a share of a new series of preferred stock at a price of $180. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either Company stock or shares in an "acquiring entity" at half of market value. The Company will generally be entitled to redeem the rights at $.001 per right at any time until the tenth day following the acquisition of 20% of its Common Stock. On February 19, 1997, the Company consummated a follow-on public offering of its Common Stock. The Company sold 1,750,500 (including the underwriters' over-allotment) shares of its Common Stock, no par value, at an offering price of $30.00 per share. After deducting the underwriters' discount and other offering expenses, the net proceeds to the Company were $49,288,000. On June 21, 1996, the Company consummated an initial public offering of its Common Stock. The Company sold 2,249,661 (including the underwriters' over-allotment) shares of its Common Stock, no par value, at an initial public offering price of $10.00 per share. After deducting the underwriters' discount and other offering expenses, the net proceeds to the Company were $19,976,000. On December 19, 1995, the Company's Board of Directors adopted, and on January 3, 1996, the Company's shareholders approved the Employee Stock Purchase Plan (Purchase Plan). The Purchase Plan allows eligible employees to purchase up to 300,000 shares of common stock at the lower of 85% of the fair market value of the stock on the first or last day of the applicable six month purchase period. Eligible employees were able to participate in the Purchase Plan beginning on October 1, 1996 through payroll withholding of up to $500 per pay period. As of October 31, 1997 and 1996, employee withholdings included in accrued expenses were $42,000 and $10,000, respectively. During fiscal 1997, 13,829 shares of Common Stock were issued under the Purchase Plan. No shares were issued under the Purchase Plan as of October 31, 1996. 10. STOCK OPTIONS: The Company has a stock option plan (the 1992 Plan) whereby 409,163 common shares were issued to key management personnel, directors and consultants at exercise prices not less than fair market value. The options have vesting terms set by the Executive Compensation and Stock Option Committee of the Board of Directors and expire 10 years after the date of grant. F-15 On December 19,1995, the Company's Board of Directors adopted, and on January 3, 1996, the Company's shareholders approved, the 1995 Incentive Plan (Incentive Plan) and the Non-Employee Directors' Stock Option Plan (Directors' Plan). The Incentive Plan and the Directors' Plan authorized the granting of up to 1,000,000 shares of Common Stock or options to purchase Common Stock to Company employees and up to 150,000 options to purchase Common Stock to non-employee directors, respectively. The Company will not grant any additional options under the 1992 Plan. The following table summarizes stock option activity: Weighted Range of Average Exercise Exercise Number of Prices Per Price Per Shares Share Share ------ ----- ----- Options outstanding at October 31, 1994............... 399,163 $ 0.24-$7.52 $2.73 Granted ..................... 207,087 7.52 7.52 --------- Options outstanding at October 31, 1995............... 606,250 0.24-7.52 4.36 Granted ..................... 139,905 7.52-10.75 8.30 Canceled .................... (832) 7.52 7.52 --------- Options outstanding at October 31, 1996............... 745,323 0.24-10.75 5.10 Granted ..................... 401,600 18.25-38.625 21.01 Exercised ................... (96,335) 2.41-18.25 5.66 Canceled .................... (11,480) 7.52-18.25 9.18 --------- Options outstanding at October 31, 1997............... 1,039,108 $0.24-$38.625 $11.14 ========= F-16 The following table summarizes information regarding stock options outstanding at October 31, 1997: Options Outstanding Options Exercisable ---------------------------------------- ---------------------- Weighted Weighted Average Average Number Remaining Exercise Number Weighted Range of Outstanding Contractual Price Exercisable Average Exercise at October Life in Per at October Exercise Prices 31, 1997 Years Share 31, 1997 Price ------ -------- ----- ----- -------- ----- $ 0.24 3,327 4.2 $ 0.24 3,327 $ 0.24 $ 2.41 330,053 5.1 $ 2.41 326,312 $ 2.41 $ 7.52 232,678 7.9 $ 7.52 132,787 $ 7.52 $ 9.00-$10.75 73,250 8.9 $ 9.18 17,131 $ 9.26 $ 18.25 313,400 9.2 $18.25 44,700 $18.25 $ 20.19-$28.00 28,000 9.7 $24.18 -- -- $ 30.00-$34.31 12,800 9.6 $31.69 250 $31.38 $ 36.13-$38.63 45,600 9.7 $36.29 -- -- As of October 31, 1997, there were 636,766 stock options available for grant under the Company's stock option plans. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and the related interpretations in accounting for its stock option plans. The disclosure requirements of Statement of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" (SFAS No. 123) were adopted by the Company in fiscal 1997. Had compensation cost for options granted during fiscal 1997 and 1996 under the stock option plans, as well as the Common Stock issued under the Purchase Plan (see Note 9), been determined based upon the fair value of the options and Common Stock at the date of grant, as prescribed by SFAS No. 123, the Company's pro forma net income and pro forma net income per share would have been reduced to the following amounts: YEAR ENDED OCTOBER 31, ----------------------------- 1997 1996 ---- ---- Net income .................. $6,222,000 $2,960,000 Pro forma net income ........ 5,369,000 2,843,000 Net income per share ........ .80 .61 Pro forma net income per share ..................... .69 .59 The weighted average fair value of each stock option granted during the years ended October 31, 1997 and 1996 was $13.36 and $4.65, respectively. As of October 31, 1997, the weighted average remaining contractual life of each stock option outstanding was 7.4 years. The weighted average remaining contractual life of each stock option granted during the years ended October 31, 1997 and 1996 was 9.6 and 8.9 years, respectively. The fair value of each option grant is estimated on the date of grant using the Black - Scholes option pricing model with the following weighted average assumptions: F-17 Year Ended October 31, -------------------------- 1997 1996 ---- ---- Risk - free interest rate ....................... 6.26% 5.98% Expected dividend yield ......................... -- -- Expected life ................................... 5.5 years 5.5 years Expected volatility ............................. 53% 53% Because additional option grants are expected to be made each year, the above pro forma disclosures are not representative of pro forma effects of reported net income for future years. In fiscal 1997, the Company granted 56,000 stock options to an employee and certain consultants for which the Company has recorded deferred compensation based upon the difference between the deemed value for accounting purposes of the Company's Common Stock and the exercise price per share on the date of option grant. The deferred compensation balance will be amortized as compensation expense over the option vesting periods which range from 1 to 4 years. 11. EMPLOYEE BENEFIT PLANS: The Company has a defined contribution retirement plan for the benefit of eligible employees. Management believes that the plan qualifies under Section 401(k) of the Internal Revenue Code. The plan provides for matching contributions by the Company at a discretionary percentage of eligible pre-tax contributions by the employee. Matching contributions by the Company were $226,000, $107,000 and $68,000 for the years ended October 31, 1997, 1996 and 1995, respectively. In fiscal 1995, the Company established a profit-sharing plan for the benefit of eligible employees. The plan provides for a target contribution of approximately 2% of total planned salaries and wages, with actual payments based upon the achievement of certain of annual performance results. The Company recorded profit sharing expense of $175,000, $150,000 and $65,000 for the years ended October 31, 1997, 1996 and 1995, respectively. 12. OTHER RELATED PARTY TRANSACTIONS: The Company recorded commission expense in fiscal 1997, 1996 and 1995 of $3,948,000, $2,444,000 and $282,000, respectively, which related to commissions payable to a distributor who is also a shareholder of the Company. Commissions payable to this distributor included in accrued expenses as of October 31, 1997 and 1996 were $2,586,000 and $959,000, respectively. The distributor is controlled by an individual who is a director of the Company. The Company also recorded net sales in fiscal 1997 of $6,760,000 to a semiconductor company controlled by a director of the Company. F-18 13. INCOME TAXES: The components of income before income taxes are as follows: Year Ended October 31, ------------------------------------------- 1997 1996 1995 ---- ---- ---- Domestic ................. $7,729,000 $4,363,000 $2,105,000 Foreign .................. 1,159,000 122,000 -- ---------- ---------- ---------- $8,888,000 $4,485,000 $2,105,000 ========== ========== ========== The components of the income tax provision are as follows: Year Ended October 31, --------------------------------------- 1997 1996 1995 ---- ---- ---- Current: Federal.......................... $2,936,000 $1,451,000 $937,000 Foreign ......................... 412,000 42,000 -- State............................ 75,000 73,000 17,000 ---------- ---------- -------- 3,423,000 1,566,000 954,000 ---------- ---------- -------- Federal.......................... (732,000) (12,000) (244,000) Foreign ......................... -- -- -- State............................ (25,000) (29,000) (7,000) ---------- ---------- -------- (757,000) (41,000) (251,000) ---------- ---------- -------- $2,666,000 $1,525,000 $703,000 ========== ========== ======== Income tax expense differs from the amount currently payable because certain expenses, primarily depreciation and accruals, are reported in different periods for financial reporting and income tax purposes. The federal statutory income tax rate is reconciled to the effective income tax rate as follows: Year Ended October 31, -------------------------- 1997 1996 1995 ---- ---- ---- Federal statutory rate ....................... 34.0% 34.0% 34.0% State income taxes, net of federal benefit ............................ 0.4 0.6 0.5 Foreign and U.S. tax effects attributable to Foreign operations ...................... (4.9) (1.3) (1.0) Research and development credit .............. (0.3) (0.2) (1.4) Other ........................................ 0.8 0.9 1.3 ----- ----- ----- 30.0% 34.0% 33.4% ===== ===== ===== F-19 The components of the net current and long-term deferred tax assets and liabilities, measured under SFAS No. 109, are as follows: October 31, ----------------------------- 1997 1996 ----------- ----------- Deferred tax assets- Inventories.......................... $ 92,000 $103,000 Warranty and installation accrual.... 683,000 342,000 Other................................ 596,000 196,000 ---------- -------- 1,371,000 641,000 Deferred tax liability- Depreciation......................... (119,000) (146,000) ---------- -------- Net deferred tax asset.......... $1,252,000 $495,000 ========== ======== 14. CUSTOMER AND GEOGRAPHIC INFORMATION: The Company's operations are conducted in one business segment. Export net sales were $49,019,000, $27,789,000 and $12,102,000 in fiscal 1997, 1996 and 1995, respectively. Export net sales to Europe and East Asia were $13,427,000 and $35,592,000 in fiscal 1997, $13,140,000 and $14,649,000 in fiscal 1996 and $10,099,000 and $2,003,000 in fiscal 1995, respectively. The following table summarizes significant customers with net sales in excess of 10% of net sales: Year Ended October 31, --------------------------------------- CUSTOMER 1997 1996 1995 -------- ----------- ----------- ---------- A .......................... $16,100,000 $12,828,000 $ * B .......................... 8,534,000 * 2,490,000 C .......................... * 11,149,000 5,287,000 D .......................... * 8,361,000 * E .......................... * 4,762,000 * F .......................... * * 3,075,000 G .......................... * * 4,041,000 - ---------- * Net sales less than 10% of net sales F-20 15. SUPPLIER CONCENTRATION: The Company relies to a substantial extent on outside vendors to manufacture and supply many of the components and subassemblies used in the Company's systems. Certain of these are obtained from a sole supplier or a limited group of suppliers, many of which are small, independent companies. Moreover, the Company believes that certain of these components and subassemblies can only be obtained from its current suppliers. The Company's reliance on outside vendors generally, and on sole suppliers in particular, involves several risks, including a potential inability to obtain an adequate supply of required components and reduced control over pricing, timely delivery and quality of components. 16. COMMITMENTS AND CONTINGENCIES: In fiscal 1995, the Company entered into a non-cancelable lease with an expiration date in November 2000 and annual rental payments of $548,000 per year for office facilities. In fiscal 1997, the Company entered into a non-cancelable agreement to lease a 60,000 square foot production facility and an 80,000 square foot office facility to be built for the Company in Exton, Pennsylvania. The operating lease has an initial term of 20 years and minimum annual rental payments of $1,482,250 for each year of the initial term. Options to extend the term of the lease for a total of 9.5 additional years at minimum annual rental payments of not more than $1,518,037 and a subsequent additional 5.5 years at fair market value are included in the lease. Occupancy will be late in fiscal 1998, at which time the monthly rentals begin. Future minimum rental payments as of October 31, 1997 on these leases are as follows: FISCAL YEAR ----------- 1998 ............................ $ 938,000 1999 ............................ 2,030,000 2000 ............................ 2,030,000 2001 ............................ 1,528,000 2002 ............................ 1,482,000 Thereafter ...................... 23,519,000 Historically a significant portion of the Company's sales have been from customers outside of the United States, including East Asia. Recently, the currencies and economies of certain Asian countries came under pressure, some of these Asian countries subsequently experienced currency devaluation, received external support and agreed to certain economic reorganization programs anticipated to reduce growth and credit demand. Management believes that the recent economic events in Asian countries will not impact the Company's financial position or results of operations as of October 31, 1997. F-21 The Company has asserted certain of its patent rights against two defendants and is the defendant in another matter seeking a declaratory judgment of patent noninfringement and invalidity, each matter pertaining to U.S. Letters Patent No. 4,911,761. The United States District Court for the District of Delaware granted a summary judgment in one matter wherein the Company is the plaintiff and the Company has filed for reargument. On December 12, 1997 a jury, following trial in the United States District Court for the District of Delaware, found the subject patent valid and enforceable on all asserted claims and found the defendant to have willfully infringed on all asserted claims. Some of the claims in the matter seeking declaratory judgment have been dismissed for lack of jurisdiction, a finding which is under appeal. Although management believes that the ultimate resolution of these matters will not have a material negative impact on the Company's financial position or results of operations, there can be no assurance in that regard. F-22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CFM Technologies, Inc. By: /s/ ROGER A. CAROLIN ------------------------------------------ Roger A. Carolin President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the date indicated. SIGNATURE TITLE DATE --------- ----- ---- /S/ CHRISTOPHER F. MCCONNELL Chairman of the Board January 27, 1998 - ----------------------------- of Directors /S/ ROGER A. CAROLIN President, Chief Executive January 27, 1998 - ----------------------------- Officer and Director (Principal Executive Officer) /S/ LORIN J. RANDALL Vice President, Chief January 27, 1998 - ----------------------------- Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) /S/ JAMES KIM Director January 27, 1998 - ----------------------------- /S/ BRAD MATTSON Director January 27, 1998 - ----------------------------- /S/ BURTON E. MCGILLIVRAY Director January 27, 1998 - ----------------------------- /S/ MILTON S. STEARNS, JR. Director January 27, 1998 - ----------------------------- F-23 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 3.1 Articles of Incorporation of CFM Technologies, Inc., as amended* 3.1.1 Amendment to Articles of Incorporation.** 3.2 By-Laws of CFM Technologies, Inc.* 4.1 Form of Common Stock Certificate.* 4.2 Statement with Respect to Shares filed with the Pennsylvania Department of State on May 1, 1997. 10.1 Employment Agreement dated as of January 9, 1995 by and between CFM Technologies, Inc. and Lorin Jeffry Randall.* 10.2 Stock Option Agreement dated March 18, 1991 between CFM Technologies, Inc. and Burton McGillivray, as extended and amended on June 11,1993 and as amended on September 25, 1994.* 10.3 Stock Option Agreement dated as of December 9,1994 by and between CFM Technologies,Inc. and Milton Stearns, as amended on November 3, 1995.* 10.4 CFM Technologies, Inc. Annual Profit Sharing Plan.* 10.4.1 Amendment to CFM Technologies, Inc. Annual Profit Sharing Plan.*** 10.5 CFM Technologies, Inc. 1992 Employee Stock Option Plan.* 10.6 Amended and Restated CFM Technologies, Inc. 1995 Incentive Plan.**** 10.7 Amended and Restated CFM Technologies, Inc. Non-Employee Directors' Stock Option Plan.**** 10.8 CFM Technologies, Inc. Employee Stock Purchase Plan.* 10.9 Rights Agreement dated as of April 24, 1997 between CFM Technologies, Inc. and American Stock Transfer and Trust Co., as Rights Agent.***** 10.10 Distributor Agreement dated November 28, 1991 by and between ANAM Semiconductor Design Co., Ltd. and CFM Technologies, Incorporated, and supplement to the Distributor Agreement dated August 26, 1994.* 10.11 Distributor Agreement dated March 3, 1992 by and between Innotech Corporation and CFM Technologies, Inc., as modified on June 15,1994.* E-1 10.12 Lease Agreement dated October 10, 1995 by and between Hough/Loew Construction, Inc. and CFM Technologies. Inc. and Addendum to Lease Agreement dated October 10,1995.* 10.12.1 Amendment Number Two to Lease Agreement dated April 30, 1996 by and between and CFM Technologies. Inc. Hough/Loew Construction, Inc.*** 10.13 Commercial Lease Agreement dated December 16, 1996 between CFM Technologies, Inc. and Devereau Properties, Inc.*** 10.13.1 First Amendment to Commercial Lease Agreement dated August 22, 1997 between CFM Technologies, Inc. and Devereau Properties, Inc. 10.14 Loan Agreement dated July 27, 1994 by and between Chester County Development Council("CCDC") and CFM Technologies, Incorporated.* 10.15 $100,000 Mortgage dated as of July 27, 1994, CFM Technologies, Incorporated to CCDC.* 10.16 Guaranties dated October 13, 1995 executed by CFMT, Inc. and CFM International Corp. in favor of Corestates Bank, N.A. ("CoreStates").* 10.17 Mortgage dated February 16, 1994 between CFM Technologies, Incorporated and Corestates.* 10.18 $150,000 Commercial Promissory Note dated September 28, 1994 from CFM Technologies, Incorporated to Corestates.* 10.19 $100,000 Commercial Promissory Note dated August 11, 1994 from CFM Technologies, Incorporated to Corestates.* 10.20 Assignment of Leases, Rents, Agreements of Sale, Licenses and Permits dated February 16, 1994 by CFM Technologies, Inc. to CoreStates.* 10.21 Agent Agreement dated December 16, 1996 between CFM Technologies, Inc. and Ampoc Far East Company Limited.*** 10.22 Letter Agreement dated March 25, 1996 between CoreStates and CFM Technologies, Inc. and $7,500,000 Master Demand Note dated April 1, 1996 from CFM Technologies, Inc. to CoreStates.* 10.23 Lease Agreement dated July 16, 1997 between CFM Technologies, Inc. and CFM Partners (No relationship with CFM Technologies, Inc.). 10.24 Agent Agreement dated April 15, 1997 by and between Aneric Enterprise PTE Limited and CFM Technologies, Inc. 10.25 Agent Agreement dated October 29, 1997 by and between Silicon International Ltd. and CFM Technologies, Inc. E-2 11 Statement re computation of per share earnings. 21 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. - ------------- * Incorporated by reference to the Registrant's Registration Statement Form S-1 (Registration No. 33-80359) declared effective on June 18, 1996. ** Incorporated by reference to the Registrant's definitive Proxy Statement dated and filed on February 13, 1997. *** Incorporated by reference to the Registrant's Registration Statement on Form S-1 (Registration No. 333-20325), filed on January 24, 1996, and the Amendment No. 1 to such Registration Statement filed on January 27, 1996. **** Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30, 1997. ***** Incorporated by reference to the Registrant's Registration Statement on Form 8-A filed on April 24, 1997. E-3 INDEX TO EXHIBITS Exhibit No. Description of Exhibit - ----------- ---------------------- 4.2 Statement with Respect to Shares filed with the Pennsylvania Department of State on May 1, 1997. 10.13.1 First Amendment to Commercial Lease Agreement dated August 22, 1997 between CFM Technologies, Inc. and Devereau Properties, Inc. 10.23 Lease Agreement dated July 16, 1997 between CFM Technologies, Inc. and CFM Partners (No relationship with CFM Technologies, Inc.). 10.24 Agent Agreement dated April 15, 1997 by and between Aneric Enterprise PTE Limited and CFM Technologies, Inc. 10.25 Agent Agreement dated October 29, 1997 by and between Silicon International Ltd. and CFM Technologies, Inc. 11 Statement re computation of per share earnings. 21 Subsidiaries of the Registrant. 23.1 Consent of Arthur Andersen LLP. 27 Financial Data Schedule. EX-4 2 STATEMENT DATED MAY 1, 1997 Exhibit 4.2 Microfilm Number Filed with the Department of State on May 01, 1997 Entity Number 2605116 /s/ YVETTE KANE ---------------------------------- Secretary of the Commonwealth STATEMENT WITH RESPECT TO SHARES-DOMESTIC BUSINESS CORPORATION In compliance with the requirements of 15 Pa.C.S. Section 1522(b) (relating to statement with respect to shares), the undersigned corporation, desiring to state the designation and voting rights, preferences, limitations, and special rights, if any, of a class or series of its shares, hereby states that: 1. The name of the corporation is CFM TECHNOLOGIES, INC. 2. (Check and complete one of the following): ___ The resolution amending the Articles under 15 Pa.C.S. Section 1522(b) (relating to divisions and determinations by the board) set forth in full, is as follows: _X_ The resolution amending the Articles under 15 Pa.C.S. Section 1522(b) is set forth in full in Exhibit A attached hereto and made a part hereof. 3. The aggregate number of shares of such class or series established and designated by (a) such resolution, (b) all prior statements, if any, filed under 15 Pa.C.S. Section 1522 or corresponding provisions of prior law with respect thereto, and (c) any other provision of the Articles is 300,000 shares. 4. The resolution was adopted by the Board of Directors or an authorized committee thereof on APRIL 17, 1997. 5. (CHECK, AND IF APPROPRIATE COMPLETE, ONE OF THE FOLLOWING): _X_ The resolution shall be effective upon the filing this statement with respect to shares in the Department of State. ___ The resolution shall be effective on: _______________ at ______________________. IN TESTIMONY WHEREOF, the undersigned corporation has caused this statement of Amendment to be signed by a duly authorized officer thereof this 28th day of April, 1997. CFM TECHNOLOGIES, INC. By: /S/ LORIN J. RANDALL -------------------------------------- Title: Vice President-Finance, Secretary and Treasurer EXHIBIT A TO STATEMENT WITH RESPECT TO SHARES OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF CFM TECHNOLOGIES, INC. RESOLVED, that pursuant to the authority vested in the Board of Directors of this Corporation in accordance with the provisions of the Articles of Incorporation, a series of Preferred Stock, no par value per share, of the Corporation be and hereby is created, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such series and the qualifications, limitations and restrictions thereof are as follows: SERIES A JUNIOR PARTICIPATING PREFERRED STOCK 1. Designation and Amount. There shall be a series of Preferred Stock that shall be designated as "Series A Junior Participating Preferred Stock," and the number of shares constituting such series shall be 300,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Junior Participating Preferred Stock to less than the number of shares then issued and outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. 2. Dividends and Distribution. (A) Subject to the prior and superior rights of the holders of any shares of any class or series of stock of the Corporation ranking prior and superior to the shares of Series A Junior Participating Preferred Stock with respect to dividends, the holders of shares of Series A Junior Participating Preferred Stock, in preference to the holders of shares of any class or series of stock of the Corporation ranking junior to the Series A Junior Participating Preferred Stock in respect thereof, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the 15th day of February, May, August and November, in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Junior Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) the Adjustment Number (as defined below) times the aggregate per share amount of all cash dividends, and the Adjustment Number times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, no par value per share, of the Corporation (the "Common Stock") since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Junior Participating Preferred Stock. The "Adjustment Number" shall initially be 100. In the event the Corporation shall at any time after April 17, 1997 (the "Rights Declaration Date") (i) declare and pay any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Junior Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Junior Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Junior Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Junior Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Junior Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 60 days prior to the date fixed for the payment thereof. 3. Voting Rights. The holders of shares of Series A Junior Participating Preferred Stock shall have the following voting rights: (A) Each share of Series A Junior Participating Preferred Stock shall entitle the holder thereof to a number of votes equal to the Adjustment Number on all matters submitted to a vote of the shareholders of the Corporation. (B) Except as required by law and by Section 10 hereof, holders of Series A Junior Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Junior Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Junior Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Junior Participating Preferred Stock, except dividends paid ratably on the Series A Junior Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; or (iii) purchase or otherwise acquire for consideration any shares of Series A Junior Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Junior Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Junior Participating Preferred Stock, or to such holders and holders of any such shares ranking on a parity therewith, upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. Reacquired Shares. Any shares of Series A Junior Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired promptly after the acquisition thereof. All such shares shall upon their retirement become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to any conditions and restrictions on issuance set forth herein. 6. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation, dissolution or winding up of the Corporation, voluntary or otherwise, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Junior Participating Preferred Stock unless, prior thereto, the holders of shares of Series A Junior Participating Preferred Stock shall have received an amount per share (the "Series A Liquidation Preference") equal to the greater of (i) $1.00 plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (ii) the Adjustment Number times the per share amount of all cash and other property to be distributed in respect of the Common Stock upon such liquidation, dissolution or winding up of the Corporation. (B) In the event, however, that there are not sufficient assets available to permit payment in full of the Series A Liquidation Preference and the liquidation preferences of all other classes and series of stock of the Corporation, if any, that rank on a parity with the Series A Junior Participating Preferred Stock in respect thereof, then the assets available for such distribution shall be distributed ratably to the holders of the Series A Junior Participating Preferred Stock and the holders of such parity shares in proportion to their respective liquidation preferences. (C) Neither the merger or consolidation of the Corporation into or with another corporation nor the merger or consolidation of any other corporation into or with the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6. 7. Consolidation, Merger, Etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the outstanding shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Junior Participating Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share equal to the Adjustment Number times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. 8. No Redemption. Shares of Series A Junior Participating Preferred Stock shall not be subject to redemption by the Company. 9. Ranking. The Series A Junior Participating Preferred Stock shall rank junior to all other series of the Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, unless the terms of any such series shall provide otherwise, and shall rank senior to the Common Stock as to such matters. 10. Amendment. At any time that any shares of Series A Junior Participating Preferred Stock are outstanding, the Amended and Restated Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Junior Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of two-thirds of the outstanding shares of Series A Junior Participating Preferred Stock, voting separately as a class. 11. Fractional Shares. Series A Junior Participating Preferred Stock may be issued in fractions of a share that shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Junior Participating Preferred Stock. EX-10 3 LEASE AGREEMENT DATED 8/22/97 Exhibit 10.13.1 FIRST AMENDMENT TO LEASE ATTACHED TO and made a part of the Lease agreement (the "Lease") made the 16th day of December 1996 by and between DEVEREUX PROPERTIES, INC., (the "Landlord"), and CFM TECHNOLOGIES, INC., (the "Tenant"), for approximately 13,941 square feet of space at 1380 Enterprise Drive, Goshen Corporate Park, West Chester, PA 19380 (the "Premises"). WHEREAS, Landlord has leased approximately 13,941 square feet of space to Tenant on the easterly side of 1380 Enterprise Drive (the "Initial Space"); and WHEREAS, Tenant wishes to lease an additional 8,023 square feet of space on the westerly side of 1380 Enterprise Drive (the "Expansion Space"); and WHEREAS, the Initial Space and the Expansion Space are not contiguous to each other; NOW THEREFORE, the parties agree to modify and amend the Lease as follows: 1. TERM OF LEASE: The term of the Initial Space is hereby amended to expire on June 30, 1998, which new term will supersede the term stated in Paragraph No.1 of the Lease. The term of the Expansion Space shall commence September 1, 1997 and expire on December 31, 1998. 2. MINIMUM RENTAL: The annual minimum rent (the Base Rent) for the Initial Space shall be One Hundred Twenty One Thousand Nine Hundred Eighty Three and 72/100 Dollars ($121,983.72) which is the product of $8.75 per square foot and 13,941 square feet of rentable area which shall be paid by Tenant in equal monthly installments of Ten Thousand One Hundred Sixty Five And 31/100 Dollars ($5,850.10) on the first day of each calendar month. The annual minimum rent (the Base Rent) for the Expansion Space shall be Seventy Thousand Two Hundred One And 25/100 Dollars ($70,201.25) which is the product of $8.75 per square foot and 8,023 square feet of rentable area which shall be paid by Tenant in equal monthly installments of Five Thousand Eight Hundred Fifty And 10/100 Dollars ($5,850.10) on the first day of each calendar month. 3. OPERATING EXPENSE REIMBURSEMENT: It is understood and agreed that the additional charges described in Article 1 and the Operating Expense Addendum (Exhibit "A") of the Lease remain in full force and effect; shall be adjusted by the total number of square feet added in the Expansion Space hereunder; and shall be readjusted when the term of the Initial Space expires. Effective September 1, 1997, the MONTHLY PAYMENT for Operating Expense Reimbursement for the Initial Space and the Expansion Space shall be Two Thousand Two Hundred Fifty Nine and 45/100 Dollars ($2,259.45) and One Thousand Four Hundred Thirty Six And 49/100 Dollars ($1,436.49), respectively. 4. IMPROVEMENTS: It is understood and agreed the Tenant shall occupy and take the Premises of the Expansion Space in its "as is" current condition. Landlord agrees to permit Tenant to repaint and recarpet the Expansion Space at Tenant's sole cost. 5. BROKERAGE: Tenant agrees to pay one full commission of 6% multiplied by the Base Rental of Expansion Space ($5,850.10 x 16 x 6% = $5,616.10) which shall be shared equally between Lieberman & Earley and Fidelity Commercial. 6. TERMINATION: Tenant's right to terminate the Lease contained in the last paragraph of Paragraph No.25 of the Lease is deleted in is entirety. All other terms and conditions of the Lease agreement dated December 16, 1996, shall remain in full force and effect. To the extent there is a conflict between the terms of the Lease and this First Amendment to Lease, this First Amendment to Lease shall prevail. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Lease to be executed the 22 day of August, 1997. TENANT: CFM TECHNOLOGIES, INC. LANDLORD: DEVEREUX PROPERTIES, By: /s/ Lorin J. Randall By: /s/ Allen Thomas ------------------------ -------------------------- EX-10 4 LEASE AGREEMENT DATED 8/16/97 Exhibit 10.23 LEASE SUMMARY SHEET 1. LANDLORD: CFM PARTNERS 120 Arrandale Boulevard Exton, Pennsylvania 2. TENANT: CFM TECHNOLOGIES, INC. 1336 Enterprise Drive West Chester, PA 19380 Contact: Lorin J. Randall, Vice President (610) 696-8300 3. BUILDING AND PREMISES: Phase I One 80,000 square foot multi-story office building to be constructed on Lot 4, and one 60,000 square foot manufacturing building to be constructed on Lots 7 and 8 Phase II One 50,000 square foot addition to the Phase I office building to be constructed on Lot 1; and one 60,000 square foot addition to the Phase I manufacturing building to be constructed on Lot 11, which shall be resubdivided concurrently with the relocation of James Hance Court 4. INITIAL TERM: Twenty (20) years, plus three (3) renewal options 5. RENT: Annual Base Rent (subject to adjustment and allocation in accordance with Lease): Years 1 through 20 $1,482,250 Additional rent for Phase II land commitment (subject to Lease terms): Years 1 and 2 $0 Years 3 through 10 $65,600 for Lot 1 (Phase II Office Land) $59,000 for Lot 11 (Phase II Manufacturing Land) Year 11 and subsequent $98,400 for Lot 1 (Phase II Office Land) years until construction $88,500 for Lot 11 (Phase II Manufacturing or release of the Land) applicable Phase II Land NOTE: This Lease Summary Sheet is for the convenience of Landlord and Tenant and shall not be deemed to be incorporated into or made a part of the attached Lease for any reason. TABLE OF CONTENTS 1. THE PARTIES .............................................................1 2. BUILDING, PREMISES AND RELATED AREAS.....................................1 3. LEASING CLAUSE; QUIET ENJOYMENT..........................................2 4. USE OF PREMISES..........................................................4 5. TERM; OPTION TO RENEW....................................................4 6. ANNUAL BASE RENT.........................................................7 7. ANNUAL ADDITIONAL RENT...................................................7 8. ASSIGNMENT OR SUBLET....................................................12 9. INSPECTION AND REPAIR OF PREMISES.......................................12 10. DAMAGE TO PREMISES......................................................13 11. EMINENT DOMAIN..........................................................14 12. TENANT'S OBLIGATIONS....................................................15 13. LANDLORD'S OBLIGATIONS..................................................16 14. INSURANCE...............................................................17 15. COMPLIANCE WITH LAWS; ZONING............................................19 16. TENANT DEFAULT..........................................................19 17. LANDLORD DEFAULT........................................................22 18. SUBORDINATION...........................................................23 19. LANDLORD'S REPRESENTATIONS AND WARRANTIES...............................23 20. CONSTRUCTION OF BUILDING AND RELATED AREAS..............................25 20.A. PROJECT COST LOAN TO LANDLORD...........................................34 21. EXTENSION RIGHT; HOLDING OVER...........................................35 22. NOTICES.................................................................35 23. MISCELLANEOUS...........................................................36 24. RIGHT OF FIRST REFUSAL..................................................37 25. RIGHT OF FIRST REFUSAL - LEASE..........................................38 26. FINANCING; PRE-COMMENCEMENT PURCHASE OPTIONS DUE TO DEFAULT.............38 27. PHASE II OFFICE EXPANSION...............................................40 28. PHASE II MANUFACTURING EXPANSION........................................46 29. SEPARATE OPTIONS........................................................53 30. PURCHASE OPTION.........................................................54 31. CONSTRUCTION MATTERS DISPUTE RESOLUTION.................................56 32. RECORDING MEMORANDUM....................................................58 33. PHASE II LAND COVENANTS AND EASEMENTS...................................58 34. INDEMNIFICATION.........................................................59 35. ENVIRONMENTAL COMPLIANCE................................................59 36. LIMITATION OF LANDLORD'S LIABILITY......................................60 37. ATTACHMENTS.............................................................60 ii EXHIBITS Exhibit A - Site Plans Exhibit B - Schedule of Estimated Real Estate Taxes and Operating Expenses Exhibit C - Base Plans and Specifications Exhibit D - Developer Schedule Exhibit E - Budget Exhibit F - Subordination, Nondisturbance and Attornment Agreement Exhibit G - Design Build Agreement Exhibit H - Recording Memorandum Exhibit I - Early Startup Expenses Exhibit J - Letter dated April 18, 1997, from Knauer & Gorman, Addressing Office Building Height Issue Exhibit K - Letters dated April 25, 1997 from Knauer & Gorman and April 24, 1997 from Chester Valley Engineers, Inc. Addressing Stormwater Management Issues Exhibit L - James Hance Court Relocation Cost Schedule (3 pages) and Phase II Office Storm and Sanitary Sewer Relocation Cost Schedule (2 pages), by Knauer & Gorman, dated April 30, 1997 Exhibit M - List of Approved Alternates, Knauer & Gorman, dated April 17, 1997 Exhibit N - Subordination Agreement by Owner Exhibit O - CFM Phase - I Cash Requirements Exhibit P - Design Build Purchase Price Schedule iii LEASE THIS LEASE AGREEMENT (this "Lease") is made and entered into as of the 16 day of July, 1997, between Landlord and Tenant named below. 1. THE PARTIES. (a) The name and address of Landlord is: CFM Partners (a Pennsylvania general partnership having James J. Gorman and Christopher J. Knauer as its general partners) 120 Arrandale Boulevard Exton, Pennsylvania (b) The name and address of Tenant is: CFM Technologies, Inc. 1336 Enterprise Drive West Chester, PA 19380 (c) The name and address of the Owner ("Owner") is: Exton Development Company, Ltd. (a Pennsylvania limited partnership) 2. BUILDING, PREMISES AND RELATED AREAS. (a) The land (the "Land") on which the Phase I office building (the "Office Building") and the Phase I manufacturing building (the "Manufacturing Building") (together called the "Buildings") will be built is described on Exhibit A attached hereto and is located at Lots 1, 4, 7, and 8, Oaklands Corporate Center, Exton, Pennsylvania. The portion of the Land on which the Office Building will be built is sometimes called the "Office Land". The portion of the Land on which the Manufacturing Building will be built is sometimes called the "Manufacturing Land". The Land is shown on the Site Plan attached hereto as Exhibit A. As shown on Exhibit A, the Land initially includes only a portion of Lot 1 along with certain stormwater drainage easements shown on the balance of Lot 1. (b) Also shown and approximately delineated as the "Phase II Land" on Exhibit A are: the remainder of Lot 1; and Lot 11 (which shall be resubdivided concurrently with the relocation of James Hance Court). The Phase II Land is not included as part of the Land subject to the Lease but is reserved for future expansion by Tenant pursuant to its options reserved under Paragraphs 27 and 28 of this Lease, below. That portion of Lot 1 on which the Tenant has reserved an option to expand the Phase I Office Building by construction of an 1 approximately 50,000 square foot addition is shown on Exhibit A and referred to herein as the "Phase II Office Land". That portion of the Phase II Land on which Tenant has reserved an option for construction of an approximately 60,000 square foot addition to the Manufacturing Building is shown on Exhibit A and referred to herein as the "Phase II Manufacturing Land". In the event that Tenant does not elect to exercise its option to expand the Office Building on the Phase II Office Land, then the Phase II Office Land shall be released from the Tenant's expansion option under Paragraph 27, below, and no longer be subject to any rights or obligations of Tenant hereunder, except for Tenant's rights under the Phase II Land Covenants and Easements described in Paragraph 33. If the Tenant does not elect to exercise its option to expand the Manufacturing Building on the Phase II Manufacturing Land, then the Phase II Manufacturing Land shall be released from the Tenant's expansion option under Paragraph 28 below and Tenant shall have no further rights or obligations pertaining to the Phase II Manufacturing Land except for Tenant's rights under the Phase II Land Covenants and Easements described in Paragraph 33. Until Tenant exercises its option to expand onto the Phase II Office Land and/or Phase II Manufacturing Land, or either, Tenant shall have no obligations whatsoever with respect thereto, other than any obligations it may have to maintain or contribute to the maintenance of any easements thereon pursuant to the express provisions set forth in this Lease. (c) The Building premises (the "Premises") initially covered by this Lease consist of the entire Buildings which will contain approximately 80,000 square feet of gross floor area in the Office Building on Lot 4 and 60,000 square feet of gross floor area in the Manufacturing Building on Lots 7 and 8. For purposes of this subparagraph and the purposes of Paragraph 20 of the Lease, the total gross floor area shall be the area of the Buildings, measured to the outside surface of the dominant exterior wall material, minus recessed windows, entrances or design features, second story lobby floor openings and mechanical penthouses. (d) Tenant and its invitees shall have the exclusive right to use those areas of the Land and Buildings including the Buildings' entrances, lobbies, corridors, elevators, lavatories, loading docks, roof, roads, driveways, stairways, sidewalks, parking facilities and other similar areas, which enable Tenant to obtain full use and enjoyment of the Premises for all customary purposes (the "Related Areas"). (e) The Buildings, the Premises, the Related Areas, the Land on which they are located and any other improvements on the Land are hereinafter collectively referred to as the "Property". The Office Building, Office Land and Office Related Areas are sometimes called the "Office Property". The Manufacturing Building, Manufacturing Land and Manufacturing Related Areas are sometimes called the "Manufacturing Property." The Phase II Land, or applicable portion thereof, shall be deemed part of the Property only upon exercise by Tenant of its expansion option(s) with respect thereto under Paragraphs 27 and/or 28, below, and only upon completion of construction of the Building expansion thereon and the applicable Phase II Commencement Date (defined in said paragraphs below) therefor. 3. LEASING CLAUSE; QUIET ENJOYMENT. (a) Landlord represents and warrants that it is the equitable owner under an installment sale agreement between Landlord and Owner of the Property and that it has full right 2 and authority from all persons having any interest in the Property to make this Lease. Landlord hereby leases the Property to Tenant and Tenant hereby accepts the same from Landlord, in accordance with the provisions of this Lease. Landlord covenants that Tenant shall have peaceful and quiet enjoyment of the Premises during the Term (as defined below) of this Lease. Landlord shall hold and reserve each parcel of the Phase II Land exclusively for Tenant's use pursuant to the Phase II Expansion Options described in Paragraphs 27 and 28 unless and until the same is released by Tenant pursuant to this Lease. (b) Landlord warrants, represents and covenants to Tenant that: (i) Landlord is a validly existing and duly registered Pennsylvania general partnership whose sole partners are identified in Paragraph 1(a). Landlord has good and marketable fee simple title to the Property and the Phase II Land free and clear of all liens and encumbrances except taxes not yet due and payable and the Permitted Exceptions as defined in Subparagraph (ii) below; (ii) Within thirty (30) days following the date of execution of this Lease, Landlord shall supply Tenant with a title report (the "Title Report") covering the Land and the Phase II Land issued by a reputable title insurance company insuring titles in the Commonwealth of Pennsylvania. The title report will contain legal descriptions of each lot or parcel of ground containing or comprising the Land or Phase II Land. Within ten (10) days of the date of receipt of the Title Report by Tenant, Tenant shall mark up Schedule B, Section 2 of the Title Report so as to indicate those exceptions to title which are unacceptable to Tenant. All exceptions to title shown on Schedule B, Section 2 of the Title Report which do not interfere with the proposed development of the Property and/or Phase II Land for Tenant's proposed use and which are not so objected to by Tenant are hereinafter called the "Permitted Exceptions". Within ten (10) days following receipt of the marked up Title Report, Landlord shall give notice to Tenant of the identity of those exceptions to title which Tenant has indicated by its notice as being unacceptable and which Landlord indicates that it is unwilling or unable to cure. Such additional exceptions and conditions shall be added to and become a part of the Permitted Exceptions unless Tenant, within ten (10) days following receipt of Landlord's notice, sends notice to Landlord of termination of this Lease, in which event this Lease shall be null and void and have no further force or effect, except that Landlord shall be entitled to reimbursement for Early Startup expenses incurred to the date of lease termination as provided in Paragraph 20(l)(iii). However, Landlord may not add Permitted Exceptions and Tenant shall not be liable for Early Start-Up Expenses on account of Permitted Exceptions, if any such Permitted Exceptions will preclude the planned development of the Property or the Phase II Land for Tenant's proposed use. (iii) Tenant may obtain a title insurance policy or commitment therefor issued by a title insurance company acceptable to Tenant. Landlord will cooperate with Tenant in obtaining said policy or commitment by delivering, within seven (7) days after notification by Tenant or its agent of the name and address of the title insurance company which will furnish the same, all title information in Landlord's possession relating to the Property and Phase II Land 3 and, thereafter, any additional documents as may be required by the title insurance company to issue its commitment or policy. Such policy or commitment must insure or commit to insure Tenant's leasehold interest, against all liens and encumbrances except taxes not yet due and payable and the Permitted Exceptions which have been approved in writing by Tenant. If such title policy is not obtainable or if the commitment shows any liens, encumbrances or exceptions to title other than those specified above, Tenant may, at its sole option, terminate this Lease at any time prior to commencement by notice to Landlord, in which event this Lease shall be null and void and have no further force or effect and any monies paid or advanced for rent, deposits, Early Startup Expenses (defined below in Article 20) or project-related costs (under Article 20.A), or otherwise, shall be returned to Tenant and Tenant shall be released from any obligations under the terms of this Lease. Notwithstanding anything herein contained to the contrary, Landlord reserves the right to impose easements, restrictions and other covenants on the Land at any time after the date of execution of this Lease as may be reasonably necessary or desirable for the development of the Land as contemplated hereunder provided such additional easements, restrictions and covenants will not materially interfere with Tenant's intended use of the Property or future Phase II expansions. (c) By execution hereof, Landlord hereby confirms that Owner is obligated to convey all of its interest in the Property to Landlord. Upon execution hereof, Landlord will cause Owner to execute the Subordination Agreement in form attached hereto as Exhibit N to confirm that it has authorized Landlord to execute this Lease and that its title and interest are subject to this Lease. 4. USE OF PREMISES. Tenant may use and occupy the Premises for general and administrative office uses, manufacturing of equipment for production, assembly and distribution of computer components, warehouse storage, and all other uses normally incident to the foregoing, and/or any and all other lawful uses conforming to the requirements of the Park Covenants (defined in this Lease below). 5. TERM; OPTION TO RENEW. (a) The term of this Lease ("Term") shall begin thirty (30) days after the later to occur of (i) the date of Substantial Completion (as defined below), (ii) the date Landlord has given Tenant written notice of Substantial Completion, or (iii) the date Tenant receives final certificates of occupancy from West Whiteland Township and the Commonwealth of Pennsylvania's Department of Labor and Industry for each Building (the "Commencement Date"), and shall end on that date which is the last day of the two hundred fortieth (240th) month following the Commencement Date (the "Expiration Date"), unless: (i) sooner terminated in accordance with the terms and conditions contained in this Lease; or (ii) extended pursuant to the provisions of this Lease. Landlord and Tenant agree to execute an amendment, within thirty (30) days after Tenant's occupancy of the Premises, establishing the Commencement Date and the Expiration Date. The term "Lease Year" as used in this Lease shall mean the period of one (1) year commencing on the Commencement Date or any anniversary thereof. Notwithstanding the foregoing, Tenant shall have the right to enter, occupy, equip and use the Premises free of any Annual Base Rent or Additional Rent (except for the Operating Expense Payment) during the 4 thirty (30) day period after the Commencement Date. Further, although the Commencement Date of the term of the Lease will not occur until Substantial Completion of Landlord's Work on the entire Property, Tenant may enter and occupy the Manufacturing Building, upon Substantial Completion thereof and prior to the Substantial Completion of the Office Property and prior to the Commencement Date of the Lease Term, provided that Tenant's use and occupancy thereof prior to the Commencement Date shall be subject to all terms and conditions of this Lease, including the requirement for payment of Annual Base Rent and any Additional Rent applicable to the Manufacturing Building except during the initial thirty (30) day "free-rent" period mentioned above in this Paragraph 5(a), which free rent period will commence as to the Manufacturing Building upon Substantial Completion of the Manufacturing Building and Tenant's occupancy thereof. (b) "Substantial Completion" and "Substantially Complete" shall mean that all of the following conditions have been satisfied with respect to the "Landlord's Work" (defined in Paragraph 20): (i) final, unconditional certificates of occupancy have been issued by West Whiteland Township and the Commonwealth of Pennsylvania Department of Labor and Industry and Landlord has passed all local inspections for Landlord's Work; (ii) Landlord's Work has been completed in accordance with the Final Plans and the requirements of the provisions of Article 20 of this Lease, as reasonably determined by Landlord's Building architect, subject to confirmation by the Consultant (identified in Paragraph 31) subject only to normal punch list items that will not interfere with the immediate occupancy of the Premises, a list of which shall be prepared by Landlord and Tenant, and which items Landlord agrees to correct by the Commencement Date; (iii) a certification by the Building architect, consented to and approved by Landlord has been delivered to Tenant, stating that: (A) the proper federal, state, county, regional and local authorities, including those having jurisdiction over applicable zoning, building, health, safety and environmental regulations, have issued all licenses, permits, approvals and consents necessary connection with Landlord's Work; (B) the Buildings comply with the applicable provisions of Paragraphs 15(a) and 19(a) hereof and with any private covenants applicable to the Property generally; and (C) all of Landlord's Work is complete, in clean and first-class condition, and where applicable, in working order such that Landlord may perform its obligations in the manner required by this Lease; and (iv) a certification by Landlord, stating that (A) the Buildings comply with the applicable provisions of any private covenants applicable to the Property generally, and (B) all of Landlord's Work is, where applicable, in a condition such that Landlord may perform its obligations in the manner required by this Lease. The "Date of Substantial Completion" shall mean the date on which Landlord's Work is Substantially Complete. (c) Landlord will commence Landlord's Work and will use all commercially reasonable efforts to Substantially Complete Landlord's Work on the Office Property and the Manufacturing Property or before the final dates respectively set forth in Article 20, below, for completion hereof (the "Scheduled Substantial Completion Date"). If either (Office or Manufacturing) Premises are not Substantially Complete by its Scheduled Substantial Completion Date, then once the Lease commences, Tenant shall receive one-half (1/2) day of abatement of Annual Base Rent (as defined in Paragraph 6 and as adjusted pursuant to Article 20) for each day that the Landlord's Work on such Premises was not Substantially Complete after the Scheduled Substantial Completion Date. If either (Office or Manufacturing) Premises are 5 Substantially Complete prior to its Scheduled Substantial Completion Date, then upon the date of commencement of the Lease, Landlord shall be entitled to receive an early completion bonus equal to one (1) day of Annual Base Rent applicable to that Premises (as defined in Paragraph 6 and as adjusted pursuant to Article 20) for each day that the Landlord's Work on such Premises was Substantially Complete prior to the Scheduled Substantial Completion Date; provided, however, Landlord shall be required to give Tenant not less than sixty (60) days prior notice of the anticipated substantial completion of either (Office or Manufacturing) Premises prior to its Scheduled Substantial Completion Date. If either Premises are not Substantially Completed by the date which is one hundred twenty (120) days after its Scheduled Substantial Completion Date, which latter date shall be extended as provided by Change Order (as provided in Article 20) and as a result of riots, insurrection, war, governmental restriction, unusually adverse weather conditions or other reasons beyond Landlord's control in the exercise of best efforts (but excluding strikes, lock-outs or labor troubles), then Tenant shall have the option to purchase the Property and, at Tenant's option, the Phase II Land, upon the terms and conditions set forth in Paragraph 26(a)(ii) below. As a condition to any extension of the Scheduled Substantial Completion Date for reasons permitted in the foregoing sentence, Landlord shall notify Tenant at the earliest practical time upon the occurrence or discovery of any occurrence or condition necessitating extension for permitted reasons beyond Landlord's control, and shall, in such notice, describe the cause of the delay and Landlord's best estimate of the length of the delay resulting from such cause. In no event shall Tenant be required to take occupancy of the Premises or accept a Commencement Date prior to the commencement date. (d) Landlord grants Tenant the option to renew this Lease under the terms and conditions as follows. (i) Provided Tenant is not in default under this Lease beyond any applicable cure period at the time the option may be exercised, Landlord grants Tenant the option to renew this Lease for three (3) additional terms (the "Renewal Periods") of (A) five (5) years, (B) four and one-half (41/2) years, and (C) five and one-half (51/2) years, respectively, following the Expiration Date, or the expiration of the preceding Renewal Period, as the case may be. Tenant must exercise its options by giving Landlord written notice at least six (6) months prior to the Expiration Date, or the expiration of the preceding Renewal Period, as the case may be. Absent notice of the exercise of any such Renewal Period option by the time required hereunder (which shall be of the essence), such Renewal Period option shall terminate and expire. (ii) The Annual Base Rent payable during each of the first two (2) Renewal Periods shall be in an amount equal to one hundred one and two-tenths percent (101.2%) of the Annual Base Rent payable pursuant to this Lease prior to the commencement of such Renewal Period. The Annual Base Rent payable during the third (3rd) Renewal Period shall be the Fair Market Rental Value of the Premises, as such Fair Market Rental Value may be mutually agreed. For that purpose, within fifteen (15) days after Tenant's exercise of the option to renew for the third Renewal Period, Landlord will notify Tenant in writing of the Fair Market Rental Value. Tenant shall have fifteen (15) days from receipt of Landlord's notice to either accept or dispute Landlord's determination of the Fair Market Rental Value. In the event that Tenant disputes Landlord's determination, Tenant shall so notify Landlord and advise Landlord 6 of Tenant's determination of the Fair Market Rental Value. If Landlord and Tenant cannot agree upon the Fair Market Rental Value within thirty (30) days of Tenant's original notice of its intent to exercise its Renewal Option, the term of the Lease shall expire upon the expiration of the second Renewal Period and Tenant shall have not further rights to renew the term of the Lease. (iii) Except as set forth above, the Renewal Periods shall be subject to all of the terms and conditions applicable to the initial term of this Lease. 5. ANNUAL BASE RENT. The Annual Base Rent shall be payable by Tenant to Landlord (by a check mailed on or prior to the first business day of each month), without any set-off, abatement, notice or demand, except as specifically set forth in this Lease, commencing on the Commencement Date, and thereafter, for each month in advance through and including the Expiration Date. The Annual Base Rent, as agreed upon execution hereof and to be adjusted pursuant to the provisions of Article 20, below, for the term of the Lease is set forth in the following schedule which allocates the total Annual Base Rent between the Office Property and the Manufacturing Property: Allocated between Total Office Property Manufacturing Property ----- --------------- ---------------------- Years 1 through 20: $1,482,250 $910,250 $572,000 Annual Base Rent, as stated in the foregoing schedule, shall be subject to adjustment in accordance with the provisions of Paragraph 20(e) through (h), below. All references in this Lease to the Annual Base Rent, upon such adjustment, shall mean and refer to the Annual Base Rent as so adjusted. Any installment of Annual Base Rent or portion thereof not paid within five (5) days of the date when due shall be subject to a late charge of five percent (5%) of the unpaid amount. Without limiting any other provision of this Lease, it is expressly understood and agreed that all charges, payments, rent, and fees of any kind and nature which Tenant is required to pay hereunder, together with all interest and penalties that may accrue thereon, shall be deemed to be additional rent ("Additional Rent"), and in the event of nonpayment thereof by Tenant, Landlord shall have all of the rights and remedies with respect thereto as would accrue to Landlord for nonpayment of Annual Base Rent. Annual Base Rent, and all Additional Rent, shall be payable to Landlord at the address set forth in Paragraph 1 hereof or to such other address as Landlord shall notify Tenant of in writing. 6. ANNUAL ADDITIONAL RENT. (a) For the purpose of this Paragraph 7: (i) Computation Year shall mean each full twelve (12) calendar months beginning on the Commencement Date; 7 (ii) Real Estate Taxes shall mean all taxes, assessments, levies and other charges, including transportation district assessments (if any), which are assessed, levied or charged upon the Property during the Term less any abatement received by Landlord, any affiliate of Landlord or any tenant of the Property. Real Estate Taxes shall not include any of the following (all of which shall be paid solely by Landlord): (A) any capital levy, estate, succession, inheritance, realty transfer, sales, use or franchise taxes, or any income, profits, or revenue tax assessment or charge, imposed upon this value of this Lease on the rents received by the Landlord under this Lease; nor (B) any increase in property taxes due to a reassessment performed as a result of the sale or transfer of the Property, but shall include any increases due to construction of the Buildings. Furthermore, Real Estate Taxes shall not include any Real Estate Taxes or any other taxes on the Phase II Land until the same is incorporated into the Property upon the applicable Phase II Commencement Date pursuant to the Tenant's Expansion Options in Paragraphs 27 or 28, and then only with respect to that Land (Phase II Office Land, Phase II Manufacturing Land, or both) as to which such option has been exercised. (iii) Operating Expenses shall mean the total, actual out-of-pocket expenses, without any mark-up or fee for management, supervision, overhead or administration, paid by Landlord to unrelated third parties (or, if to related parties, at rates not exceeding competitive rates which would otherwise be paid to unrelated third parties), and not reimbursed or reimbursable by others, which relate to the ownership, operation, repair, maintenance or replacement of the Property. Because Tenant will be responsible for the costs of operation, maintenance or repair of the Property, subject to and as more fully described in the terms of this Lease below, the Operating Expenses to be incurred by Landlord and reimbursable by Tenant pursuant to the provisions set forth below in this section shall be limited to (A) the proportionate share allocated to the Land of common costs incurred pursuant to the Declaration or Restrictive Covenants and titled Amended Protective Covenants for Oaklands Corporate Center made by Oaklands Business Parks, Inc. and recorded in Chester County, Volume 204 at page 343 (the "Park Covenants"), (B) the costs of Landlord's all-risk property insurance under Paragraph 14(b)(ii), and (C) those additional operating expenses (if any) which are listed on Exhibit B attached hereto. (iv) Phase II Land Commitment shall mean the amount payable by Tenant, as Additional Rent, for Landlord's reservation of the land area necessary to complete Phase II, pursuant to the Phase II option described below in Paragraph 27. The Phase II land commitment component of the Additional Rent: shall be zero dollars in years 1 and 2 of the Lease; in year 3 through year 10 shall be $65,600 for the Phase II Office Land and $59,000 for the Phase II Manufacturing Land; and in year 11 through 20 shall be $98,400 for the Phase II Office Land and $88,500 for the Phase II Manufacturing Land. The Phase II Land Commitment component of the Additional Rent shall be payable monthly as provided in Subparagraph 7(h) below. Notwithstanding anything to the contrary herein, the Phase II Land Commitment component of Additional Rent applicable to the Phase II Office Land shall be payable only until the Phase II Office Land is released from the Tenant's Expansion Option under Paragraph 27, below. Further, the Phase II Manufacturing Land Commitment component of Additional Rent 8 applicable to the Phase II Manufacturing Land shall be payable only until the Phase II Manufacturing Land is released from the Tenant's expansion option under Paragraph 28, below. To release all, or either (Office or Manufacturing) portion, of the Phase II Land and abate the Phase II Land Commitment component of Additional Rent, or applicable portion thereof, Tenant, at its sole option, may elect to waive the Phase II Expansion Option, or applicable portion thereof, by giving written notice of such release to the Landlord and the Phase II Land Commitment component of Additional Rent (or applicable portion thereof) shall cease to be payable upon the earlier of: the expiration of one year from the date of such notice; or any conveyance, transfer, sale or lease, or agreement to sell, transfer, convey or lease the Phase II Land (or applicable portion thereof) released by the Tenant's notice. The Phase II Land Commitment shall cease to be payable with respect to the Phase II Land, or applicable portion thereof, immediately upon Tenant's notice of the exercise of its Expansion Option with respect to such Land or applicable portion thereof. (b) In addition to the Annual Base Rent set forth in Paragraph 6, for each Computation Year during the Term, Tenant shall pay the following sums (collectively, "Annual Additional Rent"): (i) All Real Estate Taxes (the "Tax Payment"). The Tax Payment shall be made by Tenant in accordance with the terms of Subparagraph 7(c) hereof. Landlord's best estimate of the total annual tax payment for the first computation year itemized to show all Real Estate Taxes now in effect and allocable to the Property, is included in the Schedule of Estimated Real Estate Taxes and Operating Expenses attached hereto as Exhibit B. (ii) All Operating Expenses (the "Operating Expense Payment"). The Operating Expense Payment shall be made by Tenant in accordance with the terms of Subparagraph 7(d). Landlord's best estimate of the Operating Expense Payment for the first computation year itemized to show all Operating Expenses payable by Tenant is included in the Schedule of Estimated Real Estate Taxes and Operating Expenses attached as Exhibit B. (iii) The Phase II Land Commitment (the "Phase II Land Commitment Payment") shall be made by Tenant in accordance with the terms of Subparagraph 7(h). (c) The Tax Payment shall be made by Tenant as follows. Tenant shall pay directly to the appropriate governmental agencies all Real Estate Taxes before the same shall become delinquent. All such payments for the first and last Computation Year shall be prorated between Landlord and Tenant so that Tenant shall be responsible for that portion of the Real Estate Taxes which is attributable to the term of the Lease and any renewal term. If there is included in the Real Estate Taxes any special assessment or other assessment which may be paid in installments, unless otherwise directed by Tenant, Landlord will advise the appropriate governmental agency of its election to pay the same in installments and Tenant shall pay such of those installments as shall be due and payable during the term of the Lease or any renewal term regardless of when such installment was assessed. Tenant's Real Estate Tax obligation shall commence on the Commencement Date. In the event the Property, or any portion thereof, is part of a larger tract, Landlord will use its best efforts to have the Property designated as a parcel or 9 parcels separate from such other or larger tract so that the assessed valuation of the land and buildings shall relate only to the Land and Buildings constituting and constructed on the Property. In that case, the Landlord shall use its best efforts to have the billings therefor sent directly by the taxing authorities to the Tenant for payment. If the Property, or any portion thereof, is part of a larger tract and the Landlord is unable to have the Property designated as a separate parcel or parcels for taxing purposes, so that the taxes are assessed upon the larger tract of which the Property is a portion, Tenant agrees to pay that portion of the Real Estate Taxes which is reasonably attributable to the Property determined, with respect to the land portion, by dividing the land area of the Property by the total area of the larger tract which includes the Property. To the extent that the Real Estate Taxes are not separately assessed for the Property, Tenant will pay Tenant's share thereof within thirty (30) days after written demand from Landlord, provided that such written demand shall include a copy of the tax bill and Landlord's accounting of Tenant's share. In such event, Landlord shall provide Tenant with such notice and a copy of any applicable tax bill promptly upon Landlord's receipt and not later than thirty (30) days before any discount period applicable thereto expires or if no discount period applies, then not later than thirty (30) days before the date that the same are finally due and payable without penalty. If Landlord fails to do so, then Landlord shall be responsible to pay any portion of such bill which exceed the discount rate or which represents penalties or interest. If the Property or any portion thereof cannot be separately assessed from other property of the Landlord, Landlord shall pay any portion of any tax bill which includes the Tax Payment for the Property on or before the due date therefor and will furnish Tenant with proof of payment thereof upon request. (d) Tenant shall pay to Landlord the Operating Expense Payment with respect to each Computation Year in monthly installments, in advance, for each month in which this Lease is in effect, at the same time as Annual Base Rent under Paragraph 6 hereof is to be paid in amounts reasonably estimated from time to time by Landlord by a written notice to Tenant. Within ninety (90) days after the end of each Computation Year, Landlord shall furnish to Tenant itemized statements certified by an authorized agent of Landlord setting forth the actual Operating Expenses for the most recently completed Computation Year. Tenant shall pay any deficiency with respect to the Operating Expense Payment to Landlord shown by such statement within sixty (60) days after receipt of the aforesaid statement. If the total amount paid by Tenant during any Computation Year with respect to the Operating Expense Payment exceeds the actual Operating Expense Payment for such Computation Year, such excess shall be credited against payments next due under this Paragraph 7(d). If no such payments are thereafter due, such excess shall be refunded by Landlord within thirty (30) days after delivery of the aforesaid statement. The statements referred to above will include such supporting documentation as to Operating Expenses (including invoices, copies of calculations and such other information) as Tenant shall reasonably require. (e) Within one (1) year after receipt of any statement. Tenant shall have the right, by notice to Landlord, to dispute the inclusion and amount of any item or items in any statement. In the event that such a dispute is not settled within sixty (60) days after notice of such dispute has been delivered to Landlord, the dispute shall be determined by a firm of real estate audit professionals mutually acceptable to Landlord and Tenant ("Audit Professionals"). The determination of the Audit Professionals shall be final and binding upon both Landlord and 10 Tenant and the Audit Professionals' expenses shall be borne by the party against whom the decision is rendered. If it is determined that Tenant has made an underpayment, Tenant shall promptly reimburse Landlord for the amount of such underpayment. If it is determined that Tenant has made an overpayment, Tenant shall promptly receive, at Tenant's option, either (i) a credit against the Annual Base Rent and Annual Additional Rent installments next due and payable; or (ii) a lump sum payment from Landlord in such amount. The obligations hereunder shall survive any termination of this Lease. (f) To the extent that notice of same is received by Landlord, Landlord shall in turn notify Tenant promptly and, prior to the expiration of any rights of appeal, of any increase in Real Estate Taxes resulting from a notice of reassessment or from any other cause, other than a general increase in the tax rate. Should Landlord elect to contest any such increase, Landlord shall keep Tenant informed, with timely advice, of the steps being taken. Further, in the event Landlord does not contest such tax increase, and after reasonable prior notice to Landlord, Tenant shall have the right to contest any such increase and shall keep Landlord informed of the steps being taken. Landlord agrees to fully cooperate with Tenant in prosecuting any appeal taken by Tenant as a result of such increase, at no cost or expense to Landlord. To the extent Tenant obtains any reduction as a result of such contest, Tenant shall have the right to setoff against the Annual Base Rent and the Annual Additional Rent due hereunder all reasonable costs and expenses, including reasonable attorneys' fees, incurred by Tenant in connection with such contest, provided the same shall not exceed the amount of the reduction in Real Estate Taxes obtained thereby, provided Tenant gives Landlord thirty (30) days advance written notice. (g) Tenant shall have the right to examine, to copy and to have an audit conducted of all books and records of Landlord as shall pertain to Operating Expenses and Real Estate Taxes. Such audit shall be conducted by an auditing firm retained by Tenant. All expenses of such audit shall be borne by Tenant unless such audit discloses an overstatement of Operating Expenses or Real Estate Taxes of three percent (3%) or more, in which case all expenses of such audit shall be borne by Landlord, and Tenant's Operating Expense Payment or Tax Payment shall be adjusted accordingly. Landlord's liability for the cost of the audit shall be limited to Three Thousand Dollars ($3,000.00) as such amount may be increased, from time to time, by the same percentage increase as the increase in the level of the Consumer Price Index (CPI-U, All City average, 1984 = 100) from the date of this Lease to the time such cost is incurred. In the event Landlord disputes the findings of said audit, then Landlord and Tenant agree to submit any disputed items to the Audit Professionals for resolution pursuant to the terms of Subparagraph 7(e). Landlord shall maintain all books and records for a period of not less than three (3) years following the applicable Computation Year. (h) Tenant shall pay to Landlord the Phase II Land Commitment Payment with respect to each computation year in equal monthly installments, in advance, for each month in which this Lease is in effect, at the same time as Annual Base Rent under Paragraph 6 hereof is to be paid, and shall be recoverable by Landlord in the same manner as the Annual Base Rent. (i) Tenant will pay directly and promptly, as and when the same become due and payable, all water rents, rates and charges, all sewer rents, and all charges for electricity, gas, heat, steam, hot and/or chilled water, telephone, and other utilities supplied to the Property during the term and any renewal term of this Lease. 11 8. ASSIGNMENT OR SUBLET. (a) Tenant may sublet or license all or any portion of the Premises, without Landlord's consent, provided: (i) Such subletting or license will not release Tenant from liability under this Lease; (ii) Tenant must give Landlord written notice of the subletting or license including the name, address and proposed use by the sublessee or licensee; and (iii) Such subletting may only be for a permitted use hereunder. (b) Tenant shall be permitted to assign this Lease, with the prior written consent of Landlord, which consent shall not be unreasonably withheld or conditioned. If required by the terms of the holder a first mortgage on the Property, such assignment shall also be subject to approval by such mortgage holder. Landlord shall approve, disapprove or notify Tenant of specific additional information required to evaluate Tenant's request, not later than the thirtieth (30th) day following Tenant's request for consent to an assignment. In connection with any request by Tenant for a consent to assignment, Landlord and/or Landlord's lender holding a first mortgage on the Property may require financial statements or other documentation verifying the creditworthiness of the proposed assignee. Upon any such assignment, Tenant shall be released from liability under this Lease. (c) In addition to Tenant's right to sublet or license all or a portion of the Premises pursuant to Subparagraph 8(a) hereof, or to assign this Lease pursuant to Subparagraph 8(b) hereof, Tenant shall have the right to assign or transfer any interest in this Lease to a subsidiary, parent or an affiliate of Tenant or a successor to Tenant by way of merger, consolidation, corporate reorganization, or the purchase of all or substantially all of Tenant's assets (referred to herein as a "Related Transferee"), each without Landlord's consent. 9. INSPECTION AND REPAIR OF PREMISES. Upon request, at such times as may be scheduled in advance with Tenant, and subject to such conditions as may reasonably be imposed by Tenant, Landlord may inspect the Premises. Landlord shall have no obligation to make any repairs to the Premises unless and except to the extent otherwise expressly provided herein. Landlord may (but shall not be obligated except as otherwise provided herein), following prior written notice in advance, at reasonable times (except prior notice shall not be required in emergencies) enter the Premises to make repairs or replacements that Tenant may neglect or refuse to make provided that: (a) such repairs or replacements are necessary to comply with laws, maintain standards of safety for occupancy or to correct any condition constituting waste and having a substantial adverse effect on the value of the Premises; and (b) Tenant shall have failed, within 30 days after receipt of written notice from Landlord (except that no such notice 12 shall be required in the event of emergencies) to initiate steps to properly correct or abate such condition requiring repair or replacement or shall fail to pursue completion of the same with reasonable diligence thereafter. Landlord may charge Tenant, as Additional Rent, the actual out-of-pocket costs and expenses paid by Landlord to unrelated third parties and not reimbursable by others, plus a ten percent (10%) fee added by Landlord, to perform repairs or replacements which Landlord makes after Tenant's failure to do so, provided that such repair or replacement is permitted hereunder and is not Landlord's responsibility under any other provisions of this Lease. In making any inspection or effecting maintenance or repairs to the Premises, Landlord shall use all commercially reasonable efforts to protect Tenant's property and personnel from loss and injury and to avoid disrupting Tenant's regular business routine. Notwithstanding anything to the contrary contained herein, during the last five (5) years of the term of the Lease and during any Renewal Period, Landlord shall make and may not charge Tenant, as Additional Rent, for the costs of any repairs, improvements and replacements of a structural nature or of a type which may or could, according to standard accounting practices, be capitalized, except to the extent that: (i) Landlord's actual costs in effecting any such structural or other capital repair, replacement or improvement are amortized over the useful life or lives of the repairs, replacements or improvements effected; and (ii) The costs chargeable as Additional Rent shall be limited in any Lease Year to the annual amortized cost thereof and Tenant shall have no responsibility therefore after expiration of the Lease Term and any applicable extensions or renewals thereof. 10. DAMAGE TO PREMISES. (a) If any portion of the Premises, the Building or the Related Areas is damaged by fire or other casualty, then, except as provided below, the damage shall be promptly repaired by and at the expense of Landlord. Promptly upon the occurrence of any such fire or other casualty damage, Landlord will pursue a claim with its all-risk insurance carrier and notify Tenant of the time estimated, in the exercise of Landlord's best judgment, to complete repair and restoration of the damaged portions of the Property. Until such repairs and restoration are completed, the Annual Base Rent and Annual Additional Rent shall be equitably abated to the extent that the damage to the Premises and/or other portions of the Property, or any portion thereof, renders the same untenantable for Tenant's use. If such damages renders the Premises or any portion thereof untenantable for Tenant's use and such damage shall not be susceptible of complete repair and restoration within one (1) year after the occurrence of such casualty, or if Landlord fails to notify Tenant within writing of its proposed schedule for completion of repairs and restoration within sixty (60) days after the occurrence of such casualty, then Tenant may by ten (10) days written notice to Landlord, terminate this Lease as of the date of occurrence of such damage, provided such notice is given within forty-five (45) days after the date Tenant receives Landlord's written notice of the proposed completion schedule (or at any time after the sixtieth (60th) day if Landlord has failed to provide such completion schedule). If such damage can be repaired within the time period above stated and Landlord fails to complete the repair or restoration of such damage within such period, then Tenant may terminate this Lease, by thirty (30) 13 days' prior written notice to Landlord. In the alternative to terminating the Lease in either of the foregoing instances, Tenant may notify Landlord that it shall itself complete the necessary repairs and restoration in which event Tenant shall have the right to receive all proceeds of insurance payable to Landlord in respect of such casualty, and shall be deemed the assignee thereof, to be applied to the costs of repair and restoration. If Tenant completes the necessary repair or restoration upon Landlord's default, then Tenant may recover from Landlord the costs thereof to the extent not covered by the proceeds of insurance made available to Tenant and the amount of such excess costs may be offset against Annual Base Rent or Additional Rent payable hereunder. Notwithstanding anything above to the contrary, if the fire or other casualty damage occurs during the last five (5) years of the term of the Lease or during any Renewal Period, and if the damage materially and adversely affects Tenant's business operations, Tenant may, by written notice to Landlord, terminate this Lease even if the damage is capable of being repaired by Landlord within the aforementioned one (1) year period. (b) Landlord and Tenant do each hereby release and discharge the other party and any officer, agent, employee or representative of such party from any liability for loss or damage to property caused by fire or other casualty for which insurance (permitting waiver of liability and containing waiver of subrogation) is required to be carried by the injured party under the terms of this Lease. 11. EMINENT DOMAIN. (a) If the entire Property shall be taken under the power of eminent domain or conveyed in lieu thereof, then the Term shall expire on the date of such taking or conveyance, and Annual Base Rent and Annual Additional Rent shall be prorated as of such date. If a portion of the Property, the taking of which materially and adversely affects Tenant's business operations (including parking) or rights of expansion shall be taken, then Tenant may terminate this Lease by written notice to Landlord within thirty (30) days after Tenant's receipt of notice of the taking and, in such case, the term shall expire effective as of the date set forth in Tenant's notice and Annual Base Rent and Annual Additional Rent shall be prorated as of such date or any earlier date that possession of the Property commences by the condemning authority. Damages awarded Landlord for such taking or conveyance shall belong to Landlord, provided that Tenant may assert a claim for any leasehold improvements paid for by Tenant, Tenant's personal property and Tenant's moving expenses. Notwithstanding the foregoing, in the event that the portion of the Property taken in eminent domain relates only to parking, and if Landlord notifies Tenant on or before the end of thirty (30) days from the date that Landlord or Tenant receives notice of the taking that Landlord intends to supply replacement parking spaces of the same quantity and of equivalent proximity to those taken, then Landlord shall be permitted a reasonable period of time (not to exceed one hundred eighty (180) days) to supply such replacement parking and this Lease shall not be terminable by Tenant as a result of such taking provided Landlord's supply of such replacement parking is completed within such one hundred eighty (180) day period and provided that adequate and reasonably proximate temporary parking is made available to Tenant during such time period for construction and/or supply of the replacement parking spaces. 14 (b) If less than the whole of the Property is taken under the power of eminent domain or conveyed in lieu thereof, and Tenant does not elect to terminate pursuant to Subparagraph (a), then this Lease shall terminate as to the part so taken on the date that Tenant is required to yield possession thereof to the condemning authority. Landlord shall make such repairs and alterations as may be necessary in order to restore the part not taken to useful condition, all Annual Base Rent shall be equitably reduced by an amount equal to the proportionate rental value of the part so taken, and the Annual Additional Rent shall be reduced if and to such extent as such reduction in the Property subject to the Lease reduces the expenses included in the Annual Additional Rent. (c) If the Phase II Land or any part thereof necessary to Tenant's expansion is taken prior to the release thereof by Tenant or the exercise by Tenant of its expansion rights with respect thereto, then the Phase II Land Commitment component of Annual Additional Rent shall cease to be payable immediately upon the issuance of notice thereof by the condemning authority. 12. TENANT'S OBLIGATIONS. (a) Tenant shall comply with all laws pertaining to Tenant's manner of use of the Premises. Tenant shall not be required to make any structural repairs, alterations or improvements to the Premises unless and except to the extent that the same are necessary to address a condition which is not covered by Landlord's warranties and which cannot be adequately addressed through nonstructural repairs without resulting in deterioration to the Premises (subject to the provisions of Paragraph 15 if such structural repairs, alterations, or improvements are required as aforesaid in the last five (5) years of the Lease Term or any Renewal Term). In addition, Tenant shall make any repairs or replacements required to be made by Tenant under Paragraph 15. Tenant shall maintain an HVAC service and maintenance contract on the HVAC systems serving the Premises. (b) Upon the expiration or other termination of this Lease, Tenant shall surrender the Premises in substantially as good condition as when entered, ordinary wear and tear and deterioration due to age and damage by fire or other casualty covered by insurance which the Landlord is obligated to maintain hereunder, and "Permitted Alterations", as defined herein, excepted. Tenant may remove any security, telephone or computer system or any portion thereof, as well as any fixtures installed by or on be behalf of Tenant, provided Tenant repairs any damage caused by such removal. Tenant shall not be obligated to remove any fixtures installed by it except for fixtures relating solely to Tenant's particular use and not usable or adaptable for reuse by future prospective tenants who may occupy the Property as office and/or manufacturing facilities. Tenant shall remove all other personal property of Tenant, including manufacturing equipment and machinery. In no event, however, shall Tenant be required to remove any portion of such systems, equipment, machinery or fixtures installed in any wall, floor, partition, ceiling or under any floor covering. (c) Tenant shall obey reasonable rules and regulations established by or pursuant to the protective covenants for, and generally applicable to all properties within, Oaklands Business Park. 15 (d) During the Term, Tenant may make improvements and alterations to the Premises provided such work is done in a workmanlike manner with materials and finishes comparable to those then existing in the Premises (all such improvements or alterations are collectively referred to herein as "Permitted Alterations"). Notwithstanding the foregoing, Tenant shall secure Landlord's prior written approval, which approval shall not be unreasonably withheld or delayed, for any alterations requiring issuance of a building permit from applicable municipal or Department of Labor and Industry authorities. Landlord may not disapprove any such alterations requiring a building permit if the same comply with applicable codes and the standard set forth in the foregoing sentence of this Paragraph 12(d). Landlord's approval or other decision with respect to any such alterations by Tenant requiring a building permit shall be communicated to Tenant within ten (10) days after receipt of Tenant's written request accompanied by plans and specifications. Tenant shall not be required to remove any alterations, installations, additions or improvements made upon the Premises (except as provided in Subparagraph (b) above) and the same shall be surrendered with the Premises as a part thereof. Notwithstanding the foregoing, Tenant may, however, at its sole option, remove any improvements or alterations made to the Premises on Tenant's behalf, provided Tenant repairs any damage caused by such removal. Tenant may install and maintain its own security system for the Premises. (e) If, because of any act or omission of Tenant, or any of Tenant's agents, employees, or contractors, any instrument which may form the basis for any mechanics lien or other lien, charge or order for the payment of money shall be filed against Landlord or any portion of the Property, Tenant shall, at its own cost and expense, cause the same to be discharged of record by payment, bonding or otherwise within 30 days after written notice from Landlord to Tenant thereof, and Tenant will indemnify and hold Landlord harmless against and from all costs, liabilities, suits, claims and demands, including reasonable counsel fees, resulting therefrom. However, and notwithstanding the foregoing, Tenant shall have the right, at any time, to grant security interests in any goods, property or fixtures owned by Tenant and installed or kept on the Premises, including, without limitation, any of Tenant's systems, equipment, machinery or trade fixtures referenced in Subparagraph 12(b) of this paragraph, above. Landlord agrees that it will, within 10 days after any written request by Tenant, confirm the foregoing consent and will disclaim any interest of Landlord in any such property of Tenant by written instrument within such 10-day period. (f) Tenant will maintain, at its expense, insurance as provided in Paragraph 14, below. 13. LANDLORD'S OBLIGATIONS. (a) For so long as either part of the Phase II Land remains the subject of Tenant's expansion options under Paragraphs 27 and 28, below, and during any such other period that the Phase II Land is a part of any lot or lots of ground containing the Property subject to this Lease, Landlord will keep such Phase II Land in a safe, clean and sanitary condition at its own cost and expense. Such maintenance shall further include any work necessary to repair and/or restore any portion of the Phase II Land which becomes subject to any condition (e.g., sinkholes, erosion, flood damage) which may impede its use and development for Tenant's expansion 16 options described in this Lease. Landlord will indemnify and hold harmless Tenant from and against any and all costs, expenses, claims, penalties, fines and/or enforcement actions (including reasonable counsel fees associated therewith) arising from any condition in, on or emanating from the Phase II Land. Landlord's obligation to maintain the Phase II Land for the benefit of Tenant in the condition required under this Paragraph is conditioned upon payment of the Phase II Land Commitment for such Land by the Tenant. (b) Landlord will make and perform any repairs or replacements to the Property which are required for Landlord to comply with any warranty or other provisions of this Lease imposing on Landlord a duty of maintenance, repair or replacement. (c) Subject to Tenant's duty to pay Operating Expenses in accordance with the terms of Paragraph 7 and Exhibit B. Landlord shall before delinquency pay all amounts necessary and perform all obligations required under any easements or covenants relating to the ownership and operation of the Property and the provision of utility services and stormwater management drainage therefor. Without limitation, Landlord shall pay all amounts due (subject to reimbursement by Tenant as Operating Expenses for Tenant's share thereof) and perform all obligations required by Landlord as Owner of the Property under the terms of the Stormwater Basin and Drainage Easement on the Property, serving the Property and certain adjoining Lots. (d) Landlord shall, at its expense, maintain insurance as provided in Paragraph 14, below. (e) Landlord shall notify Tenant, in writing, promptly upon Landlord's discovery of the existence of any condition or of the happening, pendency or threat of any occurrence or event which does or may render false or materially inaccurate any of Landlord's representations or warranties under this Lease. By way of example, but without limitation, in the event that Landlord discovers or receives notice that any condemnation, zoning change, environmental regulation, casualty, contamination, law or ordinance exists, has occurred or has become pending or threatened, the effect of which would or may be to render the Phase II Land, or any portion thereof, unusable for the purposes of Tenant's expansion options under Paragraphs 27 or 28, Landlord shall be obligated to promptly give written notice thereof to Tenant and shall thereafter keep Tenant fully apprised with respect to the status thereof unless and until Tenant releases or otherwise terminates this Lease with respect to the Phase II Land pursuant to Tenant's rights reserved under this Lease. 14. INSURANCE. (a) Tenant shall maintain, at its expense, with insurers reasonably acceptable to Landlord, the following: (i) Standard Commercial General Liability Insurance. The limits of liability of such insurance shall be an amount not less than Two Million Dollars ($2,000,000) per occurrence, Personal Injury including death and Two Million Dollars ($2,000,000) per occurrence, Property Damage Liability or Two Million Dollars ($2,000,000) combined single 17 limit for Personal Injury and Property Damage Liability. Such policies shall name Landlord as a additional insured; and (ii) At Tenant's option, Tenant may provide the coverages required under this Subparagraph 14(a) through blanket policies of insurance covering Tenant's other properties or Tenant may self-insure. Tenant shall deliver a certificate of insurance evidencing the coverages (or such other evidence as Landlord may reasonably request) not earlier than thirty (30) days' prior to the Commencement Date, and at such other time, within thirty (30) days of Landlord's written request. Each policy will provide that Landlord shall receive at least thirty (30) days' prior written notice of cancellation, material alteration or nonrenewal of the policy. (iii) All risk property and casualty insurance, written at replacement cost value and with replacement cost endorsement covering all of Tenant's personal property in the Premises (including, without limitation, trade fixtures, floor coverings, furniture and other property removable by Tenant under the provisions of this Lease) and all other Leasehold improvements installed in the Premises by or on behalf of Tenant other than that which is included in the Landlord's Work on the Premises pursuant to the terms of this Lease. (b) Landlord shall maintain with an insurer reasonably acceptable to Tenant: (i) Standard Commercial General Liability Insurance. The limits of liability of such insurance shall be an amount not less than Two Million Dollars ($2,000,000) per occurrence, for Personal Injury including death and Two Million Dollars ($2,000,000) per occurrence, for Property Damage Liability or Two Million Dollars ($2,000,000) combined single limit for Personal Injury and Property Damage Liability. Such policies shall name Tenant as additional insured; and (ii) "All risk" property insurance on the Building, the Premises (including all Tenant improvements) and the Related Areas insuring one hundred percent (100%) of the replacement value thereof. This insurance shall include, but not be limited to, fire and broad form extended coverage perils (including sprinkler leakage, sprinkler liability, and boiler coverages). The policy will contain appropriate endorsements waiving the insurer's right of subrogation against the Tenant. The property to be insured by Landlord shall also include all improvements and betterments in the Premises, but shall not include Tenant's furniture and furnishings or any fixture or equipment removable by Tenant under the provisions of this Lease. During the construction of the Premises and until completion thereof and coverage under the above-mentioned all risk property insurance policy, Landlord will maintain builder's risk insurance covering all work and materials in place on the Property. (iii) Landlord shall deliver a certificate of insurance evidencing the coverages described in this Subparagraph 14(b) (or such other evidence as Tenant may reasonably request) not earlier than thirty (30) days prior to the Commencement Date and not later than the Commencement Date, and at such other time, within thirty (30) days of Tenant's written request. Each policy will provide that Tenant shall receive at least thirty (30) days' prior written notice of cancellation, material alteration or non-renewal of the policy. 18 (iv) All proceeds payable at any time and from time to time by any insurance company under any policy required pursuant to Subparagraph (b)(ii) shall be utilized by Landlord for construction, rebuilding, repair or restoration of the damaged or destroyed improvements on the Property to the extent required therefore in accordance with the provision of Paragraph 10(a), and not otherwise. To the extent that funds in excess of said proceeds are required to complete such work, Landlord shall provide such funds. (c) The minimum limits of liability coverages under Subparagraph 14(a) shall be increased every five (5) years during the Lease Term and any Renewal Periods in accordance with prevailing market conditions. 15. COMPLIANCE WITH LAWS; ZONING. (a) In addition to the obligations to comply with laws set forth in Subparagraph 19(a), Landlord shall, at its own expense, comply with all present and future laws, ordinances, orders and regulations of federal, state, county and township governments and of other governmental authorities having or claiming jurisdiction over the Property, including, without limitation, The Americans with Disabilities Act, the Federal Occupational Safety and Health Act of 1970 and regulations thereunder and all requirements of the Pennsylvania Department of Labor and Industry. Landlord shall also cause the Building to comply with the National Fire Code Bulletin entitled "NFPA 101 - Code for Safety to Life." Notwithstanding the foregoing, in the event that, after completion of the Landlord's Work and commencement of the Lease, any such new law, ordinance, order or regulation is enacted or adopted, Tenant shall be responsible for complying with the same if and to the extent that such compliance is required for Tenant's use of the Property; provided that, during the last five (5) years of the Lease Term or any Renewal Period, if such compliance requires structural changes to the Buildings or any other repairs, replacements or improvements which would be capitalized according to customary accounting practices, then Landlord shall perform the same and the Landlord's actual costs of compliance shall be amortized over the useful life or lives of the particular repair, replacement or improvement required for such compliance and the amortized annual cost thereof may be charged as Additional Rent over the balance of the Lease term and any applicable extensions or renewals. (b) Landlord represents and warrants that the uses permitted pursuant to Paragraph 4(a) of this Lease are permitted pursuant to the zoning regulations of West Whiteland Township, Chester County, Pennsylvania, and that it shall obtain all permits or approvals from said Township as are necessary for construction, development, occupancy and use of the Premises as aforesaid. 16. TENANT DEFAULT. (a) An "Event of Default by Tenant" shall have occurred if Tenant shall: (i) Subject to any right of offset provided in this Lease, fail to pay any installment of rent hereby reserved within ten (10) days after receiving written notice that the same is overdue, without any other notice to pay the installment, before being in default hereunder; 19 (ii) Default in fulfilling any other covenants or provisions of this Lease on its part to be performed and fail to remedy such default after Landlord shall have given Tenant written notice of such default within thirty (30) days of such notice or any such longer period of time as may be reasonably necessary for Tenant to complete a cure commenced within such thirty (30) day period and being diligently pursued to completion by Tenant. (iii) Vacate the Premises and permit the same to become unsecured and unattended. (b) Upon the occurrence of any Event of Default, Landlord may, at its option, terminate this Lease, whereupon the estate hereby vested in Tenant shall cease and any and all other right, title, and interest of Tenant hereunder shall likewise cease without notice or lapse of time, as fully and with like effect as if the entire term of this Lease had elapsed, but Tenant shall continue to be liable to Landlord as hereinafter provided. (c) Upon the occurrence of any Event of Default, or at any time thereafter, in addition to and without prejudice to any other rights and remedies Landlord shall have at law or in equity, Landlord shall have the right to re-enter the Premises, after process required by law, and recover possession thereof and dispossess any or all occupants of the Premises in the manner prescribed by the statute relating to summary proceedings, or similar statutes, but Tenant in such case shall remain liable to Landlord as hereinafter provided. (d) In case of any Event of Default, re-entry, expiration, and/or dispossession by summary proceedings, whether or not this Lease shall have been terminated as aforesaid: (i) All delinquent Annual Base Rent and Annual Additional Rent, and all other sums required to be paid by Tenant hereunder prior to the date of re-entry, expiration, and/or dispossession, together with interest at the Interest Rate (as hereinafter defined), shall become payable thereupon and be paid up to the time of such re-entry, expiration, and/or dispossession; (ii) Landlord shall have the right, but not the obligation, to relet the Premises or any part or parts thereof for the account of Tenant, either in the name of Landlord or otherwise, for a term or terms which may, at Landlord's option, be less than or exceed the period which would otherwise have constituted the balance of the term of this Lease and on such conditions (which may include concessions or free rent) as Landlord, in its reasonable discretion, may determine and may collect and receive the rents therefor. Landlord shall in no way be responsible or liable for any failure to relet the Premises or any part thereof, or for any failure to collect any rent due upon any such reletting; and (iii) Tenant shall reimburse Landlord for any reasonable, actual, out-of-pocket expenses that Landlord may incur in connection with recovering possession of the Premises and reletting thereof, such as court costs, attorneys' fees, brokerage fees, costs of advertising, costs of repairs and/or replacements (if and to the extent the Landlord would have the right to make such repairs or replacements under Paragraph 9, above), and the reasonable costs of alterations or renovations reasonably required to ready the Premises for reletting, provided that such reasonable costs of reletting ("Reletting Costs") shall in no event exceed the amount of the Annual Base Rent payable for the remainder of the term of the Lease. 20 (e) If this Lease is terminated by Landlord pursuant to Subparagraph 16(b) hereof, Tenant nevertheless shall remain liable for all Annual Base Rent and Annual Additional Rent (exclusive of the Phase II Land Commitment), which may be due or sustained prior to such termination, together with an amount (the "Liquidated Amount") equal to the present worth (as of the date of such termination) of (i) the Annual Base Rent and Annual Additional Rent, and all other sums required to be paid by Tenant hereunder during the period which would otherwise have constituted the balance of the term of this Lease, and the Reletting Costs, and reasonable attorneys' fees, costs and expenses incurred by Landlord in pursuit of its remedies hereunder, less (ii) the fair market rental value of the Premises for the remainder of the Term, as determined by an independent certified commercial real estate appraiser selected by Landlord; assuming that there will be a twelve (12) month period from the date of termination to the date on which such fair market rental will commence. Such Liquidated Amount calculated pursuant to this Subparagraph 16(e) shall be payable to Landlord in one lump sum on demand. Further, upon Landlord obtaining a judgment for the Liquidated Amount, the Liquidated Amount shall include interest on the same at the Interest Rate, from the date of termination of this Lease by Landlord until the date such judgment for the Liquidated Amount is paid by Tenant. For purposes of this Subparagraph 16(e), "present worth" shall be computed by discounting such amount to present worth at a discount rate equal to one percent (1%) above the "Prime Rate" of interest announced as such by Citibank, N.A. at its main New York City branch office, or if unavailable, a similarly nationally recognized national measurement of the "Prime Rate". If this Lease is not terminated by Landlord pursuant to Subparagraph 16(d) hereof, then without limiting Landlord's rights under Paragraph 16(c), Tenant shall pay to Landlord, on a monthly basis, the difference between (A) the Annual Base Rent and any Additional Rent and all sums required to be paid by Tenant hereunder during the balance of the Term, and the Reletting Costs, and reasonable attorneys' fees, costs, and expense incurred by Landlord in pursuit of its remedies hereunder, and (B) the amount of Annual Base Rent, Annual Additional Rent, and other sums received by Landlord from any tenant upon a reletting of the Premises. Notwithstanding anything contained herein, if Landlord elects to regain possession of the Premises, Landlord shall make all commercially reasonable efforts to relet the Property following a default and surrender of possession by Tenant. (f) TENANT HEREBY APPOINTS ANY ATTORNEY OF ANY COURT OF RECORD IN THE COMMONWEALTH OF PENNSYLVANIA TO APPEAR AS ATTORNEY FOR TENANT AS WELL AS FOR ALL PERSONS CLAIMING BY, THROUGH, OR UNDER TENANT AND TO SIGN AN AGREEMENT FOR ENTERING IN ANY COMPETENT COURT AN ACTION IN EJECTMENT AGAINST TENANT, AND ALL PERSONS CLAIMING BY, THROUGH, OR UNDER TENANT AND THEREIN CONFESS 21 JUDGMENT FOR THE RECOVERY BY LANDLORD OF POSSESSION OF THE PREMISES, FOR WHICH THIS LEASE SHALL BE ITS SUFFICIENT WARRANT, WHEREUPON, IF LANDLORD SO DESIRES, A WRIT OF POSSESSION OR OTHER APPROPRIATE WRIT UNDER THE RULES OF CIVIL PROCEDURE THEN IN EFFECT MAY ISSUE FORTHWITH, WITHOUT ANY PRIOR WRIT OR PROCEEDINGS PROVIDED THAT TENANT'S AGREEMENT HEREIN TO CONFESS JUDGMENT IN AN ACTION OF EJECTMENT IS GIVEN ON THE EXPRESS CONDITION THAT UNDER PENNSYLVANIA LAW, TENANT SHALL, NOTWITHSTANDING SUCH CONFESSION OF JUDGMENT, RETAIN THE RIGHT TO PETITION SAID COURT TO OPEN SAID JUDGMENT TO PERMIT TENANT TO RAISE AND PURSUE ANY VALID DEFENSES THAT IT MIGHT HAVE, AT LAW OR IN EQUITY, TO SUCH EJECTMENT; HOWEVER, IF SUCH PROCEEDING IS TERMINATED AND THE POSSESSION OF THE PREMISES IN OR BE RESTORED TO TENANT, LANDLORD SHALL HAVE THE RIGHT FOR THE SAME EVENT OF DEFAULT, AND UPON ANY SUBSEQUENT EVENT OF DEFAULT OR DEFAULTS, OR UPON THE TERMINATION OF THIS LEASE UNDER ANY OF THE TERMS OF THIS LEASE TO BRING ONE OR MORE FURTHER ACTION OR ACTIONS AS HEREINBEFORE SET FORTH TO RECOVER POSSESSION OF THE PREMISES AND CONFESS JUDGMENT FOR THE RECOVERY OF POSSESSION OF THE PREMISES HEREINABOVE PROVIDED. 17. LANDLORD DEFAULT. (a) If Landlord shall default or cause or permit a default in fulfilling any covenant or provisions of this Lease on its part to be performed and fail to remedy such default within thirty (30) days after Tenant shall have given Landlord written notice of such default or, if the remedy takes longer than thirty (30) days, Landlord's failure to complete the remedy within such longer period of time as is reasonably required as long as Landlord promptly commences the remedy and thereafter diligently pursues the same to completion, then Tenant shall have all rights, powers and remedies as may be permitted to it by law or equity. (b) Without limiting the rights described in Subparagraph 17(a) above, in the event that (i) Landlord, for any reason, defaults in fulfilling any covenant or provision of this Lease on its part to be performed; and (ii) such default materially and adversely interferes with the normal conduct of Tenant's business operations; and (iii) such default is not remedied within five (5) days after Tenant shall have given Landlord written notice of such default (provided that, if the default is of a nature which cannot be reasonable cured within five (5) days, then such period of five (5) days shall be extended for so long as is reasonably necessary in the exercise of best efforts, but not more than an additional twenty-five (25) days, to complete a cure initiated by Landlord during such five (5) days period), then Tenant shall have the right, but not the obligation, to remedy Landlord's default and charge Landlord for the reasonable costs incurred in effecting such remedy plus a fee of ten percent (10%) of such cost, which charges shall be payable by Landlord promptly upon demand, and upon failure thereof, Tenant may set off the amount of such charges against Annual Base Rent and Annual Additional Rent thereafter coming due under this Lease. 22 (c) Without limiting the rights described in Subparagraphs 17(a) and (b) above, in the event that (i) Landlord fails to fulfill any covenant or provision of this Lease, and (ii) such failure substantially and adversely interferes with the quiet enjoyment of the Property or conduct of Tenant's business, and (iii) such failure is not remedied within thirty (30) days after Tenant shall have given Landlord written notice of such failure, then Tenant shall have the rights to: abate rent coming due to the extent of any reduction in Tenant's ability to use the Property on a per diem basis until such default is cured; to terminate this Lease; and/or to exercise the purchase option set forth in Paragraph 30, on the terms and conditions set forth therein except as follows. In the event that Tenant elects to exercise such purchase option upon Landlord's default, all transfer taxes shall be paid by Landlord. (d) Notwithstanding anything to the contrary above set forth in Paragraphs 17(b) or (c), Tenant shall not be entitled to exercise its remedies for offset or rent abatement provided thereunder unless and except to the extent that Tenant first obtains a final judgment against Landlord for the amount to be offset or abated pursuant to the terms thereof. Furthermore, Tenant may not terminate this Lease pursuant to Subparagraph (c) above if and for so long as Landlord is diligently pursuing the cure of Landlord's default if such default is reasonably susceptible of cure within a reasonable period of time (not to exceed ninety (90) days). 18. SUBORDINATION. This Lease shall be subject and subordinate to the lien of any mortgage deed of trust or ground lease hereafter placed on all or any part of the Property, provided that the holder thereof (the "Holder") shall agree in the mortgage, deed of trust, ground lease or otherwise that this Lease and all rights, options and privileges of Tenant hereunder, including, without limitation, the rights of first refusal, purchase options and expansion options of Tenant, shall not be terminated or otherwise affected by the enforcement of any such mortgage deed of trust or ground lease if at the time thereof Tenant is not in default under this Lease beyond any applicable grace, notice or cure periods ("Nondisturbance Agreement"). Simultaneously with the execution and delivery of this Lease, Landlord shall deliver to Tenant a Subordination, Nondisturbance and Attornment Agreement executed by each Holder of any mortgage, deed of trust or ground lease then encumbering all or any part of the Property which agreement shall be substantially in the form appended hereto as Exhibit F, subject to such changes as may be reasonably required by such Holder and approved by Tenant, which approval will not be unreasonably withheld. 19. LANDLORD'S REPRESENTATIONS AND WARRANTIES. (a) Landlord represents and warrants that the Property and the Phase II Land, and the existing uses and to the best of Landlord's knowledge, after due investigation, the prior uses thereof, comply with, and that Landlord is not in violation of, and has not violated, in connection with the ownership, use, maintenance or operation of the Property, the conduct of the business related thereto, and/or the use, handling, storage or removal of toxic or hazardous materials, any applicable federal, state, county or local statutes, laws, regulations, rules, or codes, standards, orders, licenses and permits of any governmental authorities relating to environmental matters (being hereinafter collectively referred to as the "Environmental Laws"). Landlord shall, 23 at its own expense, promptly observe and comply with all Environmental Laws in connection with any activities by it or its contractors, agents or employees on or about the Property. Landlord represents that it has received no notice of any violation or claimed violation of any of the foregoing matters or of any pending or contemplated investigation, lawsuit or other action relating thereto. Landlord agrees to indemnify and hold harmless Tenant from any and all claims, damages, fines, judgments, penalties, costs and liabilities arising due to or in connection with the breach or inaccuracy of the foregoing provisions of this Paragraph 19(a). (b) Landlord represents and warrants that there is no fact pertaining to the physical condition of the Property or the Phase II Land or, to Landlord's knowledge, the area surrounding the same (i) which Landlord has not disclosed to Tenant in writing prior to the date of this Lease, and (ii) which materially adversely affects or will materially adversely affect the Property, or the use, development, enjoyment or value thereof, the exercise of Tenant's Phase II Expansion Options, or Landlord's ability to perform the obligations contemplated by this Lease. (c) With respect to the development of the Property and construction of the Buildings and Phase II Expansion thereof, Landlord represents and warrants, after due investigation and inquiry, that: (i) Landlord has met or is able to meet any presently existing or, to the best of Landlord's knowledge, pending requirements of the West Whiteland Township Historic Commission in connection with the design, planning and location of the Buildings and Related Areas and, in particular, the Manufacturing Buildings and Related Areas. (ii) Landlord is able to perform any and all necessary roadway, utility, stormwater and easement improvements and relocations required to develop the Property and construct the Buildings and Related Areas in accordance with the Base Plans and Specifications, including both with respect to the initial Property and the Phase II Expansions, and all such work (except for the Phase II road, utility, and sanitary and storm sewer relocations described in Exhibit L) shall be performed by Landlord at its cost and included, without further adjustment on account of such cost, in the Annual Base Rent. (iii) Landlord represents and warrants that all utilities and stormwater management facilities required for Tenant's occupancy and use of the Buildings in accordance with the Plans and Specifications are available at or adjacent to the Property and that the costs of relocating, improving and connecting all such facilities and utilities to the Buildings (except for the Phase II road, utility, and sanitary and storm sewer relocations described in Exhibit L) have been included in the establishment of the Annual Base Rent and will be made without additional charge or cost to Tenant. Notwithstanding the foregoing, Tenant acknowledges that the modification of the existing stormwater management basin to accommodate Phase II shall not be performed until the time of Phase II Building construction. If and when directed by Tenant, Landlord shall obtain any and all necessary sewer permits and allocations for the Phase II Expansions at the time of processing the plans and approvals and sewer permits and allocations for the initial Buildings to be constructed pursuant to this Lease and will maintain the same in full force and effect throughout the term of the Lease and until exercise or release by Tenant of the 24 Phase II Office Expansion and the Phase II Manufacturing Expansion. If there are any reservation fees payable for sewage EDUs needed in connection with the Phase II Expansion, above and beyond those necessary for Phase I, Landlord shall, at Tenant's option and direction, purchase the necessary reservation of sewer capacity for Phase II and the cost thereof (without any markup or add on by Landlord) shall be advanced by Tenant as a project cost in accordance with the loan provisions of Paragraph 20.A and, upon repayment by Landlord, shall included as a Tenant soft cost adjustment to the Annual Base Rent pursuant to the provisions of Article 20, below. (iv) The existing off-site stormwater management basins on and adjacent to the Property are sufficient to receive, detain and manage the stormwater from the Property and from the Phase II Expansions in accordance with all laws, ordinances and regulations, and any and all necessary easements and rights-of-way for the discharge of such stormwater runoff from the Property and the Phase II Expansions are in existence and have been recorded or, to the extent not in existence or recorded, will be prepared, obtained and recorded by Landlord on terms reviewed and approved by Tenant on or before the time for commencement of construction in accordance with Paragraph 33 below. (v) The height of the Buildings, as shown on the Base Plans and Specifications, meets the existing requirements and limitations of the West Whiteland Township Zoning and Building Ordinances. (vi) No proceedings in eminent domain or other governmental or private action or proceeding are pending or, to Landlord's knowledge, threatened against or involving the Property or the Phase II Land or any part thereof. The Property and Phase II Land contain no wetlands, soil conditions, geologic conditions or other physical conditions would preclude or materially interfere with Landlord's ability to develop the Property and the Phase II Land in accordance with this Lease. No zoning or other land use regulations now in existence or pending or, to Landlord's knowledge, threatened would preclude or materially interfere with Landlord's development of the Property and the Phase II Land in accordance with this Lease. (d) Any breach by Landlord of the warranties contained herein or elsewhere in this Lease or the existence of any facts or conditions rendering Landlord's representations and warranties materially inaccurate when made, shall constitute a default by Landlord under this Lease. 20. CONSTRUCTION OF BUILDING AND RELATED AREAS. (a) The Buildings shall consist of a four-story, 80,000 square foot Office Building to be constructed on Lot 4 and a 60,000 square foot, one-story Manufacturing Building to be constructed on Lots 7 and 8. The construction of the Buildings and Related Areas shall be according to plans and specifications ("Final Plans") to be prepared from the base drawings, specifications and work standards (the "Base Plans and Specifications") attached hereto as Exhibit C. Not later than seven (7) days after execution of this Lease, Landlord shall enter into a binding contract with an architect licensed to practice in the Commonwealth of Pennsylvania (the "Architect"), 25 who shall be satisfactory to Tenant. The Architect shall make such revisions to the Base Plans and Specifications as are necessary to create building plans and specifications ("Final Plans") conforming to (i) all applicable governmental laws, regulations, ordinances and code requirements, (ii) the provisions of any private covenants applicable to the Properties, and (iii) the site conditions of the Land, and which will allow Landlord to obtain permits based on such plans. The Final Plans shall include: (i) all engineering plans, subdivision plans, land development plans, and all structural, mechanical, fire suppression, life safety and landscaping plans as are required for construction of fully engineered Buildings and development of the Related Areas in accordance with the foregoing standards; and (ii) all such additional plans as may be necessary to secure conditional use zoning approval for both Phase I and Phase II. The Final Plans shall be reviewed by the parties who shall consult and cooperate with each other during the course of the preparation and subsequent revisions of the Final Plans and who shall diligently work towards achieving mutually satisfactory Final Plans. In the event Tenant and Landlord cannot reasonably agree upon mutually satisfactory plans within three (3) months following the date of this Lease, either party may (subject to the provisions of Paragraph 20(l)(iii) below, by seven (7) days prior written notice to the other, cancel and terminate the Lease, provided that Landlord shall not be entitled to terminate the Lease as a result of costs of construction if the plans and specifications desired by Tenant are consistent with the Base Plans and Specifications, it being the intent of the parties that the Annual Base Rent, set forth in Paragraph 6, has been established on the basis of Landlord's total cost of construction of the Buildings, Related Areas and all Building fixtures and equipment or set forth in the Base Plans and Specifications, with the exception only of Tenant improvements in excess of the allowances which are stated in Exhibit E ("Allowances") and approved alternates listed on Exhibit M. The complete construction and development of the Buildings and Related Areas in accordance with the Final Plans and Specifications, and subject to such change orders and Tenant improvements, as are mutually agreed in accordance with the provisions set forth below, are referred to in this Lease as the "Landlord's Work". When the Final Plans are approved by Landlord and Tenant, such plans shall be initialed and dated by the parties. (b) Without limiting any requirements set forth in Subparagraph (a), above, Landlord and Tenant agree to proceed to completion of Final Plans and Specifications on a progress basis as follows. Landlord shall deliver to Tenant revisions to the Base Plans and Specifications on progress basis, with reference to completion of Final Plans and Specifications of 33 1/3%, 66 2/3% and 100% progress levels of completion. With respect to each such completion level, Landlord shall produce the necessary plans and specifications revised at that level of progress, Tenant shall thereafter review the same and notify Landlord in writing of Tenant's rejection, approval or approval conditioned upon requested corrections for such level, and Landlord then shall incorporate any Tenant requested corrections therein prior to the delivery of the plans and specifications revised to the next progress level. If Landlord and Tenant fail to agree on any plans making up the Final Plans and Specifications by the "End Dates" therefor set forth in the Developer Schedule attached as Exhibit D, then either party may terminate the Lease, subject to the limitation on Landlord's termination set forth in Subparagraph (a), above, and Tenant's liability for reimbursement of early start-up expenses under Paragraph 20(l)(iii) below. However, Landlord may not elect to terminate if the failure to reach agreement on any of the Final Plans and Specifications is due to Landlord's failure to timely prepare or supply the necessary revisions to the Plans and Specifications. 26 (c) Landlord shall, at its sole cost, cause the Landlord's Work to be performed in a good and workmanlike manner, consistent with the level of care, quality and workmanship for a class A suburban office building and manufacturing building, and in conformance with the Final Plans and Specifications and all codes, ordinances, laws, regulations, industry standards and specifications and all zoning, land development, building and other permits and approvals. Landlord will be responsible for obtaining all requisite building, land development, soil and erosion control, subdivision, labor and industry and other permits and approvals required for performing Landlord's Work and occupancy of the Buildings. Subject to delays caused by changes requested by Tenant to the Final Plans and Specifications, Landlord's Work and construction of the Buildings shall commence not later than the "Start Dates" for each portion thereof, as set forth in the Developer Schedule attached as Exhibit D, and such construction shall thereafter proceed diligently to completion. Prior thereto, and not later than the "End Dates" respectively set forth on Exhibit D, Landlord shall have completed the phases of Landlord's Work stated therein. By the End Dates for each respective Building Shell and Building Tenant improvements, Landlord shall have Substantially Completed all of Landlord's Work on such Building and the Related Areas for such Building including, without limitation, all parking areas, landscaping, access roads, sidewalks, entrances and exists, traffic control devices required by the appropriate plans, governmental authorities, ordinances or approvals, utilities, site lighting and stormwater management facilities. The course of construction shall proceed, after commencement, in strict accordance with the timeframes stated in the "Developer Schedule" attached as Exhibit D, subject only to delays permitted under Paragraph 5(c) or caused by changes requested by Tenant to the Final Plans and Specifications, provided such delays due to Tenant changes may occur only if and for the periods that have been agreed as a consequence of such changes as set forth in a written change order ("Change Order") executed by Landlord and Tenant. Notwithstanding anything herein, the times for completion of Landlord's Work as stated herein and in Exhibit D shall not be extended or otherwise affected by corrections of Work required by Tenant to be performed by Landlord pursuant to the terms of this article hereinbelow, where such corrections are due to the failure of Landlord's Work to comply with the Final Plans and Specifications, laws, ordinances or regulations, permits or approvals, or any other standards or workmanship or performance contained in this Lease. (d) [intentionally deleted] (e) Costs of Landlord's Work. (i) The Annual Base Rent stated in Paragraph 6 has been established by the parties on the basis of the project cost allocation budget attached hereto as Exhibit E (the "Budget"). The Budget reflects the Landlord's entire costs relating to the performance of the Landlord's Work including, without limitation, the costs allocated to the Land ("Land Costs"), all off-site, on-site, shell, overhead and soft costs relating to the Landlord's Work and the cost of Allowances for Tenant improvements up to the amounts set forth in Exhibit E. Specifically, and without limitation, the Annual Base Rent includes, and there shall be no adjustment of Annual Base Rent on account of, the following: 27 (A) All costs incurred for the payment of contractors, subcontractors, suppliers and manufacturers in the construction of the Buildings and Related Areas in accordance with the Final Plans; (B) All fees and costs charged by any entity or incurred by Landlord in connection with permits and approvals, easements, rights-of-way, and sewer and utility reservations for the Landlord's Work (including, for this purpose, all conditional use zoning approvals and all easements, rights-of-way and sewer and utility reservations for Phase I); (C) All inspection and review fees charged by the Commonwealth of Pennsylvania or West Whiteland Township and by the Architect or any engineer or independent testing or inspection entity contracted with or employed by Landlord and required by Landlord's construction and/or permanent mortgagee or West Whiteland Township in connection with the construction of the Buildings and Related Areas; (D) All architectural or engineering consulting fees incurred in preparing the Final Plans or obtaining permits and approvals based thereon, including fees of civil engineers, traffic consultants, geotechnical engineers, environmental consultants, structural engineers, mechanical engineers, electrical engineers, plumbing engineers, architects and landscape architects (but excluding any of the foregoing relating to Tenant improvements in excess of allowances); (E) Landlord's and/or the General Contractor's profit and overhead; (F) Cost of general conditions encountered in the performance of the Landlord's Work; (G) Any premiums for builder's risk and owner's liability insurance; (H) Any legal fees incurred by Landlord in connection with this Lease or the Landlord's Work or any changes therein. It is the intent of the parties that the Annual Base Rent has been established to include all of the above costs and that there shall be no adjustment with respect to such costs for off-site, on-site and shell improvements and Tenant improvements within Allowances. (ii) The Annual Base Rent set forth in Paragraph 6 shall be adjusted only on account of: (A) Tenant requested changes from the Base Plans and Specifications or Final Plans and Specifications or approved alternates stated therein ("Changes") which increase or decrease the actual costs of the Landlord's Work; and (B) the actual costs relating to Tenant improvements below or above the Allowances. Landlord's Work relating to any such Tenant 28 requested Changes shall be performed on a "Closed Book" basis as defined below in Subparagraph (iii). Landlord's Work on Tenant improvements shall be performed on an "Open Book" basis defined below in Subparagraph (iv). For the purposes of establishing the amount of any adjustment to Annual Base Rent, whether calculated on a Closed Book basis or an Open Book basis, the term "Landlord's Costs", as used hereinbelow, shall mean and refer only to: (A) the actual amounts paid or payable, without markup by the Landlord, pursuant to the General Contractor's subcontracts or supply contracts for labor and materials needed to perform the Landlord's Work on the Changes or Tenant improvements, together with design fees, permit fees and increases in insurance premiums (if any of the foregoing) as are directly attributable thereto; plus (B) a fee of four percent (4%) of the foregoing amounts with respect to Landlord's Work on the Office Building or five percent (5%) of the foregoing amounts with respect to Landlord's Work on the Manufacturing Building. However, for these purposes, the Landlord's Costs attributable to Changes or Tenant improvements shall not include any additional costs or expenses which the Landlord may incur on account of general conditions, legal or other fees, costs or expenses described in Subparagraph e(i), above. (iii) For purposes hereof, "Closed Book" shall describe a process by which any increase or decrease in the Landlord's Costs attributable to Tenant requested Changes shall be established and agreed as a fixed lump sum prior to the implementation of the Change. The determination of the increase or decrease in the Landlord's Costs as a result of such Change shall be made as follows. If Tenant desires any Changes, Tenant will so notify Landlord and Landlord shall promptly thereafter advise Tenant of Landlord's estimate of the increase or decrease in the Landlord's Costs which will result from such Change. Unless otherwise agreed, Landlord shall furnish such estimate not later than five (5) days after Tenant's notification of a requested Change. If the Tenant agrees with the Landlord's estimate of the proposed increase or decrease in the Landlord's Costs on account of such Change, the parties shall proceed to document such Change by written change order in accordance with Paragraph (f) of this Article, below. Landlord and Tenant shall each use their best efforts to come to agreement on the amount of any increase or decrease in the Landlord's Costs attributable to the requested Change. If the parties, despite such best efforts, fail to agree, then either party may submit the matter to the Consultant for resolution in the manner provided for resolution of Claims under Paragraph 31 of this Lease, below. In such case, the Consultant shall prepare a written change order which incorporates the Closed Book cost of the Change and, absent objection by the other party in the manner specified under Paragraph 31(c), the Consultant's change order shall have the same effect as a written change order mutually executed by the parties. (iv) For purposes hereof, "Open Book" shall describe a process whereby any increase or decrease in the Landlord's Costs attributable to a performance of Landlord's Work on Tenant improvements subject to Allowances are determined as follows. Landlord shall perform all work on Tenant improvements in accordance with Tenant's written orders and the Costs thereof shall be charged against the Allowances. For this purpose, the Costs of Tenant improvements shall be deemed to be an amount equal to the Landlord's Costs as defined above to include the total fee of four percent (4%) with respect to any such Landlord's Work on Tenant's improvements for the Office Building and a total fee of five percent (5%) for Landlord's Work for Tenant improvements for the Manufacturing Building. No overhead or 29 profit of the General Contractor and no other costs or expenses excluded from Landlord's Costs under Subparagraph (ii) of this Paragraph (e) shall be included in the Open Book accounting for Landlord's Work on Tenant improvements. Landlord shall, promptly after request by Tenant, advise Tenant of Landlord's best estimate of the Open Book cost of the Tenant improvements proposed by Tenant. Unless otherwise agreed, such estimate shall be furnished by Landlord not later than five (5) days after Tenant's written request therefore. The Costs of such Tenant improvements shall be charged against Allowances on an Open Book basis regardless of the amount estimated therefor by Landlord upon any such request by Tenant. However, Landlord shall at all times promptly apprise Tenant, in writing, as and when Landlord determines that any Open Book costs on Tenant improvements have exceeded or may exceed the Landlord's estimate therefor. (v) Subject to approval of funding by the construction lender financing the Landlord's Work, Landlord agrees to fund all Tenant improvements, upon direction by Tenant, from the budgeted Allowances and, to the extent the Allowances are exceeded, as an Open Book adjustment to the Landlord's Costs in accordance with the preceding Subparagraph (iv). In the same manner, Landlord will, upon direction from Tenant, fund any miscellaneous design fees, permit fees or other soft costs which are not the Landlord's responsibility under this Lease. For example, but without limitation, Tenant may fund the purchase of additional sewage capacity for Phase II as an Open Book adjustment to the Landlord's Costs. Any such soft costs funded by Tenant as an Open Book adjustment to the Landlord's Costs shall be paid directly by Landlord or, to the extent paid by Tenant, shall be reimbursed by Landlord at the time of construction loan funding. There shall be no added fee by Landlord with respect to any such soft costs which the Tenant funds from the Allowance budget or as an Open Book adjustment to the Landlord's Costs. (f) At the time that Landlord shall promptly advise Tenant of Landlord's estimate of the increase or decrease in the Landlord's Costs resulting from a Tenant requested Change, Landlord shall also advise Tenant of any projected delay in achieving Substantial Completion that would result therefrom. Tenant shall have no obligation to pay for such change and there shall be no adjustment to the Annual Base Rent on account of such change, nor shall the time for Substantial Completion be extended as a result of such change, unless approved by a written change order signed by both Landlord and Tenant. Landlord may require changes in the Final Plans and Specifications only if Landlord and Tenant sign a change order. The cost of any change orders that are necessary to comply with applicable laws, ordinance, regulations, approvals, or standards of workmanship or materials under this Lease shall be borne solely by Landlord and shall not affect the amount of the Annual Base Rent. Notwithstanding the foregoing, however, Changes required for compliance with laws or regulations which are first enacted or adopted after completion of the Final Plan and Specifications shall result in adjustments to Annual Base Rent in the same manner as other changes hereunder. (g) Tenant will furnish Landlord with a written list of Tenant's authorized construction representatives for Landlord's Work. Only such construction representatives are authorized to sign any Tenant improvements orders, change order, receipt or other document on behalf of Tenant relating to Landlord's Work and without the signature of such authorized 30 construction representative, no such document shall be binding upon Tenant. Tenant may, from time to time, change or add to the list of authorized construction representatives by giving Landlord written notice of the addition or change. Upon request of Landlord, Tenant shall cause its authorized construction representatives to execute such work orders or selection forms relating to Tenant improvements as may be necessary to direct or confirm any specific materials, equipment, finishes or fixtures on the Tenant improvements in time for Landlord to perform the Landlord's Work on the same in accordance with the Developer Schedule attached as Exhibit D. (h) Only Changes in the Final Plans and Specifications ordered by Tenant and evidenced by written change orders executed by both parties after approval of the Final Plans and Specifications and Tenant improvements costing more or less than provided by the Allowances shall result in an increase or decrease in the Annual Base Rent stated in Paragraph 6. Such increase or decrease shall be amortized on a full pay-out basis over the initial twenty (20) year term of this Lease at a rate of interest equal to that payable on Landlord's permanent financing loan (not to exceed eight and one-half percent (8.5%) per annum). At such time as Landlord provides Tenant with its estimate of costs, Landlord shall also advise Tenant of the estimated increase or decrease in rent in the Annual Base Rent based on the Closed Book cost of any Tenant ordered Changes, and/or Open Book cost of Tenant improvements less or more than Allowances, and a final accounting therefor shall be provided in writing no later than forty-five (45) days after the date of any Change order and after the date that any final Open Book costs of any Tenant improvements are finally determined. In addition, Landlord shall provide Tenant with a written accounting on a monthly basis itemizing and cumulating all adjustments to Annual Base Rent made on the basis of Closed Book changes by then agreed and Open Book improvements whose cost is then finally determined. Landlord shall provide Tenant with its final accounting of adjustments to Annual Base Rent for each Building no later than the date of Substantial Completion of that Building. Upon completion of all adjustments to the Annual Base Rent in accordance with the foregoing Subparagraphs (e) through (h) of this Paragraph 20, the Annual Base Rent shall be, and all references to the Annual Base Rent in this Lease shall refer to, the Annual Base Rent as so adjusted. At the time that any accounting is made for the adjustments to Annual Base Rent permitted hereunder, such accounting shall segregate the adjustments between those applicable to the Office Property and those applicable to the Manufacturing Property, so that the Annual Base Rent, as adjusted, is allocated between the Office Property and the Manufacturing Property in the same fashion that the Annual Base Rent originally stated in Paragraph 6 was allocated between the Office Property and Manufacturing Property thereunder. (i) Landlord's Work shall be performed by Knauer and Gorman Construction Company, Inc. (the "General Contractor"). Landlord shall enter into a contract with the General Contractor for performance of Landlord's Work, which contract shall (i) require insurance coverage in amounts and types mutually and reasonably acceptable to Landlord and Tenant; (ii) include a requirement that Landlord's Work shall be completed in accordance with the Construction Schedule; (iii) require the filing of a waiver of liens or waivers binding on all subcontractors and suppliers prior to commencement of any work; and (iv) otherwise be in a form mutually and reasonably acceptable to Landlord and Tenant (the "General Contract"). Tenant shall have the right to select, in its sole discretion, the subcontractors to perform any portions of Landlord's Work that involve Tenant's telecommunications, data system/hardware, 31 security, furniture, manufacturing fixtures and equipment and graphics/plans, provided that such subcontractors are compatible with local labor conditions and do not adversely impact on the General Contractor's schedule. Landlord shall be solely responsible for all payments and other liabilities or obligations to the General Contractor, Landlord's other contractors, agents or employees who participate in the Landlord's Work. Nothing in the Final Plans creates any authority for Landlord, its agents, employees or contractors to act on behalf of Tenant or cause Tenant to incur any obligation or liability. Tenant shall have no liability whatsoever as a result of any acts, labor practices, omissions, property damage, personal injuries, employee claims, disputes or injuries or otherwise arising out of the performance by the general contractor and its subcontractors and its or their agents, employees and suppliers in the performance of any part of the Landlord's Work or any related activity on the Property or adjacent properties. Landlord shall indemnify and hold harmless Tenant, and shall require, in its contract with the General Contractor, that the General Contractor and its subcontractors, likewise indemnify and hold harmless Tenant from and against any and all claims, liabilities, damages, costs and expenses (including court costs and costs of defense by counsel of Tenant's choice) arising in connection with any such acts, omissions or liabilities of the Landlord, its General Contractor and its and their subcontractors, agents or employees. (j) During the progress of Landlord's Work, Tenant and its agents and employees may, from time to time, inspect the Building. In connection therewith, Tenant's consultants shall have the right to continuously monitor Landlord's Work. If, during such construction, Tenant and its agents and employees determine that the construction, work or materials are not being performed or supplied in accordance with the Final Plans and Specifications, standards of workmanship or materials set forth in this Lease, permits approvals, laws or regulations, or in keeping with the Construction Schedule, Tenant will give prompt notice in writing to Landlord, specifying in detail the particular deficiency, omission or other respect in which Tenant claims such construction does not conform with the requirements of this Lease. Upon the receipt of any such notice, Landlord will, without any adjustment to rent or extension of time, cause any corrections to be made to such construction that may be necessary to cause Landlord's Work to conform to all standards and requirements of this Lease. (k) Landlord warrants to Tenant for a period of five (5) years from the Commencement Date as to the Shells and Related Areas and for a period of one (1) year from the Commencement Date as to Tenant improvements that Landlord's Work shall be completed by Landlord in a good and workmanlike manner, free from faulty materials, in accordance with all applicable law, ordinances, regulations, permits and approvals and other applicable legal requirements, and sound engineering standards, in accordance with the provisions of this Agreement, and in accordance with the Final Plans and Specifications. Such warranty includes, without limitation, the repair or replacement (including labor), at Landlord's sole cost, of all materials, systems, fixtures and equipment which are not in conformance with the foregoing standards, otherwise defective or which are defectively installed by Landlord in connection with Landlord's Work. Landlord shall, at Tenant's option, assign to Tenant, or enforce for the benefit of Tenant, all warranties from subcontractors and material suppliers for such materials, systems, workmanship, fixtures and equipment. The provisions of this Subparagraph 20(k) shall survive the termination or expiration of this Lease. 32 (l) Notwithstanding any provision contained elsewhere herein to the contrary: (i) Tenant shall have the absolute right to terminate this Lease upon prior written notice to the Landlord of a period stated below (the "Notice Period") upon the occurrence of any of the following events, provided Landlord has not completed or satisfied the conditions set forth below within the said applicable notice period stated below: (A) If Tenant and Landlord cannot agree upon mutually satisfactory Final Plans and Specifications within three (3) months following the date hereof, or on any particular part of the Plans and Specifications by the time set forth in Exhibit D. The Notice Period for this event will be thirty (30) days. (B) If Landlord has not procured all requisite permits and approvals for construction of the Buildings and Related Areas according to the Final Plans and commenced construction pursuant thereto by the time allowed for commencement of construction under Subparagraph 20(c) above. The Notice Period for this event will be sixty (60) days. (C) Subject only to such delays as may be permitted under the express terms of this Lease, if Landlord has not commenced construction of the Buildings and Related Areas by the time(s) respectively provided under Subparagraph 20(c) above and the Developer Schedule attached as Exhibit D hereto. The Notice Period for this event will be sixty (60) days. (ii) For purposes of the foregoing subparagraphs, all permits and approvals mentioned above shall be in final, unappealed and unappealable form and shall include any and all necessary easements and rights-of-way for utilities and stormwater management in locations shown on the Final Plans or otherwise mutually agreed. (iii) Notwithstanding the foregoing, in the event that this Lease is terminated by Tenant due to (a) a failure of Landlord and Tenant to agree on Plans and Specifications, then, if such failure has not been due to a failure or delay by Landlord in preparing or delivering such Plans and Specifications meeting the criteria of this Lease or in responding to Tenant's requests and requirements relating thereto and meeting the requirements of this Lease, or (b) a failure by Landlord, despite all reasonable efforts to procure permits and approvals as provided in Subparagraph (i)(B) above and such failure has not been due to a breach of Landlord's representations and warranties under this Lease, then, upon such termination, Landlord shall be entitled to payment or reimbursement by Tenant (to the extent not theretofore already paid or reimbursed to Landlord) of such amounts as Landlord shall have, prior thereto, expended or incurred on account of early startup expenses (the "Early Startup Expenses") in connection with this Lease. The Early Startup Expenses shall be limited to expenses paid or incurred from those categories which are itemized in Exhibit I attached hereto and made a part hereof. Tenant's liability for Early Startup Expenses shall not exceed the total sum of Fifty Thousand Eight Hundred Dollars ($50,800.00). 33 (iv) In addition to the option to terminate for the reasons stated under Subparagraph (i) of this Paragraph 20(1), above, Tenant may, upon expiration of the same applicable period following written notification, elect to exercise its purchase option described below under Paragraph 26(a)(ii). (m) Notwithstanding anything herein, at all times during the construction of the Buildings, provided Tenant has delivered to Landlord proof of insurance as required under Paragraph 14, Landlord shall permit access by Tenant and Tenant's contractors, subcontractors and employees, for purposes of installing any systems, fixtures, equipment or other Tenant improvements necessary or desired by Tenant for use and occupancy of the Buildings and not included in the Landlord's Work. Tenant shall, to the fullest extent practical, coordinate any such work with Landlord's Work. Any such entry or activity by Tenant or its contractors, subcontractors or employees on the Office Property prior to the 120th day before its scheduled Substantial Completion date and any such entry or activity on the Manufacturing Property prior to the 60th day before its scheduled Substantial Completion date shall be only after notice to and consultation with Landlord, in advance, and shall be at such times and hours as shall have been scheduled in advance with Landlord so as not to interfere with the performance by Landlord and its general contractor and subcontractors of the Landlord's Work. Landlord agrees to promptly respond to any requests by Tenant, from time to time, to schedule work by Tenant's contractors or subcontractors and shall be deemed to have approved any entry or activity by Tenant or its contractors or subcontractors of which Landlord has been given written notice at least 7 days in advance by Tenant and to which Landlord has not objected for reasons stated and with an alternative schedule offered in writing. 20.A. PROJECT COST LOAN TO LANDLORD. (a) Attached hereto as Exhibit O is a schedule of project related costs which Landlord may fund by way of a loan from Tenant. Tenant shall advance such funds on an as needed basis only within thirty (30) days after request by Landlord and presentation of supporting invoices mentioned in Exhibit O. All funds advanced by Tenant shall bear interest at the rate of nine percent (9%) per annum and shall be repaid with interest accrued upon construction loan closing. In the event of a termination of this Lease occurring prior to construction loan closing for any reason other than a material default by Landlord under the provisions of Paragraph 19 hereof or in pursuing governmental approvals and permits or financing, Landlord shall be obligated to repay only one-half of the funds advanced with interest on such funds at the rate above stated upon Lease termination. In the event of such termination due to Landlord's material default, as above described, all such amounts (i.e., not limited to one-half) shall be repaid upon Lease termination. Landlord's obligation to repay the funds advanced by Tenant shall be evidenced by a judgment note executed by Landlord, Oaklands Business Park, Inc., James J. Gorman and Christopher J. Knauer, jointly and severally. Such judgment note shall be in the full amount indicated on Exhibit O, plus $420,000.00 for financing placement fees which may be advanced pursuant to the loan, for a total of $950,900.00. 34 (b) If Tenant elects to exercise the Phase II expansion options, Tenant agrees to fund Landlord's Phase II project-related cash requirements for the same categories of costs and for the same percentages of those costs as are itemized in Exhibit O for Phase I. Such funding shall be provided by way of a loan at the prime rate (as then quoted by the Wall Street Journal) plus one-half percent (0.5%). (c) Notwithstanding anything to the contrary contained herein, Tenant will not be obligated to fund any project costs under the Article unless and until Landlord completes an application to the proposed mortgage lender, pays the application fee thereof, and executes the above-mentioned judgment note. 21. EXTENSION RIGHT; HOLDING OVER. (a) Tenant shall have the right to extend the Term of this Lease, as extended by one or more of the Renewal Periods described in Paragraph 5(d), above, for a period of six (6) months (the "Extension Period") (the "Extension Right"). The Extension Right shall be exercised by Tenant delivering written notice to Landlord at least three (3) months prior to the Expiration Date, as extended by one or more of the Renewal Periods. The Extension Period shall be subject to all of the terms and conditions of the Lease and each monthly installment of Annual Base Rent shall be the monthly installment of Annual Base Rent in effect during the last month prior to the Extension Period. (b) If Tenant shall hold over after the expiration of the Term (as the same may be extended under Subparagraph (a) above, or Paragraph 5(d), above, its tenancy shall be on a month-to-month basis and shall be subject to all of the terms, conditions, provisions and obligations of this Lease, except that its monthly rental beginning on the first month after the expiration of the Term shall be one hundred fifty percent (150%) of the monthly Annual Base Rent installment that applied to the last month of the Term. This holdover rental amount shall be Landlord's exclusive right and remedy against Tenant and shall be deemed to cover all liabilities, obligations or charges which may be incurred by Landlord because of a holdover by Tenant except for Annual Additional Rent which shall remain payable in addition thereto. 22. NOTICES. Any notice required or permitted under this Lease shall be in writing, sent by reputable private carrier of overnight mail or mailed by United States Certified Mail, Return Receipt Requested, postage prepaid, in each case addressed as shown in Paragraph 1. Either Landlord or Tenant may, by notice to the other, change the address(es) to which notices are to be sent. All notices shall be deemed effective upon the date of delivery by Federal Express or other overnight, nationally recognized private carrier providing receipts or positive tracking of deliveries, or two business days after the date of mailing by United States Certified Mail. 35 23. MISCELLANEOUS. (a) No right or remedy herein conferred upon or reserved to either party is intended to be exclusive of any other right or remedy, and every right and remedy shall be cumulative and in addition to any other right or remedy given hereunder or now or hereafter existing at law or in equity. The failure of either party to insist upon the strict performance or any obligation shall not be deemed a waiver thereof. (b) If any provision of this Lease, or its application to any situation, shall be invalid or unenforceable to any extent, the remainder of this Lease, or the application thereof to situations other than as to which it is invalid or unenforceable, shall not be affected thereby, and every provision of this Lease shall be valid and enforceable to the fullest extent permitted by law. (c) This Lease constitutes the entire agreement between the parties and may be amended only by written agreement of the parties. (d) This Lease shall be binding upon and shall inure to the benefit of the parties hereto, their heirs, executors, administrators, successors and permitted assigns. (e) Landlord and Tenant agree that, in fulfilling all terms and conditions of this Lease, time is of the essence. (f) Subject to compliance with the Park covenants and with local laws and ordinances regarding exterior signage, Tenant shall be entitled to install its exterior facade, entry door, and free-standing and/or monument signage. The initial signage may include the installation of Tenant's existing monument sign or one comparable to it and any approval needed for such sign under the Park covenants is hereby granted or has been obtained by Landlord. Any signage permitted hereunder may be replaced, supplemented and/or removed from time to time subject only to compliance with local laws and ordinances. (g) Each of the parties hereby represents to the other that it has not dealt or negotiated with any real estate broker with reference to this Lease, except for Lieberman, Earley & Co., whose fee or commission shall be paid by Tenant in accordance with the terms of a separate agreement between such broker and the Tenant. Each party agrees to indemnify and hold harmless the other against and from any and all commissions or other fees, charges, costs or expenses claimed by any such other real estate broker or other person allegedly arising out of the dealings between such person and Tenant in respect of this Lease or the Property. (h) Tenant's purchase options hereunder shall not be assignable except to an approved assignee of Tenant's leasehold interest as provided in Paragraph 8(b) or to any entity whatsoever in connection with a proposed purchase and lease-back to Tenant or any subsidiary or affiliate of Tenant. 36 24. RIGHT OF FIRST REFUSAL. (a) From and after the effective date and during the term of this Lease and any extension or renewal hereof, Tenant shall have the right of first refusal and Landlord shall not sell, transfer or otherwise dispose of all or any part of Landlord's interest in the Property or the Phase II Land or any portion thereof (other than a sale, transfer or disposition to any person or entity affiliated with Landlord) until and unless Landlord shall have (i) obtained a bonafide offer therefore; (ii) given written notice to Tenant, which notice shall contain (A) the name of the offeror, (B) the address of the offeror, (C) all of the terms and conditions of such bonafide offer, and (D) a true and accurate copy of the actual bonafide offer, and (iii) offer to sell, transfer or otherwise dispose of such interest to Tenant at the same price and, except as hereinafter provided, upon the same terms and conditions contained in said bonafide offer. (b) If Tenant shall either give notice of rejection of said offer to it or fail to give notice of acceptance of the same within 30 days after the date of receipt of Landlord's notice, Landlord's interest in the Property (and in the Phase II Land and all portions thereof not previously released) may, during the 180 days thereafter, be sold, transferred or otherwise disposed of to the original offeror or any other buyer at the same price and upon the same terms and conditions contained in said bonafide offer as disclosed in writing to Tenant, whereupon this Right of First Refusal shall terminate and be of no further force or effect. Landlord shall, upon completion of any such sale or transfer, provide Tenant with a certified copy of the complete agreement of sale and all modifications and addendas thereto along with a copy of the settlement sheet. (c) In the event Tenant rejects said offer or fails to accept the same, this Lease and all of its terms and conditions (including this right of first refusal, and Tenant's rights of renewal, expansion and purchase set forth in this Lease) shall nevertheless remain in full force and effect and Landlord and any purchaser or purchasers of the Property (and unreleased Phase II Land), or any part thereof, shall be bound thereby. (d) Failure of Tenant to exercise this right of first refusal on one or more occasion shall not affect Tenant's right to exercise it on any subsequent occasion. Any sale or transfer of the Property (or unreleased Phase II Land), or any part thereof, other than in strict compliance with the terms of this section shall be absolutely null and void and will have no effect as to Tenant, and Tenant shall be entitled to purchase the Property and any such Phase II Land from the purchaser upon the same terms and conditions and at the same price specified in said bonafide offer, provided Tenant notifies Landlord of its election after 30 days after receipt of notice which complies with the requirements hereof. Payment of rental to such purchaser or otherwise treating such purchaser as the Landlord should not be deemed to be a waiver of any right of first refusal or any other right or privilege of Tenant and shall not create an estoppel with respect thereto. (e) Any sale or transfer of Landlord's interest in the Property (or unreleased Phase II Land), or any part thereof, or of any larger parcel of which the Property (and/or unreleased Phase II Land) may be a part, shall be expressly made subject to all the terms, covenants and conditions of this Lease. 37 (f) In the event Tenant exercises its right of first refusal, then, notwithstanding the terms of the offer (i) Landlord shall convey title by special warranty deed approved by Tenant and the Tenant's title company; (ii) title to the Property subject of the right of first refusal shall be free and clear of any liens and encumbrances except the lien for current taxes which are not delinquent at the time of closing thereon, the Permitted Exceptions and such other exceptions to title as have been agreed to in writing by Tenant; (iii) title to the Property subject of the right of first refusal shall otherwise comply with the terms of this Lease as they pertain to condition of title; and (iv) any easements or other rights benefitting the Property subject to the right of first refusal at the time of closing thereon shall be made perpetual and shall be included in the deed or in a separate recordable instrument approved by Tenant and the title insurance company insuring its interest. 25. RIGHT OF FIRST REFUSAL - LEASE. If at any time during the term of this Lease and any renewal or extension hereof, Landlord receives a bonafide offer to lease the Phase II Land or any part thereof for a term beginning after the release thereof, which offer Landlord desires to accept, Landlord shall give Tenant written notice thereof, which notice shall specify in detail the name and address of the prospective tenant and the term, rent and other covenants and conditions of the proposed lease, accompanied by Landlord's affidavit that such proposed lease is in good faith and that all terms and conditions affecting the proposed lease have been accurately disclosed. Tenant shall thereupon have the option to lease the property described in the proposed lease for the term of the proposed lease, at the rent, and upon the other covenants and conditions specified in such notice, which option Tenant may exercise by giving notice to Landlord within 30 days after receipt of the notice from Landlord. Promptly upon Tenant's submission to Landlord of a written lease containing such term, rent and other covenants and conditions of the proposed lease, Landlord shall execute, acknowledge and deliver to Tenant such written lease in duplicate and shall be entitled to receive one of such duplicates executed by Tenant. Tenant's failure, at any time, to exercise its option under this paragraph shall not affect this Lease or any of Tenant's rights or options under this paragraph or any other paragraph of this Lease. If Tenant shall either give notice of rejection of said offer to Landlord or fail to give notice of acceptance of the same within thirty (30) days of the date of receipt of Landlord's notice, Landlord may, during the one hundred eighty (180) days thereafter, enter into the proposed lease transaction upon the same terms and conditions contained in said bonafide offer as disclosed in writing to Tenant. Landlord shall, upon execution of any such lease, provide Tenant with a certified copy thereof and of all modifications and addenda thereto. 26. FINANCING; PRE-COMMENCEMENT PURCHASE OPTIONS DUE TO DEFAULT. (a) Not later than ninety (90) days after obtaining final, unappealable Land development approval for the construction of the Buildings and Related Areas, Landlord will secure a firm commitment of construction financing. If Landlord fails to obtain such commitment or, after having obtained such commitment for construction financing, (1) Landlord fails to close such mortgage loan within sixty (60) days thereafter, or (2) after closing such mortgage loan, the lender thereunder ceases to fund for whatever reason, or (3) if an event of default by the Landlord occurs under the construction loan, prior to the Commencement Date, Tenant may: 38 (i) Terminate this Lease by written notice to Landlord; or (ii) Elect, by written notice to Landlord, to purchase the Property (and, at Tenant's option, the Phase II Land or either portion thereof) from Landlord subject to the following terms and conditions: (A) The closing date shall be selected by Tenant and shall be no later than three (3) months after the date that Tenant gives Landlord written notice of its election to purchase; (B) If such purchase option is exercised due to Landlord's inability to obtain a commitment for construction loan financing, then Tenant and Landlord shall, upon such exercise, enter into a Design Build Agreement to construct the Buildings in accordance with the Final Plans and Specifications. In such event, the Land cost and the construction price shall be as set forth in the Design Build Purchase Price Schedule attached as Exhibit P, subject to adjustments for Tenant-requested changes and costs above or below allowances, as provided in Paragraph 20(e)(ii). If such inability to obtain financing has been due to Tenant's insufficient creditworthiness, the Developer Fee of Five Hundred Thousand Dollars ($500,000.00) shall be included; otherwise, it shall be excluded. The Design Build Agreement shall be on terms otherwise set forth in an Agreement attached as Exhibit G. If not prepared on signing hereof, Landlord shall prepare the proposed form thereof, for Tenant's review, promptly after execution hereof. The terms (other than price terms) of the Design Build Agreement shall be agreed and the form thereof shall be initialed for attachment as Exhibit G by the time required for mutual approval of the Final Plans and Specifications. The Design Build Agreement shall include and/or incorporate all terms of this Lease, to the extent applicable, relating to manner, time, quality and completion of Landlord's Work. (C) If Tenant elects to exercise the purchase option due to Landlord's failure to close on the committed construction loan, or due to a default thereunder after closing by Landlord, or because the construction lender ceased to fund, then Tenant may, but shall not be required, to enter into the Design Build Agreement with Landlord. If Tenant has not elected to enter into the Design Build Agreement, the purchase price for the Land only shall be $158,671.00 per acre, for a total of $4,227,500.00 if Phase II is included. If Tenant has elected to enter into the Design Build Agreement, at the closing, Tenant shall also pay for the Property that amount which would then be due under the Design Build Agreement for the Landlord's Work then completed, subject to adjustments for Tenant-requested changes and costs above or below allowances, as provided in Paragraph 20(e)(ii). In such event, however, the Developer Fee of Five Hundred Thousand Dollars ($500,000.00) shall be excluded from the Purchase Price. If Tenant has not elected to enter into a Design Build Agreement with Landlord, and construction has commenced, there shall be added to the purchase price an amount determined by the Consultant (identified in Paragraph 31) to be equal to the budgeted amount for the costs of those portions of the Landlord's Work then in place, determined with reference to Exhibit P, less the amount by which Tenant's estimated costs to complete such work in accordance with the Final Plans and Specifications exceeds the budgeted amount under Exhibit P. 39 (D) Landlord shall convey to Tenant or its assignee or nominee, by warranty deed, marketable fee simple title to the Property (and Phase II Land, if applicable), together with an assignment of all of Landlord's right, title and interest in the Final Plans and Specifications and in all permits and approvals, together with any fixtures and other building equipment thereof, subject to no encumbrances other than utility easements granted solely in connection with providing utility service to the Property, restrictive covenants that do not materially interfere with Tenant's ability to conduct its business at the Property or impose any cost upon Tenant, encumbrances that existed as of the date of this Lease and were approved by Tenant in writing, the Permitted Exceptions and any other encumbrances that were approved by Tenant in writing and real estate taxes and assessments not yet due and payable. Tenant shall be entitled to an abatement of the purchase price by any amounts required to discharge or otherwise remove any liens or encumbrances against the Property (and/or Phase II Land, if applicable). (E) All transfer taxes be split equally between Landlord and Tenant unless the purchase option has been exercised pursuant to Subparagraph (C) for the reasons states therein, in which event transfer taxes shall be paid by Landlord. (F) At the closing, Landlord shall deliver to Tenant: (1) Releases of lien (to the extent applicable), escrows and/or affidavits for any work performed by or for Landlord, as required by Tenant's title insurance company in order to insure title without exception for mechanics' liens; (2) Written assignments of any plans, permits, approvals, utility operations or other licenses, contracts or agreements relating to the Property for which Tenant requests an assignment; and (3) Such other documents as are reasonably required by Tenant to effect the closing. (b) There shall be no increase or decrease in the Annual Base Rent due to costs of permanent debt financing. 27. PHASE II OFFICE EXPANSION. (a) Provided that this Lease is in full force and effect, and Tenant is not in default hereunder beyond applicable grace and cure periods and subject to the provisions of this paragraph, Tenant shall have the right to expand the Phase I Office Building by an approximately 50,000 square foot addition to the Office Building to be constructed on Lot 1 (the "Phase II Office Land"). As previously set forth, the Land necessary for both such expansion has been reserved for future inclusion in the Property subject to this Lease and is delineated on Exhibit A. Tenant may exercise its Phase II expansion rights with respect to the Office Building addition on the Phase II Office Land by giving Landlord written notice (the "Expansion Notice"). 40 (b) The area of the Building to be constructed in the Phase II Office Land has been approximately delineated on the Site Plans appended as Exhibit A. The Base Plans and Specifications for the Building to be constructed in the Phase II Office Land shall be comparable to those for the initial Office Building space to be constructed under this Lease. At the time of giving the Expansion Notice, Tenant will provide Landlord with outline specifications for the Phase II Expansion. Within ninety (90) days thereafter, Landlord shall cause the Architect, or another architect engaged by Landlord and approved by Tenant, to prepare Final Plans and Specifications for the Phase II Office Expansion. Such Final Plans and Specifications shall be presented to Tenant for its approval by the end of such ninety (90) day period. Upon receipt of the Final Plans and Specifications for the Phase II Office Expansion, Tenant shall not unreasonably withhold its approval thereof, and Landlord and Tenant shall cooperate in good faith and with best efforts to resolve any differences and to complete the Phase II Expansion Plans and Specifications to the Tenant's satisfaction. (c) Upon approval of the Final Plans and Specifications for the Phase II Of Office Building, Tenant may solicit bids for construction of the Phase II Of Office Building(s) and Related Areas. Landlord shall have the option to present a bid from a construction company selected by Landlord for construction of the Phase II Of Office Building(s) and Related Areas. Tenant shall also have the right to secure bids from any other general contractors. Any bids submitted by Knauer and Gorman or any other contracting entity designated by Landlord shall include a discount in an amount equal to five percent (5%) of the Land Cost attributable to Phase II. Regardless of whether Landlord's designated contractor or another contractor is selected to perform the work, the Landlord shall be responsible as Owner to enter into the general contract for the construction of the Phase II Office Expansion and to cause the performance of the Landlord's Work related thereto all in the same manner as provided herein for the Buildings and Related Areas initially included in this Lease. Notwithstanding anything herein, Tenant shall have the right to select the general contractor for the Phase II Office Expansion. Further, regardless of the identity of the general contractor selected, Tenant shall have the right to select, or if selected by Landlord, to approve, the architect for the Phase II Expansion as well as any subcontractors or consultants performing services or work for the construction of the Phase II Office Buildings and Related Areas. (d) Upon approval of the Phase II Office Expansion plans, Landlord shall proceed to obtain any and all necessary governmental approvals, in final, unappealed and unappealable form, for construction of the Phase II Of Office Expansion Building(s) and any Related Areas, including parking facilities and other improvements, required by Tenant or by applicable regulations for construction and development of the Phase II Office Expansion. Such approvals shall also include any subdivision and/or condominium plan approvals as may be necessary to secure financing for the Phase II Office Expansion without disturbing the then existing permanent financing covering the Phase I development of the Property. 41 (e) Landlord will secure construction and permanent financing for construction of the Phase II Of Office Expansion. The financing shall be at the following minimum underwriting guidelines: market interest rate; amortized over a twenty (20) year term, with a five (5) year balloon payment; based on a seventy-five percent (75%) loan to value ratio, a ten percent (10%) capitalization rate, and a 1.25 debt service coverage ratio. Tenant shall not be required to participate in the financing. If Landlord is unable to secure commitments for construction and permanent financing for the Phase II Of Office Expansion within ninety (90) days after approval of the Final Plans and Specifications for Phase II, Tenant will have the option to purchase (i) the Phase II Office Land, or (ii) all Phase II Land, or (iii) the entire Property, or (iv) the entire Property together with the Phase II Office Land or all Phase II Land, by giving Landlord written notice of such election at any time after such Phase II expansion financing commitment date. If Tenant elects to exercise such purchase option, the purchase will be on the same terms and conditions as are provided in Tenant's purchase option under Paragraph 30, below, except that: the price of the Phase II Land included shall be $158,671.00 per acre (such price having been maintained by Tenant's payment of the Phase II Land Commitment in the interim). (f) If Landlord has secured the requisite financing for the Phase II Office Expansion by the Phase II Expansion financing commitment period, then Landlord shall proceed to cause the Phase II Office Expansion to be completed by a date which is not later than nine (9) months after the date of final approval by Landlord and Tenant of the Finals Plans and Specifications for the Phase II Office Expansion and receipt all approvals and permits pursuant to Subparagraph (g) below. If Landlord fails to cause substantial completion of the Phase II Office Expansion by the end of such one (1) year period, then from and after the Phase II Commencement Date, Tenant shall be entitled to abatement of one-half (1/2) day of Annual Base Rent for Phase II for each day thereafter that the Phase II Expansion has not been substantially completed. (g) If Landlord fails to secure all necessary governmental approvals and permits for construction of the Phase II Office Expansion within one hundred eighty (180) days after election by Tenant to complete the Phase II Office Expansion, then Tenant shall have the right to pursue the same as set forth hereinabove in this paragraph and/or to purchase the entire Property and/or Phase II Land in the same manner as provided in Subparagraph (e), above. Alternatively, Tenant may release the Phase II Of Office Land effective immediately and without the one (1) year notice provided in Subparagraph (m), below. Notwithstanding anything to the contrary contained herein, Tenant may, at Tenant's option, directly pursue on its own behalf the necessary governmental approvals and permits for construction of the Phase II Office Expansion. In such event, Tenant shall fund the reasonable costs thereof, as incurred, and add the same to the total Phase II Office Project Costs to be subsequently funded and reimbursed to Tenant from the construction financing for the Phase II Office Expansion. Notwithstanding anything to the contrary contained herein, Tenant may, without exercising the Phase II Office Expansion option, require Landlord to pursue all necessary governmental approvals for the Phase II Office Expansion, as above set forth, at any time after final, unappealed and unappealable approval of Land development for Phase I. In that event, Landlord and Tenant would cooperate in seeking such approvals and Tenant would bear all costs thereof subject to reimbursement, without interest, at such time as Tenant ultimately exercises the Phase II Office Expansion option and Landlord closes on the construction loan financing therefor. In the event that Tenant has funded the Phase II approval process prior to electing the Phase II Office Expansion option, and if, upon a subsequent exercise by Tenant of the Phase II Office Expansion option, Landlord fails to obtain the necessary financing therefore, as above set forth, then Tenant shall not be entitled to reimbursement for the costs it has funded by crediting the same against the purchase price payable in connection with any exercise by Tenant of the purchase option allowed under Subparagraph (e), above. 42 If Tenant elects to fund the Phase II Office Expansion approvals prior to exercise of its Phase II Office as herein provided, Tenant may abandon the same at any time and cease funding therefor. (h) The Annual Base Rent for the Phase II Office Expansion shall be based on the same ratio of rent to project cost as the Annual Base Rent applicable to the Office Property prior to the Phase II Office Expansion bears to the total project cost of the Phase I Office Building. To that end, the Annual Base Rent attributable to the Phase II Office Expansion shall be equal to the amount obtained by dividing the Total Costs of the Phase II Of Office Expansion by a number equal to the Total Costs of the Phase I Office project divided by the Annual Base Rent for the Office Property during the first Lease Year. The formula for calculating the Annual Base Rent for the Phase II Office Expansion shall, accordingly, be as follows: Annual Base Rent = Total Phase II Office x First Lease Year Annual Base Rent for Phase II Office Project Cost for Phase I Office Property -------------------------------- Total Phase I Office Project Costs For purposes of applying the foregoing formula, the terms above set forth shall have their meanings elsewhere provided in this Lease and the following additional definitions shall apply: (i) Total Phase I Office Project Costs shall mean the grand total of the project cost allocation for Phase I, as set forth on Exhibit E after adjustment on account of the Closed Book cost of Tenant Changes and the Open Book cost of Tenant improvements above or below Allowances pursuant to Paragraphs 20(e) through (h) of the Lease; and (ii) Total Phase II Office Project Cost shall mean the total costs of Landlord's Work relating to the Phase II Office Expansion and falling within the same categories of costs as have been itemized for Phase I on Exhibit E subject to the following changes and limitations. Land acquisition cost for the Phase II Office Expansion shall be limited to the currently budgeted amount of $723,478.00. Site work and Shell Building construction costs shall be limited to the contract price therefor pursuant to the general contract with the General Contractor selected by Tenant pursuant to Paragraph 27(c), above. However, if the General Contractor selected by the Tenant is not the Landlord's designated general contractor, then the site work and Shell Building construction costs may additionally include fees and expenses relating to Owner representation on the Landlord's behalf during construction, such as project manager and/or field personnel to oversee and/or inspect the construction by the General Contractor, provided that the costs thereof to be included in the Total Phase II Office Project Costs shall in no event exceed an amount equal to one percent (1%) of the actual contract price for construction of site work and Shell Buildings. The costs of storm and sanitary sewer relocation work included in the general contract for site work shall be limited to the amount set forth in Exhibit L. The cost of any other utility relocations shall be excluded (having been included in the established Annual Base Rent for Phase I). 43 The Annual Base Rent, as calculated in accordance with the foregoing, shall be subject to adjustment on account of the change in the cost of financing of Landlord's Work on the Phase II Office Expansion from such financing cost for Phase I. Such adjustment shall be made by multiplying the Annual Base Rent for the Phase II Office (calculated as above set forth) by the percentage change between the interest rate applicable on the permanent financing loan initially obtained for the financing of the Phase I Office Project Costs and the interest rate applicable to the financing obtained by Landlord for the Phase II Office Project Costs and adding the result to the Annual Base Rent (if the Phase II interest rate is greater than the Phase I interest rate) or subtracting the result from the Annual Base Rent (if the Phase II interest rate is less than the Phase I interest rate). However, in no event shall the Annual Base Rent be so adjusted on account of a difference in the rate of financing on the Phase II Office Project Costs by a factor which is any greater than the percentage change between the prime rate quoted by the Wall Street Journal on the date of issuance of the Phase I permanent financing commitment and the prime rate quoted by the Wall Street Journal on the date of issuance of the permanent financing commitment for Phase II. (i) At the time that Landlord delivers the Final Plans and Specifications for Tenant's approval for the Phase II Office Expansion, Landlord will furnish Tenant with an accounting of the Annual Base Rent to be added under the Lease as a result of the addition to the Premises to be included in the Phase II Office Expansion. Such accounting shall be made in accordance with the formula provided under Paragraph (h) of this section, above, assuming the general contract is to be awarded to Landlord's designated General Contractor. Once the general contract for the construction is actually awarded to Landlord's designated contractor or another general contractor selected by Tenant, the increase in Annual Base Rent attributable to the Phase II Office Expansion shall be finalized based on such bid award. Thereafter, the Annual Base Rent for the Phase II Office Expansion shall be adjusted, prior to the Phase II Office Expansion Commencement Date, only on account of Changes ordered by the Tenant and/or Tenant improvements above or below Allowances in the same manner as the Annual Base Rent for the Office Building Premises initially subject to this Lease is adjustable on account of such Tenant Changes and/or improvements under Paragraph 20(e) through (h), above. Once the Final Plans have been approved and the general contract for the construction has been awarded, the parties will enter into an appropriate addendum to this Lease setting forth the finally confirmed Annual Base Rent for the Phase II Office Expansion which will thereupon be subject to change only for Tenant ordered Changes and/or improvements as above set forth. (j) The Annual Base Rent as finally calculated and adjusted in accordance with the foregoing Paragraph (i) shall commence on the Phase II Commencement Date applicable to the Office Expansion (defined in this paragraph below) and shall be subject to increases effective on the anniversary date of the Commencement Date occurring every five (5) years thereafter until the end of the initial term of this Lease. Each such increase in the Annual Base Rent attributable to the Phase II Office Expansion shall be in an amount equal to one and two-tenths percent (1.2%) of the Annual Base Rent in effect prior to such increase. The election by Tenant to proceed with the Phase II Office Expansion shall not affect or extend the initial twenty (20) year term 44 of this Lease if notice of the exercise of such expansion option takes place in years 1 through 5 of such initial term. If the Tenant elects to proceed with the Phase II Office Expansion after the fifth (5th) year but prior to the commencement of the tenth (10th) year, Tenant shall at that time have the option to extend the term by initiating a new twenty (20) year term commencing with the Phase II Office Commencement Date. In that event: the Second Renewal Period option under Paragraph 5(d)(i)(B) shall be deleted; the first Renewal Period Option under Paragraph 5(d)(i)(A) shall be reduced to a term equal to the difference between the length of the extended initial term and twenty-nine and one-half (291/2) years; and the third Renewal Period Option at Fair Market Rental Value under Paragraph 5(d)(i)(C) shall remain at five and one-half (51/2) years and shall become and replace the deleted Second Renewal Period. The intent of the foregoing is that the extended initial term plus the first Renewal Period (if exercised) shall still equal twenty-nine and one-half (291/2) years and the remaining Renewal Period for five and one-half (51/2) years shall be at Fair Market Rental Value. Whether or not the initial twenty (20) year term is reinitiated, as allowed hereunder, the Annual Base Rent payable for each Lease Year from and after the Phase II Commencement Date (defined below) shall be equal to the Annual Base Rent attributable to Phase II, as calculated in the manner above set forth, plus that amount which would have been payable under this Lease had the Phase II Expansion not been exercised. In that event, the Annual Base Rent payable for years 16 through 20 of the initial Lease term, as set forth in Paragraph 6 and adjusted pursuant to Paragraphs 20(e) through (h), shall continue until expiration of the reinitiated initial twenty (20) year Lease term. (k) The Premises constructed pursuant to the Phase II Office Expansion shall become part of the Premises, and the Related Areas of the Phase II Office Expansion shall become part of the Property, and all of the terms and conditions of this Lease shall first apply thereto, as of the date that Tenant first conducts business in the Phase II Office Expansion Building(s) in the normal course of its operations, but not before all conditions to commencement, as previously set forth for the initial Premises under this Lease, under Section 5(a) and (b) of this Lease have been met with respect to Landlord's Work on the Phase II Office Expansion. Such date shall is herein referred to as the "Phase II Commencement Date". (l) Landlord and Tenant each agree, upon written request of the other, to execute a memorandum confirming the Phase II Office Expansion Commencement Date, and the adjusted Annual Base Rent after inclusion of the Phase II Office Expansion, promptly upon determination of the Phase II Office Expansion Commencement Date. (m) All standards of workmanship and materials, warranties, rights and remedies relating to construction of the initial Buildings under Article 20 or elsewhere in this Lease shall, except where superseded by particular or inconsistent provisions of this Article 27, apply to the Phase II Office Expansion. (n) At any time during the term of this Lease, Tenant may release the Phase II Office Land by giving Landlord written notice one year in advance of such release, as hereinabove set forth in Subparagraph 7(a)(iv). Upon the release of such Phase II Office Land, the same shall no longer be subject to this Lease and Tenant shall have no rights or obligations with respect thereto except for Tenant's continuing easements thereon and Tenant's rights under the Phase II Land covenants. 45 If the Phase II Office Land is released, Tenant shall (unless theretofore released) retain its rights with respect to expansion on the Phase II Manufacturing Land and, until released, shall continue to pay the Phase II Manufacturing Land Commitment component of Additional Rent allocable thereto. (o) In the event that, after execution of this Lease, any event or condition occurs or develops, or any law, ordinance or regulation is enacted, which would preclude the development and use of the Phase II Office Land for the Tenant's Phase II Office Expansion in accordance with the terms of this Lease, then the Phase II Office Land Commitment component of Annual Additional Rent shall immediately abate and cease to be payable upon the occurrence or existence of such event or condition, or upon the enactment of such law, ordinance or regulation. Further, as soon as Landlord has knowledge or reason to know that any of the foregoing events has occurred or may occur and will have or may have the effect of materially interfering with the proposed use and development of the Phase II Office Land and for the purpose of Tenant's Phase II Of Office Landlord will promptly notify Tenant of the same in writing. If any of Landlord's representations or warranties contained herein, which relate to the proposed use and development of the Phase II Office Land, are false or materially inaccurate at the time of execution of this Lease, and, as the direct or indirect result thereof, the development and use of the Phase II Office Land for Tenant's Phase II Office Expansion or will be prevented or materially impeded, then, without limitation of any other remedies of Tenant under this Lease, Tenant may release the Phase II Office Land effective immediately and without any advance notice and be entitled to offset against the installments of Annual Base Rent and Annual Additional Rent next coming due under the Lease, until such setoff is fully exercised, all amounts theretofore paid on account of the Phase II Office Land Commitment. Further, if Tenant releases the Phase II Manufacturing Land simultaneously with the release of the Phase II Office Land, then such setoff shall also include all amounts theretofore paid on account of the Phase II Manufacturing Land Commitment. If Landlord fails to notify Tenant promptly when Landlord discovers or has reason to know of any facts, conditions or events which may materially interfere with the Landlord's ability to complete the Phase II Office Expansion, Tenant may, without limitation of any other rights or remedies under this Lease, immediately release the Phase II Office Land without any advance notice and be entitled to offset against the installments of Annual Base Rent and Annual Additional Rent next coming due under the Lease, until such setoff is fully exercised, all amounts paid on account of the Phase II Office Land Commitment since the date that Landlord knew or should have known of the existence or occurrence of such facts, conditions or events. In the latter event, if Tenant releases the Phase II Manufacturing Land simultaneously with the release of the Phase II Office Land, then such setoff shall also include all amounts paid since the same date on account of the Phase II Manufacturing Land Commitment. 28. PHASE II MANUFACTURING EXPANSION. (a) Provided that this Lease is in full force and effect, and Tenant is not in default hereunder beyond applicable grace and cure periods and subject to the provisions of this paragraph, Tenant shall have the right to expand the Phase I Manufacturing Building by an approximately 60,000 square foot addition to the Manufacturing Building to be constructed on a portion of Lot 11 which shall be resubdivided concurrently with the relocation of James Hance Court 46 (the "Phase II Manufacturing Land"). As previously set forth, the Land necessary for both such expansion has been reserved for future inclusion in the Property subject to this Lease and is delineated on Exhibit A. Tenant may exercise its Phase II expansion rights with respect to the Manufacturing Building addition on the Phase II Manufacturing Land by giving Landlord written notice (the "Expansion Notice"). (b) The area of the Building to be constructed in the Phase II Manufacturing Land has been approximately delineated on the Site Plans appended as Exhibit A. The Base Plans and Specifications for the Building to be constructed in the Phase II Manufacturing Land shall be comparable to those for the initial Manufacturing Building space to be constructed under this Lease. At the time of giving the Expansion Notice, Tenant will provide Landlord with outline specifications for the Phase II Expansion. Within ninety (90) days thereafter, Landlord shall cause the Architect, or another architect engaged by Landlord and approved by Tenant, to prepare Final Plans and Specifications for the Phase II Manufacturing Expansion. Such Final Plans and Specifications shall be presented to Tenant for its approval by the end of such ninety (90) day period. Upon receipt of the Final Plans and Specifications for the Phase II Manufacturing Expansion, Tenant shall not unreasonably withhold its approval thereof, and Landlord and Tenant shall cooperate in good faith and with best efforts to resolve any differences and to complete the Phase II Expansion Plans and Specifications to the Tenant's satisfaction. (c) Upon approval of the Final Plans and Specifications for the Phase II Manufacturing Building, Tenant may solicit bids for construction of the Phase II Manufacturing Building(s) and Related Areas. Landlord shall have the option to present a bid from a construction company selected by Landlord for construction of the Phase II Manufacturing Building(s) and Related Areas. Tenant shall also have the right to secure bids from any other general contractors. Any bids submitted by Knauer and Gorman or any other contracting entity designated by Landlord shall include a discount in an amount equal to five percent (5%) of the Land Cost attributable to Phase II. Regardless of whether Landlord's designated contractor or another contractor is selected to perform the work, the Landlord shall be responsible to enter into the general contract for the construction of the Phase II Manufacturing Expansion and to cause the performance of the Landlord's Work related thereto all in the same manner as provided herein for the Buildings and Related Areas initially included in this Lease. Notwithstanding anything herein, Tenant shall have the right to select the general contractor for the Phase II Office Expansion. Further, regardless of the identity of the general contractor selected, Tenant shall have the right to select, or if selected by Landlord, to approve, the architect for the Phase II Expansion as well as any subcontractors or consultants performing services or work for the construction of the Phase II Manufacturing Buildings and Related Areas. (d) Upon approval of the Phase II Manufacturing Expansion plans, Landlord shall proceed to obtain any and all necessary governmental approvals, in final, unappealed and unappealable form, for construction of the Phase II Manufacturing Expansion Building(s) and any Related Areas, including parking facilities and other improvements, required by Tenant or by applicable regulations for construction and development of the Phase II Manufacturing Expansion. Such approvals shall also include any subdivision and/or condominium plan approvals as may be necessary to secure financing for the Phase II Manufacturing Expansion without disturbing the then existing permanent financing covering the Phase I development of the Property. 47 (e) Landlord will secure construction and permanent financing for construction of the Phase II Manufacturing Expansion. The financing shall be at the following minimum underwriting guidelines: market interest rate; amortized over a twenty (20) year term, with a five (5) year balloon payment; based on a seventy-five percent (75%) loan to value ratio, a ten percent (10%) capitalization rate and a 1.25 debt service coverage ratio. Tenant shall not be required to participate in the financing. If Landlord is unable to secure commitments for construction and permanent financing for the Phase II Manufacturing Expansion within ninety (90) days after approval of the Final Plans and Specifications for Phase II, Tenant will have the option to purchase (i) the Phase II Manufacturing Land, or (ii) all Phase II Land, or (iii) the entire Property, or (iv) the entire Property together with the Phase II Manufacturing Land or all Phase II Land, by giving Landlord written notice of such election at any time after such Phase II expansion financing commitment date. If Tenant elects to exercise such purchase option, the purchase will be on the same terms and conditions as are provided in Tenant's purchase option under Paragraph 30, below, except that: the price of the Phase II Land included shall be $158,671.00 per acre (such price having been maintained by Tenant's payment of the Phase II Land Commitment in the interim). (f) If Landlord has secured the requisite financing for the Phase II Manufacturing Expansion by the Phase II Expansion financing commitment period, then Landlord shall proceed to cause the Phase II Manufacturing Expansion to be completed by a date which is not later than nine (9) months after the date of final approval by Landlord and Tenant of the Finals Plans and Specifications for the Phase II Manufacturing Expansion and receipt all approvals and permits pursuant to Subparagraph (g) below. If Landlord fails to cause substantial completion of the Phase II Manufacturing Expansion by the end of such one (1) year period, then from and after the Phase II Commencement Date, Tenant shall be entitled to abatement of one-half (1/2) day of Annual Base Rent for Phase II for each thereafter that the Phase II Expansion has not been substantially completed. (g) If Landlord fails to secure all necessary governmental approvals and permits for construction of the Phase II Manufacturing Expansion within one hundred eighty (180) days after election by Tenant to complete the Phase II Manufacturing Expansion, then Tenant shall have the right to pursue the same as set forth hereinabove in this paragraph and/or to purchase the Property and/or Phase II Land in the same manner as provided in Subparagraph (e) above. Alternatively, Tenant may release the Phase II Manufacturing Land effective immediately and without the one (1) year notice provided in Subparagraph (m), below. Notwithstanding anything to the contrary contained herein, Tenant may, at Tenant's option, directly pursue on its own behalf the necessary governmental approvals and permits for construction of the Phase II Manufacturing Expansion. In such event, Tenant shall fund the reasonable costs thereof, as incurred, and add the same to the total Phase II Manufacturing Project Costs to be subsequently funded and reimbursed to Tenant from the construction financing for the Phase II Manufacturing Expansion. 48 Notwithstanding anything to the contrary contained herein, Tenant may, without exercising the Phase II Office Expansion option, require Landlord to pursue all necessary governmental approvals for the Phase II Office Expansion, as above set forth, at any time after final, unappealed and unappealable approval of Land development for Phase I. In that event, Landlord and Tenant would cooperate in seeking such approvals and Tenant would bear all costs thereof subject to reimbursement, without interest, at such time as Tenant ultimately exercises the Phase II Office Expansion option and Landlord closes on the construction loan financing therefor. In the event that Tenant has funded the Phase II approval process prior to electing the Phase II Office Expansion option, and if, upon a subsequent exercise by Tenant of the Phase II Office Expansion option, Landlord fails to obtain the necessary financing therefore, as above set forth, then Tenant shall not be entitled to reimbursement for the costs it has funded by crediting the same against the purchase price payable in connection with any exercise by Tenant of the purchase option allowed under Subparagraph (e), above. If Tenant elects to fund the Phase II Office Expansion approvals prior to exercise of its Phase II Office Expansion option, as herein provided, Tenant may abandon the same at any time and cease funding therefor. (h) The Annual Base Rent for the Phase II Manufacturing Expansion shall be based on the same ratio of rent to project cost as the Annual Base Rent prior to the Phase II Manufacturing Expansion bears to the total project cost of the Phase I Manufacturing Building. To that end, the Annual Base Rent attributable to the Phase II Manufacturing Expansion shall be equal to the amount obtained by dividing the total costs of the Phase II Manufacturing Expansion by a number equal to the Total Costs of the Phase I Manufacturing project divided by the Annual Base Rent for the Office Property during the first Lease Year. The formula for calculating the Annual Base Rent for the Phase II Manufacturing Expansion shall, accordingly, be as follows: Annual Base Rent = Total Phase II Manufacturing x First Lease Year Annual Base Rent for Phase II Project Cost for Phase I Manufacturing Property Manufacturing Total Phase I Manufacturing Project Costs For purposes of applying the foregoing formula, the terms above set forth shall have their meanings elsewhere provided in this Lease and the following additional definitions shall apply: (i) Total Phase I Manufacturing Project Costs shall mean the grand total of the project cost allocation for Phase I, as set forth on Exhibit E after adjustment on account of the Closed Book cost of Tenant Changes and the Open Book cost of Tenant improvements above or below Allowances pursuant to Paragraphs 20(e) through (h) of the Lease; and (ii) Total Phase II Manufacturing Project Cost shall mean the total costs of Landlord's Work relating to the Phase II Manufacturing Expansion and falling within the same categories of costs as have been itemized for Phase I on Exhibit E subject to the following 49 changes and limitations. Land acquisition cost for the Phase II Manufacturing Expansion shall be limited to $651,172.00. Site work and Shell Building construction costs shall be limited to the contract price therefor pursuant to the general contract with the General Contractor selected by Tenant pursuant to Paragraph 28(c), above. However, if the General Contractor selected by the Tenant is not the Landlord's designated general contractor, then the site work and Shell Building construction costs may additionally include fees and expenses relating to Owner representation on the Landlord's behalf during construction, such as project manager and/or field personnel to oversee and/or inspect the construction by the General Contractor, provided that the costs thereof to be included in the Total Phase II Manufacturing Project Costs shall in no event exceed an amount equal to one percent (1%) of the actual contract price for construction of site work and Shell Buildings. The Costs associated with relocation of James Hance Court and all utilities relocation shall be limited to the amounts provided in Exhibit L subject to adjustment as provided therein. The Annual Base Rent, as calculated in accordance with the foregoing, shall be subject to adjustment on account of the change in the cost of financing of Landlord's Work on the Phase II Manufacturing Expansion from such financing cost for Phase I. Such adjustment shall be made by multiplying the Annual Base Rent for the Phase II Manufacturing (calculated as above set forth) by the percentage change between the interest rate applicable on the permanent financing loan initially obtained for the financing of the Phase I Manufacturing Costs and the interest rate applicable to the financing obtained by Landlord for the Phase II Manufacturing Project Costs and adding the result to the Annual Base Rent (if the Phase II interest rate is greater than the Phase I interest rate) or subtracting the result from the Annual Base Rent (if the Phase II interest rate is less than the Phase I interest rate). However, in no event shall the Annual Base Rent be so adjusted on account of a difference in the rate of financing on the Phase II Manufacturing Project Costs by a factor which is any greater than the percentage change between the prime rate quoted by the Wall Street Journal on the date of issuance of the Phase I permanent financing commitment and the prime rate quoted by the Wall Street Journal on the date of issuance of the permanent financing commitment for Phase II. (i) At the time that Landlord delivers the Final Plans and Specifications for Tenant's approval for the Phase II Manufacturing Expansion, Landlord will furnish Tenant with an accounting of the Annual Base Rent to be added under the Lease as a result of the addition to the Premises to be included in the Phase II Manufacturing Expansion. Such accounting shall be made in accordance with the formula provided under Paragraph (h) of this section, above, assuming the general contract is to be awarded to Landlord's designated General Contractor. Once the general contract for the construction is actually awarded to Landlord's designated contractor or another general contractor selected by Tenant, the increase in Annual Base Rent attributable to the Phase II Manufacturing Expansion shall be finalized based on such bid award. Thereafter, the Annual Base Rent for the Phase II Manufacturing Expansion shall be adjusted, prior to the Phase II Manufacturing Expansion Commencement Date, only on account of Changes ordered by the Tenant and/or Tenant improvements above or below Allowances in the same manner as the Annual Base Rent for the Manufacturing Building Premises initially subject to this Lease is adjustable on account of such Tenant Changes and/or improvements under Paragraph 20(e) through (h), above. Once the Final Plans have been approved and the general 50 contract for the construction has been awarded, the parties will enter into an appropriate addendum to this Lease setting forth the finally confirmed Annual Base Rent for the Phase II Manufacturing Expansion which will thereupon be subject to change only for Tenant ordered Changes and/or improvements as above set forth. (j) The Annual Base Rent as finally calculated and adjusted in accordance with the foregoing Paragraph (i) shall commence on the Phase II Commencement Date applicable to the Manufacturing Expansion (defined in this paragraph below) and shall be subject to increases effective on the anniversary date of the Commencement Date occurring every five (5) years thereafter until the end of the initial term of this Lease. Each such increase in the Annual Base Rent attributable to the Phase II Manufacturing Expansion shall be in an amount equal to one and two-tenths percent (1.2%) of the Annual Base Rent in effect prior to such increase. The election by Tenant to proceed with the Phase II Manufacturing Expansion shall not affect or extend the initial twenty (20) year term of this Lease if notice of the exercise of such expansion option takes place in years 1 through 5 of such initial term. If the Tenant elects to proceed with the Phase II Manufacturing Expansion after the fifth (5th) year, but prior to the commencement of the tenth (10th) year, Tenant shall at that time have the option to extend the term by initiating a new twenty (20) year term commencing with the Phase II Manufacturing Commencement Date. In that event: the Second Renewal Period option under Paragraph 5(d)(i)(B) shall be deleted; the first Renewal Period Option under Paragraph 5(d)(i)(A) shall be reduced to a term equal to the difference between the length of the extended initial term and twenty-nine and one-half (291/2) years; and the third Renewal Period Option at Fair Market Rental Value under Paragraph 5(d)(i)(C) shall remain at five and one-half (51/2) years and shall become and replace the deleted Second Renewal Period. The intent of the foregoing is that the extended initial term plus the first Renewal Period (if exercised) shall still equal twenty-nine and one-half (291/2) years and the remaining Renewal Period for five and one-half (51/2) years shall be at Fair Market Rental Value. Whether or not the initial twenty (20) year term is reinitiated, as allowed hereunder, the Annual Base Rent payable for each Lease Year from and after the Phase II Commencement Date (defined below) shall be equal to the Annual Base Rent attributable to Phase II, as calculated in the manner above set forth, plus that amount which would have been payable under this Lease had the Phase II Expansion not been exercised. In that event, the Annual Base Rent payable for years 16 through 20 of the initial Lease term, as set forth in Paragraph 6 and adjusted pursuant to Paragraph 20(e) through (h), shall continue until expiration of the reinitiated initial twenty (20) year Lease term. (k) The Premises constructed pursuant to the Phase II Manufacturing Expansion shall become part of the Premises, and the Related Areas of the Phase II Manufacturing Expansion shall become part of the Property, and all of the terms and conditions of this Lease shall first apply thereto, as of the date that Tenant first conducts business in the Phase II Manufacturing Expansion Building(s) in the normal course of its operations, but not before all conditions to commencement, as previously set forth for the initial Premises under this Lease, under Section 5(a) and (b) of this Lease have been met with respect to Landlord's Work on the Phase II Manufacturing Expansion. Such date shall is herein referred to as the "Phase II Commencement Date". 51 (l) Landlord and Tenant each agree, upon written request of the other, to execute a memorandum confirming the Phase II Manufacturing Expansion Commencement Date, and the adjusted Annual Base Rent after inclusion of the Phase II Manufacturing Expansion, promptly upon determination of the Phase II Manufacturing Expansion Commencement Date. (m) All standards of workmanship and materials, warranties, rights and remedies relating to construction of the initial Buildings under Article 20 or elsewhere in this Lease shall, except where superseded by particular or inconsistent provisions of this Article 28, apply to the Phase II Manufacturing Expansion. (n) At any time during the term of this Lease, Tenant may release the Phase II Manufacturing Land by giving Landlord written notice one year in advance of such release, as hereinabove set forth in Subparagraph 7(a)(iv). Upon the release of such Phase II Manufacturing Land, the same shall no longer be subject to this Lease and Tenant shall have no rights or obligations with respect thereto except for Tenant's continuing easements thereon and Tenant's rights under the Phase II Land covenants. If the Phase II Manufacturing Land is released, Tenant shall (unless theretofore released) retain its rights with respect to expansion on the Phase II Office Land and, until released, shall continue to pay the Phase II Office Land Commitment component of Additional Rent allocable thereto. (o) In the event that, after execution of this Lease, any event or condition occurs or develops, or any law, ordinance or regulation is enacted, which would preclude the development and use of the Phase II Manufacturing Land for the Tenant's Phase II Manufacturing Expansion in accordance with the terms of this Lease, then the Phase II Manufacturing Land Commitment component of Annual Additional Rent shall immediately abate and cease to be payable upon the occurrence or existence of such event or condition, or upon the enactment of such law, ordinance or regulation. Further, as soon as Landlord has knowledge or reason to know that any of the foregoing events has occurred or may occur and will have or may have the effect of materially interfering with the proposed use and development of the Phase II Manufacturing Land and for the purpose of Tenant's Phase II Manufacturing Expansion, Landlord will promptly notify Tenant of the same in writing. If any of Landlord's representations or warranties contained herein, which relate to the proposed use and development of the Phase II Manufacturing Land, are false or materially inaccurate at the time of execution of this Lease, and, as the direct or indirect result thereof, the development and use of the Phase II Manufacturing Land for Tenant's Phase II Manufacturing Expansion or will be prevented or materially impeded, then, without limitation of any other remedies of Tenant under this Lease, Tenant may release the Phase II Manufacturing Land effective immediately and without any advance notice and be entitled to offset against the installments of Annual Base Rent and Annual Additional Rent next coming due under the Lease, until such setoff is fully exercised, all amounts theretofore paid on account of the Phase II Manufacturing Land Commitment. Further, if Tenant releases the Phase II Office Land simultaneously with the release of the Phase II Manufacturing Land, then such setoff shall also include all amounts theretofore paid on account of the Phase II Office Land Commitment. If Landlord fails to notify Tenant promptly when Landlord discovers or has reason to know any facts, conditions or events which may materially interfere with the Landlord's ability to complete the Phase II Manufacturing Expansion, Tenant may, without limitation of any other 52 rights or remedies under this Lease, immediately release the Phase II Manufacturing Land without any advance notice and be entitled to offset against the installments of Annual Base Rent and Annual Additional Rent next coming due under the Lease, until such setoff is fully exercised, all amounts paid on account of the Phase II Manufacturing Land Commitment since the date that Landlord knew or should have known of the existence or occurrence of such facts, conditions or events. In the latter event, if Tenant releases the Phase II Office Land simultaneously with the release of the Phase II Manufacturing Land, then such setoff shall also include all amounts paid since the same date on account of the Phase II Office Land Commitment. 29 SEPARATE OPTIONS. (a) The Phase II Office Expansion option under Paragraph 27 and the Phase II Manufacturing Expansion under Paragraph 28 are separate options which may be exercised simultaneously or individually, such that the Phase II Office Expansion may be exercised independent of the Phase II Manufacturing Expansion and visa versa and it shall not be a condition to exercise of either expansion that the expansion option with respect to the remaining parcel of Phase II can be exercised. However, Tenant may, at its sole option, elect to exercise both expansions simultaneously, in which event Landlord shall process the necessary approvals, secure the necessary financing and construct the two phases simultaneously. If Tenant elects to exercise the Phase II Office Expansion and the Phase II Manufacturing Expansion options simultaneously, then the Phase II Office Expansion and the Phase II Manufacturing Expansion shall be regarded as a single, integral expansion and the Phase II Commencement Date shall not apply with respect to either expansion until the Landlord's Work with respect to both the Office Building Expansion and the Manufacturing Building Expansion are completed in accordance with the terms of this Lease, but Tenant's occupancy and obligations shall commence for each Building Expansion when complete in the same manner as under Paragraph 5(a) respecting Phase I. (b) The options to renew set forth in Paragraph 5(d) may be exercised by Tenant with respect to the entire Property (including the Phase II Office Land and/or the Phase II Manufacturing Land to the extent that it is incorporated in the Lease) or may, at Tenant's option, be exercised with respect to only the Office Land (together with the Phase II Office Land if then incorporated) or the Manufacturing Land (together with the Phase II Manufacturing Land if then incorporated). Tenant's written notice of the exercise of the renewal option shall specify whether the renewal option shall apply to the entire Property (together with the Phase II Land if then incorporated) or only to the Office Land (together with the Phase II Office Land if then incorporated) or Manufacturing Land (together with the Phase II Manufacturing Land if then incorporated). (c) The purchase option set forth in Paragraph 30, below, may be exercised by Tenant for the entire Property or, at Tenant's option, only with respect to the Office Land (plus the Phase II Office Land if identified in the Tenant's written notice of exercise of the purchase option) or Manufacturing Land (plus the Phase II Manufacturing Land if identified in the written notice of exercise of the Tenant's purchase option). 53 (d) The Tenant's purchase option under Paragraph 30 and its renewal option under Exhibit B are separate and cumulative options and may be exercised separately and distinctly with respect to the Office Land (and Phase II Office if included) and the Manufacturing Land (and Phase II Manufacturing Land if included). For example, Tenant may elect to purchase the Office Land at the end of the initial term of the Lease, while electing to renew the Lease of the Manufacturing Land at the end of the initial term of the Lease. 30 PURCHASE OPTION. At the end of the initial term of this Lease, and at the end of any renewal term, or at any such other time as expressly permitted due to Landlord's failure to perform certain stated requirements under this Lease, Tenant shall have the option to purchase the Property. Such purchase shall include the Phase II Manufacturing Land and the Phase II Office Land, if and to the extent that such Phase II Land (or applicable portion thereof) has been incorporated into the Lease pursuant to the Tenant's expansion options. If the Phase II Land, or either portion thereof, has not been incorporated into the Lease pursuant to Tenant's exercise of its expansion options, then Tenant's purchase of the Property pursuant to this purchase option may, at Tenant's election, additionally include such Phase II Land or either portion thereof. The purchase of the Property and any Phase II Land included in the purchase, shall be on the following terms and conditions: (a) The purchase price for the Property and any Phase II Land included shall be its Fair Market Value determined as follows (unless otherwise mutually agreed): (i) A panel of three (3) appraisers shall be established to determine the Fair Market Value of the Property. Members of the panel of appraisers must have experience in appraising comparable office properties in the Southeastern Pennsylvania region, not be affiliated with either Landlord or Tenant, and be a member of the American Institute of Real Estate Appraisers. Landlord and Tenant shall each appoint one appraiser and the two appraisers so appointed shall promptly name a third appraiser. If either Landlord or Tenant fails to designate an appraiser within ten (10) business days after a written request to do so by the other party, then the other may request the regional director of the chapter of the American Arbitration Association with jurisdiction over disputes arising in the suburban Philadelphia, Pennsylvania metropolitan area ("Director"), or his or her designee, to designate an appraiser who, when so designated, shall act in the same manner as if he or she had been the appraiser designated by the party so failing to designate an appraiser. If the two appraisers are unable to agree upon a third appraiser within ten (10) days, such third appraiser shall be designated by the Director upon the request of either of the two appraisers. (ii) Each of the three appraisers shall submit, within ten (10) business days after all three appraisers had been designated, a written report specifying the appraisers' opinion of the Fair Market Value of the Property. Each appraisers' report shall be in writing and shall be prepared independently and without consultation with any of the other appraisers. The sale price of the Property shall be equal to the numerical average of the two (2) appraisals closest in amount to one another. 54 (iii) Each party shall pay the fees and expenses of the appraiser appointed by such party and one-half of all other expenses and the fees and expenses of the third appraiser. (iv) All the decisions of the Board of Appraisers arrived at in accordance with the provisions of this subparagraph shall be final and binding. (b) Closing on Tenant's exercise of the purchase option shall be held thirty (30) days after the Fair Market Value has been determined in accordance with the above procedure or by other mutual written agreement of the parties. (c) Upon closing on the exercise of the Tenant's purchase option, all rights and obligations under this Lease shall terminate. (d) Tenant's exercise of the purchase option must be given to Landlord in writing at least one hundred eighty (180) days prior to the end of the initial term or renewal term (unless this purchase option has been triggered by Landlord's default or failure to obtain financing or approvals, or meet progress or completion time requirements, as elsewhere expressly provided in this Lease, in any of which latter events the notice of exercise may be given at any time after any such triggering event). (e) The closing date shall be selected by Tenant and shall be at any time prior to the end of the initial term or renewal term, as the case may be, provided that if this purchase option has been triggered by Landlord's default or failure to obtain financing or approvals pursuant to the expressed provisions of this Lease, then the closing date selected by Tenant shall be no later than three (3) months after the date that Tenant gives Landlord written notice of its election to purchase. (f) Landlord shall convey to Tenant, or its assignee or nominee, by warranty deed, marketable fee simple title to the Property, together with all of Landlord's right, title and interest in the Final Plans and Specifications and in all permits and approvals, and together with any fixtures and other building equipment, subject to no encumbrances other than the Permitted Exceptions, utility easements granted solely in connection with providing utility service to the Property, restrictive covenants that do not in any way interfere with Tenant's ability to conduct its business at the Property or impose any cost upon Tenant, encumbrances that existed as of the date of this Lease and were approved by Tenant in writing, and any other encumbrances that were approved by Tenant in writing and Real Estate Taxes and assessments no yet due and payable. Tenant shall be entitled to an abatement of the purchase price in an amount equal to any amounts which must be paid or payable to discharge or otherwise any liens or encumbrances existing at the time of closing and not permitted by the terms hereof. (g) Transfer taxes shall be divided evenly between Landlord and Tenant unless otherwise provided by this Lease in certain instances. 55 (h) At the closing, Landlord will deliver to Tenant: (i) Releases of liens (to the extent applicable) and/or affidavits for any work performed by or for Landlord, as required by Tenant's title and insurance company in order to insure title without exception for mechanics' liens; (ii) Written assignments of any plans, permits, approvals, utility capacities, or other licenses, contracts or agreements relating to the Property for which Tenant requests an assignment; and (iii) Such other documents as are reasonably required by Tenant to effect the closing. 31. CONSTRUCTION MATTERS DISPUTE RESOLUTION. (a) For purposes of this article, a "Claim" means a demand or assertion by one of the parties seeking adjustment or interpretation of the terms of this Lease, payment of money, extension of time, modification of plans or specifications, or other relief with respect to the terms of this Lease, to the extent that any such claim relates to or arises out of the Plans and Specifications, the progress reviews thereof, the Landlord's Work and any and all covenants, warranties, representations and exhibits relating thereto, the calculation of adjustments to Annual Base Rent or otherwise relating to the planning, design, construction, substantial completion or completion of the Buildings and Related Areas, the costs of Changes therein or Allowances therefor, and/or any defects or deficiencies existing or alleged to exist therein. (b) For purposes of this paragraph, the "Consultant" shall mean and refer to R/E Group Development Advisors unless and until the parties mutually designate another Consultant or another Consultant is designated pursuant to the terms of this article. In the event that the Consultant identified herein or any other Consultant mutually designated or otherwise appointed pursuant to the provisions of this article is no longer able or willing to act as the Consultant hereunder, then the Consultant shall be any successor consultant appointed by the Consultant within seven (7) days after written request by either of the parties for such substitute appointment. If the Consultant fails or refuses to confirm his availability to serve as the Consultant and also fails to appoint a substitute Consultant within seven (7) days after written request by either party, then the Consultant shall be chosen by each parties' selection of an independent licensed architect and the two architects so selected shall mutually appoint the Consultant. For this purpose, each party must select an architect within three (3) days after written request by the other and must notify the other of their selection in writing within such three (3) day period. The architects so selected must mutually appoint the Consultant within seven (7) days after both such architects have been selected and confirmed. If, despite the adherence of the parties to the foregoing procedures, the initially designated Consultant is not willing or able to serve and no substitute Consultant is appointed by such Consultant, mutually agreed by the parties or designated by independent architects selected by them in accordance with the foregoing procedures, then this article shall have no further force or effect and the parties may pursue any Claims and the resolution thereof without mediation or arbitration by the Consultant. 56 (c) In the event of any Claim, including unresolved disputes within the scope of Subparagraph (a), either party may, by written notice, submit the Claim to the Consultant by giving written notice thereof to the Consultant and to the other party simultaneously. Either party may submit any information or documentation to the Consultant with copies simultaneously provided to the other party. The Consultant may also schedule a meeting of the parties with the Consultant. Within seven (7) days after receipt of notice of a Claim, the Consultant will: (i) Request additional supporting data from Landlord or Tenant or their representatives; (ii) Notify the parties of a written decision intended to resolve the Claim, which may be on terms as presented by the claimant, or by the other party, or in such other manner as concluded to be proper by the Consultant. In resolving any such Claims, the Consultant shall consider the terms of this Lease, all exhibits hereto, all plans, specifications and other documents generated pursuant to the terms of this Lease and any such data supporting or opposing the Claim as either party has submitted. The Consultant shall resolve the Claim according to the intent of the parties as determined by the Consultant from this Lease and exhibits and any mutually agreed documentation generated therefrom. If the Consultant is unable to determine how the Claim should be resolved on the basis of the mutual intent of the parties at the time of making of this Lease or the applicable documentation attached to or generated pursuant to the terms of this Lease and mutually approved, then the Consultant shall decide the Claim according to industry standards and their application to projects most comparable to the project described in this Lease. (iii) If a Claim has not been resolved by the Consultant within seven (7) days after written notice thereof, or within seven (7) days after submission of any additional documentation as may have been requested by the Consultant, then either party shall be free to pursue a resolution of the Claim or enforcement of this Lease in any manner allowed under the Lease or by law or in equity. (iv) Notwithstanding anything to the contrary contained in this Lease, neither party may exercise any right or remedy or seek to enforce any obligation with respect to any obligation, condition or subject which would appropriately be made the subject of a Claim as defined in Subparagraph (a), above, unless and until the matter has first been submitted as a Claim for resolution by the Consultant pursuant to the foregoing provisions of this article. By way of example, but without limitation, no suit or other proceeding may be commenced and no option to terminate this Lease may be exercised on account of any condition, event, defect, nonpayment or other matter within the scope of the Claims set forth in Subparagraph (a) unless and until the Claim is first submitted to the Consultant for disposition in accordance with this article. (v) Pending resolution of a Claim by the Consultant, the parties shall proceed in accordance with this Lease to meet all other timetables, obligations, payments and other requirements of the Lease. 57 (d) Any decision by the Consultant with respect to a Claim submitted pursuant to this article will be final and binding unless either party gives written notice of objection to such decision within seven (7) days after its receipt of written notice thereof. Otherwise, the decision of the Consultant shall be deemed to be the mutual agreement of the parties with respect to their resolution of the Claim and shall be regarded as having the same effect as a mutual, written modification of or supplement to this Lease. If either party gives such written notice of objection to the decision of the Consultant within the time period stated, the decision shall not be final or binding on either of the parties but shall be admissible as evidence (subject to competency as evidence under all other applicable rules) in any action or proceeding thereafter initiated and relating to the subject matter of the Claim. (e) Landlord and Tenant shall indemnify and hold harmless the Consultant from and against claims, damages, costs, liabilities and expense arising in connection with a Claim submitted by either party or the performance of any Claim resolution functions hereunder. Such indemnification shall extend also to claims asserted by third parties against the Consultant to the extent the same are alleged to relate to any Claim resolution actions or functions hereunder provided, however, as between Landlord and Tenant, inter se, each agrees to bear and be responsible to indemnify the other for the cost of such indemnification of the Consultant against third-party claims if and to the extent that such third-party claim arises out of or in connection with a contract, employment, invitee or other relationship between the third party and the Landlord or Tenant (as the case may be) as such inter se indemnifying party. 32. RECORDING MEMORANDUM. Landlord and Tenant shall, simultaneously with execution of this Lease, execute a memorandum for recording in the Chester County Office for the Recording of Deeds to give notice of the existence and term of this Lease and of certain options and privileges of Tenant hereunder. The form of the recording of the memorandum shall be substantially as set forth in Exhibit H attached hereto and made a part hereof. 33. PHASE II LAND COVENANTS AND EASEMENTS. (a) Tenant shall have the right to approve any improvements to any released Phase II Land to ensure compatible use and design continuity with Tenant's Phase I development. Future uses on any released Phase II Office Land shall be limited to suburban corporate office uses. Future uses on any released Phase II Manufacturing Land shall be limited to a single-story building for office, warehouse, light manufacturing and assembly uses, with no trucking, loading or truck storage facilities or parking area visible from the Phase I Manufacturing Building. The restrictions contain herein shall be set forth in the recording memorandum mentioned in Paragraph 32. (b) In connection with the development of the Property, Landlord shall grant and declare upon Lot 1 an easement permitting the installation, maintenance, repair and replacement of the access drive from Oaklands Boulevard located, in part, on Lot 1, as shown on the Site Plans attached as Exhibit A and servicing the Phase I Office Property. The terms of such easement shall be set forth in a recordable instrument on terms satisfactory to Tenant, whose approval shall not be unreasonably withheld, and shall be recorded prior to the Commencement Date of the Lease. Such easement shall survive any release by Tenant of the Phase II Office 58 Expansion on the Phase II Office Land hereunder. In addition, in connection with the development of the Office Land and the Manufacturing Land, Landlord shall grant and declare any such other easements for access, stormwater drainage and management, utilities or other purposes as may be necessary on the Phase II Office Land, Phase II Manufacturing Land, or any such other lands, as may be required either by the Subdivision and Land Development Plans for the Property or as may be otherwise necessary for the proper development of the Property. Such easements shall be prepared by Landlord in the form of recordable instruments on terms satisfactory to Tenant, whose approval shall not be unreasonably withheld, and shall be recorded prior to the Commencement of construction pursuant to this Lease. 34. INDEMNIFICATION. (a) Tenant will indemnify Landlord and save Landlord harmless from and against any and all claims, liability and expenses (other than consequential damages but including reasonable attorneys' fees) for loss or damage suffered by Landlord because of (i) the negligence of Tenant, its agents, contractors or employees, and (ii) any act or occurrence in the Premises, unless caused by the negligence or willful misconduct of Landlord, its agents, contractors or employees. (b) Landlord shall indemnify Tenant and save Tenant harmless from and against any and all claims, liabilities and expenses (other than consequential damages but including reasonable attorneys' fees) for loss or damage suffered by Tenant because of (i) the negligence of Landlord or Landlord's agents, contractors or employees, and (ii) any act of occurrence on the Phase II Land, or the Oaklands Corporate Center outside of the Premises, unless caused by the negligence or willful misconduct of Tenant, its agents, contractors or employees. (c) Nothing in this Paragraph 34 is intended to require indemnification for any property claim for which insurance is required to be maintained under the terms of this Lease. To the extent permitted by the policies of insurance required to be maintained hereunder, each party waives and releases the other from any claims for damage or losses which are covered by such policies of insurance and shall, to the extent possible, cause the policies of insurance required to be maintained by it hereunder to include waivers of subrogation whereunder the insurer agrees that such waiver and release shall not effect coverage under such policies and shall be binding upon the insurer. 35. ENVIRONMENTAL COMPLIANCE. Tenant will not cause or permit any toxic or hazardous substances to be used, stored, generated or disposed of on or in the Premises by Tenant, Tenant's agents, employees, contractors or invitees, except in accordance with applicable Environmental Laws. Tenant will indemnify and hold harmless Landlord from any and all claims, damages, fines, judgments, penalties, costs (including reasonable attorneys' fees) and liabilities arising from a breach by Tenant of the foregoing obligation to comply with Environmental Laws. Without limiting the foregoing, if Tenant causes or permits the presence of any hazardous or toxic substances on the Premises in a manner which violates applicable Environmental Laws and such results in contamination, 59 Tenant will promptly, at its sole expense, take any and all necessary actions to return the Premises to the condition existing prior to the presence of any such contamination. 36. LIMITATION OF LANDLORD'S LIABILITY. Anything in this Lease to the contrary notwithstanding, Tenant agrees that Tenant shall look solely to the estate and property of Landlord in the Property for the collection of any judgment or other judicial process requiring the payment of money by Landlord in the event of a default or breach by Landlord with respect to any of the terms, covenants, agreements, provisions and conditions of this Lease to be kept, observed and/or performed by Landlord, and no other assets of Landlord shall be subject to levy, execution or other procedures for the satisfaction of Tenant's remedies. 37. ATTACHMENTS. The following exhibits form a part of this Lease and were attached before this Lease was signed by the parties: Exhibit A - Site Plans: Land Development Plan, Lots 4, 7 and 8 Oaklands Corp. Center made by Chester Valley Engineers dated 6/30/97 Conditional Use Plan, Lots 1, 4, 7, 8 and 11, CFM Technologies, Phase I, Oaklands Corporate Center, made by Bernardon and Associates, dated 4/17/97 Oaklands Corporate Center Plan of Resubdivision for Lots 9, 11, 12 and 13 made by Chester Valley Engineers, Inc., dated December 10, 1996 (marked to show Phase I Manufacturing Land and Phase II Manufacturing Land) Resubdivision Plan, Lots 1, 3 and 4, Oaklands Corporate Center for Oaklands Business Parks Inc. dated April 6, 1995, last revised June 22, 1995 (marked to show Phase I Office Land and Phase II Office Land) Exhibit B - Schedule of Estimated Real Estate Taxes and Operating Expenses 60 Exhibit C - Base Plans and Specifications: CFM Technologies Rendering by Bernardon and Associates (PR-0) First Floor Plan, New Building for CFM Technologies, Inc., by Bernardon and Associates dated 7/3/97 (PR-1) Second Floor Plan, New Building for CFM Technologies, Inc., by Bernardon and Associates, dated 7/3/97 (PR-2) Third Floor Plan, New Building for CFM Technologies, Inc., by Bernardon and Associates, dated 7/3/97 (PR-3) Fourth Floor Plan, New Building for CFM Technologies, Inc., by Bernardon and Associates, dated 7/3/97 (PR-4) Plan of New Building for CFM Technologies, Inc., East and West Elevations, by Bernardon and Associates, dated April 21, 1997. Last revision 7/3/97 (PR-5) New Building for CFM Technologies, Inc., Typical Wall Sections, dated April 21, 1997, last revised 7/3/97, made by Bernardon and Associates (PR-6) Section A-A New Building for CFM Technologies, Inc., Floor Plan, made by Bernardon and Associates, dated 5/6/97, last revised 7/3/97 (PR-7) New Building for CFM Technologies, Inc., Production Building Floor Plan, made by Bernardon and Associates, dated 4/17/97, last revised 7/3/97 (PR 1.1) New Building for CFM Technologies, Inc., Production Building Elev/Wall Section, made by Bernardon and Associates, Elevations, dated 4/17/97, last revised 7/3/97 (PR-2.1) New Building for CFM Technologies, Production Building Section by Bernardon Associates dated 5/6/97, last revised 7/3/97 (PR-3.1) Preliminary Project Manual for Office Building, CFM Technologies, Inc., made by Bernardon and Associates, dated 5/2/97, last revised 7/3/97 Preliminary Project Manual for Production Facility, CFM Technologies, Inc., made by Bernardon and Associates, dated 5/2/97, last revised 7/3/97 Exhibit D - Developer Schedule Phase I Manufacturing Developer's Schedule Phase I Of Office Building Developer's Schedule 61 Exhibit E - Budget Phase I 80,000 Square Foot Office Project Cost Allocation, by Knauer & Gorman, dated April 29, 1997 Phase I 60,000 Square Foot Manufacturing Project Cost Allocation, by Knauer & Gorman, dated April 29, 1997 Exhibit F - Subordination, Nondisturbance and Attornment Agreement Exhibit G - Design Build Agreement - To be prepared (A1A DOC A191) Exhibit H - Recording Memorandum - To be prepared Exhibit I - Early Startup Expenses, by Knauer & Gorman, dated April 21, 1997 / Knauer & Gorman letter dated 5/29/97 to R. Buckner / Memo from R. Buckner to Knauer and Gorman dated 5/30/97 Exhibit J - Letter dated April 18, 1997, from Knauer & Gorman, Addressing Office Building Height Issue Exhibit K - Letters dated April 25, 1997 from Knauer & Gorman and April 24, 1997 from Chester Valley Engineers, Inc. Addressing Stormwater Management Issues Exhibit L - James Hance Court Relocation Cost Schedule (3 pages) and Phase II Office Storm and Sanitary Sewer Relocation Cost Schedule (2 pages), by Knauer & Gorman, dated April 30, 1997 Exhibit M - List of Approved Alternates (Shell Building Related Construction Cost Estimate Beyond Scope of RFP) Knauer & Gorman Inc., dated April 17, 1997 (last revised May 1, 1997) Exhibit N - Subordination Agreement by Owner Exhibit O - CFM Phase - I Cash Requirements Exhibit P - Design Build Purchase Price Schedule (a) Tenant's Purchase Option - Landlord's Completion Default (6/18/97) (b) Tenant's Purchase Option - Landlord's Financing Default (6/18/97) (c) Tenant's Purchase Option - Landlord's Breach After Loan Commitment 62 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease. CFM PARTNERS By:/s/ James J. Gorman - ------------------------------------ James J. Gorman By: /s/ Christopher J. Knauer ------------------------------------ Christopher J. Knauer CFM TECHNOLOGIES, INC. By: /s/ Lorin J. Randall - ----------------------------------- Lorin J. Randall 63 EX-10 5 AGENT AGREEMENT DATED 4/15/97 Exhibit 10.24 AGENT AGREEMENT This AGENT AGREEMENT is made and entered into this 5th day of April, 1997, by and between Aneric Enterprise PTE Limited, a corporation organized and existing under the laws of Singapore with its principal place of business located at 629, Cititech Industrial Bldg. #06-21, Aljunied Road, Singapore 389838 (hereinafter referred to a as "Agent") and CFM TECHNOLOGIES, INC., a Pennsylvania corporation, with its principal place of business located at 1336 Enterprise Drive, West Chester, Pennsylvania, 19380 (hereinafter referred to as the "Company"). NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. APPOINTMENT OF AGENT. Company hereby appoints Agent as its exclusive agent for the sale of certain items described in Attachment "A" (hereinafter referred to as "Products") in the countries and locations listed in Exhibit "B" (hereinafter referred to as "Territory"). Agent is authorized by the above appointment to sell Products only to customers located in Agent's territory for use in manufacturing facilities located in Agent's territory, and Agent shall refer to Company all inquiries made from prospective customers which do not fall under the scope of this Agreement. All inquiries or orders received by Company for Products from any party in the Territory shall be referred to Agent. The list of Products as set forth in Appendix A may be changed, abandoned, or supplemented in writing by mutual agreement between the parties. It is understood by the parties that the Agent shall be acting as an independent sales agent of Company's Products, and Agent shall be solely responsible for all expenses connected with the operation of its business. Agent shall have no authority to contract in the name of or bind the Company in any manner whatsoever. Agent shall defend and hold Company harmless from all claims arising out of Agent's conduct. All transactions or activities in connection with this Agreement will comply with the letter and the spirit of all applicable laws as well as ethical business standards. Care must be taken to avoid disseminating inaccurate or misleading technical or business information. 2. TERM OF AGREEMENT. This Agreement shall continue in effect for a period of one (1) year from the date of its execution and shall automatically renew year after year, unless terminated pursuant to Paragraph 10 hereof. 3. RESPONSIBILITIES. a. COMPANY'S RESPONSIBILITIES. Company shall make every reasonable effort to manufacture quantities of the Products sufficient to meet the requirements of end user customers sold to by Agent. Company shall have responsibility for Product installation, service, and support. b. AGENT'S RESPONSIBILITIES. Agent agrees to: (i) use its best efforts to promote the sale and use of the Products and to solicit and secure orders for the Products within its Territory, and further to serve the best interests of Company in any and all matters in accordance with this Agreement; (ii) Refrain from manufacturing or selling of products which directly compete with the Products of the Company for the duration of this Agreement and for a period of three (3) years following the termination of this Agreement for any reason. (iii) Agent shall prepare a sales forecast for each quarter providing projections of end-user sales of Products by item, by end -user name, by quarter for (6) six fiscal quarters of the Company, including the quarter in which the forecast is prepared. This forecast shall be updated monthly to be received by CFM by the 15th day of each month. 4. CONFIDENTIALITY. Agent acknowledges that this Agreement creates a relationship of trust and confidence between Agent and Company. Agent acknowledges that proprietary data and proprietary information are embodied in the Company's Products, and in data, information, and material supplied by Company to Agent or acquired by Agent in the course of performance of this Agreement. Agent acknowledges that all such proprietary data and proprietary information, including such data and information as is contained in the Products and their constituent parts, constitute the sole and exclusive property to the Company, and Agent will carefully protect such information and use it only in furtherance of the Company's business. Agent hereby agrees to hold in confidence during the term of this Agreement, and thereafter for a period of three (3) years, any and all information of a confidential nature regarding Company's business or affairs, including without limitation, data provided by Company regarding the design and/or methods of Company of the Products, and not to disclose the same to any person, firm, or corporation. On all the above information of a confidential or proprietary nature, Company shall stamp "CONFIDENTIAL" or so indicate in other appropriate ways for software or other intangible materials. The following information shall not be considered confidential: a. information which is already generally available to the public; b. information which hereafter becomes generally available to the public, except as a result of a fault of the party to whom the information was disclosed; c. information which Company agrees to disclose in writing; d. information which can be shown to have been properly known to Agent prior to the transmittal thereof from Company; or e. information which is obtained by Agent from a third party which had the right to possess and to disclose the information. 5. PRICE AND PRICE CHANGES. a. PRICE. The Company will from time to time provide the Agent with price schedules for the Company's products in the Territory. Agent agrees that it will not sell the Company's Products in its Territory at prices other than those on the Territory price list without Company's express knowledge and written consent. The company agrees to pay the Agent a commission for the Products purchased by the customer/ end- user according to the price paid by the customer/ end-user. Commission will be a pre-determined rate of six percent (6%) of collected funds. The commission rate may be changed upon the written agreement of both parties. 6. TERMS OF PAYMENT. The terms of payment shall be as follows: a. 50%, after receipt of payment by Company from customer/end user based upon shipment of equipment. 50%, after receipt of payment by Company from customer/end user based upon final acceptance. b. Company to pay Agent commission within 10 days of receipt of payment by Company from customer/end-user. 7. DELIVERY. The Company shall use its best efforts to fill all orders promptly upon acceptance thereof. However, if conditions beyond the control of Company arise which prevent compliance with normal delivery schedules, Company shall not be liable for damages, general, special or otherwise. Deliveries shall be made Ex-Factory West Chester, Pennsylvania. Customer shall have the right to select the packer and carrier of its choice and shall bear all costs related thereto. The Company shall retain title and bear the risk of loss until such time as a shipment leaves the Company's dock, at which time title shall pass to the Customer, and the risk of loss shall be borne by Customer. Customer shall arrange and pay for insurance against loss or damage to the equipment during transit. 8. SALES AND SUPPORT. Agent agrees to provide competent personnel for the sales, specification review, negotiation, and technical sales support to customers within its Territory. Company agrees to provide reasonable training for Agent's personnel at its offices in West Chester, Pennsylvania. 9. ADVERTISING. Company shall supply Agent with reasonable quantities of sales materials such as catalogs, brochures, and reprints of its advertising materials at no charge to Agent. Agent shall have the right to conduct advertising campaigns with respect to the Products at its expense. Agent shall refrain from making any claims or representations concerning the Products in excess of those made by Company. Agent will translate the above materials into local languages as may be needed from time to time. Upon termination of this Agreement, Agent shall return all unused sales materials to Company and shall refrain from further use of all such materials in its activities. 10. TERMINATION. A. This Agreement may be terminated: 1. by an agreement in writing duly signed by the parties hereto; or 2. by either party at will, with or without cause, upon not less than thirty (30) days notice in writing, given by registered or certified mail to the other party. B. Commissions, preceding and following the date of Termination, shall be paid as follows: 1. Following notification and preceding the Termination Date, commissions to Agent will be paid in with accordance with Sections 6(a) and 6(b). 2. Any order for shipment of Product into the Territory which shipment (Ex-Works) shall occur prior to the Termination Date shall result in full payment of any commission due to Agent based upon shipment of equipment, subject to Section 6(b). No commissions will be paid for shipments into the Territory made after the Termination Date. 3. Any Product shipped into the Territory for which Final Acceptance is received prior to the Termination Date shall result in full payment of any commission due to Agent based upon final acceptance, subject to Section 6(b). No commissions will be paid for final acceptance events which occur after the Termination Date. The acceptance of any order from a customer in the Agent's territory after the termination of this Agreement shall not be construed as a renewal or extension hereof nor as a waiver of termination. Neither Company nor Agent shall, by reason of the termination or non-renewal of this Agreement, be liable to the other for compensation, reimbursement or damages on account of the loss of prospective profits on anticipated sales, or on account of expenditures, investments, leases or commitments in connection with the business or goodwill of Company or Agent, or otherwise. 11. MISCELLANEOUS. a. ASSIGNMENT. This agreement is not assignable or transferable by either party in whole or in part, except with written consent of the other party. b. GOVERNING LAW AND LANGUAGE. This Agreement shall be governed in all respects by the laws of the Commonwealth of Pennsylvania. This Agreement has been negotiated and executed in the English language, and the rules of construction and definition of the English language shall be applied in interpreting this Agreement. c. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and agreement between the parties. d. SEVERABILITY. If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. e. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefits of the parties hereto and their respective successors and assigns. f. TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. g. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall construe one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above set forth. THE COMPANY: /s/ Roger A. Carolin ------------------------------------ Roger A. Carolin President and Chief Executive Officer CFM Technologies, Inc. THE AGENT: /s/ Eric Ng ___________________________________ Eric Ng Managing Director Aneric Enterprise Pte Ltd. EXHIBIT A PRODUCTS Full Flow(TM) systems for semiconductor applications. EXHIBIT B TERRITORY Singapore Malaysia Thailand Indonesia EX-10 6 AGENT AGREEMENT DATED 10/29/97 Exhibit 10.25 AGENT AGREEMENT This AGENT AGREEMENT is made and entered into this 29th day of October, 1997, by and between Silicon International Ltd., a corporation organized and existing under the laws of Hong Kong with its principal place of business located Unit 303, Four Seas Building, 208-212 Nathan Road, Kowloon, Hong Kong (hereinafter referred to a as "Agent") and CFM TECHNOLOGIES, INC., a Pennsylvania corporation, with its principal place of business located at 1336 Enterprise Drive, West Chester, Pennsylvania, 19380 (hereinafter referred to as the "Company"). NOW THEREFORE, in consideration of the mutual covenants contained herein, the parties hereto agree as follows: 1. APPOINTMENT OF AGENT. Company hereby appoints Agent as its exclusive agent for the sale of certain items described in Attachment "A" (hereinafter referred to as "Products") in the countries and locations listed in Exhibit "B" (hereinafter referred to as "Territory"). Agent is authorized by the above appointment to sell Products only to customers located in Agent's territory for use in manufacturing facilities located in Agent's territory, and Agent shall refer to Company all inquiries made from prospective customers which do not fall under the scope of this Agreement. All inquiries or orders received by Company for Products from any party in the Territory shall be referred to Agent. The list of Products as set forth in Appendix A may be changed, abandoned, or supplemented in writing by mutual agreement between the parties. It is understood by the parties that the Agent shall be acting as an independent sales agent of Company's Products, and Agent shall be solely responsible for all expenses connected with the operation of its business. Agent shall have no authority to contract in the name of or bind the Company in any manner whatsoever. Agent shall defend and hold Company harmless from all claims arising out of Agent's conduct. All transactions or activities in connection with this Agreement will comply with the letter and the spirit of all applicable laws as well as ethical business standards. Care must be taken to avoid disseminating inaccurate or misleading technical or business information. 2. TERM OF AGREEMENT. This Agreement shall continue in effect for a period of one (1) year from the date of its execution and shall automatically renew year after year, unless terminated pursuant to Paragraph 10 hereof. 3. RESPONSIBILITIES. a. COMPANY'S RESPONSIBILITIES. Company shall make every reasonable effort to manufacture quantities of the Products sufficient to meet the requirements of end user customers sold to by Agent. Company shall have responsibility for Product installation, service, and support. b. AGENT'S RESPONSIBILITIES. Agent agrees to: (i) use its best efforts to promote the sale and use of the Products and to solicit and secure orders for the Products within its Territory, and further to serve the best interests of Company in any and all matters in accordance with this Agreement; (ii) Refrain from manufacturing or selling of products which directly compete with the Products of the Company for the duration of this Agreement and for a period of six (6) months following the termination of this Agreement for any reason. (iii) Agent shall prepare a sales forecast for each quarter providing projections of end-user sales of Products by item, by end -user name, by quarter for (6) six fiscal quarters of the Company, including the quarter in which the forecast is prepared. This forecast shall be updated monthly to be received by CFM by the 15th day of each month. 4. CONFIDENTIALITY. Agent acknowledges that this Agreement creates a relationship of trust and confidence between Agent and Company. Agent acknowledges that proprietary data and proprietary information are embodied in the Company's Products, and in data, information, and material supplied by Company to Agent or acquired by Agent in the course of performance of this Agreement. Agent acknowledges that all such proprietary data and proprietary information, including such data and information as is contained in the Products and their constituent parts, constitute the sole and exclusive property to the Company, and Agent will carefully protect such information and use it only in furtherance of the Company's business. Agent hereby agrees to hold in confidence during the term of this Agreement, and thereafter for a period of three (3) years, any and all information of a confidential nature regarding Company's business or affairs, including without limitation, data provided by Company regarding the design and/or methods of Company of the Products, and not to disclose the same to any person, firm, or corporation. On all the above information of a confidential or proprietary nature, Company shall stamp "CONFIDENTIAL" or so indicate in other appropriate ways for software or other intangible materials. The following information shall not be considered confidential: a. information which is already generally available to the public; b. information which hereafter becomes generally available to the public, except as a result of a fault of the party to whom the information was disclosed; c. information which Company agrees to disclose in writing; d. information which can be shown to have been properly known to Agent prior to the transmittal thereof from Company; or e. information which is obtained by Agent from a third party which had the right to possess and to disclose the information. 5. PRICE AND PRICE CHANGES. a. PRICE. The Company will from time to time provide the Agent with price schedules for the Company's products in the Territory. Agent agrees that it will not sell the Company's Products in its Territory at prices other than those on the Territory price list without Company's express knowledge and written consent. The company agrees to pay the Agent a commission for the Products purchased by the customer/end-user according to the price paid by the customer/ end-user. Commission will be a pre-determined rate of four and one-half percent (4.5%) of collected funds. The commission rate may be changed upon the written agreement of both parties. 6. TERMS OF PAYMENT. The terms of payment shall be as follows: a. One-half (50%), after receipt of payment by Company from customer/end user based upon shipment of equipment. One-half (50%), after receipt of payment by Company from customer/end user based upon final acceptance. b. Company to pay Agent commission within 10 days of receipt of payment by Company from customer/end-user. 7. SPARE PARTS. Agent agrees to purchase spare parts for resale to customers or to the Company (when used for warranty repairs) during the term of this agreement. Such purchases shall be made from recommended listings of spare parts to be supplied by the Company. Orders placed by Agent for such spare parts shall be in an amount not less than 22.2% of any commissions paid to Agent during each annual period ending on October 31. 8. APPLICATION ENGINEER SUPPORT. Agent agrees to hire and retain a minimum an applications engineer to support each customer site at which three or more Full Flow systems are installed or on order. The Company agrees to provide technical training to such application engineers at no cost to Agent and Agent agrees to pay for all travel, living and incidental expenses of such applications engineers during the period of any such training. Additional applications engineers may be hired by Agent and trained by Company for customer sites with more than three Full Flow systems, subject to mutual agreement between Agent and Company. 9. DELIVERY. The Company shall use its best efforts to fill all orders promptly upon acceptance thereof. However, if conditions beyond the control of Company arise which prevent compliance with normal delivery schedules, Company shall not be liable for damages, general, special or otherwise. Deliveries shall be made Ex-Factory West Chester, Pennsylvania. Customer shall have the right to select the packer and carrier of its choice and shall bear all costs related thereto. The Company shall retain title and bear the risk of loss until such time as a shipment leaves the Company's dock, at which time title shall pass to the Customer, and the risk of loss shall be borne by Customer. Customer shall arrange and pay for insurance against loss or damage to the equipment during transit. 10. SALES AND SUPPORT. Agent agrees to provide competent personnel for the sales, specification review, negotiation, and technical sales support to customers within its Territory. Company agrees to provide reasonable training for Agent's personnel at its offices in West Chester, Pennsylvania. 11. ADVERTISING. Company shall supply Agent with reasonable quantities of sales materials such as catalogs, brochures, and reprints of its advertising materials at no charge to Agent. Agent shall have the right to conduct advertising campaigns with respect to the Products at its expense. Agent shall refrain from making any claims or representations concerning the Products in excess of those made by Company. Agent will translate the above materials into local languages as may be needed from time to time. Upon termination of this Agreement, Agent shall return all unused sales materials to Company and shall refrain from further use of all such materials in its activities. 12. TERMINATION. A. This Agreement may be terminated: 1. by an agreement in writing duly signed by the parties hereto; or 2. by either party at will, with or without cause, less than one hundred and eighty (180) days notice in writing, given by registered or certified mail to the other party. The date of termination (Termination Date) is defined a180 days following the date of notification. B. Commissions, preceding and following the Termination shall be paid as follows: 1. Following notification and preceding the Termination Date, commissions to Agent will be paid in accordance with Sections 6(a) and 6(b). 2. Any order for shipment of Product into the Territory which shipment (Ex-Works) shall occur prior to the Termination Date shall result in full payment of any commission due to Agent based upon shipment of equipment, subject to Section 6(b). No commissions will be paid for shipments into the Territory made after the Termination Date. 3. Any Product shipped into the Territory for which Final Acceptance is received prior to the Termination Date shall result in full payment of any commission due to Agent based upon final acceptance, subject to Section 6(b). No commissions will be paid for final acceptance events which occur after the Termination Date. The acceptance of any order from a customer in the Agent's territory after the Termination Date of this Agreement shall not be construed as a renewal or extension hereof nor as a waiver of termination. Neither Company nor Agent shall, by reason of the termination or non-renewal of this Agreement, be liable to the other for compensation, reimbursement or damages on account of the loss of prospective profits on anticipated sales, or on account of expenditures, investments, leases or commitments in connection with the business or goodwill of Company or Agent, or otherwise. 13. MISCELLANEOUS. a. ASSIGNMENT. This agreement is not assignable or transferable by either party in whole or in part, except with written consent of the other party. b. GOVERNING LAW AND LANGUAGE. This Agreement shall be governed in all respects by the laws of the Commonwealth of Pennsylvania. This Agreement has been negotiated and executed in the English language, and the rules of construction and definition of the English language shall be applied in interpreting this Agreement. c. ENTIRE AGREEMENT. This Agreement constitutes the full and entire understanding and agreement between the parties. d. SEVERABILITY. If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. e. BINDING EFFECT. This Agreement shall be binding upon and inure to the benefits of the parties hereto and their respective successors and assigns. f. TITLES AND SUBTITLES. The titles of the paragraphs and subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. g. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall construe one instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above set forth. THE COMPANY: BY: /s/ Lorin J. Randall ----------------------------------- THE AGENT: /s/ John Dunn ----------------------------------- John Dunn President Silicon International Ltd. EXHIBIT A PRODUCTS Full Flow(TM) systems for semiconductor applications. EXHIBIT B TERRITORY People Republic of China Hong Kong, P.R. China EX-11 7 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME PER COMMON SHARE FISCAL YEAR ENDED OCTOBER 31, ------------------------------- 1997 1996 1995 ---- ---- ---- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Net income $6,222 $2,960 $1,402 ====== ====== ====== Weighted average common and common equivalent shares: Common Stock 7,318 4,624 3,802 Stock options (treasury stock method) 446 184 146 Cheap stock (treasury stock method) -- 23 46 ------ ------ ------ Weighted average common and common equivalent shares 7,764 4,831 3,994 ------ ------ ------ Net income per common share $0.80 $0.61 $0.35 ====== ====== ====== Computed on a basis as described in Note 2 of the Notes to Consolidated Financial Statements. EX-21 8 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF CFM TECHNOLOGIES, INC. JURISDICTION OF NAME INCORPORATION - ---- --------------- CFMT, Inc. ........................................ Delaware CFM International Corp. ........................... Guam CFM Technologies Limited........................... Scotland CFM Technologies, S.A. ............................ France CFM Technologies Limited Singapore Branch.......... Singapore EX-23 9 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into CFM Technologies, Inc.'s previously filed Form S-8 Registration Statement File No. 333-19749. ARTHUR ANDERSEN LLP Philadelphia, Pa., January 27, 1998 EX-27 10 FINANCIAL DATA SCHEDULE
5 1000 12-MOS OCT-31-1997 NOV-01-1996 OCT-31-1997 26,865 19,316 33,392 0 16,081 98,734 13,765 3,562 109,496 16,938 0 0 0 80,762 9,106 109,496 75,772 75,772 40,072 28,694 0 0 (1,882) 8,888 2,666 0 0 0 0 6,222 .80 .80
-----END PRIVACY-ENHANCED MESSAGE-----