-----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, QdRpNbqgOrvaImj9JxcK/l24sSEu+sevQlKPCuKUQi2H4Ieh0Hc5FzosPUuR21vy +MOxIysGBzmohDXzm2cuwg== 0001056359-01-000002.txt : 20010224 0001056359-01-000002.hdr.sgml : 20010224 ACCESSION NUMBER: 0001056359-01-000002 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SPECTRIAN CORP /CA/ CENTRAL INDEX KEY: 0000925054 STANDARD INDUSTRIAL CLASSIFICATION: 3663 IRS NUMBER: 770023003 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24360 FILM NUMBER: 1544056 BUSINESS ADDRESS: STREET 1: 350 W JAVA DR CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 4087455400 MAIL ADDRESS: STREET 1: 350 WEST JAVA DRIVE STREET 2: C/O CORPORATE CONTROLLER CITY: SUNNYVALE STATE: CA ZIP: 94089 10-Q 1 0001.txt FILING ON FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- FORM 10-Q -------------- (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________. Commission file number: 0-24360 SPECTRIAN CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 77-0023003 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 350 West Java Drive Sunnyvale, California 94089 (Address of principal executive offices) (Zip Code) Telephone Number (408) 745-5400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of February 9, 2001 there were 11,478,986 shares of the Registrant's Common Stock outstanding. ==============================================================================
SPECTRIAN CORPORATION FORM 10-Q INDEX FOR QUARTER ENDED DECEMBER 31, 2000 Page ---- PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 2000 and March 31, 2000............................................... 3 Condensed Consolidated Statements Of Operations - Three Months and Nine Months Ended December 31, 2000 and December 26, 1999........ 4 Condensed Consolidated Statements of Cash Flows - Nine Months Ended December 31, 2000 and December 26, 1999.......................... 5 Notes to Condensed Consolidated Financial Statements............... 6 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................ 14 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk......... 28 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings.................................................. 29 ITEM 6. Exhibits and Reports on Form 8-K................................... 29 Signatures......................................................... 30
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
SPECTRIAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data) (Unaudited) December 31, March 31, 2000 2000 (1) ---- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 18,218 $ 11,553 Short-term investments 118,077 36,027 Restricted short-term investment 6,790 -- Accounts receivable, less allowance for doubtful accounts of $420 and $420, respectively 27,784 23,817 Inventories 22,508 34,542 Deferred tax asset 4,800 -- Prepaid expenses and other current assets 5,584 4,400 -------- -------- Total current assets 203,761 110,339 Property and equipment, net 10,994 19,668 Other assets 1,268 1,268 -------- -------- Total assets $216,023 $131,275 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 22,437 $ 16,416 Accrued liabilities 20,416 13,773 Income taxes payable 4,820 20 Deferred gain, current portion 31,800 -- Current portion of debt and capital lease Obligations -- 730 -------- -------- Total current liabilities 79,473 30,939 Deferred gain, net of current portion 26,200 -- Debt and capital lease obligations, net of current portion -- 1,351 -------- -------- Total liabilities 105,673 32,290 Commitments and contingencies (Note 10) STOCKHOLDERS' EQUITY: Preferred stock, $0.001 par value, 5,000,000 shares authorized; none issued and outstanding, respectively -- -- Common stock, $0.001 par value, 20,000,000 shares authorized; 12,243,465 and 11,859,507 shares issued, respectively; 11,243,465 and 10,859,507 shares outstanding, respectively 12 12 Additional paid-in capital 164,316 160,117 Treasury stock, 1,000,000 shares of common stock held (14,789) (14,789) Deferred compensation expense (76) (937) Accumulated other comprehensive loss (57) (617) Accumulated deficit (39,056) (44,801) -------- -------- Total stockholders' equity 110,350 98,985 -------- -------- Total liabilities and stockholders' equity $216,023 $131,275 ======== ======== (1) Derived from the March 31, 2000 audited balance sheet included in the 2000 Annual Report on Form 10-K of Spectrian Corporation.
See accompanying notes to condensed consolidated financial statements. 3 SPECTRIAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Three Months Ended Nine Months Ended ------------------------- ------------------------- December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---- ---- ---- ---- NET REVENUES $51,398 $49,144 $135,504 $123,595 COSTS AND EXPENSES: Cost of revenues 39,490 37,195 109,472 95,763 Research and development 5,422 5,633 16,364 16,039 Selling, general and Administrative 5,267 5,173 17,133 14,000 ------- ------- -------- -------- Total costs and expenses 50,179 48,001 142,969 125,802 ------- ------- -------- -------- OPERATING INCOME (LOSS) 1,219 1,143 (7,465) (2,207) INTEREST INCOME 563 711 1,683 2,586 INTEREST EXPENSE (73) (118) (162) (419) OTHER INCOME 11,701 624 11,701 624 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 13,410 2,360 5,757 584 INCOME TAXES -- 16 12 74 ------- ------- -------- -------- NET INCOME $13,410 $ 2,344 $ 5,745 $ 510 ======= ======= ======== ======== NET INCOME PER SHARE: Basic $ 1.20 $ 0.22 $ 0.52 $ 0.05 ======= ======= ======== ======== Diluted $ 1.19 $ 0.20 $ 0.51 $ 0.05 ======= ======= ======== ======== SHARES USED IN COMPUTING PER SHARE AMOUNTS: Basic 11,154 10,519 11,014 10,316 ======= ======= ======== ======== Diluted 11,270 11,774 11,251 10,939 ======= ======= ======== ========
See accompanying notes to condensed consolidated financial statements. 4
SPECTRIAN CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) Nine Months Ended -------------------------- December 31, December 26, 2000 1999 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,745 $ 510 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 8,294 10,086 Loss on sale of short-term investments 7 -- Gain on the sale of UltraRF (11,701) -- (Gain) loss on sale of property and equipment, net 48 (595) Stock option compensation expense 154 239 Increase in deferred tax asset (4,800) -- Increase in income tax payable 4,800 -- Changes in operating assets and liabilities: Accounts receivable (3,967) (20,442) Inventories 6,858 (5,435) Prepaid expenses and other current assets (1,415) (1,185) Accounts payable 2,991 10,096 Accrued liabilities (57) (6,590) -------- -------- Net cash provided by (used in) operating activities 6,957 (13,316) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of short-term investments (2,966) (31,148) Proceeds from sale and maturities of short-term Investments 9,182 30,743 Purchase of property and equipment (6,757) (5,239) Costs associated with sale of UltraRF (2,791) -- Proceeds from sale of property and equipment 98 3,362 -------- -------- Net cash used in investing activities (3,234) (2,282) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of debt and capital lease obligations (1,964) (4,239) Proceeds from sales of common stock, net 4,906 6,746 -------- -------- Net cash provided by financing activities 2,942 2,507 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 6,665 (13,091) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,553 26,254 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $18,218 $13,163 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $ 162 $ 419 ======== ======== Cash paid for income taxes $ 12 $ 74 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION Principles of Consolidation --------------------------- The accompanying unaudited condensed consolidated financial statements of Spectrian Corporation and subsidiaries ("Spectrian" or the "Company") have been prepared in conformity with generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements include all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the financial information set forth therein. These financial statements should be read in conjunction with the Company's audited consolidated financial statements as set forth on pages F-1 through F-22 of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. The interim results presented herein are not necessarily indicative of the results of operations that may be expected for the full fiscal year ending March 31, 2001, or any other future period. Reclassifications ----------------- Certain items have been reclassified to be consistent with current presentation. The reclassifications have no effect on previously disclosed net income or stockholders' equity. 2. SALE OF ULTRARF On December 29, 2000, the Company completed the sale of substantially all of the assets and liabilities comprising the Company's semiconductor division, UltraRF, pursuant to the Asset Purchase Agreement dated as of November 20, 2000 (the "Asset Purchase Agreement") among Cree, Inc. ("Cree"), Zoltar Acquisition, Inc. ("Zoltar") and the Company for 1,815,402 shares of Cree common stock valued at $64,503,000, based upon the per share price at the date of closing, plus common stock of Cree with a guaranteed realizable value of $30 million, less $1,034,000 owed by the Company to Cree due to a change in the net assets of UltraRF between October 1, 2000 and December 29, 2000. Of the total consideration received, 191,094 shares of Cree common stock valued at $6,790,000 were placed in escrow to secure the Company's representations, warranties and covenants under the Asset Purchase Agreement for a period of up to 12 months. Accordingly, the value of Cree common stock under escrow was classified as restricted investment in Cree common stock in the financial statements. As part of the definitive agreement, the Company and Cree entered into a two-year supply agreement under which Spectrian is obligated to purchase from Cree an aggregate of $58 million of semiconductors. In the event Spectrian fails to make these purchases it is obligated to pay Cree the amount of the shortfall. Accordingly, the Company deferred $58 million of the gain on sale of UltraRF and will recognize it in future periods as the related purchase commitments to Cree are fulfilled. In addition, Spectrian and Cree entered into a one-year joint development agreement to develop advanced technologies related to laterally diffused metal oxide semiconductors ("LDMOS"), linear high gain LDMOS driver modules, high efficiency LDMOS power modules and SiC MESFET components, under which Spectrian will pay to Cree a development fee of $2.4 million in four quarterly installments of $600,000 beginning in April 2001. The Company also subleased one of the facilities in Sunnyvale, California, to Cree for a term of 11 years (with three options to extend the lease an additional five years) with similar terms as the lease agreement between the Company and its landlord. The Company realized an aggregate net gain of $69.7 million from the sale of UltraRF assets, of which $58.0 million was deferred as noted above, with the balance of $11.7 million being recognized during the quarter ended December 31, 2000. 6 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) Summarized below are the unaudited pro forma results of the Company as though UltraRF had been sold at April 1, 1999 (in thousands, except per share data):
Nine Months Year Ended Ended December 31, March 31, 2000 2000 ---- ---- Total revenue $134,423 $162,687 ======== ======== Net loss $ (9,501) $(13,914) ======== ======== Net loss per share basic and diluted $ (0.86) $ (1.33) ======== ========
The pro forma financial information presented above is not necessarily indicative of either the results of operations that would have occurred had the disposal taken place at the beginning of fiscal 2000 or of future results of operations of the Company. The gain on sale of UltraRF has not been included in the pro forma results above because it is non-recurring and directly related to the sale. 3. BALANCE SHEET COMPONENTS Balance sheet components are as follows (in thousands):
December 31, March 31, 2000 2000 ---- ---- Inventories: ----------- Raw materials $15,219 $16,763 Work in progress 1,913 10,353 Finished goods 5,376 7,426 ------- ------- $22,508 $34,542 ======= =======
Property and equipment: ---------------------- Machinery and equipment $45,148 $58,322 Software 3,980 4,248 Leasehold improvements 2,568 3,781 ------- ------- 51,696 66,351 Less accumulated depreciation and amortization 40,702 46,683 ------- ------- $10,994 $19,668 ======= ======= Accrued liabilities: ------------------- Employee compensation and benefits $ 6,500 $ 4,310 Warranty 9,800 7,123 Restructuring 100 996 Other accrued liabilities 4,016 1,344 ------- ------- $20,416 $13,773 ======= =======
7 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) 4. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for accounting for derivative and hedging activities. In July, 1999 the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133 until the first fiscal year beginning after June 15, 2000. The Company is currently assessing the impact of SFAS 133 on its consolidated financial position, liquidity and results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," as amended by SAB 101A and 101B, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company is currently assessing the impact of this new Staff Accounting Bulletin on its consolidated financial position, liquidity and results of operations. 5. SHORT-TERM INVESTMENTS The Company considers all liquid investments with an original maturity of three months or less to be cash equivalents. The cash equivalents consisted of investment grade, interest-bearing commercial paper and money market funds as of December 31, 2000. The Company has classified its investments in certain debt securities and common stock investments in Cree as "available-for-sale," and records such investments at fair market value, with unrealized gains and losses reported as a separate component of stockholders' equity. Realized gains and losses are determined using the specific identification method. Interest income is recorded using an effective interest rate, with the associated premium or discount amortized to interest income. As of December 31, 2000 and March 31, 2000, short-term investments classified as available-for-sale securities were as follows (in thousands):
Amortized Unrealized Fair As of December 31, 2000 Cost Gain (Loss) Value ----------------------- ---- ----------- ----- Government bonds & notes $ 10,107 $ 12 $ 10,119 Corporate bonds & notes 23,778 (69) 23,709 Common stock investments 94,503 -- 94,503 -------- ---- -------- 128,388 (57) 128,331 Less amounts classified as cash equivalents 3,464 -- 3,464 -------- ---- -------- Short-term investments $124,924 $(57) $124,867 ======== ==== ======== Contractual maturity dates of bonds and notes: Less than 1 year $ 2,463 1 to 5 years 27,901 -------- $ 30,364 ======== 8 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) Amortized Unrealized Fair As of March 31, 2000 Cost Gain (Loss) Value -------------------- ---- ---------- ----- Government bonds & notes $ 14,599 $(166) $ 14,433 Commercial paper 29,545 (451) 29,094 -------- ----- -------- 44,144 (617) 43,527 Less amounts classified as cash equivalents 7,500 -- 7,500 -------- ----- -------- Securities available for sale $ 36,644 $(617) $ 36,027 ======== ===== ======== Contractual maturity dates: Less than 1 year $ 3,500 1 to 5 years 32,527 -------- $ 36,027 ========
6. PER SHARE COMPUTATION Basic net income per share is computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed using the weighted average number of common and potentially dilutive common shares outstanding during the period using the treasury stock method. Potentially dilutive common shares include the effect of stock options. For the three and nine months ended December 31, 2000, options to purchase 2,222,079 and 1,499,300 common shares were outstanding, but were not included in the computation of diluted net income per share because the exercise prices of the options were greater than the average market price of the common shares. For the three and nine months ended December 26, 1999, options to purchase 227,547 and 538,015 common shares were outstanding, but were not included in the computation of diluted net income per share because the exercise prices of the options were greater than the average market price of the common shares. Reconciliation of weighted average shares used in computing net income per share is as follows (in thousands):
Three Months Ended Nine Months Ended ------------------------ ------------------------- December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---- ---- ---- ---- Weighted average common shares outstanding 11,154 10,519 11,014 10,316 Dilutive effect of stock options outstanding, using the treasury stock method 116 1,255 237 623 ------ ------ ------ ------ Shares used in computing diluted net income per share 11,270 11,774 11,251 10,939 ====== ====== ====== ======
9 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) 7. SEGMENT INFORMATION Prior to December 29, 2000, the Company divided its business into two operating segments based upon product type under the management approach: Amplifier Division and Semiconductor Division, which operated under the tradename of UltraRF. UltraRF derived substantially all of its revenues from sales to the Amplifier Division. The Company allocated operating expenses to these segments but did not allocate interest income and expense, other income, the provision for income taxes and certain corporate operating expenses. Corporate expenses that were allocated to the operating segments were allocated based on predetermined annual allocation methods. Appropriate intersegment eliminations were made in the consolidation of the Company's consolidated financial statements. Segment assets, which included inventories and property and equipment, were reported upon by operation. No other assets and liabilities were reported separately. Following the sale of UltraRF on December 29, 2000, the Company began operating as one vertical integrated unit. See Note 2 to the Condensed Consolidated Financial Statements "Sale of UltraRF". Consolidated Statement of Operations Data - Fiscal 2001 (in thousands):
Three Months Ended December 31, 2000 --------------------------------------- Amplifier UltraRF Other* Total --------- ------- ------ ----- Net revenues, external $ 50,969 $ 429 $ -- $ 51,398 Net revenues, intersegment -- 8,860 (8,860) -- Amortization and depreciation 1,119 703 750 2,572 Income (loss) before income taxes $ (244) $ 1,467 $12,187 $ 13,410 Nine Months Ended December 31, 2000 --------------------------------------- Amplifier UltraRF Other* Total --------- ------- ------ ----- Net revenues, external $134,423 $ 1,081 $ -- $135,504 Net revenues, intersegment -- 23,487 (23,487) -- Amortization and depreciation 3,755 2,185 2,354 8,294 Income (loss) before income taxes $ (5,852) $ 313 $11,296 $ 5,757
Consolidated Statement of Operations Data - Fiscal 2000 (in thousands):
Three Months Ended December 26, 1999 --------------------------------------- Amplifier UltraRF Other* Total --------- ------- ------ ----- Net revenues, external $ 48,973 $ 171 $ -- $ 49,144 Net revenues, intersegment -- 7,760 (7,760) -- Amortization and depreciation 1,379 625 1,294 3,298 Income (loss) before income taxes $ 301 $ 1,680 $ 379 $ 2,360 Nine Months Ended December 26, 1999 --------------------------------------- Amplifier UltraRF Other* Total --------- ------- ------ ----- Net revenues, external $123,356 $ 239 $ -- $123,595 Net revenues, intersegment -- 18,650 (18,650) -- Amortization and depreciation 4,157 1,909 4,020 10,086 Income (loss) before income taxes $ (4,597) $ 1,977 $ 3,204 $ 584
10 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) *Data in the "Other" column represents the elimination of intersegment revenues, interest income and expense, other income, the provision for income taxes, certain unallocated corporate expenses and corporate amortization and depreciation that is subsequently allocated to the operating segments. Consolidated Balance Sheet Data (in thousands):
December 31, 2000 --------------------------------------- Amplifier UltraRF Other* Total --------- ------- ------ ----- Segment assets $29,325 $ -- $ 4,177 $ 33,502 Expenditures for additions to long-lived assets $ 2,590 $ 3,478 $ 689 $ 6,757 March 31, 2000 --------------------------------------- Amplifier UltraRF Other* Total --------- ------- ------ ----- Segment assets $32,142 $13,605 $ 8,463 $ 54,210
Geographic Segment Data: Revenue from unaffiliated customers by geographic region as a percentage of revenues were as follows:
Three Months Ended Nine Months Ended ------------------------ ------------------------- December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---- ---- ---- ---- Canada 40% 42% 41% 47% United States 23% 14% 27% 16% France 8% 22% 16% 20% South Korea 28% 22% 15% 17% Other countries 1% -- 1% --
The Company's long-lived assets are located in the following countries (in thousands):
December 31, March 31, 2000 2000 ---- ---- United States $ 7,243 $18,226 Thailand 2,767 1,218 South Korea 984 224 ------- ------- $10,994 $19,668 ======= =======
8. DISCONTINUED MANUFACTURING OPERATIONS AND RELATED RESTRUCTURING CHARGES During fiscal 1999, the Company transitioned the assembly and test of its higher volume single carrier power amplifier products to a contract manufacturer located in Thailand on a turnkey basis. During the fourth quarter of fiscal 2000, the Company decided to transfer the remaining power amplifier production in Sunnyvale, California, to the contract manufacturer. In connection with the decision, the Company recognized in fiscal 2000 an approximately $1.0 million restructuring charge for estimated severance costs related to organizational changes and a planned reduction in work force. Approximately 90 employees engaged in manufacturing and production related functions are 11 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) anticipated to be terminated as a result of the restructuring. The Company anticipates that the restructuring will be substantially completed in the fourth quarter of fiscal 2001. The following table represents the restructuring activity that took place up through December 31, 2000 (in thousands):
Reduction in Workforce --------- Balance at March 31, 2000 $ 996 Cash payment of severance costs (896) ----- Balance at December 31, 2000 $ 100 =====
The balance of the restructuring accrual is included in current liabilities on the condensed consolidated balance sheets. 9. COMPREHENSIVE INCOME Statement of Financial Accounting Standard No. 130 ("SFAS 130") "Reporting Comprehensive Income" establishes rules for the reporting and display of comprehensive income and its components. The following are the components of comprehensive income (loss) (in thousands):
Three Months Ended Nine Months Ended ------------------------ ------------------------- December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---- ---- ---- ---- Net income $13,410 $2,344 $5,745 $ 510 Unrealized gain (loss) on marketable securities 224 (239) 560 (706) ------- ------ ------ ------ Comprehensive income (loss) $13,634 $2,105 $6,305 $ (196) ======= ====== ====== ======
The components of accumulated other comprehensive loss are as follows (in thousands):
December 31, March 31, 2000 2000 ---- ---- Unrealized loss on marketable securities $(57) $(617) ==== =====
10. COMMITMENTS AND CONTINGENCIES Litigation ---------- On December 23, 1997, a purported class action complaint, Russ Warye et al v. Spectrian Corporation et al, Case No. C97-04672, was filed in the United States District Court for the Northern District of California against Spectrian and certain of its officers and directors. The complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by making false and misleading statements about Spectrian's business and prospects between July 17, 1997 through October 23, 1997. On February 5, 1998, a virtually identical complaint, Bernstein et al v. Spectrian Corp. et al, Case No. CV771849, was filed in the Superior Court for the State of California, County of Santa Clara. The state court complaint alleged that Spectrian and certain of its officers and directors violated California state securities and common law and was based on the same allegations as the complaint filed in federal court. A final settlement has been reached by the parties which encompasses both the federal and state actions. Pursuant to the Private Securities Litigation Reform Act, the federal court approved the settlement on October 20, 2000 and dismissed the federal action. On December 4, 2000, the state court approved the settlement and dismissed the state action. The terms of the settlement did not have a material adverse effect on the Company's financial position or results from operations. Commitment ---------- As described in Note 2, the Company has a $58.0 million commitment to purchase semiconductors over the next two years. 12 SPECTRIAN CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued) (Unaudited) 11. LINE OF CREDIT The Company has a revolving line of credit of $10.0 million with a bank collateralized by the majority of the Company's assets. The line of credit expires on June 30, 2001. Under the terms of the master agreement governing this credit instrument, as amended, the Company is required to maintain certain minimum working capital, net worth, profitability and other specific financial ratios. The master agreement also has certain restrictions on other indebtedness and the payment of dividends. The Company was in compliance with all debt covenants at December 31, 2000. The amount available to borrow at December 31, 2000 was $10.0 million. At December 31, 2000, the Company can borrow at either (i) a variable rate equal to the prime rate (9.0%) or (ii) a fixed rate equal to 200 basis points above the LIBOR rate (totaling 8.40%). The Company had no borrowings under the line of credit at December 31, 2000. 12. SUBSEQUENT EVENTS In January 2001, the Company liquidated the portion of its Cree common stock with a guaranteed realizable value of $30 million and invested the proceeds in government and corporate bonds and notes. The Company also sold the 191,094 shares held in escrow for approximately $6,309,000 and realized a loss of approximately $481,000 from the sale of these securities. The $6.3 million will remain in escrow for a period of up to 12 months. In addition, the Company entered into various option arrangements known as a cashless collar, expiring from July 2001 to October 2001, to hedge one million shares of the remaining 1,624,308 shares of Cree common stock on hand. As a result, the Company is able to realize an average of $25.25 per share for the one million hedged shares if the share price of Cree common stock is lower than approximately $25.25 per share when the options expire. If the Cree common stock price exceeds an average of $41.68 per share when the options expire, the Company may sell its hedged shares at approximately $41.68 or settle the options for a cash amount equal to the difference between the Cree common stock price and the option price. Until the options expire, the Company will be restricted from disposing of the one million shares. 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the ''Securities Act'') and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), including statements regarding Spectrian Corporation's ("the Company") expectations, hopes, intentions or strategies regarding the future. When used herein, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend" and similar expressions are intended to identify forward-looking statements within the meaning of the Securities Act and the Exchange Act. Forward looking statements include, but are not limited to: the statements in the second paragraph of "Overview" regarding the recognition in the future of gains on the sale of UltraRF, the development agreement with Cree , and the effect of the sale of UltraRF on the Company's semiconductor cost, in the third paragraph regarding the impact on the Company of a loss of a major OEM customer, in the fourth paragraph regarding international sales as a percentage of future revenues and the impact of currency fluctuations on future revenues, in the fifth paragraph regarding outsourcing, and in the last paragraph regarding average selling prices and gross margins; the statements under "Results of Operations - Research and Development" regarding new product development initiatives; the statements in the last paragraph under "Liquidity and Capital Resources" concerning availability of the line of credit, the anticipated spending for capital additions for the next twelve months and the sufficiency of the Company's available resources to meet cash requirements; and the statements in "Factors Affecting Future Operating Results." Results could differ materially based on various factors including, but not limited to, those described below, under the heading "Factors Affecting Future Operating Results" and elsewhere in this Quarterly Report on Form 10-Q. Among such factors, those which could cause results to differ materially in the case of the above- referenced forward-looking statements include, but are not limited to: the risks of international sales; fluctuations in operating results; customer concentration; the highly competitive market for the Company's products; declining average sales prices; rapid technological change, evolving industry standards, and dependence on new products; and product quality, performance and reliability. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. Investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward-looking statements as a result of various factors. These forward-looking statements are made in reliance upon the safe harbor provision of The Private Securities Litigation Reform Act of 1995. Overview - - -------- Spectrian designs, manufacturers and markets high-power RF amplifiers, for the global wireless communications industry. The Company's power amplifiers support a broad range of transmission standards, including AMPS, TDMA, CDMA, PCS, GSM, WLL, IMT-2000, CDMA2000 and UMTS. Spectrian's power amplifiers are utilized as part of the infrastructure for both wireless voice and data networks. The Company's power amplifiers boost the power of a signal so that it can reach a wireless phone or other device within a designated geography. On December 29, 2000, the Company completed the sale of substantially all of the assets and external liabilities comprising its semiconductor division, UltraRF, to Cree, Inc. ("Cree") pursuant to the Asset Purchase Agreement dated as of November 20, 2000 (the "Asset Purchase Agreement") among Cree, Zoltar Acquisition, Inc. ("Zoltar") and the Company for 1,815,402 shares of common stock of Cree plus common stock with a guaranteed realizable value of $30 million, less $1,034,000 owed by the Company to Cree due to a change in the net assets of UltraRF between October 1, 2000 and December 29, 2000. As part of the definitive agreement, the Company and Cree entered into a two-year supply agreement under which Spectrian is obligated to purchase from Cree an aggregate of $58 million of semiconductors. In the event Spectrian fails to make these purchases, it is obligated to pay Cree the amount of the shortfall. Accordingly, Spectrian deferred $58 million of the gain on sale of UltraRF and will recognize it in future periods as the related purchase commitments to Cree are fulfilled. Spectrian and Cree have also entered into a one-year joint development agreement to develop advanced technologies related to laterally diffused metal oxide semiconductors ("LDMOS"), linear high gain LDMOS driver modules, high efficiency LDMOS power modules and SiC MESFET components. Following the close of the sale of UltraRF, the Company will no longer have revenues related to the sale of the UltraRF products to third party customers. Additionally, as a result of the sale, the Company's cost of semiconductors used in the manufacturing of amplifier products will increase because future purchases from UltraRF will include a gross margin component. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For the nine months ended December 31, 2000, Nortel Networks Corporation ("Nortel") and Verizon Communications ("Verizon"), formed by the merger of Bell Atlantic and GTE Corporation, accounted for approximately 60% and 20% of net revenues, respectively. For the nine months ended December 26, 1999, Nortel accounted for approximately 75% of net revenues. The Company and Nortel have a supply agreement, renegotiated annually, pursuant to which Nortel commits to purchase a certain volume of its annual power amplifier requirements for specified prices from the Company. This agreement allows Nortel to change the product mix requirements, which can significantly affect the Company's gross margins, and to change requested delivery dates without significant financial consequences to Nortel, which affects the Company's ability to efficiently manage production schedules and inventory levels and to accurately forecast product sales. The Company's business, financial condition and results of operations have been materially adversely affected in the past by anticipated orders failing to materialize and by deferrals or cancellations of orders as a result of changes in customer requirements. In the year ended March 31, 1999 ("fiscal 1999"), the first and fourth quarters of the year ended March 31, 2000 ("fiscal 2000") and the first and second quarters of the year ended March 31, 2001 ("fiscal 2001"), product orders fell resulting in substantial losses in those fiscal periods. There can be no assurance that the Company will not experience such fluctuations in the future. If the Company is unable to find customers to generate demand for its new products, the Company's revenues may be materially adversely affected. If the Company were to lose Nortel, Verizon or any other major customer, or if orders by Nortel, Verizon or any other major customer were to otherwise materially decrease either in unit quantity or in price, the Company's business, financial condition and results of operations would be materially adversely affected. During the nine months ended December 31, 2000 and December 26, 1999, sales outside of the United States were 73% and 84%, respectively. The Company expects that international sales will continue to account for a significant percentage of the Company's net revenues for the foreseeable future. Financial market turmoil, economic downturn, consolidation or merger of customers, and other changes in business conditions in any of the Company's current or future markets, such as Canada, South Korea and France, may have a material adverse effect on the Company's sales of its products. Furthermore, because the Company's products are priced in U.S. dollars, currency fluctuations and instability in the financial markets that are served by the Company may have the effect of making the Company's products more expensive than those of other manufacturers whose products are priced in the local currency of the customer and may result in reduced revenues for the Company. In Sunnyvale, California, the Company services all of its power amplifier products. As of September 2000, the Company has transferred its high volume power amplifier production to a contract manufacturer located in Thailand on a turnkey basis. The Company utilizes contract manufacturing to decrease the Company's manufacturing overhead and costs of its products, to increase flexibility to respond to fluctuations in product demand and to leverage the strengths of the contract manufacturer's focus on high volume, high quality manufacturing. The cost of transitioning manufacturing activities to the contract manufacturer were higher than the savings from costs of products, which adversely affected the Company's gross margin from January 1999 to November 2000. As a result of its manufacturing and development infrastructure, the Company has a high level of fixed costs and is dependent upon substantial revenue to achieve and maintain profitability. The market for the Company's products is becoming increasingly competitive. The Company is selling its power amplifier products in South Korea, as well as directly to cellular service providers where its competitors are already established as suppliers. In addition, the Company competes with at least one merchant amplifier manufacturer for business from Nortel. This competition has resulted in, and will continue to result in reduced average selling prices for the Company's products, which accordingly will negatively impact gross margins. Results of Operations - - --------------------- The following table sets forth for the periods indicated certain statement of operations data of the Company expressed as a percentage of total revenues and gross margin on sales. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Three Months Ended Nine Months Ended ------------------------ ------------------------- December 31, December 26, December 31, December 26, 2000 1999 2000 1999 ---- ---- ---- ---- NET REVENUES 100.0% 100.0% 100.0% 100.0% COSTS AND EXPENSES: Cost of revenues 76.8 75.7 80.8 77.5 Research and development 10.5 11.5 12.1 13.0 Selling, general and Administrative 10.3 10.5 12.6 11.3 ----- ----- ----- ----- Total costs and expenses 97.6 97.7 105.5 101.8 ----- ----- ----- ----- OPERATING INCOME (LOSS) 2.4 2.3 (5.5) (1.8) INTEREST INCOME 1.1 1.4 1.2 2.1 INTEREST EXPENSE (0.1) (0.2) (0.1) (0.3) OTHER INCOME 22.7 1.3 8.6 0.5 ----- ----- ----- ----- INCOME BEFORE INCOME TAXES 26.1 4.8 4.2 0.5 INCOME TAXES -- -- -- 0.1 ----- ----- ----- ----- NET INCOME 26.1% 4.8% 4.2% 0.4% ===== ===== ===== ===== GROSS MARGIN ON SALES 23.2% 24.3% 19.2% 22.5% ===== ===== ===== =====
Net Revenues. The Company's net revenues increased 5% to $51.4 million ------------ for the three months ended December 31, 2000 from $49.1 million for the three months ended December 26, 1999. The Company's net revenues increased 10% to $135.5 million for the nine months ended December 31, 2000 from $123.6 million for the nine months ended December 26, 1999. The increase in net revenues compared to the three months ended December 26, 1999 is due to higher average selling prices and volumes in the multi-channel power amplifier ("MCPA") products which was partially offset by lower volumes and average selling prices in the single carrier power amplifier ("SCPA") products. The growth in net revenues compared to the nine months ended December 26, 1999 is due to higher volumes in the Broadband and MCPA products, which combined for net revenues of $20.5 million for the nine months ended December 26, 1999 and for revenues of $50.1 million for the nine months ended December 31, 2000 which was partially offset by lower average selling prices and volumes in SCPA products. UltraRF revenues from external customers increased to $1.1 million from $0.2 million for the nine months ended December 31, 2000 and December 26, 1999, respectively. Cost of Revenues. Cost of revenues consists primarily of turnkey amplifier ---------------- costs for the Company's higher volume products, internal amplifier assembly and test costs for its lower volume and new products, radio frequency ("RF") semiconductor fabrication, assembly and test costs, raw materials, manufacturing overhead and warranty costs. The Company's cost of sales increased by 6% to $39.5 million for the three months ended December 31, 2000 from $37.2 million for the three months ended December 26, 1999. The Company's cost of sales increased by 14% to $109.5 million for the nine months ended December 31, 2000 from $95.8 million for the nine months ended December 26, 1999. The increases on a dollar and percentage basis for the three and nine months ended December 31, 2000 were due to higher MCPA unit volumes, lower yields on semiconductor production and higher inventory obsolescence expense. Gross margin on sales was 23% for the three months ended December 31, 2000 as compared to 24% for the three months ended December 26, 1999. Gross margin on sales was 19% for the nine months ended December 31, 2000 as compared to 23% for the nine months ended December 26, 1999. The decrease in gross margin was primarily a result of declining average sales prices in all products and lower yields on semiconductor production. The Company anticipates that gross margin as a percentage of net revenues will decrease as a result of the sale of the UltraRF division to Cree as the Company is required to purchase the LDMOS RF semiconductor parts at market price rather than recognizing the cost of revenues at the actual cost of production. Research and Development. Research and development ("R&D") expenses ------------------------ include the cost of designing, developing or reducing the manufacturing cost of amplifiers and RF semiconductors. The Company's R&D expenses decreased by 4% to $5.4 million in the three months ended December 31, 2000 from $5.6 million in the three months ended December 26, 1999. The Company's R&D expenses increased by 2% to $16.4 million for the nine months ended 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) December 31, 2000 from $16 million in the nine months ended December 26, 1999. As a percentage of net revenues, R&D expenses represented 11% of revenues for the three months ended December 31, 2000 as compared to 12% of revenues for the three months ended December 26, 1999. As a percentage of net revenues, R&D expenses represented 12% for the nine months ended December 31, 2000 as compared to 13% of net revenues for the nine months ended December 26, 1999. The increase in R&D expenses on a dollar basis for the nine months ended December 1, 2000 reflects new product development initiatives which the Company believes are required to meet current and future market and customer requirements. The decrease in R&D expenses as a percentage of net revenues for the three and nine months ended December 31, 2000 was due to the proportionately greater increase in net revenues than R&D expenses as compared to the similar periods in the prior year. Selling, General and Administrative. Selling, general and administrative ----------------------------------- ("SG&A") expenses include compensation and benefits for sales, marketing, senior management and administrative personnel, commissions paid to independent sales representatives, professional fees and other expenses. The Company's SG&A expenses increased by 2% to $5.3 million in the three months ended December 31, 2000 from $5.2 million in the three months ended December 26, 1999. The Company's SG&A expenses increased by 22% to $17.1 million for the nine months ended December 31, 2000 from $14 million in the nine months ended December 26, 1999. As a percentage of net revenues, SG&A expenses represented 10% for the three months ended December 31, 2000 as compared to 11% of net revenues for the three months ended December 26, 1999. As a percentage of net revenues, SG&A expenses represented 13% for the nine months ended October 1, 2000 as compared to 11% of net revenues for the nine months ended December 26, 1999. The increase in SG&A expenses on a dollar and percentage basis was principally due to increased commissions, marketing efforts to diversify the customer base, creation of the UltraRF sales force and network, increased sales and marketing activities in South Korea, costs incurred to evaluate strategic alternatives for UltraRF, and added maintenance and support for the new enterprise resource planning ("ERP") system. Interest Income. Interest income for the three months ended December 31, --------------- 2000 decreased to $0.6 million from $0.7 million for the three months ended December 26, 1999. Interest income for the nine months ended December 31, 2000 decreased to $1.7 million from $2.6 million for the nine months ended December 26, 1999. The decrease in interest income resulted from lower interest-bearing investment balances associated with reduced average cash and cash equivalent balances. Interest Expense. Interest expense, for the three months ended December ---------------- 31, 2000 decreased to $73,000 from $118,000 for the three months ended December 26, 1999. Interest expense for the nine months ended December 31, 2000 decreased to $162,000 from $419,000 for the nine months ended December 26, 1999. The decrease in interest expense resulted from substantially reduced average borrowing levels. Other Income. Other income for the three and nine months ended December ------------ 31, 2000 increased to $11.7 million from $0.6 million for the three and nine months ended December 29, 1999. Other income for the three and nine months ended December 31, 2000 represents a $11.7 million gain recognized on sale of UltraRF in December 2000. Other income for the three and nine months ended December 26, 1999, represents a $0.6 million gain on the sale of a light industrial building in December 1999. Income Taxes. Due to the losses incurred by the Company in prior years and ------------ the related net operating loss carryforwards available to the Company, the Company did not record any income tax expense except for the minimum state income tax expense for the three and nine months ended December 31, 2000. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Recent Accounting Pronouncements - - -------------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 established a new model for accounting for derivative and hedging activities. In July, 1999 the Financial Accounting Standards Board issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS 137 deferred the effective date of SFAS 133 until the first fiscal year beginning after June 15, 2000. The Company is currently assessing the impact of SFAS 133 on its consolidated financial position, liquidity and results of operations. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements," as amended by SAB 101A and 101B, which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosures related to revenue recognition policies. The Company is currently assessing the impact of this new Staff Accounting Bulletin on its consolidated financial position, liquidity and results of operations. Liquidity and Capital Resources - - ------------------------------- The Company has financed its growth through sales of common stock, private sales of equity securities, capital equipment leases, bank lines of credit and cash flows from operations. Principal sources of liquidity at December 31, 2000 consisted of cash and short-term investments of $48.6 million, investment in Cree common stock of $94.5 million and bank borrowing arrangements. The Company has a revolving line of credit of $10.0 million with a bank collateralized by the majority of the Company's assets. The line of credit expires on June 30, 2001. It is anticipated that the Company will renew the line of credit. Under the terms of the master agreement governing this credit instrument, as amended, the Company is required to maintain certain minimum working capital, net worth, profitability and other specific financial ratios. The master agreement also has certain restrictions on other indebtedness and the payment of dividends. The Company was in compliance with all debt covenants as of December 31, 2000. The amount available to borrow at December 31, 2000 was $10.0 million. The Company can borrow at either (i) a variable rate equal to the prime rate or (ii) a fixed rate equal to 200 basis points above the LIBOR rate, which at December 31, 2000 was 9% and 8.4%, respectively. The Company had no borrowings under the line of credit at December 31, 2000. In January 1997, the Company borrowed $6.0 million under a term loan collateralized by certain capital equipment. During the three months ended December 31, 2000, the Company paid off the outstanding principal balance of this term loan. The Company's working capital increased by $44.9 million to $124.3 million as of December 31, 2000 from $79.4 million as of March 31, 2000. The increase was primarily attributable to a $94.5 million increase in investment in Cree common stock which was the consideration received for the sale of UltraRF, a $4 million increase in accounts receivable, a $1.2 million increase in prepaid expenses and other current assets, a $1 million increase in cash, cash equivalents and short-term investments and a $0.7 million decrease in current portion of debt and capital lease obligations, which were partially offset by a $31.8 million increased in current portion of deferred gain on the sale of UltraRF, a $12 million decrease in net inventories, a $6 million increase in accounts payable and a $6.6 million increased in accrued liabilities. Cash provided by operations was $7 million for the nine months ended December 31, 2000 compared to cash used by operations for the nine months ended December 26, 1999 of $13.3 million. Cash provided by operations for the nine months ended December 31, 2000 was principally the result of a $5.7 million net income, depreciation and amortization of $8.3 million, a $6.9 million decrease in net inventories, a $3 million increase in accounts payable, which were partially offset by a $11.7 million noncash gain on the sale of UltraRF net assets, a $4 million increase in accounts receivable as a result of higher sales in the current quarter and a $1.4 million increase in prepaid expenses and other current assets. Cash used by operations for the nine months ended December 26, 1999 was principally the result of a $20.4 million increase in accounts receivable, which increased proportionately with revenue growth, combined 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) with a $6.6 million reduction in accrued liabilities and $5.4 million increase in inventories which were partially offset by a $0.5 million net income, $10.1 million in depreciation and amortization expense and a $10.1 million increase in accounts payable, which increased proportionately with production levels. The Company's investing activities during the nine months ended December 31, 2000 used cash of approximately $3.2 million as compared to cash used of $2.3 million during the comparable period in the prior year. Cash used by investing activities during the nine months ended December 31, 2000 resulted primarily from $6.8 million in additions to property and equipment, $2.8 million in payments for transaction costs associated with the sale of UltraRF, and $3 million in purchases of short-term investments which were partially offset by $9.2 million proceeds from sale and maturates of short-term investments. Capital additions for the nine months ended December 31, 2000 included manufacturing test and production equipment required to support new products and test equipment to support various research and development projects. Cash used for investing activities during the nine months ended December 26, 1999 resulted primarily from $5.2 million additions to property And equipment, partially offset by $3.3 million in proceeds from the sale of a light industrial building by the Company. Capital additions for the nine months ended December 26, 1999 included manufacturing and test equipment required to support new products, test equipment to support various research and development projects, and the ERP system. The Company's financing activities during the nine months ended December 31, 2000 provided cash of approximately $2.9 million as compared to providing $2.5 million of cash during the comparable period in the prior year. Cash provided by financing activities during the nine months ended December 31, 2000 was the result of $4.9 million proceeds from the issuance of common stock, through the exercise of employee stock options and employee stock purchase plan activity, which was partially offset by $2 million in repayments of debt and capital lease obligations. Cash provided by financing activities during the nine months ended December 26, 1999 was the result of $6.7 million in proceeds from the issuance of common stock, through the exercise of employee stock options and employee stock plan activity, which was partially offset by $4.2 million in repayments of debt and capital lease obligations. As part of the sale of UltraRF, the Company has committed to purchase $58.0 million of semiconductors over the next two years. The Company anticipates spending approximately $7.0 million over the next twelve months for capital additions primarily to support manufacturing production and test requirements and development projects. Based on the Company's current working capital position, the cash flows the Company expects to generate from the remainder of fiscal 2001 operations, and the available line of credit, the Company believes that sufficient resources will be available to meet the Company's cash requirements for at least the next twelve months. Cash requirements for future periods will depend on the Company's profitability, timing and level of capital expenditures, working capital requirements and rate of growth. Factors Affecting Future Operating Results - - ------------------------------------------ Customer Concentration; Dependence on Nortel and Verizon. The wireless -------------------------------------------------------- infrastructure equipment market is dominated by a small number of large OEMs and wireless service providers, including Ericsson, Lucent, Motorola, Nortel, Verizon and Siemens. The Company's revenues are derived primarily from sales to a limited number of these customers, in particular, Nortel and Verizon. Furthermore, a substantial portion of revenues from Nortel in the past has resulted from sales of a limited number of the Company's products. The Company's business, financial condition and results of operations have been materially adversely affected in the past by anticipated orders failing to materialize and by deferrals or cancellations of orders as a result of changes in customer requirements. The Company and Nortel have a supply agreement, renegotiated annually, pursuant to which Nortel commits to purchase a certain volume of its annual power amplifier requirements for specified prices from the Company. This agreement allows Nortel to change the product mix requirements, which can significantly affect the Company's gross margins, and to change requested delivery dates without significant financial consequences to Nortel, which affects the Company's ability to efficiently manage production schedules and inventory levels and to accurately forecast product sales. Any reduction in the level of purchases of the Company's amplifiers by Nortel or Verizon, or any material reduction in pricing without significant offsets, would have a material adverse effect on the Company's business, financial condition and results of operations. Further, if the Company were to lose Nortel or any other major customer, or if orders by Nortel or Verizon or any other major customer were to otherwise materially decrease, the Company's business, financial condition and results of operations would be materially adversely affected. In addition, wireless infrastructure equipment OEMs have come under increasing price pressure from wireless service providers, which in turn has resulted in downward pricing pressure on the Company's products. The Company expects to incur increasing pricing pressures from Nortel, Verizon and other major customers in future periods, which could result in declining average sales prices and gross margins for the Company's products. Fluctuations in Operating Results. The Company's quarterly and annual --------------------------------- results have in the past been, and will continue to be, subject to significant fluctuations due to a number of factors, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. In particular, the Company's results of operations are likely to vary due to: the timing, cancellation, delay or rescheduling of OEM customer orders and shipments; the timing of announcements or introductions of new products by the Company, its competitors or their respective OEM customers; the acceptance of such products by wireless equipment OEMs and their customers; relative variations in manufacturing efficiencies and costs; competitive factors such as the pricing, availability, and demand for competing amplification products; changes in average sales prices and related gross margins which vary significantly based upon product mix; subcontractor performance; variations in operating expenses; changes in manufacturing capacity and variations in the utilization of this capacity; shortages of key supplies; the long sales cycles associated with the Company's customer specific products; the timing and level of product and process development costs; changes in inventory levels; and the relative strength or weakness of international financial markets. Anticipated orders from the Company's OEM customers have in the past failed to materialize and delivery schedules have been deferred or canceled as a result of changes in OEM customer requirements and the Company expects this pattern to continue as customer requirements continue to change and industry standards continue to evolve. Reduced demand for wireless infrastructure equipment in the past has caused significant fluctuations in the Company's product sales. There can be no assurance that the Company will not experience such fluctuations in the future or that the Company will experience in the future the same annual revenue growth that it did in fiscal 2000. The Company establishes its expenditure levels for product development and other operating expenses based on its expected revenues, and expenses are relatively fixed in the short term. As a result, variations in timing of revenues can cause significant variations in quarterly results of operations. There can be no assurance that the Company will be profitable on a quarter-to-quarter basis in the future. The Company believes that period-to- period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. Due to all the foregoing factors, it is likely that in some future quarter or quarters the Company's revenues or operating results will not meet the expectations of public stock market analysts or investors. In such event, the market price of the Company's Common Stock would be materially adversely affected. Declining Average Sales Prices. The Company has experienced, and expects ------------------------------ to continue to experience, declining average sales prices for its products. Wireless infrastructure equipment manufacturers have come under increasing price pressure from wireless service providers, which in turn has resulted in downward pricing pressure on the Company's products. In addition, competition has increased the downward pricing pressure on the Company's products. Since wireless infrastructure equipment manufacturers frequently negotiate supply arrangements far in 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) advance of delivery dates, the Company often must commit to price reductions for its products before it is aware of how, or if, cost reductions can be obtained. To offset declining average sales prices, the Company believes that it must achieve manufacturing cost reductions. If the Company is unable to achieve such cost reductions, the Company's gross margins will decline, and such decline will have a material adverse effect on the Company's business, financial condition and results of operations. Product Quality, Performance and Reliability. The Company expects that -------------------------------------------- its customers will continue to establish demanding specifications for quality, performance and reliability that must be met by the Company's products. Power amplifiers as complex as those offered by the Company often encounter development delays and may contain undetected defects or failures. The Company has from time to time in the past experienced product quality, performance and reliability problems. In addition, multicarrier power amplifiers have a higher probability of malfunction than single carrier power amplifiers because of their greater complexity. There can be no assurance that defects or failures relating to the Company's product quality, performance and reliability will not occur in the future that may have a material adverse effect on the Company's business, financial condition and results of operations. Internal Amplifier Design and Production Capabilities of OEMs. The ------------------------------------------------------------- Company believes that a majority of the present worldwide production of power amplifiers is captive within the manufacturing operations of wireless equipment OEMs, many of which have chosen not to purchase amplifiers from outside suppliers. In addition, these manufacturers could decide to sell amplifiers to other wireless equipment OEMs. If this should occur, the competition for power amplifiers would significantly increase and could have a material adverse effect on the Company's business, financial condition and results of operations. The Company also believes that those OEMs that purchase from third party amplifier vendors are reluctant to switch once committed to a particular merchant vendor. Consequently, the Company has only limited opportunities to increase revenues by replacing internal OEM amplifier production or displacing other merchant amplifier suppliers. Moreover, given the limited opportunities for merchant power amplifier suppliers, any decision by an OEM to employ a second source merchant supplier for a product currently purchased from a merchant supplier may reduce the existing merchant supplier's ability to maintain a given level of product sales to such OEM or, possibly, to retain the OEM as a customer due to price competition from the second source merchant supplier. There can be no assurance that the Company's major OEM customers will continue to rely, or increase their reliance, on the Company as an external source of supply for their power amplifiers, or that other wireless equipment OEMs will become customers of the Company. If the major wireless infrastructure equipment suppliers do not purchase or continue to purchase their power amplifiers from merchant suppliers, the Company's business, results of operations and financial condition will be materially adversely affected. Rapid Technological Change; Evolving Industry Standards; Dependence on New -------------------------------------------------------------------------- Products. The markets in which the Company and its OEM customers compete are - - -------- characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. In particular, because the Company's strategy of rapidly bringing to market products customized for numerous and evolving modulation standards requires developing and achieving volume production of a large number of distinct products, the Company's ability to rapidly design and produce individual products for which there is significant OEM customer demand will be a critical determinant of the Company's future success. A softening of demand in the markets served by the Company or a failure of modulation standard in which the Company has invested substantial development resources may have a material adverse effect on the Company's business, financial condition and results of operations. No assurance can be given that the Company's product development efforts will be successful, that its new products will meet customer requirements and be accepted or that its OEM customers' product offerings will achieve customer acceptance. If a significant number of development projects, including the Company's new multicarrier products, do not result in substantial volume production or if technologies or standards supported by the Company's or its customers' products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be materially adversely affected. Purchase and Supply Agreement with Cree. In connection with the Company's --------------------------------------- completion of the sale of UltraRF to Cree, the Company entered into a Purchase and Supply Agreement, dated as of December 29, 2000 by and between the Company and Zoltar (subsequently renamed "UltraRF, Inc."). Pursuant to the Purchase and Supply Agreement, the Company committed to purchase and accept delivery from UltraRF, Inc. certain components at a minimum aggregate purchase price. The Company's need for UltraRF, Inc. components during a calendar quarter may 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) be insufficient to satisfy its minimum commitments for such calendar quarter. In such event, the Company would be obligated to purchase excess inventory that it may never utilize or to pay a shortfall surcharge, either of which could have a material adverse effect on the Company's business, financial conditions, and cash flows. Arm's-Length Relationship. The Company relies on UltraRF for the supply ------------------------- of a substantial amount of components used in the manufacture of its products. When the Company operated UltraRF as a separate division, it may have obtained more favorable terms for semiconductor products than through negotiations with unaffiliated third parties. With the sale of UltraRF, the Company must now deal with UltraRF on an arm's-length basis. Accordingly, the prices and other terms for UltraRF semiconductor products may now be less favorable to the Company. Sole or Limited Sources of Products, Materials and Services. The Company ----------------------------------------------------------- currently procures from single sources power amplifier assemblies, certain specialized semiconductors, components and services for its products. The Company purchases these products, components and services on a purchase order basis, does not carry significant inventories of these components and does not have any long-term supply contracts with its sole source vendors. During calendar 2000, the Company completed the transfer of the production of power amplifiers to a contract manufacturer in Thailand. As a result of this transfer, the Company no longer has significant manufacturing capacity. The Company issues non-cancelable purchase orders to the contract manufacturer 60 days in advance of requested delivery, which is greater than the committed delivery schedule of some of its customers, such as Nortel. On December 29, 2000, the Company completed the sale of substantially all of the assets and liabilities comprising the Company's semiconductor division, UltraRF, pursuant to the Asset Purchase Agreement dated as of November 20, 2000 to Cree. As a result, the Company no longer manufactures LDMOS RF power semiconductors, which are one critical component in the Company's power amplifier products. As part of the definitive agreement, the Company and Cree entered into a two-year supply agreement under which the Company is obligated to purchase from Cree an aggregate of $58 million of semiconductors. Consequently, Cree becomes a sole source vendor to supply LDMOS RF power semiconductors to the Company. The Company's reliance on sole sources for certain components and its migration to an outsourced, turnkey manufacturing strategy entail certain risks including reduced control over the price, timely delivery, reliability and quality of the components. If the Company were to change any of its sole source vendors or contract manufacturer, the Company would be required to requalify the components with each new vendor or contract manufacturer, respectively. Any inability of the Company to obtain timely deliveries of components or assembled amplifiers of acceptable quality in required quantities or a significant increase in the prices of components for which the Company does not have alternative sources could materially and adversely affect the Company's business, financial condition and results of operations. The Company has occasionally experienced difficulties in obtaining some components, and no assurance can be given that shortages will not occur in the future. Risks of International Sales. The Company operates in an international ---------------------------- market and expects that international sales will continue to account for a significant percentage of the Company's total revenues for the foreseeable future. These sales involve a number of inherent risks, including imposition of government controls, currency exchange fluctuations, potential insolvency of international distributors, representatives and customers, reduced protection of intellectual property rights in some countries, the impact of recessionary environments in economies outside the United States, political instability and generally longer receivables collection periods, as well as tariffs and other trade barriers. In addition, because substantially all of the Company's foreign sales are denominated in U.S. dollars, increases in the value of the dollar relative to the local currency would increase the price of the Company's products in foreign markets and make the Company's products relatively more expensive and less price competitive than competitors' products that are priced in local currencies. There can be no assurance that these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, financial condition and results of operations. The Company anticipates that turmoil in financial markets and the deterioration of the underlying economic conditions in certain countries where the Company has significant sales may have an impact on its sales to customers located in or whose projects are based in those countries due to the impact of currency fluctuations on the relative price of the Company's products and restrictions on government spending imposed by the International Monetary Fund (the "IMF") on those countries receiving the IMF's assistance. In addition, customers in those countries may face reduced access to working capital to fund component purchases, such as the Company's products, due to higher interest rates, reduced funding of wireless infrastructure by domestic governments, reduced bank lending due to contractions in the money supply or the deterioration in the customer's or its bank's financial condition or the inability to access equity 22 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) financing. A substantial majority of the Company's products are sold to OEMs who incorporate the Company's products into systems sold and installed to end-user customers. These OEMs are not required by contract and do not typically provide the Company with information regarding the location and identity of their end-user customers, and, therefore, the Company is not able to determine what portion of its product sales have been or future orders will be incorporated into OEM sales to end-users in countries experiencing financial market turmoil and/or deterioration of economic conditions. Furthermore, a large portion of the Company's existing customers and potential new customers are servicing new markets in developing countries that the Company's customers expect will deploy wireless communication networks as an alternative to the construction of a wireline infrastructure. If such countries decline to construct wireless communication systems, or construction of such systems is delayed for any reason, including business and economic conditions and changes in economic stability due to factors such as increased inflation and political turmoil, such delays could have a material adverse effect on the Company's business, financial condition and results of operations. Reliance upon Growth of Wireless Services. Sales of power amplifiers to ----------------------------------------- wireless infrastructure equipment suppliers and network operators have in the past accounted, and are expected in the future to account, for substantially all of the Company's product sales. Demand for wireless infrastructure equipment is driven by demand for wireless service. Although demand for power amplifiers has grown in recent years, if demand for wireless services fails to increase or increases more slowly than the Company or its customers currently anticipate, the Company's business, financial condition and results of operations would be materially and adversely affected. Market for the Company's Products Is Highly Competitive. The wireless ------------------------------------------------------- communications equipment industry is extremely competitive and is characterized by rapid technological change, new product development and product obsolescence, evolving industry standards and significant price erosion over the life of a product. The ability of the Company to compete successfully and sustain profitability depends in part upon the rates at which wireless equipment OEMs incorporate the Company's products into their systems and the Company captures market share from other merchant suppliers. The Company's major OEM customers continuously evaluate whether to manufacture their own amplification products or purchase them from outside sources. There can be no assurance that these OEM customers will incorporate the Company's products into their systems or that in general they will continue to rely, or expand their reliance, on external sources of supply for their power amplifiers. These customers and other large manufacturers of wireless communications equipment could also elect to enter the merchant market and compete directly with the Company, and at least one OEM, NEC, has already done so. Such increased competition could materially adversely affect the Company's business, financial condition and results of operations. The Company's principal competitors in the market for wireless amplification products provided by merchant suppliers currently include AML Communications, Amplidyne, Fujitsu, Mitsubishi and Powerwave Technologies. No assurance can be given that the Company's competitors will not develop new technologies or enhancements to existing products or introduce new products that will offer superior price or performance features compared to the Company's products. Uncertain Protection of Intellectual Property. The Company's ability to --------------------------------------------- compete successfully and achieve future revenue growth will depend, in part, on its ability to protect its proprietary technology and operate without infringing the rights of others. The Company has a policy of seeking patents on inventions resulting from its ongoing research and development activities. There can be no assurance that the Company's pending patent applications will be allowed or that the issued or pending patents will not be challenged or circumvented by competitors. Notwithstanding the Company's active pursuit of patent protection, the Company believes that the success of its business depends more on the collective value of its patents, specifications, computer aided design and modeling tools, technical processes and employee expertise. The Company generally enters into confidentiality and nondisclosure agreements with its employees, suppliers, OEM customers, and potential customers and limits access to and distribution of its proprietary technology. However, there can be no assurance that such measures will provide adequate protection for the Company's trade secrets or other proprietary information, or that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors. The failure of the Company to protect its proprietary technology could have a material adverse effect on its business, financial condition and results of operations. 23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Risk of Third Party Claims of Infringement. The communications equipment ------------------------------------------ industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have resulted in significant and often protracted and expensive litigation. Although there is currently no pending intellectual property litigation against the Company, the Company or its suppliers may from time to time be notified of claims that the Company may be infringing patents or other intellectual property rights owned by third parties. If it is necessary or desirable, the Company may seek licenses under such patents or other intellectual property rights. However, there can be no assurance that licenses will be offered or that the terms of any offered licenses will be acceptable to the Company. The failure to obtain a license from a third party for technology used by the Company or otherwise secure rights to use such technology could cause the Company to incur substantial liabilities, to suspend the manufacture of products or expend significant resources to develop noninfringing technology. There can be no assurance that the Company would be successful in such development or that such licenses would be available on reasonable terms, if at all. In the event that any third party makes a successful claim against the Company or its customers and either a license is not made available to the Company on commercially reasonable terms or a "design around" is not practicable, the Company's business, financial condition and results of operations would be materially adversely affected. Furthermore, the Company may initiate claims or litigation against third parties for infringement of the Company's proprietary rights or to establish the validity of the Company's proprietary rights. Litigation by or against the Company could result in significant expense to the Company and divert the efforts of the Company's technical and management personnel, whether or not such litigation results in a favorable determination for the Company. In the event of an adverse result in any such litigation, the Company could be required to pay substantial damages, indemnify its customers, cease the manufacture, use and sale of infringing products, expend significant resources to develop noninfringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. Government Regulation of Communications Industry. Radio frequency ------------------------------------------------ transmissions and emissions, and certain equipment used in connection therewith are regulated in the United States, Canada and throughout the rest of the world. Regulatory approvals generally must be obtained by the Company in connection with the manufacture and sale of its products, and by wireless service providers to operate the Company's products. The United States Federal Communications Commission (the "FCC") and regulatory authorities abroad constantly review RF emission issues and promulgate standards based on such reviews. If more stringent RF emission regulations are adopted, the Company and its OEM customers may be required to alter the manner in which radio signals are transmitted or otherwise alter the equipment transmitting such signals, which could materially adversely affect the Company's products and markets. The enactment by federal, state, local or international governments of new laws or regulations or a change in the interpretation of existing regulations could also materially adversely affect the market for the Company's products. Although deregulation of international communications industries along with radio frequency spectrum allocations made by the FCC have increased the potential demand for the Company's products by providing users of those products with opportunities to establish new wireless personal communications services, there can be no assurance that the trend toward deregulation and current regulatory developments favorable to the promotion of new and expanded personal communications services will continue or that other future regulatory changes will have a positive impact on the Company. The increasing demand for wireless communications has exerted pressure on regulatory bodies worldwide to adopt new standards for such products, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have in the past caused, and may in the future cause, the cancellation, postponement or rescheduling of the installation of communications systems by the Company's OEM customers. These delays have had in the past, and in the future may have, a material adverse effect on the sale of products by the Company to such OEM customers. Environmental Regulations. The Company is subject to a variety of local, ------------------------- state and federal governmental regulations relating to the storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture the Company's products. The Company believes that it is currently in compliance in all material respects with such regulations and that it has obtained all necessary environmental permits to conduct its business. Nevertheless, the failure to comply with current or future regulations could result in the imposition of substantial fines on the Company, suspension of production, alteration of its manufacturing processes or cessation of operations. Compliance with such regulations could require the Company to acquire expensive remediation equipment or to incur substantial expenses. Any failure by the Company to control the use, disposal, removal or storage of, or to adequately restrict the discharge of, or assist in the cleanup of, hazardous or toxic substances, could subject the Company to significant liabilities, including joint and several liabilities under certain statutes. The imposition of such liabilities could materially adversely affect the Company's business, financial condition and results of operations. 24 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Management of Growth; Dependence on Key Personnel. The Company's business ------------------------------------------------- and growth has placed, and is expected to continue to place, a significant strain on the Company's personnel, management and other resources. The Company's ability to manage any future growth effectively will require it to attract, motivate, manage and retain new employees successfully, especially in the highly competitive northern California job market, to integrate new employees into its overall operations and to retain the continued service of its key technical, marketing and management personnel, and to continue to improve its operational, financial and management information systems. Although the Company has employment contracts with several of its executive officers, these agreements do not obligate such individuals to remain in the employment of the Company. The Company does not maintain key person life insurance on any of its key technical personnel. The competition for such personnel is intense. The Company has experienced loss of key employees in the past and could in the future. Such losses could have a material adverse effect on the Company. As a result of the plan to discontinue manufacturing operations in Sunnyvale, California, and the Company's other restructuring activities, several key executives have ceased to be employees of the Company. The Company's ability to manage its growth will require it to continue to invest in its operational, financial and management information systems, procedures and controls. The Company can give no assurance that it will be able to manage its growth effectively. Failure to manage growth effectively would have a material adverse effect on the Company's business, financial condition and results of operations. The Company may, from time to time, pursue the acquisition of other companies, assets or product lines that complement or expand its existing business. The Company may also, from time to time, pursue divestitures of existing operations. Acquisitions and divestitures involve a number of risks that could adversely affect the Company's operating results. These risks include the diversion of management's attention from day-to-day business, the fluctuation of operating results due to the timing of charges for costs associated with acquisitions or divestitures, the difficulty of combining and assimilating the operations and personnel of the acquired companies, the difficulty of separating a divested operation from the remaining operation, charges to the Company's earnings as a result of the purchase of intangible assets, and the potential loss of key employees as a result of an acquisition or divestiture. Should any acquisition take place, we can give no assurance that this acquisition will not materially and adversely affect the Company or that any such acquisition will enhance the Company's business. Volatility of Stock Price. The market price of the shares of Common Stock ------------------------- has been and is likely to continue to be highly volatile, and is affected significantly by factors such as fluctuations in the Company's quarterly and annual operating results, customer concentration, the timing difference between Nortel's requested delivery dates and its vendor purchase commitments to support the customer's delivery requirements, reliance on international markets, the absence of the economies of scale achieved by some of its competitors, announcements of technological innovations, new customer contracts or new products by the Company or its competitors, announcements by the Company's customers regarding their business or prospects, changes in analysts' expectations, estimates and recommendations, news reports regarding the Company, its competitors and its markets, governmental regulatory action, developments with respect to patents or proprietary rights, announcements of significant acquisitions or strategic partnerships by the Company or its competitors, announcements of significant divestitures of existing businesses or product lines, the market price of the shares of the common stock of Cree, general market conditions and other factors. In addition, the stock market in general, and the market prices for power amplifier manufacturers in particular, have experienced extreme volatility that is often unrelated to the operating performance of these companies. These broad market and industry fluctuations may adversely affect the price of the Company's common stock, regardless of actual operating performance. The market price of the Company's Common Stock has fluctuated significantly in the past. 25 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Volatility of Cree's Common Stock Price. Pursuant to the Asset Purchase --------------------------------------- Agreement, the Company received as partial consideration for the sale of UltraRF, 1,815,402 shares of common stock of Cree. In January 2001, the Company sold 191,094 shares, which were held in escrow for approximately $6,309,000 and realized a loss of approximately $481,000 from the sale of these securities. In addition, the Company entered into various option arrangements, expiring from July 2001 to October 2001, to hedge one million shares of the remaining 1,624,308 shares of Cree common stock on hand. As a result, the Company is able to realize an average of $25.25 per share for the one million hedged shares if the share price of Cree is lower than this when the options expire. If the Cree stock price exceeds an average of $41.68 when the options expire, the Company may sell its hedged shares at this price or settle the options for a cash amount equal to the difference between the Cree stock price and the option price. Until the options expire, the Company will be restricted from disposing of the one million shares. The Company is currently holding the remaining 624,308 shares of Cree common stock, which are not subject to such option arrangements. The Company faces a number of risks due to the size of its ownership in Cree including the risk that its financial statements and results of operations reflect the Company's ownership stake in Cree which impacts the Company's stock price. The market price of the shares of Cree's common stock has been and is likely to continue to be highly volatile. Such volatility in the market price of Cree's common stock and the resulting impact on investors and analysts' perceptions of the change of the Company's valuation due to the size of its holdings in Cree common stock may adversely affect the market price of the Company's common stock. Escrow Shares. Of the total consideration paid under the Asset Purchase ------------- Agreement, approximately $6 million is currently held in escrow to secure the Company's representations, warranties and covenants under the Asset Purchase Agreement for a period of 12 months. If any claims for indemnification are made against the Company anytime during this 12 month period, whether meritorious or not, the Company may be delayed or precluded from realizing the proceeds placed in escrow. Legal Proceedings. On December 23, 1997, a purported class action ----------------- complaint, Russ Warye et al v. Spectrian Corporation et al, Case No. C97-04672, was filed in the United States District Court for the Northern District of California against Spectrian and certain of its officers and directors. The complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by making false and misleading statements about Spectrian's business and prospects between July 17, 1997 through October 23, 1997. On February 5, 1998, a virtually identical complaint, Bernstein et al v. Spectrian Corp. et al, Case No. CV771849, was filed in the Superior Court for the State of California, County of Santa Clara. The state court complaint alleged that Spectrian and certain of its officers and directors violated California state securities and common law and was based on the same allegations as the complaint filed in federal court. A final settlement was reached by the parties which encompasses both the federal and state actions. Pursuant to the Private Securities Litigation Reform Act, the federal court approved the settlement on October 20, 2000 and dismissed the federal action. On December 4, 2000, the state court approved the settlement and dismissed the state action. The terms of the settlement did not have a material adverse effect on the Company's financial position or results from operations. Shareholder Rights Plan; Issuance of Preferred Stock. The Board of ---------------------------------------------------- Directors of the Company adopted a Shareholder Rights Plan in October 1996 (the "Previous Agreement"). On August 9, 2000, pursuant to section 27 of the Previous Agreement, the Company's Board of Directors agreed to restate the dividend that it had declared under the Previous Agreement in a Second Amended and Restated Preferred Shares Rights Agreement dated August 14, 2000 (the "Rights Agreement"). Under the Rights Agreement, the Company's Board of Directors amended the Previous Agreement to amend the dividend of one right (a "Right," and collectively the "Rights") to purchase one one-thousandth share of the Company's Series A Preferred for each outstanding share of Common Stock, par value $0.001 per share ("Common Shares"), of the Company. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred at an exercise price of $126.00 (the "Purchase Price"), subject to adjustment. The Rights become exercisable upon the occurrence of certain events, including the announcement of a tender offer or exchange offer for the Company's Common Stock or the acquisition of a specified percentage of the Company's Common Stock by a third party. The exercise of the Rights could have the effect of delaying, deferring or preventing a change in control of the Company, including, without limitation, discouraging a proxy contest or making more difficult the acquisition of a substantial block of the 26 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company's Common Stock. These provisions could also limit the price that investors might be willing to pay in the future for shares of the Company's Common Stock. The Board of Directors has the authority to issue up to 5,000,000 shares of undesignated Preferred Stock and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued shares of undesignated Preferred Stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the Company's stockholders. For example, in connection with the Company's Shareholder Rights Plan, the Board of Directors designated 20,000 shares of Preferred Stock as Series A Participating Preferred Stock although none of such shares have been issued. The Preferred Stock could be issued with voting, liquidation, dividend and other rights superior to those of the holders of Common Stock. The issuance of Preferred Stock under certain circumstances could have the effect of delaying, deferring or preventing a change in control of the Company. 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company develops products in the United States and markets its products in North America, Europe and the Asia-Pacific region. Thus, the financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make the Company's products less competitive in foreign markets. The Company's exposure to market rate risk for changes in interest rates relate primarily to its investment portfolio. The Company does not hold derivative financial instruments in its investment portfolio. The Company places its investments with high quality institutions and limits the amount of credit exposure to any one issuer. The Company is averse to principal loss and ensures the safety and preservation of its invested funds by limiting default, market and reinvestment risk. The Company classifies its short-term investments as "fixed-rate" if the rate of return on such instruments remains fixed over their term. These "fixed-rate" investments include fixed-rate U.S. government securities and corporate obligations with contractual maturity dates ranging from less than one year to greater than five years. The table below presents the amounts and related weighted interest rates of the Company's short-term investments at December 31 and March 31, 2000 (dollars in thousands).
December 31, March 31, 2000 2000 ---- ---- Average fixed interest rate 5.7% 6.0% ======= ======= Amortized cost $30,421 $36,644 ======= ======= Fair value $30,364 $36,027 ======= ======= Contractual maturity dates: Less than 1 year $ 2,463 $ 3,500 1 to 5 years 27,901 32,527 ------- ------- $30,364 $36,027 ======= =======
Pursuant to the Asset Purchase Agreement, the Company received as partial consideration for the sale of UltraRF, 1,815,402 shares of common stock of Cree. In January 2001, the Company sold 191,094 shares, which were held in escrow for approximately $6,309,000 and realized a loss of approximately $481,000 from the sale of these securities. In addition, the Company entered into various option arrangements, expiring from July 2001 to October 2001, to hedge one million shares of the remaining 1,624,308 shares of Cree common stock on hand. As a result, the Company is able to realize an average of $25.25 per share for the one million hedged shares if the share price of Cree is lower than this when the options expire. If the Cree stock price exceeds an average of $41.68 when the options expire, the Company may sell its hedged shares at this price or settle the options for a cash amount equal to the difference between the Cree stock price and the option price. Until the options expire, the Company will be restricted from disposing of the one million shares. The Company is currently holding the remaining 624,308 shares of Cree common stock, which are not subject to such option arrangements. A 20% adverse change in the value of Cree common stock as of December 31, 2000, assuming the hedging had not been in place, would result in an approximate $12.9 million decrease in the fair value of the Company's available for sale securities. 28 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On December 23, 1997, a purported class action complaint, Russ Warye et al v. Spectrian Corporation et al, Case No. C97-04672, was filed in the United States District Court for the Northern District of California against Spectrian and certain of its officers and directors. The complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by making false and misleading statements about Spectrian's business and prospects between July 17, 1997 through October 23, 1997. On February 5, 1998, a virtually identical complaint, Bernstein et al v. Spectrian Corp. et al, Case No. CV771849, was filed in the Superior Court for the State of California, County of Santa Clara. The state court complaint alleged that Spectrian and certain of its officers and directors violated California state securities and common law and was based on the same allegations as the complaint filed in federal court. A final settlement has been reached by the parties which encompasses both the federal and state actions. Pursuant to the Private Securities Litigation Reform Act, the federal court approved the settlement on October 20, 2000 and dismissed the federal action. On December 4, 2000, the state court approved the settlement and dismissed the state action. The terms of the settlement will not have a material adverse effect on the Company's financial position or results from operations. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. --------
Exhibit Number Description ------ ----------- 2.1++ Asset Purchase Agreement dated as of November 20, 2000 among Cree, Inc., a North Carolina corporation, Zoltar Acquisition, Inc., a North Carolina corporation and Spectrian Corporation, a Delaware corporation. 10.48 Purchase and Supply Agreement dated as of December 29, 2000 by and between Spectrian Corporation, a Delaware corporation and Zoltar Acquisition, Inc., a North Carolina corporation. 10.49 Sublease Agreement dated as of December 29, 2000 between Zoltar Acquisition, Inc., a North Carolina corporation, and Spectrian Corporation, a Delaware corporation. 10.50 Payment and Performance Guaranty of Sublease dated December 29, 2000, by Cree, Inc., a North Carolina corporation in favor of Spectrian Corporation, a California corporation. 10.51 Standard Industrial/Commercial Net Lease dated December 12, 2000 by and between CSS Properties II, LLC and Spectrian Corporation. _____________________________ ++ Incorporated by reference to Exhibit 2.1 of Current Report on Form 8-K filed by the Registrant on January 16, 2001.
(b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K ------------------- with the Securities and Exchange Commission on December 5, 2000 regarding the Company's entering into an Asset Purchase Agreement with Cree, Inc. and Zoltar Acquisition, Inc. for the sale of the Company's UltraRF division. 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPECTRIAN CORPORATION --------------------- (Registrant) Dated: February 14, 2001 By: /s/ MICHAEL D. ANGEL ---------------------------- Michael D. Angel Executive Vice President, Finance and Administration, Chief Financial Officer and Secretary (Authorized Officer and Principal Financial and Accounting Officer) 30 INDEX TO EXHIBITS
Exhibit Sequentially Number Description Numbered Page ------ ----------- ------------- 2.1++ Asset Purchase Agreement dated as of November 20, 2000 among Cree, Inc., a North Carolina corporation, Zoltar Acquisition, Inc., a North Carolina corporation and Spectrian Corporation, a Delaware corporation. __ 10.48 Purchase and Supply Agreement dated as of December 29, 2000 by and between Spectrian Corporation, a Delaware corporation and Zoltar Acquisition, Inc., a North Carolina corporation. __ 10.49 Sublease Agreement dated as of December 29, 2000 between Zoltar Acquisition, Inc., a North Carolina corporation, and Spectrian Corporation, a Delaware corporation. __ 10.50 Payment and Performance Guaranty of Sublease dated December 29, 2000, by Cree, Inc., a North Carolina corporation in favor of Spectrian Corporation, a California corporation. __ 10.51 Standard Industrial/Commercial Net Lease dated December 12, 2000 by and between CSS Properties II, LLC and Spectrian Corporation. __ _____________________________ ++ Incorporated by reference to Exhibit 2.1 of Current Report on Form 8-K filed by the Registrant on January 16, 2001.
31 EX-10.48 2 0002.txt PURCHASE AND SUPPLY AGREEMENT DATED AS OF DECEMBER 29, 2000 EXHIBIT 10.48 CONFIDENTIAL TREATMENT PURCHASE AND SUPPLY AGREEMENT This Purchase and Supply Agreement ("Agreement") dated as of December 29, 2000 is entered into by and between Spectrian Corporation ("Spectrian"), a Delaware corporation, and Zoltar Acquisition, Inc. ("Newco"), a North Carolina corporation and a wholly-owned subsidiary of Cree, Inc., a North Carolina corporation ("Parent"). RECITALS WHEREAS, Spectrian, through its UltraRF division, is a developer and supplier of ultra linear, high-performance radio amplifiers for the wireless infrastructure market; WHEREAS, Newco is a newly formed entity that intends to be a developer and supplier of high-performance radio frequency power semiconductors and integrated modules for the wireless infrastructure market; WHEREAS, Spectrian, Parent and Newco have entered into an Asset Purchase Agreement, dated November 20, 2000 (the "Asset Purchase Agreement"), pursuant to which, among other things, Newco shall purchase Spectrian's UltraRF business division; and WHEREAS, following the purchase of Spectrian's UltraRF business division, Newco wishes to supply Spectrian with high-performance radio frequency power semiconductors and integrated modules and related components and systems (collectively, "Components") and Spectrian wishes to acquire such Components from Newco. NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement and intending to be legally bound, Spectrian and Newco agree: ARTICLE I. TERM, QUANTITY, QUALITY, PRICING AND PAYMENT -------------------------------------------- Section 1.1 Term. The term of this Agreement shall commence on January ---- 1, 2001 (the "Effective Date") and shall end at the conclusion of the twenty four (24) month period following the Effective Date (the "Term."). Section 1.2 Minimum Commitment. In each calendar quarter during the ------------------ Term, Spectrian agrees to purchase and accept delivery from Newco of, and Newco agrees to sell and ship to Spectrian, Components having an aggregate purchase price not less than the respective minimum commitment amounts set forth below: Calendar Quarter Ending Minimum Commitment ----------------------- ------------------ March 31, 2001 [***] June 30, 2001 [***] September 30, 2001 [***] December 31, 2001 [***] March 31, 2002 [***] *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT June 30, 2002 [***] September 30, 2002 [***] December 31, 2002 [***] (for each calendar quarter, and as it may be reduced or modified by the terms hereof, the "Minimum Commitment"). The Minimum Commitment shall be satisfied by Spectrian Purchases; provided, however, that, to the extent that Spectrian Purchases in a calendar quarter exceed the Minimum Commitment for that calendar quarter, such excess shall not carry over to be applied against the Minimum Commitment for any subsequent calendar quarter. As used herein, "Spectrian Purchases" means the aggregate amount the purchase price (without giving effect to the Shortfall Surcharge (defined below)) of purchases of Components from Newco and other of the Parent's products that are shipped by Newco to Spectrian during a given calendar quarter or that have Original Delivery Dates (as defined in Section 3.1) or scheduled delivery dates otherwise mutually agreed upon in writing, in each case within such calendar quarter if not shipped during that calendar quarter. For purposes of this Section 1.2, Spectrian Purchases include purchase of Components from Newco by any subsidiary of Spectrian in which Spectrian owns over 50% or by an entity which controls Spectrian (owns 50% or greater ownership in Spectrian); provided, however, that purchases by any of the entities specified in Schedule 1.2 hereto shall not be included as Spectrian Purchases. If Spectrian fails to satisfy the Minimum Commitment for any calendar quarter, Spectrian shall pay to Newco in cash, within thirty (30) days following such calendar quarter, an amount equal to the Shortfall Surcharge. As used herein, "Shortfall Surcharge" for any calendar quarter means the difference between the (a) Adjusted Minimum Commitment (defined as Minimum Commitment less (i) Performance and Component Availability Adjustments and (ii) Guaranteed Supply Adjustments) for such calendar quarter and (b) Spectrian Purchases for such calendar quarter. Spectrian agrees to promptly notify Newco in the event Spectrian expects to not achieve its Minimum Commitment in any period. In the event that a Shortfall Surcharge shall be payable with respect to any calendar quarter, the amount of the Shortfall Surcharge shall be deemed to have been allocated pro rata among all Components shipped during such calendar quarter as an increase in the purchase price thereof. Section 1.3 Guaranteed Capacity. Newco agrees that it will allocate ------------------- sufficient production capacity to Spectrian to meet [***] of the Minimum Commitment, subject to the other provisions of this Agreement, including the provisions of Section 2.4 regarding lead times. Section 1.4 Performance and Component Availability. (a) Spectrian will -------------------------------------- provide Newco with quarterly product roadmaps and specifications for future Spectrian products. Spectrian will consider in good faith utilizing Components from Newco in products under development by Spectrian provided that such Components are Competitive. Spectrian and Newco shall in good faith discuss, and mutually agree in writing from time to time, upon the requirements for Components to be deemed "Competitive". The requirements will be based upon whether such products (i) have key performance parameter limits that are within the key performance parameter limits for a third party component that Spectrian might otherwise utilize, (ii) meet the specification requirements of Spectrian's product design, (iii) have been fully released to manufacturing by Newco, (iv) are to be projected to be available in quantities necessary to support the projected Spectrian production requirements and (v) have a competitive *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 2 CONFIDENTIAL TREATMENT price. The parties agree that the Components listed on Schedule 1.4 hereto are deemed to be Competitive in the Spectrian products for which they currently are utilized as of the date hereof. Newco shall be afforded a period of [***] months from the date that production parts are commercially available (or, if later, from the date the parties have mutually agreed upon the requirements for a Component to be Competitive) in which to develop and release such Competitive products to manufacturing. (b) In the event that Spectrian determines to "lock in" a Component in its design of Spectrian products, it shall give written notice to Newco of its determination with respect to such Component (a "Locked In Component"). Thereafter, subject to the other provisions of this Agreement, if Locked In Components are not available from Newco that meet the Competitive requirements, and if other Components from the Newco portfolio are not available which would otherwise meet Spectrian's Competitive requirements for the Minimum Commitment, then the dollar volume of these Components which are purchased by Spectrian from other vendors in a calendar quarter shall be deemed to be a "Performance and Product Availability Adjustment" for purposes of the Minimum Commitment for such quarter. Section 1.5 Guaranteed Supply. Subject to the other provisions of this ----------------- Agreement, Newco shall assure supply to Spectrian of all Components that have been designed into Spectrian's products. In the event that Newco decides to discontinue manufacturing and delivery of certain Components ("End-of-Life"), Newco will accept all purchase orders provided by Spectrian ("Last Time Buy") of the specific part number(s) subject to Newco's End of Life notification for a period of twelve (12) months from the date of notification and Newco agrees that delivery will not exceed twenty four (24) months from the date of such notification. Spectrian's Last Time Buy must be placed before the expiration of the twelve (12) month period following the End of Life notification. All Last Time Buy purchase orders shall be placed on a non-cancelable and non- refundable basis and marked as such on Spectrian's purchase orders. The price for finished Components purchased under a Last Time Buy will be subject to the prices or pricing criteria, as outlined in Section 1.6. Spectrian will make reasonable efforts to assess its Last Time Buy requirements for each product being subject to an End of Life notification and place an order for such requirement. In addition, Spectrian may request that a portion of the Life Time Buy be in the form of Qualified Die Bank. "Qualified Die Bank" is defined as die in wafer form which has been subjected to the wafer fabrication process and has had a sample of ten (10) die across the wafer selected and then packaged and tested for those specific ten (10) die to confirm that the wafer will yield good RF performance devices at an economic yield. The approval by Newco of such a Spectrian request for a portion of its Last Time Buy in the form of Qualified Die Bank will not be unreasonably withheld. Spectrian shall purchase the Qualified Die Bank under provisions of the Last Time Buy stated above, and will bear the risk for die yield. The price for Qualified Die Bank will be no greater than the lower of (i) market price and (ii) [***] of Newco's standard manufacturing cost (which shall include a reasonable manufacturing overhead allocation). In the event that Newco is unable to satisfy Spectrian's Last Time Buy or Qualified Die Bank request for bipolar technology Components which have been designed into Spectrian products prior to the Effective Date, Newco agrees to transfer a royalty free license of the manufacturing process (including packaging technology, unless Newco agrees to provide such *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 3 CONFIDENTIAL TREATMENT services to Spectrian to complete the Qualified Die Bank at a reasonable cost) to such End of Life bipolar Components to Spectrian (or a designee approved by Newco, such approval not to be unreasonably withheld) to be manufactured exclusively for Spectrian and be for Spectrian's own use, in order to ensure that the supply of such devices to Spectrian remains uninterrupted. The technical information to support such transfer will be provided at cost so as to ensure that there is no interruption in supply and in no event later than 24 months after the End of Life notification. In the event that Spectrian purchases Components subsequent to an End of Life notification from another vendor by virtue of the fact that Newco could not deliver Components to Spectrian under Spectrian's Last Time Buy purchase orders, then the purchases of such Components from another vendor other than Newco shall be deemed to be a "Guaranteed Supply Adjustment" for purposes of the Minimum Commitment. Notwithstanding the foregoing, Newco agrees to not End of Life any Components during the 12 month period following the Effective Date except as disclosed on Schedule 1.5. Section 1.6 Qualified Die Bank Purchases. From time to time, Spectrian ---------------------------- may request that Newco provide it with Qualified Die Bank without regard to the Life Time Buy provisions above. The approval by Newco of such a Spectrian request will not be unreasonably withheld, but Spectrian shall bear the risk for die yield. The price for such Qualified Die Bank shall be [***] of Newco's standard manufacturing cost (which shall include a reasonable manufacturing overhead allocation). Any such purchase of Qualified Die Bank shall be credited against the Minimum Commitment for the quarter in which such purchase is made. Such Qualified Die Bank may be held by Spectrian and thereafter submitted to Newco for Component finishing, in which case the price of the Component shall be the difference between the Component price determined pursuant to Section 1.7 and the price previously paid for such Qualified Die Bank. The differential in price shall be credited against the Minimum Commitment for the quarter in which such Component is shipped. Any Qualified Die Bank purchased by Spectrian hereunder may not be sold or transferred to any party other than Newco. Section 1.7 Prices. (a) The prices for products purchased by ------ Spectrian will be as set forth on Appendix A hereto, with the pricing determined as of the date of the Spectrian purchase order based upon the date of shipment from Newco. For shipments of bipolar products after the quarter ending June 30, 2001, the price for each bipolar product shall be the price set forth in the column for such quarter unless there shall have occurred a significant increase in packaging costs, in which case the parties shall negotiate in good faith the price for bipolar products having such increased packaging costs. For shipments of LDMOS products after the quarter ending June 30, 2001, the parties shall negotiate in good faith, not less than 90 days prior to the start of a calendar quarter, the price for LDMOS products to be shipped during such calendar quarter. The parties agree to negotiate in good faith (i) changes to the LDMOS prices set forth in Appendix A from time to time in the future and (ii) prices for new Components, in each case based to ensure best available commercial price at a similar volume purchase discount and a cost per watt benchmark for substantially equivalent products of any leading competitor where specific comparable price is not available. In the event that Newco elects not to meet the best available commercial price for a particular product having equivalent specifications to the Newco Component, where such price is offered in writing to Spectrian for quantities not less than those *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 4 CONFIDENTIAL TREATMENT Spectrian would otherwise purchase from Newco under this Agreement, and Newco has had at least thirty (30) days after its receipt of a copy of the third party offer in which to meet such price, Spectrian may purchase such product from a third party vendor at such lower price, in which case such purchase will be credited against the Minimum Commitment Notwithstanding the foregoing, Newco shall provide Spectrian with its "most favored customers" pricing with respect all of Spectrian's Component purchases (without regard to volume or mix) for all purchase orders placed during the (2) two consecutive 12 month periods following the Effective Date, with the "most favored customer pricing" determined at the time Spectrian submits its purchase order. (b) The Component prices do not include sales, use, consumption or excise taxes of any taxing authority. The amount of such taxes, if any, will be added to the Component prices in effect at the time of shipment thereof and shall be reflected in the invoices submitted to Spectrian by Newco pursuant to this Agreement. Spectrian shall pay the amount of such taxes to Newco in accordance with the payment provisions of this Agreement. Section 1.8 Payment. Spectrian shall pay Newco the applicable price for ------- the Components that Newco ships to Spectrian hereunder within thirty (30) days from the date of the invoice therefor. All payments due to Newco under this Agreement shall be made in U.S. Dollars by Spectrian by wire transfer to an account to be designated in writing by Newco from time to time. All amounts not paid when due shall bear interest at the rate of one percent (1%) per month (or such other percentage, if lower, as shall not exceed the maximum rate permitted by law) commencing forty five (45) days from the date of the relevant invoice. Spectrian shall be responsible for reasonable attorneys' feeds and any other reasonable expenses incurred by Newco in connection with the collection of any amounts due and payable hereunder. ARTICLE II. FORECASTS, LEAD TIMES AND ORDERS -------------------------------- Section 2.1 Rolling Forecasts. (a) Not less than ten (10) days prior ----------------- to the end of each calendar month during the Term, Spectrian shall submit to Newco a forecast of its purchase of Standard Components (broken down by individual Standard Components) for each of the following six months (a "Standard Component Forecast") and a forecast of its purchase of Custom Components (broken down by individual Custom Component) for each of the following six months (a "Custom Component Forecast" and, together with a Standard Component Forecast, the "Component Forecasts"). As used herein, "Standard Components" are Components that Newco makes generally available for sale to the public. "Custom Components" are all Components that are not Standard Components. (b) Attached hereto as Schedule 2.1(a)(i) is Spectrian's Standard Component Forecast for the period beginning on January 1, 2001 and ending on June 30, 2001. Attached 5 hereto as Schedule 2.1(a)(ii) is Spectrian's Custom Component Forecast for the period beginning on January 1, 2001 and ending on June 30, 2001 (the "Initial Custom Component Forecast").1 Section 2.2 Firm Orders. The first two months of each Standard ----------- Component Forecast and the first three months of each Custom Component Forecast shall be deemed to be a "Firm Order", against which Newco shall ship Components to Spectrian. Firm Orders shall include a delivery date determined in accordance with Section 2.4 hereof. The Firm Orders shall be binding on both parties, and Spectrian shall be obligated to purchase and Newco shall be obligated to supply Components in the quantities indicated therein. Firm Orders may not be cancelled or modified by either party without the written consent of the other party. Section 2.3 Cancelled Custom Orders. Spectrian may cancel any Custom ----------------------- Component order during the period ending on the date (the "Trigger Date") that is the later to occur of (i) 90 days prior to the anticipated delivery date determined in accordance with Section 2.4 hereof and (ii) a date mutually agreed to by Spectrian and Newco. In such event, Spectrian shall be obligated to reimburse Newco for any packaging costs incurred by Newco with respect to such cancelled order (plus any restocking or similar penalty of any third party supplier). The amount of such reimbursement shall not be credited against the Minimum Commitment. Section 2.4 Lead Times. Not later than ten (10) days prior to the end ---------- of each calendar quarter, Newco will publish and provide to Spectrian the lead times for delivery of Standard Components. For Standard Components, the lead time shall be [***] from the date that Spectrian shall submit a purchase order for such Standard Components to Newco; provided, however, that Newco in good faith may modify the lead time for a particular Component if (i) the amount of such Component ordered is more than 110% of the amount of such Component ordered by Spectrian within the preceding three month period and (ii) such Components had been fully released to manufacturing prior to the commencement of such three month period; and provided, further, that for Components that had not been so released, a reasonable lead time shall be established (and notice thereof provided to Spectrian) at the time such Components are released to manufacturing. For Custom Components, the lead time shall be [***] or such other time as may be mutually agreed in writing by the parties. Newco from time to time in good faith may modify the lead times for Components by giving written notice to Spectrian base on changes in Newco's vendors' lead times and Newco's capacity (subject to the minimum capacity provisions above) , except that the lead time in effect as of the date of the purchase order may not be modified without the consent of the parties. Newco shall not be obligated to accept purchase orders for Components requesting deliveries outside the lead time applicable under this Section 2.4. Section 2.5 Existing Purchase Orders. Newco shall continue to honor the ------------------------ terms and conditions of all third party purchase orders as provided in the Asset Purchase Agreement. - - ------------------------------ 1 These two attachments will be provided by Spectrian not later than December 10, and will ensure that Spectrian satisfies the Minimum Commitment for the initial calendar quarter. *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 6 CONFIDENTIAL TREATMENT Section 2.6 Future Purchase Orders. The terms and conditions of ---------------------- Spectrian's standard purchase order and Newco's standard purchase order acceptance form attached hereto as Schedule 2.6 shall be exchanged by the parties, in Spectrian's case to confirm the Components and delivery dates ordered pursuant to the Component Forecasts, and in Newco's case to confirm its acceptance of orders and agreement to the delivery dates, but shall otherwise be considered exchanged as an administrative convenience only, without adding to or modifying any of the provisions of this Agreement. ARTICLE III. DELIVERY AND SHIPPING --------------------- Section 3.1 Delivery. Newco shall deliver Components to Spectrian on -------- the dates requested by Spectrian and agreed to by Newco in the purchase orders (the "Original Delivery Dates"); provided, however, that Newco may fill Firm Orders up to fourteen (14) days before or after the Original Delivery Dates and still be in compliance with the delivery terms hereof; provided, further, however, that for purposes of the Minimum Commitment the purchase date shall be deemed to be the Original Delivery Dates. Section 3.2 Shipping. All sales of Components under this Agreement are -------- made F.O.B. shipping point. Spectrian shall be responsible for all transportation costs and title and risk of loss shall pass to Spectrian upon shipment by Newco. ARTICLE IV. INSPECTION ---------- Section 4.1 Prompt Notice. Promptly after receiving each shipment of ------------- Components, Spectrian shall examine such Components for any damage, defect, non-conformance or shortage. Spectrian shall notify Newco within fifteen (15) days of receipt of Component if the Component does not comply with the Component specification (determined by reference to UltraRF's published specifications as in effect on the date hereof or as otherwise may be mutually agreed to in writing) and Newco shall, upon Spectrian's request and as soon as reasonably possible, replace the non-conforming Component with a Component meeting the Component specification. ARTICLE V. PRODUCT WARRANTY ---------------- Section 5.1 Warranty Period. Newco agrees to assume the warranty --------------- Obligation for UltraRF products which were shipped to external customers during the [***] period prior to the Effective Date. Spectrian represents to Newco that the aggregate amount of shipments to third parties prior to the date hereof does not exceed [***]2 *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. 7 CONFIDENTIAL TREATMENT [***] and that Spectrian is unaware of any defects therein and has not received notice of any warranty or similar claims with respect thereto which have not previously been remedied in accordance with the warranty obligations assumed by Newco hereunder or under the Asset Purchase Agreement. With respect to products shipped after the Effective Date, Newco agrees to a Component warranty period of [***] from the date of Component shipment. The warranty provided by Newco shall be as set forth on Schedule 5.1 hereto. Section 5.2 Scope of Warranty. Newco agrees that the Components shipped ----------------- by it pursuant to this Agreement shall be entitled to the warranty terms set forth on Schedule 5.2 hereto. ARTICLE VI. LIMITATION OF LIABILITY ----------------------- Section 6.1 Limitation of Liability. IN NO EVENT SHALL ANY PARTY BE ----------------------- LIABLE TO ANY OTHER PARTY FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES INCLUDING, WITHOUT LIMITATION, LOST PROFITS, IRRESPECTIVE OF THE WAY IN WHICH SUCH DAMAGES MAY ARISE, EVEN IF THE PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. ARTICLE VII. CONFIDENTIALITY --------------- Section 7.1 Confidentiality. Any information disclosed by one party or --------------- its Affiliates to the other party or its Affiliates in connection with the performance of this Agreement and designated in writing by the disclosing party at the time of the disclosure as confidential (collectively, the "Confidential Information") shall be received and maintained in confidence by the receiving party using the same standard of care that the receiving party uses to protect its own like confidential information, but not less than reasonable care. The Confidential Information may be used by the receiving party only to perform its obligations under this Agreement, and shall not be disclosed to a third party without the prior written consent of the disclosing party. The disclosure of Confidential Information shall be restricted only to those employees of the receiving party requiring access to the Confidential Information to perform its obligations under this Agreement. As used herein, "Affiliate" shall mean, with respect to a party, any other person or entity which, directly or indirectly, controls, is controlled by or is under common control with such party, where "control" and "controlled" mean ownership of more than fifty percent (50%) of the outstanding equity interests having voting rights with respect to the election of the board or directors or comparable governing authority. Each party shall be responsible for any breach by its Affiliates of the obligations of this Article VII. - - -------------------------------- 2 As of the date of the Asset Purchase Agreement, the amount is not greater than [***]. The amount to be inserted will be the actual amount of such sales as of the Effective Date. 8 *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT The provisions of this Section 7.1 shall not apply to Confidential Information which is: (a) already known to the receiving party without an obligation of confidentiality (it being understood that information of either party in the possession of the other party prior to the Effective Date shall be covered by this exception); (b) publicly known or becomes publicly known through no unauthorized act of the receiving party; (c) rightfully received by the receiving party without obligation of confidentiality from a third party; (d) disclosed to a third party by the disclosing party without similar restrictions; (e) approved for disclosure by the disclosing party; or (f) required to be disclosed pursuant to a requirement of a governmental agency or by law as long as the receiving party provides to the disclosing party notice of the requirement prior to any disclosure. Section 7.2 Return of Confidential Information. Upon the expiration or ---------------------------------- termination of this agreement for any reason, each party shall upon request return to the other party or certify in writing the destruction of all Confidential Information received in tangible form by it or its Affiliates from the other party or its Affiliates and cease any further use of such Confidential Information. ARTICLE VIII. DISPUTE RESOLUTION ------------------ Section 8.1 Dispute Resolution. All controversies, disputes or claims ------------------ arising among the parties in connection with, or with respect to, any provision of this Agreement which has not been resolved within thirty (30) days after either Parent, on the one hand, or Spectrian, on the other hand, have notified the other in writing of such controversy, dispute or claim, shall be submitted for arbitration in accordance with the rules of the American Arbitration Association or any successor thereof. Arbitration shall take place at an appointed time and place in Sunnyvale, California. Section 8.2 Selection of Arbitrators. Newco and Spectrian each shall ------------------------ select one independent arbitrator (who shall not be counsel for such party), and the two so designated shall select a third independent arbitrator. If either party shall fail to designate an arbitrator within seven calendar days after arbitration is requested, or if the two arbitrators shall fail to select a third arbitrator within 14 calendar days after arbitration is requested, then such arbitrator shall be selected by the American Arbitration Association or any successor thereto upon application of either party. Judgment upon any award of the majority of arbitrators shall be binding and shall be entered in a court of competent jurisdiction. Subject to the provisions of this Agreement, the award of the arbitrators may grant any relief that a court of general jurisdiction has authority to grant, including, without limitation, an award of damages and/or injunctive relief, and shall assess, in addition, the cost of the arbitration, including the reasonable fees of the arbitrator, reasonable attorneys' fees and costs of all prevailing parties, against all non-prevailing parties. Section 8.3 Temporary Injunctive Relief. Nothing herein contained shall --------------------------- bar the right of any of the parties to seek and obtain temporary injunctive relief from a court of competent jurisdiction in accordance with applicable law against threatened conduct that will cause loss or damage, pending completion of the arbitration, and the prevailing party therein shall be entitled to an award of its reasonable attorneys' fees and costs. 9 CONFIDENTIAL TREATMENT Section 8.4 Arbitration Rules. All disputes and claims shall be ----------------- determined by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "Rules") in effect on the date hereof, except that such Rules shall be modified by this Agreement. Section 8.5 Arbitration Proceedings. All arbitral proceedings arising under, or in connection with, this Agreement shall be governed by the Federal Rules of Civil Procedure. Notwithstanding the previous sentence, the arbitrators' award shall be made no later than ninety (90) days after their appointment. Subject to the parties' right to be treated fairly, the arbitrators may shorten the periods of time otherwise applicable to the arbitral proceedings under the Rules or the Federal Rules of Civil Procedure to permit the award to be made within the time limitation set forth in the previous sentence. ARTICLE IX. MISCELLANEOUS ------------- Section 9.1 No Agency. The relationship between Newco and Spectrian is -------- that of independent contractors and nothing herein shall be deemed to constitute the relationship of partners, joint venturers, nor of principal and agent, between Newco and Spectrian. Neither party shall have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other or to bind the other to any contract, agreement or undertaking with any third party. Section 9.2 Notices. All notices required or permitted to be given ------- under this Agreement shall be in writing and shall be sent by facsimile transmission or mailed by registered or certified mail addressed to the party to whom such notice is required or permitted to be given as set forth in the Asset Purchase Agreement. Any party may, by written notice to the other parties, as provided herein designate a new address to which notices to the party giving the notice shall thereafter be mailed. Except as otherwise provided in this Agreement, all such communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; one Business Day after being timely delivered to a next-day air courier; five business days after being deposited in the mail, postage prepaid, if mailed. Section 9.3 Amendments and Waivers. The provisions of this Agreement, ---------------------- including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, without the written consent of each party. The failure by any party at any time to enforce any of the terms or conditions of this Agreement shall not constitute or be construed as a waiver of the terms and conditions. Each party expressly reserves the right to enforce the terms and conditions of this Agreement at any time. Section 9.4 Successors And Assigns. This Agreement shall be binding ---------------------- upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, provided that this Agreement and the rights and obligations contained herein or in any exhibit or schedule hereto shall not be assignable, in whole or in part, without the prior written consent of the parties 10 CONFIDENTIAL TREATMENT hereto and any attempt to effect any such assignment without such consent shall be void, provided, further, that other party's consent shall not be necessary for the assignment of a party's rights and obligations hereunder to a person or entity which has acquired all or substantially all of such party's assets if the purchaser assumes and agrees in writing for the benefit of the other party to perform the selling party's obligations hereunder. In the event that more than fifty percent (50%) of the outstanding capital stock of Parent or Spectrian shall be acquired by a third party, Newco or Spectrian, as applicable, shall be obligated to cause such third party to acknowledge and to assume and agree in writing, for the benefit of the other party hereto, to perform the obligations of Newco or Spectrian, as the case may be. In the event that more than fifty percent (50%) of the equity interest of Parent or Spectrian shall be acquired by a third party, such third party shall be required to acknowledge the obligations of Newco or Spectrian, as the case may be. Section 9.5 No Third Party Beneficiaries. This Agreement is solely for ---------------------------- the benefit of the parties, and is not intended to confer upon any other person any rights or remedies. Section 9.6 Titles and Headings. The Article and Section headings in ------------------- this Agreement are inserted for convenience of reference only, and are not intended to constitute a part of or to affect the meaning or interpretation of this Agreement. Section 9.7 Attachments. The attachments to this Agreement shall be ----------- construed with and as an integral part of this Agreement to the same extent as if they had been set forth in full in this Agreement. Section 9.8 Severability. The remedies provided herein are cumulative ------------ and not exclusive of any remedies provided by law. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable. Section 9.9 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of North Carolina, as applied to contracts made and performed within the State of North Carolina without regard to principles of conflicts of law. Section 9.10 Counterparts. This Agreement may be executed in any number ------------ of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. Section 9.11 Entire Agreement. This Agreement contains the entire ---------------- understanding of the parties hereto with respect to the subject matter hereof. This Agreement supercedes all prior agreements and understandings, oral and written, with respect to its subject matter. 11 CONFIDENTIAL TREATMENT Section 9.12 Force Majeure. No party shall be liable to the other party ------------- for any failure to perform any obligation under this Agreement (other than the payment of money owed hereunder) where such failure is due to causes beyond the reasonable control of the party. Such causes include, but are not limited to acts of war, government export controls, other governmental acts (including without limitation changes in applicable law), industrial dispute, lock-out, accident, fire, explosion, transport delays, acts of a third party, or loss or damage to any equipment due to acts of God. Each party shall use its best efforts to comply with its respective obligations under this Agreement despite the intervention or occurrence of any such cause, and to resume compliance with those obligations as soon as any such cause ceases to affect the performance of its obligations under this Agreement. Section 9.13 Termination. Either party may terminate this Agreement in ----------- the event that (a) the other party materially breaches this Agreement; (b) the other party becomes insolvent or enters bankruptcy, receivership, liquidation, composition of creditors, dissolution or any similar proceeding; or (c) a significant portion of the assets of the other party necessary for the performance of this Agreement become subject to attachment, embargo or expropriation. A party intending to terminate this Agreement pursuant to this Article IX (other than clause (b) of the preceding paragraph) shall first notify the other party of the grounds for the intended termination. If the other party fails to remedy such grounds for termination within thirty (30) days of such notice (or any longer period of time as mutually agreed by the parties), then the terminating party may terminate this Agreement effective upon notice to the other party without the need for any judicial action. The provisions of this Article IX are without prejudice to any other rights or remedies either party may have by reason of the default of the other party. In the event a competitor of Spectrian in the wireless infrastructure market acquires a significant interest in Newco (directly or indirectly), Newco will provide Spectrian with reasonable assurances that Newco will utilize its best efforts to preserve the confidentiality of all information related to products produced for Spectrian and Spectrian product programs. The provisions of Articles VI and VII shall survive termination of the Agreement. The termination of this Agreement shall not affect any rights either party has accrued at the time the termination becomes effective. Section 9.14 Attorneys' Fees. In any action or proceeding brought to --------------- enforce any provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party, as determined by the court, shall be entitled to recover its reasonable attorneys' fees in addition to any other available remedy. 12 CONFIDENTIAL TREATMENT IN WITNESS WHEREOF, Spectrian and Newco have caused this Agreement to be executed in multiple counterparts by their duly authorized representatives. ZOLTAR ACQUISITION, INC. SPECTRIAN CORPORATION By: By: ----------------------------- -------------------------- Name: Name: ----------------------------- -------------------------- Its: Its ----------------------------- -------------------------- Date: December 29, 2000 Date: December 29, 2000 13 CONFIDENTIAL TREATMENT Schedule 1.2 Purchases Not Considered Spectrian Purchases For purposes of Section 1.2, Spectrian Purchases include purchase of Components from Newco by any subsidiary of Spectrian in which Spectrian owns over 50% or by an entity which controls Spectrian (owns 50% or greater ownership in Spectrian); provided, however, that purchases by any of the entities specified below shall not be included as Spectrian Purchases: [***] [***] [***] [***] [***] *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT
Schedule 1.4 Performance and Component Availability The following products are deemed to be Competitive: PART NUMBER PRODUCT NAME FREQUENCY - - ----------- ------------ --------- [***] [***]
*** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT Schedule 1.5 Guaranteed Supply Newco may elect to End of Life the following products during the 12 month period following the Effective Date: [***] *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT Schedule 2.1(b)(i) Spectrian's Standard Component Forecast For the Period Beginning on January 1, 2001 and Ending on June 30, 2001 [***] *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT Schedule 2.1(b)(ii) Spectrian's Custom Component Forecast For the Period Beginning on January 1, 2001 and Ending on June 30, 2001 [***] *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT Schedule 2.6 Future Purchase Orders Terms and conditions of Spectrian's standard purchase order and Newco's standard purchase order acceptance form: See Insert--Spectrian's Standard Purchase Order Forms. See Insert--Newco's Standard Purchase Order Acceptance Form.
SHIP TO: [SPECTRIAN SPECTRIAN PURCHASE ORDER LOGO PURCHASE ORDER REVISION PAGE DEPICTED HERE] 350 West Java Drive Sunnyvale, CA 94089 Phone 408-745-5400 THIS PUHCHASE ORDER NUMSER MUST APPEAR ON ALL FAX 408-541-0257 INVOICES PACKING LISTS! CARTONS AND Resale No~ SRGH 26-753509 CORRESPONDENCE RELATED TO THIS ORDER DATE OF ORDER BUYER DATE OF REVISION BUYER VENDOR BILL TO: CUSIOMER ACCT NO. VENDOR NO. PAYMENT TERMS FREIGHT TERMS FOB. SHIP VIA CONFIRM TO /TELEPHONE/ P0 TYPE LINE PART NUMBER/DESCRIPTION REV DELIVERY DATE QUANTITY UNIT UNIT PRICE EXTENSION TAX - - ---- ----------------------- --- ------------- -------- ---- ---------- --------- --- TOTAL ----------------- AUTHORIZED SIGNATURE SUPPLIER
TERMS AND CONDITIONS OF PURCHASE ORDER 1. All portions of this purchase order which do not have a definite scheduled delivery date stated may be cancelled at any time by Spectrian without additional charge or recourse to Spectrian. 2. Our part number must appear on all packages, packing list and invoice. 3. Ship per instructions, unless otherwise specifically instructed in writing. 4. Do not declare extra value, unless otherwise specifically instructed in writing. 5. Packing list must accompany each shipment. 6. Last shipment on order must be marked "Final Shipment" on packing list and on invoice. 7. This order will become a binding contract upon the receipt of the acceptance signed by the seller. This acceptance must be made within 10 days of the date of the purchase order. Said contract shall constitute the entire agreement of the parties hereto and shall supersede all prior offers, negotiations, and agreements on the articles covered by this order. No changes shall be made in terms conditions, prices or deliveries without Spectrian's written consent and Spectrian shall not be bound by any terms and conditions on sellers acknowledgement forms and/or on invoices which impose terms or conditions at variance with those hereof. NO CONFIRMATION OR ACCEPTANCE OF THIS ORDER BY SELLER WHICH STATES TERMS ADDITIONAL TO OR DIFFERENT FROM THOSE SET OUT HEREIN SHALL OPERATE AS AN ACCEPTANCE OF THIS ORDER UNLESS SPECTRIAN SPECIFICALLY ASSENTS IN WRITING TO SUCH ADDITIONAL OR DIFFERENT TERMS. 8. No charge will be allowed for packing, crating, drayage or storage unless stated herein. 9. Spectrian reserves the right to cancel any portion of this order if not received on dates specified. 10. Payment for material on this order shall not constitute any acceptance thereof but all material shall be received subject to Spectrian inspection and rejection. Defective material or material not in accordance with Spectrian's specification will be held for seller's instructions and at his risk and expense. All goods rejected shall at Spectrian's option be promptly replaced or be deleted from this purchase order with price being reduced accordingly. 11. By acceptance of this purchase order and shipment of product called for harem, seller expressly warrants that: (A) all materials and work will conform to specifications, drawings, or descriptions furnished and or adopted by Spectrian and will be of good workmanship material, and free of defects. (B) test and inspection data and other objective evidence required to prove compliance to buyer's specifications referenced herein will be retained for a minimum of three years after shipment. (C) such objective evidence including test and inspection data will be made available to buyer or buyer's authorized representative upon request at any time during that period. 12. Unless otherwise herein agreed, special dies, tools, and patterns used in the manufacture of said articles shall be furnished by and at the expense of the seller. Said dies, tools, and patterns shall be kept in good condition and from time to time when necessary shall be replaced by the seller without expense to Spectrian. However, Spectrian has the option at any time to reimburse the seller for the whole or any part of said dies, tools, and patterns and replacements and become the owner and entitled to the possession of same. 13. Spectrian shall have the privilege to make changes in (A) the specifications, drawings, and samples, if any; (B) the method of shipment or packaging; (C) the place and time of delivery and (D) the articles and materials, including the quantity thereof to be furnished by seller. If any such changes cause an increase or decrease in the cost of, or time required for, performance of this purchase order, an equitable adjustment shall be made in the contract price or delivery schedule, or both by mutual consent. Any claim by seller for adjustment under this clause must be in writing, and asserted within thirty (30) days from the date of receipt by seller of the notification. 14. Vendor shall be liable to Spectrian for all consequential and incidental damages and expenses (including attorneys' fees) actually or proximately arising from any breach of Vendor's representations, warranties or covenants herein. Vendor hereby agrees to defend, indemnify and hold Spectrian, its owners, officers, directors, employees and agents harmless from and against any and all claims and suits for property damage, personal injury, death, expenses (including attorneys' fees), economic loss, foregone profits, losses or damages of any kind whatsoever actually or proximately arising from (A) any breach of Vendors' representations, warranties or covenants herein, or (B) infringements or alleged infringements by any products, materials or designs purchased or furnished by Vendor of the United States or foreign patents, trademarks, copyrights, trade secrets or other proprietary rights. 15. Spectrian shall not be held liable for manufacture or shipment of quantities in excess of authorized releases. However, Spectrian reserves the right to accept excess quantities in subject to the terms of the sale. Any such acceptance shall not constitute a revision of the order and Spectrian shall not be held liable for any further quantities manufactured or shipped in excess of authorized releases. 16. Spectrian shall not be liable for any cost, loss, or expense incurred by seller in connection with any material not specifically authorized by written release unless a scheduled date has been established for subject material in this purchase order. 17. The remedies of Spectrian under this purchase order are not exclusive and the exercise by Spectrian of any remedy shall not limit Spectrian in pursuing other remedies provided for in law. 18. Spectrian reserves the right to gain access to vendor's production facilities and witness any activities and/or test required to verify compliance to purchase order and/or drawing specifications. SUPPLIER REV. DESCRIPTION OF CHANGE DATE APPROVED - - --- --------------------- ---- -------- A RELEASED UltraRF's Terms and Conditions RELEASED
DRAWN BY: Customer Service APPROVAL: Vice President APPROVAL: Mandel Berenberg Sheryle Henson Chris Tubis DATE: DATE: DATE: UItraRF 160 Gibraltar Court, Sunnyvale, CA 94089 TITLE: DWG NUMBER: REV: UItraRF's Terms and Conditions 040201 A SHEET I OF 6
UltraRF CONFIDENTIAL 1. TERMS AND CONDITIONS. Products and services furnished by UltraRF are sold -------------------- only on the terms and conditions stated herein. Notwithstanding any terms or conditions in Customer's order, UltraRF's assent and agreement and performance of any contract is expressly made conditional on Customer's assent to UltraRF's Terms and Conditions of Sale, whether in writing or by contract, unless otherwise specifically agreed to in writing by UltraRF. Acceptance or payment for Product shall constitute assent. All contracts for the sale of Products shall be construed and governed by the internal laws of the State of California where UltraRF has its principal place of business. 2. DELIVERY AND PAYMENT, TITLE, RISK OF LOSS & TAXES. Shipping will be FOB ------------------------------------------------- UltraRF's point of shipment, with title and risk of loss passing to Customer at that point. Shipping shall be by UltraRF's shipping agent in normal commercial packaging. Payment will be due thirty (30) days from the date of invoice. Past due balances shall be subject to a monthly service charge equal to 12% of the unpaid amount of the invoice, but not more than the amounts allowed by law. UltraRF will use all reasonable efforts to deliver Products to a mutually agreeable schedule. However, delivery dates are approximate and UltraRF is not liable for delays in delivery for any reason. Notwithstanding anything in this document to the contrary, UltraRF reserves the right to adopt an equitable plan of allocation and to adjust delivery schedules accordingly in the event of shortages. Products must be scheduled for delivery within six months of date of Customer's order Customer agrees to pay all applicable taxes. 3. ACCEPTANCE. The furnishing by UltraRF of a Product to Customer shall ---------- constitute acceptance of that Product by Customer, unless notice of a defect or nonconformity is received by UltraRF within thirty (30) days of the receipt of the Product at Customer's designated receiving address. Any use of a Product by Customer, its agents, employees, contractors or licensees, for any purpose after receipt thereof, shall constitute acceptance of that Product by Customer. UltraRF may repair or, at its option, replace defective or nonconforming parts after receipt of notice of defect or nonconformity. 4. WARRANTY. UltraRF warrants that its Products sold, at the time of shipment, -------- to be free from defects in material and workmanship and conform to UltraRF's specifications. For Products that fail to meet warranty, UltraRF shall, at its option, and as Customer's exclusive remedy, either replace defective Products with the same or equivalent Products that meet this warranty or refund the purchase price. Customer must provide written notice of and return nonconforming Product. This warranty does not apply to Products that have been subjected to misuse, including, but not limited to, improper testing, assembly, and mishandling. This warranty shall not be expanded, and no obligation or liability will arise, due to technical advice, assistance, or service, written or otherwise, that UltraRF may provide. THIS WARRANTY EXTENDS TO CUSTOMER ONLY. WARRANTY RETURNS FROM THE CUSTOMER'S CUTOMER WILL NOT BE ACCEPTED. THIS WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS. (a) Time Period - Product is warranted for a period of three (3) years from date of shipment. (b) Exceptions - Device chips and wafers that have received electrical probe/test and visual inspection are warranted to conform to UltraRF's specifications or specifications accepted by UltraRF for a period of ninety (90) days from date of shipment This warranty shall not apply to device chips or wafers improperly removed from their original shipping container, not stored per UltraRE's recommended procedures, and/or subjected to testing or operational procedures not accepted by UltraRF in writing. Chips and wafers that are purchased untested and development Products and licensed programs are provided 'AS IS' and without warranty. 2 of 6 5. RESALE. Customer shall not resell any UltraRF Products to brokers or ------ exporters. If Customer breaches the terms of this paragraph, in addition to UltraRF's cancellation rights, Customer agrees to fully indemnify UltraRF, its officers, employees and distributors, from any and all liability, including attorneys' fees and costs. - 6. CRITICAL APPLICATIONS DISCLAIMER. Products are not intended or authorized -------------------------------- for use in Products surgically implanted into the body, for life support Products or for other Products for which a Product failure could cause personal injury or death. If Customer or Customer's customers use Products for such unintended or unauthorized uses, Customer agrees to fully indemnify UltraRF, its officers, employees and distributors from all liability, including attorneys' fees and costs. 7. PATENTS AND OTHER INDUSTRIAL PROPERTY RIGHTS. UltraRF will hold Customer -------------------------------------------- harmless as set forth herein, in respect to any claim that the design or manufacture of any Product in UltraRF's commercial line of Products or manufactured to specifications set by UltraRF and furnished hereunder constitutes an infringement of any patent or other industrial property rights of the United States or Canada. UltraRF will pay all damages and costs either finally awarded in a suit, or paid in UltraRF's sole discretion, by way of settlement, which are based on such claim of infringement, provided that UltraRF is notified promptly in writing of such claim of infringement and is given full authority, information and assistance in settling or defending such claim. UltraRF shall have no liability whatsoever hereunder with respect to claims settled by Customer without UltraRF's prior written consent. In the event that UltraRF is required to hold Customer harmless hereunder, UltraRF will in its sole discretion and at its own expense, either procure for Customer the right to continue using the Product, replace it with a non-infringing Product, or remove it and refund an equitable portion of the selling price and transportation costs thereof. THIS SHALL CONSTITUTE ULTRARF'S ENTIRE LIABILITY FOR ANY PATENT OR COPYRIGHT INFRINGEMENT OR CLAIM THEREOF BASED UPON MODIFICATION OF THE PRODUCTS PERFORMED BY OTHERS THAN ULTRARF, USE OF PRODUCTS IN COMBINATION WITH OTHER EQUIPMENT OR FOR ANY CLAIM BASED UPON OR RELATED TO ANY ALLEGED INFRINGEMENT OF ANY PATENT OR OTHER INDUSTRIAL PROPERTY RIGHTS. Customer shall hold UltraRF harmless against any expense, loss, costs or damages resulting from claimed infringement of patents, trademarks or other industrial property rights arising out of compliance by UltraRF with Customer's design, specifications, or instructions. Except for Customer's implied license to use and sell a Product incident to its purchase and the implied license of Customer to sell or otherwise dispose of possession of a copy of a copyrighted work from UltraRF, the sale of Products does not convey any license by implication, estoppel, or otherwise. ULTRARF DISCLAIMS LIABILITY FOR ANY U.S. PATENT OR COPYRIGHT INFRINGEMENT, ARISING FROM USE OR MANUFACTURE BY ANYONE OF INVENTIONS IN CONNECTION WITH PRODUCTS OR SERVICES SOLD, USED OR INTENDED FOR SALE OR USE IN PERFORMING CONTRACTS WITH THE UNITED STATES OR RELATED SUBCONTRACTS. Customer, without the express prior written consent of UltraRF, does not have the right to use UltraRFs trademarks, trade names, corporate slogans, corporate logos, or corporate designations in the sale, lease or advertising of any Products, or any Product container, component part, business forms, sales, advertising or proffiotional materials, other business supplies or materials, whether in writing, orally or otherwise. 3 of 6 8. LIABILITY. ULTRARF'S TOTAL LIABILITY, EXCEPT FOR PERSONAL INJURY, AND --------- EXCEPT FOR THE LIMITED LIABILITIES OTHERWISE PROVIDED IN SECTIONS 4 AND 7, WHETHER FOR BREACH OF CONTRACT, WARRANTY, NEGLIGENCE, STRICT LIABILITY IN TORT OR OTHERWISE, IS LIMITED TO THE PRICE OF THE PARTICULAR PRODUCTS SOLD HEREUNDER WITH RESPECT TO WHICH LOSSES OR DAMAGES ARE CLAIMED. IN NO EVENT SHALL ULTRARF BE LIABLE FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES OR LIABILITY TO THIRD PARTIES TO THE FULL EXTENT SUCH MAY BE DISCLAIMED BY LAW. 9. QUOTATIONS AND PRICES. All quotations are subject to the terms and --------------------- conditions stated herein as well as any additional terms and conditions that may appear in UltraRF's quotations or proposals. In the case of a conflict between the terms and conditions stated herein and those appearing in the quotation or proposal, the latter shall control. UltraRF's prices and quotations are subject to the following: (a) All published prices are subject to change without notice. (b) UNLESS OTHERWISE SPECIFIED IN WRITING, ALL QUOTATIONS ARE FIRM FOR, AND EXPIRE, THIRTY (30) DAYS AFTER DATE THEREOF AND CONSTITUTE OFFERS. Budgetary quotations and estimates are for preliminary information only and shall neither constitute offers, nor impose any responsibility or liability upon UltraRF. (c) Unless otherwise stated in writing by UltraRF, all prices quoted shall be exclusive of transportation, insurance, taxes (including without limitation, any sales, use or similar tax levied on or on an interest in Products), license fees, customs fee, duties and other charges related thereto, all of which shall be born by Customer who shall hold UltraRF harmless therefrom, provided that, if UltraRF, in its sole discretion chooses to make any such payment, customer shall reimburse UltraRF in full upon demand. (d) Stenographical, typographical and clerical errors are subject to correction. (e) Prices quoted are for Products only and do not include technical data, proprietary rights of any kind, patent rights, qualification, environmental or other than UltraRF's standard tests, and other than UltraRF's normal domestic commercial packaging unless expressly agreed to in writing by UltraRF. (f) Published weights and dimensions are approximate only. Certified dimension drawings can be obtained upon request. Manuals, programs, listings, drawings or other documentation required hereunder must be referenced specifically. 10. ORDERS. All orders shall be subject to acceptance by UltraRF only at its ------ principal place of business. 11. CANCELLATION. ------------ (a) Standard Product: Customer may cancel an order with thirty (30) days written notice prior to UltraRF's shipment date at no charge. (b) Special Product (non-standard, custom, or Product unique to a customer): Customer may cancel order with ninety (90) days written notice prior to UltraRF's shipment date at no charge. Nevertheless, Customer shall remain liable to pay for all non-transferable and non-cancelable raw materials and work in process as of the date that UltraRF receives customer's written notification of cancellation. 4 of 6 (c) UltraRF reserves the right to cancel all or any part of an order, without any liability to Customer, if e Customer provides inaccurate information as to its intended use of the Product, or if Customer is in default under any of the terms and conditions of this document. 12. SPECIAL PRODUCT. Shipment of Special Product within 5% of the quantity --------------- ordered constitutes full shipment 13. CONFIDENTIAL INFORMATION. All materials and Products furnished by UltraRF ------------------------ or Customer and identified as containing confidential information must be held in confidence by the recipient using at least the degree of care the recipient uses for its own confidential information, but no less than reasonable care. Recipient may not disclose such materials or confidential information except to employees who require use of the materials in the performance of their duties. Confidential information does not include information in the public domain, information known to the recipient prior to any disclosure hereunder, information developed independently of any disclosure hereunder, information later communicated to the recipient by another without obligation of confidence, or information communicated by the owner to a third party free of any obligation of confidence. All confidential information and materials containing confidential information shall be held in confidence by the recipient for five (5) years after receipt. 14. EXPORT CONDITIONS. If, at the time or times of UltraRF's performance ----------------- hereunder, an export license is required for UltraRF to lawfully export Products or technical data, then the issuance of the appropriate licenses to UltraRF or its subcontractor shall constitute a condition precedent to UltraRF's obligations hereunder. Customer agrees to comply with all applicable export laws, regulations and orders. Specifically, but without limitation, Customer agrees that it will not resell, re-export or ship, directly or indirectly, any Products or technical data in any form without obtaining appropriate export or re-export licenses from the U.S. Government. Customer acknowledges that the applicable export laws, regulations and orders may differ from item to item and/or from time to time. 15. GOVERNMENT CONTRACT COMPLIANCE. If Customer sells Products to the U.S. ------------------------------ Government, UltraRF makes no representations, certifications, or warranties whatsoever about compliance with acquisition statutes or regulations, except UltraRF will comply with the following clauses applicable to subcontracts for commercial items: FAR 52.222-26, Equal Opportunity; FAR 52.222-35, Affirmative Action for Special Disabled Vietnam Era Veterans; and FAR 52.222-36, Affirmative Action for Handicapped Workers. Notwithstanding, if Customer sells Products to any other public entity, state, or local or international, or to a prime contractor or subcontractor of such entities, Customer remains solely and liable for compliance with all acquisition statutes and regulations. Except as expressly provided in this paragraph, UltraR.F makes no representations, certifications, or warranties whatsoever about compliance with acquisition statutes and regulations, including, without limitation, those that may relate to pricing, quality, origin or content. 16. LICENSED PROGRAMS. In the absence of a separate software license between ----------------- Customer and UltraRF, the following terms and conditions apply to UltraRF's licensed programs: a. Licensed programs include computer software and firmware, Title to the licensed programs delivered hereunder remain vested in UltraR.F or UltraRF's licensor and cannot be assigned or transferred without UltraRF's written authorization. Customer agrees not to reverse engineer, disassemble, de- compile, or modify any programs. 5 0F 6 b. For stand alone licensed programs, UltraRF grants to Customer a non- exclusive license to use the licensed programs for its internal use in single computer system. Customer may make up to (5) copies of the licensed programs for Customer's internal use, so long as Customer has paid UltraRF's then current licensing fee and faithfully reproduces all of UltraRF's copyright notices and proprietary legends on the copies. Customer agrees not to disclose, in any form, the licensed programs or any portion thereof to any person other than employees of Customer. c. For licensed programs embedded in Products, UltraRF grants Customer a license to use such embedded licensed programs in Products subject to the terms and conditions herein. d. If Customer is in default of any of the terms and conditions of this document, the rights granted herein by UltraRF may be terminated on one month's prior written notice. Within one month after termination, Customer will furnish to UltraRF a certificate certifying that the original and all copies of the licensed programs and derivative versions thereof, in whole or in part and in any form, have been destroyed. 17. GENERAL. ------- (a) Entire Agreement; Amendment. This document constitutes the entire and final --------------------------- agreement and supercedes all other communications. No modifications shall be binding unless made in a written agreement signed by both parties. (b) Serviceability. If any provision is held invalid, all other provisions -------------- shall remain valid. (c) No Assignment. Neither party may assign its rights and obligations ------------- hereunder without the prior written consent of the other. (d) Excusable Delay. UltraRF shall not be liable for any delay or failure to --------------- perform due to any cause beyond its control. (e) Dispute Resolution. UltraRF and Customer will attempt to settle all claims ------------------ through negotiation or non-binding mediation prior to commencement of arbitration proceedings. All disputes concerning any contract or Product hereunder not otherwise resolved between UltraRF and Customer shall be resolved by binding arbitration under the Commercial Arbitration Rules of the American Arbitration Association or such other rules as may be agreed upon by the parties. The arbitration shall be conducted by a single arbitrator who is an attorney, chosen and agreed upon by the parties. Arbitration shall be held at the location of UltraRF's principal place of business. The parties shall be entitled to reasonable discovery in the discretion of the arbitrator. The arbitrator shall make a reasoned award stating his conclusions and reasons for the award. The prevailing party shall be entitled to costs including arbitrator fees and reasonable attorney fees. Customer consents to exclusive venue and to personal jurisdiction in the State of California for purposes of litigation of any matter arising out of this document. No action, regardless of form, arising out of or in any way connected with the Products or Services furnished by UltraRF, may be brought by Customer more than one (1) year after the cause of action has accrued. If any part, provision or clause of the Terms and Conditions of Sale, or the application thereof to any person or circumstances, is held invalid, void or unenforceable, such holding shall not affect and shall leave valid all other parts, provisions, clauses or applications of the terms and conditions remaining, and to this end the terms and conditions shall be treated as serviceable. 6 OF 6 CONFIDENTIAL TREATMENT Schedule 5.1 Warranty Period [***] [***] [***] [***] [***] *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT Schedule 5.2 Scope of Warranty [***] [***] [***] [***] *** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. CONFIDENTIAL TREATMENT
Appendix A Prices PART PRODUCT FREQUENCY Jul-Sep'00 Oct-Dec'00 Jan-Mar'01 Apr-Jun '01 NUMBER NAME Pricing Pricing Pricing Pricing - - ------ ----------- --------------- --------- ---------- ---------- ---------- ----------- [***]
*** Confidential treatment requested pursuant to a request for confidential treatment filed with the Securities and Exchange Commission. Omitted portions have been filed separately with the Commission. EX-10.49 3 0003.txt SUBLEASE AGREEMENT DATED AS OF DECEMBER 29, 2000 EXHIBIT 10.49 Zoltar Acquisition, Inc. Sublease Agreement 160 Gibraltar Court Sunnyvale, California 94089 December 29, 2000 1
TABLE OF CONTENTS Page ---- 1. Demise of Premises.................................................. 1 2. Certain Definitions................................................. 1 3. Title and Condition................................................. 8 4. Use of Leased Premises; Quiet Enjoyment............................. 10 5. Term................................................................ 10 6. Basic Rent.......................................................... 11 7. Additional Rent..................................................... 12 8. Net Lease; Non-Terminability........................................ 13 9. Payment of Impositions.............................................. 14 10. Compliance with Laws and Easement Agreements; Environmental Matters. 15 11. Liens; Recording.................................................... 16 12. Maintenance and Repair.............................................. 17 13. Alterations and Improvements........................................ 17 14. Permitted Contests.................................................. 18 15. Indemnification..................................................... 19 16. Insurance........................................................... 22 17. Casualty and Condemnation........................................... 26 18. Termination Events.................................................. 27 19. Restoration......................................................... 29 20. Procedures Upon Purchase............................................ 30 21. Assignment and Subletting; Prohibition against Leasehold Financing.. 30 22. Events of Default................................................... 32 23. Remedies and Damages Upon Default................................... 33 24. Notices............................................................. 36 25. Estoppel Certificate................................................ 37 26. Surrender........................................................... 37 27. No Merger of Title.................................................. 37 28. Books and Records................................................... 38 29. Determination of Value.............................................. 38 30. Non-Recourse as to Landlord......................................... 40 31. Financing........................................................... 41 32. Subordination....................................................... 41 33. Financial Covenants................................................. 42 34. Right to Vacate; Rejectable Offer Upon Vacation..................... 42 35. Tax Treatment; Reporting............................................ 42 36. Right of First Refusal.............................................. 42 37. Security Deposit.................................................... 42 38. Miscellaneous....................................................... 43
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EXHIBITS - - -------- Exhibit "A" - Premises Exhibit "B" - Machinery and Equipment Exhibit "B-1" - Tenant's Property Exhibit "C" - Schedule of Permitted Encumbrances Exhibit "D" - Rent Schedule Exhibit "E" - Acquisition Costs Exhibit "F" - Approved Investments Exhibit "G" - Covenants Exhibit "H" Form of Guaranty of Lease
ii This SUBLEASE AGREEMENT (this "Sublease") is made as of December 29, 2000, between SPECTRIAN CORPORATION, a California corporation ("Landlord"), with an address at 350 West Java Drive, Sunnyvale, California 94089, and ZOLTAR ACQUISITION, INC., a North Carolina corporation to be known as UltraRF, Inc. ("Tenant"), with an address of 160 Gibraltar Court, Sunnyvale, California 94089. RECITALS A. SPEC (CA) QRS 12-20, INC., a California corporation ("Master ------ Landlord") and Landlord are parties to that certain Spectrian Lease Agreement - - -------- dated November 19, 1996, as amended by that certain First Amendment to Lease dated March 26, 1997 (as amended, the "Master Lease"), with regard to certain premises comprised of two (2) distinct parcels of real property, one of which is located at 350 W. Java Drive, Sunnyvale, California 94089 (as more particularly described in the Master Lease, the "West Java Premises"), and the ------------------ other located at 160 Gibraltar Court, Sunnyvale, California 94089 (as more particularly described in the Master Lease, the "Gibraltar Premises"). B. Pursuant to that certain Asset Purchase Agreement dated as of November 20, 2000 (the "Asset Purchase Agreement"), by and among Landlord, ------------------------ Tenant and Cree, Inc., a North Carolina corporation ("Cree"), Landlord has agreed to sell a portion of its business and assets to Tenant and Cree. As part of such contemplated sale (the "Sale Transaction"), Landlord intends to ---------------- sublease to Tenant, and Tenant intends to sublease from Landlord, all of Landlord's right, title and interest under the Master Lease in and to the Gibraltar Premises, all in accordance with the terms of this Sublease. In consideration of the rents and provisions herein stipulated to be paid and performed, Landlord and Tenant hereby covenant and agree as follows: 1. Demise of Premises. Landlord hereby demises and lets to Tenant, and ------------------ Tenant hereby takes and leases from Landlord, for the term and upon the provisions hereinafter specified, the following described property (hereinafter referred to as the "Leased Premises", which premises is more particularly described in the applicable description in Exhibit "A" attached hereto and made a part hereof and shall include the portions of items (a), (b) and (c) of this Paragraph 1 located thereon or therein and appertaining thereto): (a) the premises described in Exhibit "A" hereto, together with the Appurtenances (collectively, the "Land"); (b) the buildings, structures and other improvements now or hereafter constructed on the Land (collectively, the "Improvements"); and (c) the fixtures, machinery, equipment and other property described in Exhibit "B" hereto (collectively, the "Equipment"). --------- 2. Certain Definitions. "Additional Rent" shall mean Additional Rent as defined in Paragraph 7. "Adjoining Property" shall mean all sidewalks, driveways, curbs, gores and vault spaces adjoining the Leased Premises. "Alterations" shall mean all changes, additions, improvements or repairs to, all alterations, reconstructions, renewals, replacements or removals of and all substitutions or 1 replacements for any of the Improvements or Equipment, both interior and exterior, structural and non-structural, and ordinary and extraordinary. "Appurtenances" shall mean all tenements, hereditaments, easements, rights-of-way, rights, privileges in and to the Land, including (a) easements over other lands granted by any Easement Agreement and (b) any streets, ways, alleys, vaults, gores or strips of land adjoining the Land. "Assignment" shall mean any assignment of rents and leases from Landlord or Master Landlord to a Lender which (a) encumbers any of the Leased Premises and (b) secures Landlord's obligation to repay a Loan, as the same may be amended, supplemented or modified from time to time. "Basic Rent" shall mean Basic Rent as defined in Paragraph 6. "Basic Rent Adjustment Date" shall mean Basic Rent Adjustment Date as defined in Exhibit "D" hereto. "Basic Rent Payment Dates" shall mean the Basic Rent Payment Dates as defined in Paragraph 6. "Casualty" shall mean any injury to or death of any person or any loss of or damage to any property (including the Leased Premises) included within or related to the Leased Premises or arising from the Adjoining Property. "Commencement Date" shall mean December 29, 2000. "Condemnation" shall mean a Taking. "Condemnation Notice" shall mean notice or knowledge of the institution of or intention to institute any proceeding for Condemnation. "Costs" of a Person or associated with a specified transaction shall mean all reasonable costs and expenses incurred by such Person or associated with such transaction, including without limitation, attorneys' fees and expenses, court costs, brokerage fees, escrow fees, title insurance premiums, mortgage commitment fees, mortgage points, recording fees and transfer taxes, as the circumstances require. "Covenants" shall mean the covenants and agreements described on Exhibit "G" hereto. "CPI" shall mean CPI as defined in Exhibit "D" hereto. "Default Rate" shall mean the Default Rate as defined in Paragraph 7(a)(v). "Default Termination Amount" shall mean the greater of (a) Fair Market Value or (b) the sum of the Floor Amount and any Prepayment Premium which Landlord will be required to pay in prepaying any Loan with the proceeds of the Default Termination Amount. 2 "Easement Agreement" shall mean any conditions, covenants, restrictions, easements, declarations, licenses and other agreements listed as Permitted Encumbrances or as may, hereafter affect any Leased Premises. "Environmental Law" shall mean (i) whenever enacted or promulgated, any applicable federal, state, foreign and local law, statute, ordinance, rule, regulation, license, permit, authorization, approval, consent, court order, judgment, decree, injunction, code, requirement or agreement with any governmental entity (x) relating to pollution (or the cleanup thereof), or the protection of air, water vapor, surface water, groundwater, drinking water supply, land (including land surface or subsurface), plant, aquatic and animal life from injury caused by a Hazardous Substance or (y) concerning exposure to, or the use, containment, storage, recycling, reclamation, reuse, treatment, generation, discharge, transportation, processing, handling, labeling, production, disposal or remediation of Hazardous Substances, Hazardous Condition or Hazardous Activity, in each case as amended and as now or hereafter in effect, and (ii) any common law or equitable doctrine (including, without limitation, injunctive relief and tort doctrines such as negligence, nuisance, trespass and strict liability) that may impose liability or obligations or injuries or damages due to or threatened as a result of the presence of, exposure to, or ingestion of, any Hazardous Substance. The term Environmental Law includes, without limitation, the federal Comprehensive Environmental, Response, Compensation, and Liability Act of 1980, the Superfund Amendments and Reauthorization Act, the federal Water Pollution Control Act, the federal Clean Air Act, the federal Clean Water Act, the federal Resource Conservation and Recovery Act of 1976 (including the Hazardous and Solid Waste Amendments to RCRA), the federal Solid Waste Disposal Act, the federal Toxic Substance Control Act, the federal Insecticide, Fungicide and Rodenticide Act, the federal Occupational Safety and Health Act of 1970, the federal National Environmental Policy Act and the federal Hazardous Materials Transportation Act, each as amended and as now or hereafter in effect and any similar state or local Law. "Environmental Violation" shall mean (a) any direct or indirect discharge, disposal, spillage, emission, escape, pumping, pouring, injection, leaching, release, seepage, filtration or transporting of any Hazardous Substance at, upon, under, onto or within the Leased Premises, or from the Leased Premises to the environment, in violation of any Environmental Law or which results in any liability to or any claim against Landlord, Tenant or Lender, any Federal, state or local government or any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (b) any deposit, storage, dumping, placement or use of any Hazardous Substance at, upon, under or within the Leased Premises or which extends to any Adjoining Property in violation of any Environmental Law or which results in any claim or liability to any Federal, state or local government or to any other Person for the costs of any removal or remedial action or natural resources damage or for bodily injury or property damage, (c) the abandonment or discarding of any barrels, containers or other receptacles containing any Hazardous Substances in violation of any Environmental Laws, (d) any activity, occurrence or condition which results in any claim, liability, cost or expense to Landlord or Lender or any other owner or occupier of the Leased Premises, or which could result in a creation of a lien on the Leased Premises (or any portion thereof or interest therein) under any Environmental Law or (e) any violation of or noncompliance with any Environmental Law. "Equipment" shall mean the Equipment as defined in Paragraph 1. 3 "Escrow Holder" shall mean a nationally recognized title insurance company or any Person that would otherwise qualify as a Lender. "Event of Default" shall mean an Event of Default as defined in Paragraph 22(a). "Facility Representations" means, collectively, only the following: (i) each of the express representations and warranties made by Landlord under Sections 5.10(a) and 5.18 of the Asset Purchase Agreement to the extent that, under the terms of the Asset Purchase Agreement, they expressly apply to the Leased Premises, and (ii) each of the express representations and warranties made by Landlord under Sections 5.5, 5.6(c), 5.9, 5.10, 5.11, 5.18, 5.19 and 5.20 of the Asset Purchase Agreement to the extent that, under the terms of the Asset Purchase Agreement, they expressly apply to: (A) Equipment, and (B) that portion of Improvements which constitute leasehold improvements. "Fair Market Value" shall mean the fair market value of the Leased Premises as of the Relevant Date as affected and encumbered by this Sublease. For all purposes of this Sublease, Fair Market Value shall be determined in accordance with the procedure specified in Paragraph 29. "Fair Market Rental Value" shall mean the fair market rental value of the Leased Premises as of the Relevant Date for the relevant Renewal Term determined in accordance with the procedure specified in Paragraph 29. "Fair Market Value Date" shall mean the date when the Fair Market Value is determined in accordance with Paragraph 29. "Federal Funds" shall mean federal or other immediately available funds which at the time of payment are legal tender for the payment of public and private debts in the United States of America. "Floor Amount" shall mean the amount set forth on Exhibit "E" hereto. "Hazardous Activity" means any activity, process, procedure or undertaking which directly or indirectly (i) procures, generates or creates any Hazardous Substance; (ii) causes or results in the release, seepage, spill, leak, flow, discharge or emission of any Hazardous Substance into the environment (including the air, ground water, watercourses or water systems), (iii) involves the containment or storage of any Hazardous Substance; or (iv) would cause any of the Leased Premises or any portion thereof to become a hazardous waste treatment, recycling, reclamation, processing, storage or disposal facility within the meaning of any Environmental Law. "Hazardous Condition" means any condition which would support any claim or liability under any Environmental Law, including the presence of underground storage tanks. "Hazardous Substance" means (i) any substance, material, product, petroleum, petroleum product, derivative, compound or mixture, mineral (including asbestos), chemical, gas, medical waste, or other pollutant, in each case whether naturally occurring, man-made or the by-product of any process, that is toxic, harmful or hazardous or acutely hazardous 4 to the environment or public health or safety or (ii) any substance supporting a claim under any Environmental Law, whether or not defined as hazardous as such under any Environmental Law. Hazardous Substances include, without limitation, any toxic or hazardous waste, pollutant, contaminant, industrial waste, petroleum or petroleum-derived substances or waste, radon, radioactive materials, asbestos, asbestos containing materials, urea formaldehyde foam insulation, lead and polychlorinated biphenyls. "Impositions" shall mean the Impositions as defined in Paragraph 9(a). "Improvements" shall mean the Improvements as defined in Paragraph 1. "Initial Term" shall mean Initial Term as defined in Paragraph 5(a). "Insurance Requirements" shall mean the requirements of all insurance policies maintained in accordance with this Sublease. "Land" shall mean the Land as defined in Paragraph 1. "Landlord Indemnitee" shall mean a Landlord Indemnitee as defined in Paragraph 15. "Law" shall mean any constitution, statute, rule of law, code, ordinance, order, judgment, decree, injunction, rule, regulation, requirement or administrative, or judicial determination, even if unforeseen or extraordinary, of every duly constituted governmental authority, court or agency, now or hereafter enacted or in effect. "Lease Year" shall mean, with respect to the first Lease Year, the period commencing on the Commencement Date and ending at midnight on the last day of the twelfth (12th) consecutive calendar month following the month in which the Commencement Date occurred, and each succeeding twelve (12) month period during the Term. "Leased Premises" shall mean the Leased Premises as defined in Paragraph 1. "Legal Requirements" shall mean the requirements of all present and future Laws (including but not limited to Environmental Laws) and all covenants, restrictions and conditions now or hereafter of record which may be applicable to Tenant or to any of the Leased Premises, or to the use, manner of use, occupancy, possession, operation, maintenance, alteration, repair or restoration of any of the Leased Premises, even if compliance therewith necessitates structural changes or improvements or results in interference with the use or enjoyment of any of the Leased Premises. "Lender" shall mean any person or entity (and their respective successors and assigns) which may, after the date hereof, make a Loan to Landlord or Master Landlord or is the holder of any Note and which is a bank, insurance company, bank affiliate or wholly-owned subsidiary of any such bank, credit company, public or private pension plan, investment bank, institutionally managed fund or any other Person that is in the business of, directly or indirectly, making commercial mortgage loans and whose Mortgage provides that any Net Award shall be held and applied in accordance with the terms of this Sublease. 5 "Loan" shall mean any loan made by one or more Lenders to Landlord or Master Landlord, which loan is secured by a Mortgage and an Assignment and evidenced by a Note. "Master Lease" shall mean as defined in Recital A of this Sublease. "Master Lease Basic Rent" shall mean, collectively, the sum of the Basic Rent (as defined in the Master Lease) due from Landlord to Master Landlord for the Gibraltar Premises and the West Java Premises. "Master Lease Term" shall mean the term of the Master Lease as defined in Paragraph 5 and other applicable provisions thereof. "Monetary Obligations" shall mean Rent and all other sums payable by Tenant under this Sublease to Landlord, to any third party on behalf of Landlord or to any Indemnitee. "Mortgage" shall mean any first leasehold mortgage or leasehold deed of trust from Landlord and/or Master Landlord to a Lender which (a) encumbers Landlord's or Master Landlord's interest in the Leased Premises or this Sublease, and (b) secures Landlord's or Master Landlord's obligation to repay a Loan, as the same may be amended, supplemented or modified. "Net Award" shall mean (a) the entire award payable to Master Landlord, Landlord or Lender by reason of a Condemnation whether pursuant to a judgment or by agreement or otherwise, or (b) the entire proceeds of any insurance required under clauses (i), (ii) (to the extent payable to Master Landlord, Landlord or Lender), (iv), (v) or (vi) of Paragraph 16(a), as the case may be, less any expenses incurred by Master Landlord, Landlord and Lender in collecting such award or proceeds. "Note" shall mean any promissory note evidencing Landlord's or Master Landlord's obligation to repay a Loan, as the same may be amended, supplemented or modified. "Partial Casualty" shall mean any Casualty which does not constitute a Termination Event. "Partial Condemnation" shall mean any Condemnation which does not constitute a Termination Event. "Permitted Encumbrances" shall mean those covenants, restrictions, reservations, liens, conditions and easements and other encumbrances, other than any Mortgage or Assignment, listed on Exhibit "C" hereto (but such listing shall not be deemed to revive any such encumbrances that have expired or terminated or are otherwise invalid or unenforceable). "Person" shall mean an individual, partnership, association, corporation or other entity. "Prepayment Premium" shall mean any payment (other than a payment of principal and/or interest) which Landlord or Master Landlord is required to make under a Note or a Mortgage by reason of any prepayment by Landlord or Master Landlord of any principal up to and including but not in excess of Ten Million Dollars ($10,000,000), due under a Note or 6 Mortgage, and which may be (in lieu of such prepayment premium or prepayment penalty) a "make whole" clause requiring a prepayment premium in an amount sufficient to compensate the Lender for the loss of the benefit of the Loan due to prepayment. "Prime Rate" shall mean the interest rate per annum as published, from time to time, in the Wall Street Journal as the "Prime Rate" in its column entitled "Money Rate". The Prime Rate may not be the lowest rate of interest charged by any "large U.S. money center commercial banks" and Landlord makes no representations or warranties to that effect. In the event the Wall Street Journal ceases publication or ceases to publish the "Prime Rate" as described above, the Prime Rate shall be the "Prime Rate" as published by Bank of America, or if not published, the "Prime Rate" shall be the average per annum discount rate (the "Discount Rate") on ninety-one (91) day bills ("Treasury Bills") issued from time to time by the United States Treasury at its most recent auction, plus three hundred (300) basis points. If no such 91-day Treasury Bills are then being issued, the Discount Rate shall be the discount rate on Treasury Bills then being issued for the period of time closest to ninety-one (91) days. "Relevant Date" shall mean (a) the date immediately prior to the event which gives rise to an Event of Default for the purpose of determining the Default Termination Amount under Paragraph 23, (b) the date when Fair Market Value is redetermined, in the event of a redetermination of Fair Market Value pursuant to Paragraph 20(c), and (c) the first day of the applicable Renewal Term. "Renewal Term" shall mean Renewal Term as defined in Paragraph 5. "Rent" shall mean, collectively, Basic Rent and Additional Rent. "Security Deposit" shall mean Security Deposit as defined in Paragraph 37. "Site Assessment" shall mean a Site Assessment as defined in Paragraph 10(c). "State" shall mean the State of California. "Surviving Obligations" shall mean any obligations of Tenant or Landlord under this Sublease, actual or contingent, which arise on or prior to the expiration or prior termination of this Sublease or which survive such expiration or termination by their own terms. "Taking" shall mean any taking or damaging of all or a portion of any of the Leased Premises (i) in or by condemnation or other eminent domain proceedings pursuant to any Law, general or special, or (ii) by reason of any agreement with any condemnor in settlement of or under threat of any such condemnation or other eminent domain proceeding, or (iii) by any other means. The Taking shall be considered to have taken place as of the later of the date actual physical possession is taken by the condemnor, or the date on which the right to compensation and damages accrues under the law applicable to the Leased Premises. "Tenant Indemnitee" shall mean a Tenant Indemnitee as defined in Paragraph 15. "Tenant's Property" shall mean the Tenant's Property as defined in Exhibit B-1. 7 "Term" shall mean the Term as defined in Paragraph 5. "Termination Amount" shall mean the sum of the Floor Amount and any Prepayment Premium which Landlord will be required to pay in its or the Master Landlord's prepaying of any Loan with proceeds of the Termination Amount. "Termination Date" shall mean the Termination Date as defined in Paragraph 18. "Termination Event" shall mean a Termination Event as defined in Paragraph 18. "Termination Notice" shall mean Termination Notice as defined in Paragraph 18(a). "Third Party Purchaser" shall mean the Third Party Purchaser as defined in Paragraph 21(g). 3. Title and Condition. (a) The Leased Premises are demised and let subject to (i) the Mortgage and Assignment presently in effect, (ii) the rights of any Persons in possession of the Leased Premises, (iii) the existing state of title of any of the Leased Premises, including any Permitted Encumbrances, (iv) any state of facts which an accurate survey or physical inspection of the Leased Premises might show, (v) all Legal Requirements, including any existing violation of any thereof, and (vi) the condition of the Leased Premises as of the commencement of the Term, without representation or warranty by Landlord. In addition, this Sublease is and shall be at all times subject to all of the terms, covenants and conditions of the Master Lease and shall in all respects be limited to the estate granted to Landlord by Master Landlord pursuant to the Lease. Excluding only the obligations with regard to the payment of Rent (which obligations are governed by this Sublease), Tenant assumes and agrees to be bound by the terms of and to perform all of the obligations and duties of Landlord under the Master Lease with respect to the Leased Premises. Tenant shall not commit or permit to be committed any act or omission which shall violate any terms, covenants or conditions of the Lease. Each of Landlord and Tenant agrees that it shall promptly forward to the other any and all notices or other communications it receives from the Master Landlord under the Lease. Where any approval or consent shall be required of Master Landlord pursuant to the provisions of the Lease, Landlord may, without limitation, condition its approval or consent upon Landlord's obtaining the approval or consent of the Master Landlord. Landlord agrees to use commercially reasonable efforts to request such consent from the Master Landlord; provided, however, that in no event shall Landlord be obligated to file any judicial, administrative or other proceeding in connection with requesting or obtaining any consent from Master Landlord. To the extent that the terms of this Sublease are more restrictive than the terms of the Lease, the terms of this Sublease shall prevail. (b) Tenant acknowledges that the Leased Premises are in good condition and repair at the inception of this Sublease. LANDLORD LEASES AND WILL LEASE AND TENANT TAKES AND WILL TAKE THE LEASED PREMISES AS IS. TENANT ACKNOWLEDGES THAT LANDLORD (WHETHER ACTING AS LANDLORD HEREUNDER OR IN ANY OTHER CAPACITY) HAS NOT MADE AND WILL NOT MAKE, NOR SHALL LANDLORD BE DEEMED TO HAVE MADE, ANY WARRANTY OR 8 REPRESENTATION; EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED PREMISES, INCLUDING ANY WARRANTY OR REPRESENTATION AS TO (i) ITS FITNESS, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE, (ii) THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, (iii) THE EXISTENCE OF ANY DEFECT, LATENT OR PATENT, (iv) LANDLORD'S TITLE THERETO, (v) VALUE, (vi) COMPLIANCE WITH SPECIFICATIONS, (vii) LOCATION, (viii) USE, (ix) CONDITION, (x) MERCHANTABILITY, (xi) QUALITY, (xii) DESCRIPTION, (xiii) DURABILITY (xiv) OPERATION OR (xv) THE EXISTENCE OF ANY HAZARDOUS SUBSTANCE; AND ALL RISKS INCIDENT THERETO ARE TO BE BORNE BY TENANT. TENANT ACKNOWLEDGES THAT THE LEASED PREMISES ARE OF ITS SELECTION AND TO ITS SPECIFICATIONS AND THAT THE LEASED PREMISES HAVE BEEN INSPECTED BY TENANT AND ARE SATISFACTORY TO IT. IN AGREEING TO ENTER INTO THIS SUBLEASE, TENANT IS RELYING SOLELY ON ITS OWN JUDGMENT WITH RESPECT TO THE RESULTS OF ITS INSPECTION OF THE LEASED PREMISES. IN THE EVENT OF ANY DEFECT OR DEFICIENCY IN ANY OF THE LEASED PREMISES OF ANY NATURE, WHETHER LATENT OR PATENT, LANDLORD SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY WITH RESPECT THERETO OR FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING STRICT LIABILITY IN TORT). THE PROVISIONS OF THIS PARAGRAPH 3(b) HAVE BEEN NEGOTIATED, AND ARE INTENDED TO BE A COMPLETE EXCLUSION AND NEGATION OF ANY WARRANTIES BY LANDLORD, EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE LEASED PREMISES, ARISING PURSUANT TO THE UNIFORM COMMERCIAL CODE OR ANY OTHER LAW NOW OR HEREAFTER IN EFFECT OR ARISING OTHERWISE. (c) Tenant represents to Landlord that Tenant has examined the title to the Leased Premises prior to the execution and delivery of this Sublease and has found the same to be satisfactory for the purposes contemplated hereby. Tenant acknowledges and agrees that (i) Tenant has only the subleasehold right of possession and use of the Leased Premises as provided herein, (ii) the Improvements conform to all material Legal Requirements and all Insurance Requirements, (iii) all easements necessary or appropriate for the use or operation of the Leased Premises have been obtained, (iv) all contractors and subcontractors who have performed work on or supplied materials to the Leased Premises have been fully paid, and all materials and supplies have been fully paid for, (v) the Improvements have been fully completed in all material respects in a workmanlike manner, and (vi) all Equipment necessary or appropriate for the use or operation of the Leased Premises has been installed and is presently fully operative in all material respects. (d) Landlord hereby assigns to Tenant, without recourse or warranty whatsoever, all warranties, guaranties, indemnities and similar rights which Landlord may have against any manufacturer, seller, engineer, contractor or builder in respect of any of the Leased Premises. Such assignment shall remain in effect until an Event of Default occurs or until the expiration or earlier termination of this Sublease, whereupon such assignment shall cease and all of said warranties, guaranties, indemnities and other rights shall automatically revert to Landlord. (e) Landlord and Tenant acknowledge and agree that nothing in this Sublease (including, without limitation, Sections 3(a) through 3(d)) is intended, nor shall any provision of 9 this Sublease be construed, to supersede, limit or otherwise adversely affect or expand in scope any of the Facility Representations; provided, however, that each Facility Representation shall, for purposes of this Sublease, cease to have legal force and effect from and after the expiration of the survival period applicable to and designated for such Facility Representation under Section 11.3 of the Asset Purchase Agreement. 4. Use of Leased Premises; Quiet Enjoyment. --------------------------------------- (a) Tenant may occupy and use the Leased Premises for office, research and development, assembly, manufacturing (including without limitation semi-conductor wafer fabrication and electronics manufacturing), storage, warehousing and all related uses, and, subject to Landlord's consent, which consent shall not be unreasonably withheld, any other use permitted by Law. Tenant shall not use or occupy or permit any of the Leased Premises to be used or occupied, nor do or permit anything to be done in or on any of the Leased Premises, in a manner which would (i) violate any Law or Legal Requirement, (ii) make void or voidable or cause any insurer to cancel any insurance required by this Sublease, or make it impossible to obtain any such insurance at commercially reasonable rates, (iii) cause structural injury to any of the Improvements or (iv) constitute a public or private nuisance or waste. (b) Subject to the provisions hereof, so long as no Event of Default has occurred and is continuing, Tenant shall have the right to quietly hold, occupy and enjoy the Leased Premises throughout the Term, without any hindrance, ejection or molestation by Landlord with respect to matters that arise after the date hereof, provided that Landlord or Master Landlord, or their respective agents may enter upon and examine any of the Leased Premises at such reasonable times as Landlord or Master Landlord may select and upon reasonable notice to Tenant (except in the case of any emergency, in which event no notice shall be required) for the purpose of inspecting the Leased Premises, verifying compliance or non-compliance by Tenant with its obligations hereunder and the existence or non-existence of an Event of Default or event which with the passage of time and/or notice would constitute an Event of Default, showing the Leased Premises to prospective Lenders and purchasers and taking such other action with respect to the Leased Premises as is permitted by any provision hereof. When showing the Leased Premises to prospective Lenders and purchasers, Landlord agrees to use reasonable efforts to minimize disruption to Tenant's business and operations on the Leased Premises. Landlord shall indemnify Tenant for any damages, losses, and costs and expenses caused directly by Landlord's failure to use reasonable efforts to minimize disruption to Tenant's business and operations in connection with Landlord's inspections of the Leased Premises. 5. Term. ==== (a) Subject to the provisions hereof, Tenant shall have and hold the Leased Premises for an initial term (the "Initial Term") (the Initial Term, as extended or renewed in accordance with the provisions hereof, being called the "Term") commencing on the Commencement Date and ending on the date which is one calendar day prior to the Expiration Date (as defined in the Master Lease) of the Initial Term (as defined in the Master Lease) of the Master Lease (the "Expiration Date"). Accordingly, the Expiration Date of the Initial Term (as defined in this Sublease) is November 29, 2011. 10 (b) Provided that if, on or prior to the Expiration Date or any other Renewal Date (as hereinafter defined) this Sublease shall not have been terminated pursuant to any provision hereof, then on the Expiration Date and on the fifth (5th) and tenth (10th) anniversaries of the Expiration Date (the Expiration Date and each such anniversary being a "Renewal Date"), the Term shall be extended for an additional period of five (5) years (a "Renewal Term"), so long as (i) Tenant shall have notified Landlord in writing in recordable form at least one (1) year prior to the next Renewal Date that Tenant is electing to so extend this Sublease as of the next Renewal Date, and (ii) on or before the applicable Renewal Date, Landlord shall have extended the term of the Master Lease by a period of time that is equal to or greater than the time period of the applicable Renewal Term, Landlord having the right but not the obligation to so extend the term of the Master Lease. Any such extension of the Term shall be subject to all of the provisions of this Sublease, as the same may be amended, supplemented or modified. Each Renewal Term shall expire one calendar day prior to the corresponding Renewal Term (as defined in the Master Lease) under the Master Lease. (c) If Tenant fails to exercise its option pursuant to Paragraph 5(b) to extend the Term, or if Landlord fails to extend the term of the Master Lease by a period of time equal to or greater than any particular Renewal Term to which Tenant desires to extend the Term under this Sublease, or if an Event of Default has occurred and is continuing, then Landlord shall have the right during the remainder of the Term then in effect and, in any event, Landlord shall have the right during the last year of the Term, to (i) advertise the availability of any of the Leased Premises for sale or reletting and to erect upon any of the Leased Premises signs indicating such availability and (ii) show any of the Leased Premises to prospective purchasers or tenants or their agents at such reasonable times as Landlord may select. 6. Basic Rent. Tenant shall pay to Landlord in advance, as annual rent for ---------- the Leased Premises during the Term, the amounts determined in accordance with Exhibit "D" hereto ("Basic Rent"), commencing on the Commencement Date, and ---------- continuing on the first day of each March, June, September and December thereafter during the Term (each such day being a "Basic Rent Payment Date") ----------------------- Each such rental payment shall be made, at Landlord's sole discretion, (a) to Landlord at its address set forth above and/or to such one or more other Persons, at such addresses and in such proportions as Landlord may direct by fifteen (15) days' prior written notice to Tenant (in which event Tenant shall give Landlord notice of each such payment concurrent with the making thereof), and (b) by a check mailed at least seven (7) days before the applicable Basic Rent Payment Date, or in Federal Funds. Pro rata Basic Rent for the period from the Commencement Date through the last calendar day of February, 2001 shall be paid on the Commencement Date. 11 7. Additional Rent. --------------- (a) Tenant shall pay and discharge, as additional rent (collectively, "Additional Rent"): (i) except as otherwise specifically provided herein, all out- of-pocket costs and expenses of Tenant and Landlord which are reasonably incurred by Landlord or Tenant in connection or associated with (A) the ownership, use, non-use, occupancy, possession, operation, condition, design, construction, maintenance, alteration, repair or restoration of any of the Leased Premises (except payments on any Loan, third party management fees, replacement reserves for the Equipment and Improvements, real estate commissions, costs related to the sale of the Leased Premises to any Person and costs related to obtaining and closing any Loan or any other loan unless such costs are part of any other Cost of Landlord unrelated to the Leased Premises and Impositions (which are governed by Paragraph 9 hereof)), (B) the performance of any of Tenant's obligations under this Sublease, (C) any transfer of any of the Leased Premises to Tenant under this Sublease, (D) any Condemnation proceedings, (E) the adjustment, settlement or compromise of any insurance claims involving or arising from any of the Leased Premises, (F) the prosecution, defense or settlement of any litigation involving or arising from any of the Leased Premises, this Sublease, or the sale of the Leased Premises to Landlord excluding litigation by Tenant against Landlord in which Tenant is the prevailing party and excluding litigation or any proceeding concerning any Loan or any other loan secured by the Leased Premises unless such litigation or proceeding arises out of any action or non-action by Tenant under this Sublease, (G) the exercise or enforcement by Landlord, its successors and assigns, of any of its rights under this Sublease if Landlord is the prevailing party, (H) any amendment to or modification or termination of this Sublease made at the request of Tenant, (I) Costs of Landlord's counsel incurred in connection with any act undertaken by Landlord (or its counsel) at the request of Tenant, or incurred in connection with any act of Landlord performed at the request of Tenant or if Tenant fails to perform its obligations under this Sublease, and (J) any other items specifically required to be paid by Tenant under this Sublease; (ii) payments to be made to or on behalf of any Landlord pursuant to Paragraph 15 hereof; (iii) after the date all or any portion of any installment of Basic Rent is due and not paid, an amount equal to three percent (3%) of the amount of such unpaid installment or portion thereof, provided, however, that with respect to the first late payment of all or any portion of any installment of Basic Rent in any Lease Year, the Late Charge shall not be due and payable unless the Basic Rent has not been paid within seven (7) days following the due date thereof; (iv) a sum equal to any late charge or default penalties in excess of the amount of Late Charge and Default Rate paid by Tenant on that portion of the Basic Rent equal to payments of principal and interest payable by Master Landlord and/or Landlord on any Note then in effect and legal fees and expenses of Lender, which are payable by Master Landlord and/or Landlord to any Lender under any Note by reason of Tenant's late payment or non-payment of Basic Rent or by reason of an Event of Default; and 12 (v) interest at the rate (the "Default Rate") of three percent (3%) over the Prime Rate per annum on the following sums until paid in full: (A) all overdue installments of Basic Rent from the respective due dates thereof and (B) all overdue amounts of Additional Rent relating to obligations which Landlord shall have paid on behalf of Tenant, from the date of payment thereof by Landlord. (b) Tenant shall pay and discharge (i) any Additional Rent referred to in Paragraph 7(a)(i) when the same shall become due, provided that amounts which are billed to Landlord or any third party, but not to Tenant, shall be paid within seven (7) days after Tenant's receipt of Landlord's written demand for payment thereof, and (ii) any other Additional Rent, within seven (7) days after Tenant's receipt of Landlord's written demand for payment thereof. (c) In no event shall amounts payable under Paragraph 7(a)(iii), (iv) and (v) exceed the maximum amount permitted by applicable Law. 8. Net Lease; Non-Terminability. ---------------------------- (a) This is a net lease and, except as otherwise specifically provided herein, all Monetary Obligations shall be paid without notice or demand (provided that notice of increases in Basic Rent payments shall be given as required under Exhibit "D" and in accordance with the provisions of Paragraph 24) and without set-off, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense (collectively, a "Set-Off"). (b) Except as otherwise expressly provided herein, this Sublease and the rights of Landlord and the obligations of Tenant hereunder shall not be affected by any event or for any reason, including the following: (i) any damage to or theft, loss or destruction of any of the Leased Premises, (ii) any Condemnation, (iii) Tenant's acquisition of ownership of any of the real property upon which the Leased Premises are situated, (iv) any default on the part of Master Landlord under any Note, Mortgage, Assignment or any other agreement, (v) any latent or other defect in any of the Leased Premises, (vi) the breach of any warranty of any seller or manufacturer of any of the Equipment, (vii) any violation of Paragraph 4(b) or any other provision of this Sublease by Landlord, (viii) the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution or winding-up of, or other proceeding affecting Master Landlord or Landlord, (ix) the exercise of any remedy, including foreclosure, under any Mortgage or Assignment, (x) any action with respect to this Sublease (including the disaffirmance hereof) which may be taken by Landlord, any trustee, receiver or liquidator of Landlord or any court under the Federal Bankruptcy Code or otherwise, (xi) any interference with Tenant's use of the Leased Premises, (xii) market or economic changes, (xiii) any default under the Master Lease by Master Landlord or Landlord, or (xiv) any other cause, whether similar or dissimilar to the foregoing, any present or future Law to the contrary notwithstanding. The foregoing shall not limit Tenant's right to recover damages or obtain any equitable remedy in the event of a default by Landlord, subject in any event to the provisions, of Paragraph 30(a). (c) The obligations of Tenant hereunder shall be separate and independent covenants and agreements, all Monetary Obligations shall continue to be payable in all events (or, in lieu thereof, Tenant shall pay amounts equal thereto), and the obligations of Tenant hereunder shall continue unaffected unless the requirement to pay or perform the same shall have 13 been terminated pursuant to an express provision of this Sublease. All Rent payable by Tenant hereunder shall constitute "rent" for all purposes (including Section 502 (b)(6) of the Bankruptcy Code). (d) Except as otherwise expressly provided herein, Tenant shall have no right and hereby waives all rights which it may have under any Law (i) to quit, terminate or surrender this Sublease or any of the Leased Premises, or (ii) to any Set-Off of any Monetary Obligations. 9. Payment of Impositions. ---------------------- (a) Tenant shall, before interest or penalties are due thereon, pay and discharge all taxes (including real and personal property, franchise, sales and rent taxes), all charges for any easement or agreement maintained for the benefit of any of the Leased Premises, all assessments and levies, all permit, inspection and license fees, all rents and charges for water, sewer, utility and communication services relating to any of the Leased Premises, and all other public charges whether of a like or different nature, even if unforeseen or extraordinary, imposed upon or assessed against (i) Tenant, (ii) Tenant's possessory interest in the Leased Premises, (iii) any of the Leased Premises, (iv) Landlord as a result of or arising in respect of the acquisition, ownership, occupancy, leasing, use, possession or sale of any of the Leased Premises, any activity conducted on any of the Leased Premises, or the Rent, or (v) any Lender by reason of any tax or charge payable to or on behalf of Lender which is not imposed as of the date hereof, is customarily paid by tenants or by borrowers pursuant to then prevailing mortgage practices and which is a substitute for any ad valorem tax payable on the Leased Premises or any portion thereof and (as to this clause (v)) which Landlord has agreed to pay (collectively, the "Impositions"); provided, that nothing in this Sublease shall obligate Tenant to pay (A) income, excess profits or other taxes of Landlord (or Lender) which are determined on the basis of Landlord's (or Lender's) net income or net worth, (B) any estate, inheritance, succession, gift or similar tax imposed on Landlord or (C) any capital gains or transfer tax imposed on Landlord in connection with the sale of the Leased Premises to any Person except for a sale of the Leased Premises or any part thereof to Tenant or to any nominee or designee of Tenant. If any Imposition may be paid in installments without penalty, Tenant shall have the option to pay such Imposition in installments; in such event, Tenant shall be liable only for those installments which accrue or become due and payable during the Term. Tenant shall prepare and file all tax reports required by governmental authorities which relate to the Impositions. Tenant shall deliver to Landlord (1) copies of all settlements and notices pertaining to the Impositions which may be issued by any governmental authority within ten (10) days after Tenant's receipt thereof, (2) receipts for payment of all taxes required to be paid by Tenant hereunder within thirty (30) days after the due date thereof and (3) receipts for payment of all other Impositions within ten (10) days after Landlord's request therefor. (b) Landlord shall have the right during the occurrence of an Event of Default to require Tenant to pay to Landlord an additional monthly sum (each an "Escrow Payment") sufficient to pay the Escrow Charges (as hereinafter defined) as they become due. As used herein, "Escrow Charges" shall mean real estate taxes on the Leased Premises or payments in lieu thereof and premiums on any insurance required by this Sublease. Landlord shall determine, in a commercially reasonable manner, the amount of the Escrow Charges and of each Escrow Payment. The Escrow Payments may be commingled with other funds of Landlord or other Persons and no interest thereon shall be due or payable to Tenant. Landlord shall apply the Escrow Payments to the payment of the Escrow Charges in such order or priority as Landlord shall determine or as required by law. If at any time the Escrow Payments theretofore paid to Landlord shall be insufficient for the payment of the Escrow Charges, Tenant, within ten (10) days after Landlord's demand therefor, shall pay the amount of the deficiency to Landlord. 10. Compliance with Laws and Easement Agreements; Environmental Matters. ------------------------------------------------------------------- (a) Subject to Landlord's indemnity obligations set forth in Section 15(c) of this Sublease, Tenant shall, at its expense, comply with and conform to, and cause the Leased Premises and any other Person occupying any part of the Leased Premises to comply with and conform to, all Insurance Requirements and Legal Requirements (including all applicable Environmental Laws) and shall maintain in full force and effect all permits, licenses and utility services required for the use and occupancy of the Leased Premises. Tenant shall not at any time (i) cause, permit or suffer to occur any Environmental Violation or (ii) permit any sublessee, assignee or other Person occupying the Leased Premises under or through Tenant to cause, permit or suffer to occur any Environmental Violation. (b) Tenant, at its sole cost and expense, will at all times promptly and faithfully abide by, discharge and perform all of the covenants, conditions and agreements contained in any Easement Agreement on the part of Landlord or the occupier to be kept and performed thereunder. Tenant will not alter, modify, amend or terminate any Easement Agreement, give any consent or approval thereunder, or enter into any new Easement Agreement without, in each case, prior written consent of Landlord, which will not be unreasonably withheld. (c) Upon prior written notice from Landlord and/or Master Landlord, Tenant shall permit such persons as Landlord and/or Master Landlord may designate ("Site Reviewers") to visit the Leased Premises and perform, environmental site investigations and assessments ("Site Assessments") on the Leased Premises for the purpose of determining whether there exists on the Leased Premises any Environmental Violation or any condition which could result in any Environmental Violation. Such Site Assessments may include both above and below the ground testing for Environmental Violations and such other tests as may be necessary, in the opinion of the Site Reviewers, to conduct the Site Assessments. Tenant shall supply to the Site Reviewers such historical and operational information regarding the Leased Premises as may be reasonably requested by the Site Reviewers to facilitate the Site Assessments, and shall make available for meetings with the Site Reviewers appropriate personnel having knowledge of such matters. The cost of performing and reporting any Site Assessment which discloses an Environmental Violation that first occurs or arises on or after the Commencement Date shall be paid by Tenant. The cost of performing and evaluating any Site Assessment that fails to disclose an Environmental Violation that first occurred or arose on or after the Commencement Date shall be paid by Landlord. (d) If an Environmental Violation first arises or occurs during the Term of this Sublease and, in Landlord's reasonable judgment, the cost of remediation of the same is likely to exceed $100,000, Tenant shall provide to Landlord, within ten (10) days after Landlord's request therefor, adequate financial assurances that Tenant will effect such remediation in accordance with applicable Environmental Laws. 15 (e) Notwithstanding any other provision of this Sublease, if an Environmental Violation first arises or occurs on or after the Commencement Date, the Term would otherwise terminate or expire and Landlord, after good faith efforts, shall have been unable to relet the Leased Premises solely because of the existence of such Environmental Violation, then, at the option of Landlord, the Term shall be automatically extended beyond the date of termination or expiration and this Sublease shall remain in full force and effect beyond such date until the earliest to occur of (i) the completion of remedial action to the extent necessary to make the Leased Premises relettable, (ii) the date specified in a written notice from Landlord to Tenant terminating this Sublease or (iii) the date on which Tenant obtains a bona-fide replacement tenant for the Leased Premises on terms reasonably satisfactory to Master Landlord and Landlord (and in this regard Landlord and its broker shall reasonably cooperate with Tenant with respect to Tenant's marketing efforts). (f) If Tenant fails to comply with any requirement of any Environmental Law in connection with any Environmental Violation which first occurs or arises on or after the Commencement Date, Landlord and/or the Master Landlord shall have the right (but no obligation) to take any and all actions as the Site Reviewers shall deem necessary in order to cure such Environmental Violation. (g) Tenant shall notify Landlord immediately alter becoming aware of any Environmental Violation (or alleged Environmental Violation) or noncompliance with any of the covenants contained in this Paragraph 10 and shall forward to Landlord immediately upon receipt thereof copies of all orders, reports, notices, permits, applications or other communications relating to any such violation or noncompliance. 11. Liens; Recording. ---------------- (a) Tenant shall not, directly or indirectly, create or permit to be created or to remain and shall promptly discharge or remove any lien, levy or encumbrance on any of the Leased Premises or on any Rent or any other sums payable by Tenant under this Sublease, other than any Mortgage or Assignment, the Permitted Encumbrances and any mortgage, lien, encumbrance or other charge created by or resulting solely from any act or omission of Landlord or Master Landlord. NOTICE IS HEREBY GIVEN THAT NEITHER LANDLORD NOR MASTER LANDLORD SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT OR TO ANYONE HOLDING OR OCCUPYING ANY OF THE LEASED PREMISES THROUGH OR UNDER TENANT, AND THAT NO MECHANICS' OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LANDLORD OR MASTER LANDLORD IN AND TO ANY OF THE LEASED PREMISES. LANDLORD OR MASTER LANDLORD MAY AT ANY TIME POST ANY NOTICES ON THE LEASED PREMISES REGARDING SUCH NON-LIABILITY OF LANDLORD OR MASTER LANDLORD. (b) Tenant shall execute, deliver and record, file or register (collectively, "record") all such instruments as may be required or permitted by any present or future Law in order to evidence the respective interests of Landlord, Master Landlord and Tenant in any of the Leased Premises, and shall cause a memorandum of this Sublease (or, if such a memorandum 16 cannot be recorded, this Sublease), and any supplement hereto or thereto, to be recorded in such manner and in such places as may be required or permitted by any present or future Law in order to protect the validity and priority of this Sublease. 12. Maintenance and Repair. ---------------------- (a) Tenant shall at all times maintain the Leased Premises and the Adjoining Property in as good repair and appearance as each is in on the date hereof and fit to be used for their intended use in accordance with the better of the practices generally recognized as then acceptable by other companies in its industry, or observed by Tenant with respect to the other real properties owned or operated by it, and, in the case of the Equipment, in as good mechanical condition as it was on the later of the date hereof or the date of its installation, except for ordinary wear and tear. Tenant shall take every other action necessary or appropriate for the preservation and safety of the Leased Premises. Tenant shall promptly make all Alterations of every kind and nature, whether foreseen or unforeseen, which may be required to comply with the foregoing requirements of this Paragraph 12(a). Landlord shall not be required to make any Alteration, whether foreseen or unforeseen, or to maintain the Leased Premises or Adjoining Property in any way, and Tenant hereby expressly waives any right which may be provided for in any Law now or hereafter in effect to make Alterations at the expense of Landlord or to require Landlord to make Alterations. Any Alteration made by Tenant pursuant to this Paragraph 12 shall be made in conformity with the provisions of Paragraph 13. (b) If any Improvement, now or hereafter constructed by Tenant, shall (i) encroach upon any setback or any property, street or right-of-way adjoining any of the Leased Premises, (ii) violate the provisions of any restrictive covenant affecting any of the Leased Premises, (iii) hinder or obstruct any easement or right-of-way to which any of the Leased Premises is subject or (iv) impair the rights of others in, to or under any of the foregoing, Tenant shall, promptly after receiving notice or otherwise acquiring knowledge thereof, either (A) obtain from all necessary parties waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation, hindrance, obstruction or impairment, whether the same shall affect Landlord, Tenant or both, or (B) take such action as shall be necessary to remove all such encroachments, hindrances or obstructions and to end all such violations or impairments, including, if necessary, making Alterations. 13. Alterations and Improvements. ---------------------------- (a) Tenant shall have the right, without having obtained the prior written consent of Landlord, Master Landlord and Lender, to make (i) non- structural Alterations to the Leased Premises, (ii) structural Alterations or a series of related structural Alterations that, as to any such Alterations or series of related Alterations, do not cost in excess of $250,000 with respect to the Leased Premises and (iii) to install Equipment in the Improvements or accessions to the Equipment that, as to such Equipment or accessions, do not cost in excess of $250,000, so long as at the time of construction or installation of any such Equipment or Alterations no Event of Default exists and the value and utility of the Leased Premises is not materially diminished thereby. For any other Alterations or Equipment or accessions thereto the cost of which is in excess of $250,000, the prior written approval of Landlord, Master Landlord and Lender shall be required, such approval not to be unreasonably withheld, delayed or conditioned and such 17 approval shall not, in any event, include any requirement that the space to be improved must be returned to its original condition at the end of the Term if the Alterations are of general utility and do not adversely affect the value of the Leased Premises. Tenant shall not construct upon the Land any additional buildings without having first obtained the prior written consent of Landlord, Master Landlord and Lender. (b) If Tenant makes any Alterations pursuant to this Paragraph 13 or as required by Paragraph 12 or 17 (such Alterations and actions being hereinafter collectively referred to as "Work"), then (i) the market value of the Leased Premises shall not be lessened in any material respect by any such Work or its usefulness impaired, (ii) all such Work shall be performed by Tenant or its contractors in a good and workmanlike manner, (iii) all such Work shall be expeditiously completed in compliance with all Legal Requirements, (iv) all such Work shall comply with the requirements of all insurance policies required to be maintained by Tenant hereunder, (v) if any such Work involves the replacement of Equipment or parts thereto, all replacement Equipment or parts shall have a value and useful life equal to the greater of (A) the value and useful life on the date hereof of the Equipment being replaced or (B) the value and useful life of the Equipment being replaced immediately prior to the occurrence of the event which required its replacement (assuming such Replaced Equipment was then in the condition required by this Sublease), (vi) Tenant shall promptly discharge or remove all liens filed against any of the Leased Premises arising out of such Work, (vii) Tenant shall procure and pay for all permits and licenses required in connection with any such Work, (viii) all such Work shall be the property of Landlord and shall be subject to this Sublease, and Tenant shall execute and deliver to Landlord any document requested by Landlord evidencing the assignment to, Landlord of all estate, right, title and interest (other than the leasehold estate created hereby) of Tenant or any other Person thereto or therein, and (ix) Tenant shall comply, to the extent requested by Landlord or required by this Sublease, with the provisions of Paragraph 19(a), whether or not such Work involves restoration of the Leased Premises. (c) Tenant shall have the right at any time during the Term to install and remove Tenant's Property which shall remain Tenant's Property (subject to Tenant's obligations to repair and restore). 14. Permitted Contests. Notwithstanding any other provision of this ------------------ Sublease, Tenant shall not be required to (a) pay any Imposition, (b) discharge or remove any lien referred to in Paragraph 11 or 13, (c) take any action with respect to any encroachment, violation, hindrance, obstruction or impairment referred to in Paragraph 12(b), or (d) comply with any Legal Requirements (such non-compliance with the terms hereof being hereinafter referred to collectively as "Permitted Violations"), so long as at the time of such non-compliance no -------------------- Event of Default exists and so long as Tenant shall contest, in good faith, the existence, amount or validity thereof or the manner in which compliance with Legal Requirements is to be achieved, the amount of the damages caused thereby, or the extent of its or Landlord's liability therefor by appropriate proceedings which shall operate during the pendency thereof to prevent or stay (i) the collection of, or other realization upon, the Permitted Violation so contested, (ii) the sale, forfeiture or loss of any of the Leased Premises or any Rent to satisfy or to pay any damages caused by any Permitted Violation, (iii) any material interference with the use or occupancy of any of the Leased Premises, (iv) any interference with the payment of any Rent, (v) the cancellation or increase in the rate of any insurance policy or a statement by the carrier that 18 coverage will be denied or (vi) the enforcement or execution of any injunction, order or Legal Requirement with respect to the Permitted Violation. Tenant shall provide Landlord and Master Landlord security which is required by Law or, if not required, which is satisfactory, in Landlord's and Master Landlord's reasonable judgment (which shall be based, among other things, on an analysis of Tenant's creditworthiness), to assure that such Permitted Violation is corrected, including all Costs, interest and penalties that may be incurred or become due in connection therewith. While any proceedings which comply with the requirements of this Paragraph 14 are pending and the required security is held by Landlord and Master Landlord, neither Landlord nor Master Landlord shall have the right to correct any Permitted Violation thereby being contested unless Landlord or Master Landlord is required by law to correct such Permitted Violation and Tenant's contest does not prevent or stay such requirement as to Landlord or Master Landlord. Each such contest shall be promptly and diligently prosecuted by Tenant to a final conclusion, except that Tenant, so long as the conditions of this Paragraph 14 are at all times complied with, has the right to attempt to settle or compromise such contest through negotiations. Tenant shall pay any and all losses, judgments, decrees and Costs in connection with any such contest and shall, promptly after the final determination of such contest, fully pay and discharge the amounts which shall be levied, assessed, charged or imposed or be determined to be payable therein or in connection therewith, together with all penalties, fines, interest and Costs thereof or in connection therewith, and perform all acts the performance of which shall be ordered or decreed as a result thereof. No such contest shall subject Landlord or Master Landlord to the risk of any civil or criminal liability. 15. Indemnification. --------------- (a) Tenant shall pay, protect, indemnify, defend, save and hold harmless Landlord, Master Landlord, Lender and all other Persons described in Paragraph 30 (each a "Landlord Indemnitee") from and against, any and all liabilities, losses, damages (including punitive damages), penalties, Costs (including reasonable attorneys' fees and costs), causes of action, suits, claims, demands or judgments of any nature whatsoever, howsoever caused, without regard to the form of action and whether based on strict liability, gross negligence, negligence or any other theory of recovery at law or in equity, arising, directly or indirectly, from any of the following matters, events, circumstances, conditions or occurrences: (i) any matter, event, occurrence, condition or circumstance that occurs during the Term of this Sublease (as such Term may be extended from time to time in accordance with the terms of this Sublease) pertaining to the ownership, leasing, use, non-use, occupancy, operation, management, condition, design, construction, maintenance, repair or restoration of any of the Leased Premises or Adjoining Property, (ii) any claim by a third party based on personal injury or property damage where such injury or damage occurs during the Term and is caused, directly or indirectly, by any casualty, event, or circumstances in any manner arising from any of the Leased Premises or Adjoining Property, (iii) any violation by Tenant of any provision of this Sublease (and/or any act or omission by Tenant that directly or indirectly causes a violation of the Master Lease), any contract or agreement to which Tenant is a party, any Legal Requirement or any Permitted Encumbrance, (iv) any alleged, threatened or actual Environmental Violation and/or Hazardous Activity first arising or occurring during the Term of this Sublease, including (A) liability for response costs and for costs of removal and remedial action incurred by the United States Government, any state or local governmental unit or any other Person, or damages from injury to or destruction or loss of natural resources, including the reasonable costs of assessing such 19 injury, destruction or loss, incurred pursuant to Section 107 of CERCLA, or any successor section or act or provision of any similar state or local Law, (B) liability for costs and expenses of abatement, correction or clean-up, fines, damages, response costs or penalties which arise from the provisions of any of the other Environmental Laws and (C) liability for personal injury or property damage arising under any statutory or common-law tort theory, including damages assessed for the maintenance of a public or private nuisance or for carrying on of a dangerous activity; (v) any migration of Hazardous Substances from the Leased Premises to the West Java Premises; (vi) any latent defects within the Leased Premises or Adjoining Property first arising or occurring at any time on or after the Commencement Date of the Term; (vii) any patent defects within the Leased Premises or Adjoining Property first arising or occurring at any time on or after the Commencement Date of the Term; (viii) any latent and/or patent defect arising or occurring at any time prior to the Commencement Date of the Term to the extent the same does not constitute a breach by Landlord of any Facility Representation; and (ix) any act or omission of Tenant during the Term of this Sublease. Notwithstanding the foregoing, Tenant's indemnification and other obligations under the foregoing provisions of this Subparagraph 15(a) shall not be applicable with respect to (1) any Landlord Indemnitee due to the gross negligence or willful misconduct of such Landlord Indemnitee or its agents, employees or contractors, (2) Landlord for any matter caused solely by Landlord's breach of this Sublease or any document evidencing or securing a Loan (so long as such breach is not caused by Tenant's breach of this Sublease), (3) any Landlord Indemnitee with respect to any misrepresentation made by such Landlord Indemnitee, (4) any Lender for non-payment of principal, interest or penalties due on any Loan, or (5) any claim brought or threatened in writing against Landlord prior to the Commencement Date of the Term; provided, however, that Tenant's indemnification and other obligations under this Subparagraph 15(a) shall continue to apply to the extent such claim arises, directly or indirectly, from any act or omission of Tenant. The term "actual knowledge" as used in this Sublease means the actual, conscious (and not imputed) knowledge of the officers of Landlord and of the persons listed on Schedule 1 hereof as of the Commencement Date, without making any investigation or inquiry, and without any duty or obligation to make any investigation or inquiry. Landlord represents to Tenant that the persons listed on Schedule 1 are the persons employed by Landlord that are most familiar with the daily business and operations of the Leased Premises as of the last calendar day immediately preceding the Commencement Date. As used in this Sublease, the terms "latent defect" and "patent defect" shall have the meanings ascribed to such terms under California statutory and common laws; provided, however, that patent defects shall be deemed to include any defects which are discoverable or could have been discovered by Tenant through reasonable inspection. (b) In case any action or proceeding is brought against any Landlord Indemnitee by reason of any such claim, (i) Tenant may, except in the event of a conflict of interest or a dispute between Tenant and any such Landlord Indemnitee or during the continuance of an Event of Default, retain its own counsel and defend such action (it being understood that Landlord may employ counsel of its choice to monitor the defense of any such action at its cost) and (ii) such Landlord Indemnitee shall notify Tenant to resist or defend such action or proceeding by retaining counsel reasonably satisfactory to such Landlord Indemnitee, and such Landlord Indemnitee will cooperate and assist in the defense of such action or proceeding if reasonably requested to do so by Tenant. In the event of a conflict of interest or dispute or during the continuance of an Event of Default, Landlord shall have the right to select counsel, and the cost of such counsel shall be paid by Tenant. 20 (c) Landlord shall pay, protect, indemnify, defend, save and hold harmless Tenant and any director, officer, general partner, limited partner, employee or agent of Tenant, or any general partner of Tenant, any of its general partners or shareholders (or any legal representative, heir, estate, successor or assign of any thereof), any predecessor or successor partnership or corporation (or other entity) of Tenant or any of its general partners, either directly or through Tenant or its general partners or any predecessor or successor partnership or corporation or their shareholders, officers, directors, employees or agents (or other entity) (each a "Tenant Indemnitee") ----------------- from and against, any and all liabilities, losses, damages (including punitive damages), penalties, Costs (including reasonable attorneys' fees and costs), causes of action, suits, claims, demands or judgments of any nature whatsoever, howsoever caused, without regard to the form of action and whether based on strict liability, gross negligence, negligence or any other theory of recovery at law or in equity, arising, directly or indirectly, from any of the following matters, events, circumstances, conditions or occurrences: (i) any matter, event, occurrence, condition or circumstance that occurs during the period of time from the commencement date of the Master Lease Term through the date which is one (1) calendar day immediately prior to the Commencement Date (such period being the "Pre-Existing Period"), pertaining to the leasing, use, non-use, ------------------- occupancy, operation, management, construction, maintenance, repair or restoration of any of the Leased Premises, Adjoining Property, but only to the extent such matter, event, occurrence or circumstance would also constitute a breach of any Facility Representation, (ii) any claim by a third party based on personal injury or property damage where such injury or damage occurs during the Pre-Existing Period and is caused, directly or indirectly, by any casualty, event or circumstances in any manner arising from any of the Leased Premises or Adjoining Property; (iii) any violation by Landlord of any provision of this Sublease, or any other contract or agreement to which Landlord is a party (including the Master Lease), (iv) any violation by Landlord during the Pre- Existing Term of any Legal Requirement or any Permitted Encumbrance; (v) any alleged, threatened or actual Environmental Violation and/or Hazardous Activity arising or occurring during the Pre-Existing Term, including (A) liability for response costs and for costs of removal and remedial action incurred by the United States Government, any state or local governmental unit or any other Person, or damages from injury to or destruction or loss of natural resources, including the reasonable costs of assessing such injury, destruction or loss, incurred pursuant to Section 107 of CERCLA, or any successor section or act or provision of any similar state or local Law, (B) liability for costs and expenses of abatement, correction or clean-up, fines, damages, response costs or penalties which arise from the provisions of any of the other Environmental Laws, and (C) liability for personal injury or property damage arising under any statutory or common-law tort theory, including damages assessed for the maintenance of a public or private nuisance or for carrying on of a dangerous activity; and (vi) any migration of Hazardous Substances from the West Java Premises to the Leased Premises. Notwithstanding the foregoing, Landlord's indemnification and other obligations under the foregoing provisions of this Subparagraph 15(c) shall not be applicable with respect to (i) any Tenant Indemnitee due to the gross negligence or willful misconduct of such Tenant Indemnitee or its agents, employees or contractors, (ii) Tenant for any matter caused solely by Tenant's breach of this Sublease or any document evidencing or securing a Loan (so long as such breach is not caused by Landlord's breach of this Sublease), (iii) any Tenant Indemnitee with respect to any misrepresentation made by such Tenant Indemnitee, (iv) any latent defects within the Leased Premises arising at any time for which Landlord has no actual knowledge, (vi) any latent defects within the Leased Premises arising 21 during the Pre-Existing Term for which Landlord has actual knowledge and which Landlord discloses in writing to Tenant prior to the Commencement Date, or (vii) any patent defects within the Leased Premises arising at any time. To the extent based or triggered by any matter, event, occurrence or circumstance which constitutes a breach of a Facility Representation or any other representation or warranty made by Landlord hereunder, the indemnity and other obligations of Landlord under Subparagraph 15(c) hereof shall terminate when the survival period applicable to any such representation or warranty (including, but not limited to, any Facility Representation) expires. (d) In case any action or proceeding is brought against any Tenant Indemnitee by reason of any such claim, (i) Landlord may, except in the event of a conflict of interest or a dispute between Landlord and any such Tenant Indemnitee or during the continuance of an Event of Default, retain its own counsel and defend such action (it being understood that Landlord may employ counsel of its choice to monitor the defense of any such action at its cost) and (ii) such Tenant Indemnitee shall notify Landlord to resist or defend such action or proceeding by retaining counsel reasonably satisfactory to such Tenant Indemnitee, and such Tenant Indemnitee will cooperate and assist in the defense of such action or proceeding if reasonably requested to do so by Landlord. In the event of a conflict of interest or dispute, Tenant shall have the right to select counsel, and the cost of such counsel shall be paid by Landlord. (e) The obligations of Tenant and Landlord under this Paragraph 15 shall survive any termination, expiration or rejection in bankruptcy of this Sublease with respect to any indemnified matter, including any condition, that existed, occurred or arose out of a matter or condition that existed or occurred prior to the date of such termination, expiration or rejection, whether or not known or actionable at such date. 16. Insurance. --------- (a) Tenant shall maintain the following insurance on or in connection with the Leased Premises: (i) (A) Insurance against physical loss or damage to the Improvements and Equipment as provided under a standard "All Risk" property policy (but excluding earthquake and flood coverage) in amounts not less than the actual replacement cost of the Improvements and Equipment and (B) subject to the provisions of the last two (2) sentences of this Paragraph 16 (a) (i) , earthquake and flood coverage in the amount of $5,000,000. The policies described in clause (A) above shall contain Replacement Cost and Agreed Amount Endorsements and shall contain deductibles not more than $100,000 per occurrence and the earthquake and flood policy described in clause (B) shall contain deductibles of not more than $1,000,000. The amount of such insurance shall not be reduced and the amount of such deductible shall not be increased as long as such insurance is available. If such insurance is not available, the amounts of coverage and deductibles may be reduced or increased, respectively, as applicable. (ii) Commercial general liability insurance against claims for personal and bodily injury, death or property damage occurring on, in or as a result of the use of the Leased Premises, in an amount not less than $10,000,000 per occurrence/ annual aggregate 22 including but not limited to incidental medical malpractice, and all other coverage extensions that are usual and customary for properties of this size and type; provided, however, that Landlord shall have the right to require such higher limits as may be reasonable and customary for properties of this size and type. (iii) Worker's compensation insurance covering all persons employed by Tenant in connection with any work done on or about any of the Leased Premises for which claims for death, disease or bodily injury may be asserted against Landlord, Tenant or any of the Leased Premises or, in lieu of such worker's compensation insurance, a program of self-insurance complying with the rules, regulations and requirements of the appropriate agency of the State or States in which the Leased Premises are located. (iv) If applicable, comprehensive boiler and machinery insurance on any of the Equipment or any other equipment on or in the Leased Premises, including but not limited to service interruption, expediting expenses, ammonia contamination, hazardous clean-up and comprehensive object definition, in an amount not less than $5,000,000 for damage to property, bodily injury or death resulting from such covered perils as found in a standard comprehensive boiler & machinery policy. Such policies shall contain a deductible not to exceed $100,000. (v) Loss of rents insurance on an actual loss sustained basis with a period of indemnity not less than one year from the time of loss. (vi) During any period in which substantial Alterations at the Leased Premises are being undertaken, builder's risk insurance covering the total completed value including any "soft costs" with respect to the Improvements being altered or repaired (on a completed value, non-reporting basis), replacement cost of work performed and equipment, supplies and materials furnished in connection with such construction or repair of Improvements or Equipment, together with such "soft cost" endorsements and such other endorsements as Landlord may reasonably require and general liability, worker's compensation and automobile liability insurance with respect to the Improvements being constructed, altered or repaired. (vii) Such other insurance (or other terms with respect to any insurance required pursuant to this Paragraph 16 except for the earthquake coverage described in Paragraph 16 (a)(i), including without limitation amounts of coverage, deductibles and form of mortgagee clause) on or in connection with any of the Leased Premises as Landlord or Lender may reasonably require, which at the time is usual and commonly obtained in connection with properties similar in type of building size, use and location to the Leased Premises. (b) The insurance required by Paragraph 16(a) shall be written by companies which have a Best's rating of at least A:X (unless a lesser rating is approved by Landlord) and are admitted in, and approved to write insurance policies by, the State Insurance Department for the states in which the Leased Premises are located. The insurance policies (i) shall be on such terms as Landlord may reasonably approve and (ii) shall be in amounts sufficient at all times to satisfy any coinsurance requirements thereof. The insurance referred to in 23 Paragraphs 16 (a)(i), 16(a)(iv) and 16(a)(vi) shall name Master Landlord and Landlord as additional insureds and Lender as loss payee and Tenant as its interest may appear. The insurance referred to in Paragraph 16(a)(ii) shall name Master Landlord, Landlord and Lender as additional insureds, and the insurance referred to in Paragraph 16(a)(v) shall name Tenant as insured and Lender, Master Landlord and Landlord as loss payee. If said insurance or any part thereof shall expire, be withdrawn, become void, voidable, unreliable or unsafe for any reason, including a breach of any condition thereof by Tenant or the failure or impairment of the capital of any insurer, or if for any other reason whatsoever said insurance shall become reasonably unsatisfactory to Landlord, Tenant shall immediately obtain new or additional insurance reasonably satisfactory to Landlord. (c) Each insurance policy referred to in clauses (i), (iv), (v) and (vi) of Paragraph 16 (a) shall contain standard non-contributory mortgagee clauses in favor of and acceptable to Lender. Each policy required by any provision of Paragraph 16 (a), except clause (iii) thereof, shall provide that it may not be cancelled except after thirty (30) days' prior notice to Landlord and Lender. Each such policy shall also provide that any loss otherwise payable thereunder shall be payable notwithstanding (i) any act or omission of Landlord or Tenant which might, absent such provision, result in a forfeiture of all or a part of such insurance payment, (ii) the occupation or use of any of the Leased Premises for purposes more hazardous than those permitted by the provisions of such policy, (iii) any foreclosure or other action or proceeding taken by Lender pursuant to any provision of the Mortgage, Note, Assignment or other document evidencing or securing the Loan upon the happening of an event of default therein or (iv) any change in title to or ownership of any of the Leased Premises. (d) Tenant shall pay as they become due all premiums for the insurance required by Paragraph 16(a), shall renew or replace each policy and deliver to Landlord evidence of the payment of the full premium therefor or installment then due at least thirty (30) days prior to the expiration date of such policy, and shall promptly deliver to Landlord all original policies or certified copies thereof. In the event that, within seven (7) calendar days after Tenant's receipt of Landlord's demand, Tenant fails to deliver to Landlord such evidence of the payment of the full premium of any insurance policy required hereunder, and/or the original of such insurance policy or a certified copy thereof, then Landlord shall have the right, but not the obligation, to obtain such insurance policy in the form required hereunder and pay the premiums and commissions associated with such insurance policy, in which event Tenant shall reimburse landlord for all costs and expenses incurred by Landlord in connection with obtaining such policy, including, without limitation, insurance premiums, commissions and reasonable attorneys' fees and costs. (e) Anything in this Paragraph 16 to the contrary notwithstanding, any insurance which Tenant is required to obtain pursuant to Paragraph 16(a) may be carried under a "blanket" or umbrella policy or policies covering other properties or liabilities of Tenant, provided that such "blanket" or umbrella policy or policies otherwise comply with the provisions of this Paragraph 16 and provided further that such policies shall provide for a reserved amount thereunder with respect to the Leased Premises so as to assure that the amount of insurance required by this Paragraph 16 will be available notwithstanding any losses with respect to other property covered by such blanket policies. The amount of the total insurance allocated to the Leased Premises, which amount shall be not less than the amounts required pursuant to this Paragraph 16, shall be specified either (i) in each such "blanket" or umbrella policy or (ii) in a written statement, which Tenant shall deliver to Landlord, from the insurer thereunder. The original or a certified copy of each such "blanket" or umbrella policy shall promptly be delivered to Landlord. 24 (f) Tenant shall have the replacement cost and insurable value of the Improvements and Equipment determined from time to time as required by the replacement cost and agreed amount endorsements and shall deliver to Landlord the new replacement cost and agreed amount endorsement or certificate evidencing such endorsement promptly upon Tenant's receipt thereof. (g) Tenant shall promptly comply with and conform to (i) all provisions of each insurance policy required by this Paragraph 16 and (ii) all requirements of the insurers thereunder applicable to Landlord, Tenant or any of the Leased Premises or to the use, manner of use, occupancy, possession, operation, maintenance, alteration or repair of any of the Leased Premises, even if such compliance necessitates Alterations or results in interference with the use or enjoyment of any of the Leased Premises. (h) Tenant shall not carry separate insurance concurrent in form or contributing in the event of a Casualty with that required in this Paragraph 16 unless (i) Landlord and Lender are included therein as named insureds, with loss payable as provided herein, and (ii) such separate insurance complies with the other provisions of this Paragraph 16. Tenant shall immediately notify Landlord of such separate insurance and shall deliver to Landlord the original policies or certified copies thereof. (i) All policies shall contain effective waivers by the carrier against all claims for insurance premiums against Landlord and shall contain full waivers of subrogation against Landlord. (j) All proceeds of any insurance required under Paragraph 16(a) shall be payable as follows: (i) Except for proceeds payable to a Person other than Master Landlord, Landlord, Tenant or Lender, all proceeds of insurance required under clauses (ii) , (iii) , (iv) , (v) and (vii) of Paragraph 16(a) and proceeds attributable to the general liability coverage provisions of Builder's Risk insurance under clause (vi) of Paragraph 16(a) shall be payable to Escrow Holder or, if required by the Mortgage, to Lender who shall apply such proceeds to the Persons legally entitled thereto for the benefit of the named insureds as their interests appear. (ii) Proceeds of insurance required under clause (i) of Paragraph 16 (a) and proceeds attributable to Builder's Risk insurance (other than its general liability coverage provisions) under clause (vi) of Paragraph 16 (a) shall be payable to Escrow Holder (or Lender) and applied as set forth in Paragraph 17 or Paragraph 18, as applicable. If Tenant is obligated to restore the Leased Premises, then Escrow Holder or Lender, as the case may be, shall make the proceeds available to Tenant in accordance with the applicable provisions hereof and Tenant shall apply the Net Award to restoration of the Leased Premises in accordance with the applicable provisions of this Sublease. (iii) Each insurer is hereby authorized and directed to make payment under said policies directly to Escrow Holder or, if required by the Mortgage, to Lender instead 25 of to Master Landlord, Landlord and Tenant jointly, and Tenant hereby appoints each of Escrow Holder and Lender as Tenant's attorneys-in-fact to endorse any draft therefor. 17. Casualty and Condemnation. ------------------------- (a) If any Casualty to the Leased Premises occurs, Tenant shall give Master Landlord, Landlord and Lender immediate notice thereof. So long as no Event of Default has occurred and is continuing Tenant is hereby authorized to adjust, collect and compromise all claims under any of the insurance policies required by Paragraph 16(a) (except public liability insurance claims payable to a Person other than Tenant, Master Landlord, Landlord or Lender) and to execute and deliver on behalf of Master Landlord and Landlord all necessary proofs of loss, receipts, vouchers and releases required by the insurers and Master Landlord and Landlord shall have the right to join with Tenant therein. Any final adjustment, settlement or compromise of any such claim shall be subject to the prior written approval of Master Landlord and Landlord, which shall not be unreasonably withheld or delayed, and Master Landlord and Landlord shall have the right to prosecute or contest, or to require Tenant to prosecute or contest, any such claim, adjustment, settlement or compromise. If an Event of Default has occurred and is continuing, Tenant shall not be entitled to adjust, collect or compromise any such claim or to participate with Master Landlord or Landlord in any adjustment, collection and compromise of the Net Award payable in connection with a Casualty. Tenant agrees to sign, upon the request of Master Landlord or Landlord, all such proofs of loss, receipts, vouchers and releases. The rights of Master Landlord and Landlord under this Paragraph 17(a) shall be extended to Lender if and to the extent that any Mortgage so provides. (b) Tenant, immediately upon receiving a Condemnation Notice, shall notify Master Landlord, Landlord and Lender thereof. So long as no Event of Default has occurred and is continuing, Tenant is authorized to collect, settle and compromise the amount of any Net Award and Master Landlord and Landlord shall have the right to join with Tenant herein. If an Event of Default has occurred and is continuing, Master Landlord and Landlord shall be authorized to collect, settle and compromise the amount of any Net Award and Tenant shall not be entitled to participate with Master Landlord and Landlord in any Condemnation proceeding or negotiations under threat thereof or to contest the Condemnation or the amount of the Net Award therefor. No agreement with any condemnor in settlement or under threat of any Condemnation shall be made by Tenant without the written consent of Master Landlord and Landlord, which shall not be unreasonably withheld. Subject to the provisions of this Paragraph 17(b), Tenant hereby irrevocably assigns to Master Landlord and Landlord any award or payment to which Tenant is or may be entitled by reason of any Condemnation, whether the same shall be paid or payable for Tenant's leasehold interest hereunder or otherwise; but nothing in this Sublease shall impair Tenant's right to any award or payment on account of Tenant's trade fixtures, equipment or other tangible property which is not part of the Equipment, moving expenses or loss of business, if available, to the extent that and so long as (i) Tenant shall have the right to make, and does make, a separate claim therefor against the condemnor and (ii) such claim, does not in any way reduce either the amount of the award otherwise payable to Master Landlord and Landlord for the Condemnation of Master Landlord's fee interest in, and Landlord's leasehold interest in, the Leased Premises or the amount of the award (if any) otherwise payable for the Condemnation of Tenant's leasehold interest hereunder. The rights of Master Landlord and Landlord under this 26 Paragraph 17(b) shall also be extended to Lender if and to the extent that any Mortgage so provides. (c) If any Partial Casualty (whether or not insured against) or Partial Condemnation shall occur to the Leased Premises, this Sublease shall continue, notwithstanding such event, and there shall be no abatement or reduction of any Monetary Obligations, except to the extent of proceeds received by Landlord from the insurance described in Paragraph 16(a)(v) hereof. Promptly after such Partial Casualty or Partial Condemnation, Tenant, as required in Paragraph 12 (a), shall commence and diligently continue to restore the Leased Premises as nearly as possible to their value, condition and character immediately prior to such event (assuming the Leased Premises to have been in the condition required by this Sublease). So long as no Event of Default has occurred and is continuing, any Net Award up to and including $250,000 shall be paid by Escrow Holder to Tenant and Tenant shall restore the Leased Premises in accordance with the requirements of Paragraph 13(b)of this Sublease. Any Net Award in excess of $250,000 shall (unless such Casualty resulting in the Net Award is a Termination Event) be made available by Escrow Holder (or Lender if the terms of the Mortgage so require) to Tenant for the restoration of any of the Leased Premises pursuant to and in accordance with and subject to the provisions of Paragraph 19 hereof. If any Casualty or Condemnation which is not a Partial Casualty or Partial Condemnation shall occur, Tenant shall comply with the terms and conditions of Paragraph 18. 18. Termination Events. ------------------ (a) If (i) all the Leased Premises shall be taken by a Taking, or (ii) (A) any substantial portion of the Leased Premises shall be taken by a Taking (and provided that the Taking of such portion would materially adversely affect Tenant's use and occupation of the Leased Premises and its operations thereon) or (B) all or any substantial portion of the Leased Premises shall be damaged or destroyed by a Casualty (and provided that the damage caused by such casualty would materially adversely affect Tenant's use and occupation of the Leased Premises and its operations thereon), and (1) as to such Casualty Tenant shall provide evidence satisfactory to Master Landlord, Landlord and Lender that it shall be unable to rebuild the Leased Premises by the beginning of the ninth (9th) calendar month following the date of such Casualty, or (2) the Casualty was an earthquake or the insurer is insolvent so that proceeds (exclusive of the required deductible) sufficient to rebuild the Leased Premises are not available and, in any such case, Tenant certifies and covenants to Master Landlord and Landlord that it will forever abandon operations at the Leased Premises, (each of the events described in the above clauses (i) and (ii) shall hereinafter be referred to as a "Termination Event"), then (x) in the case of (i) above, Tenant shall be obligated, within thirty (30) days after Tenant receives a Condemnation Notice, and (y) in the case of (ii) above Tenant shall have the option within thirty (30) days after Tenant receives a Condemnation Notice or thirty (30) days after the Casualty, as the case may be, to give to Master Landlord and Landlord written notice (a "Termination Notice") of Tenant's election to terminate this Sublease as to the Leased Premises in the form described in Paragraph 18(b). (b) A Termination Notice shall contain (i) notice of Tenant's intention to terminate this Sublease as to the Leased Premises on the first Basic Rent Payment Date which occurs at least sixty (60) days after the date of the Termination Notice (the "Termination Date"), ---------------- 27 (ii) a binding and irrevocable offer of Tenant to pay the Termination Amount, and (iii) if the Termination Event is an event described in Paragraph 18(a)(ii), the certification and covenant described therein and a certified resolution of the Board of Directors of Tenant authorizing the same. (c) Upon the Termination Date, Tenant shall pay the Termination Amount and all unpaid Monetary Obligations to Landlord, and this Sublease shall terminate as to the Leased Premises; provided that, if Tenant has not satisfied all Monetary Obligations as to the Leased Premises (collectively, "Remaining Obligations") on or prior to the Termination Date, then Master Landlord and/or Landlord may, at its option, extend the date on which this Sublease may terminate as to the Leased Premises to a date which is no later than the first Basic Rent Payment Date after the Termination Date on which Tenant has satisfied all Remaining Obligations; provided, however, the parties acknowledge that if this Sublease Lease is terminated pursuant to this Paragraph 18(c) the Tenant has no obligation to repair or restore any damage to the Leased Premises. Upon such termination (i) all obligations of Tenant hereunder as to the Leased Premises shall terminate except for any Surviving Obligations, (ii) Tenant shall immediately vacate and shall have no further right, title or interest in or to any of the Leased Premises and (iii) the Net Award shall be retained by Landlord. Notwithstanding anything to the contrary hereinabove contained, if on the date when this Sublease would otherwise terminate as provided above, Landlord shall not have received the full amount of the Net Award payable by reason of the applicable Termination Event, then the date on which this Sublease is to terminate automatically shall be extended to the first Basic Rent Payment Date after the receipt by Landlord of the full amount of the Net Award; provided that, if Tenant has not satisfied all Remaining Obligations on such date, then Landlord may, at its option, extend the date on which this Sublease shall terminate to a date which is no later than the first Basic Rent Payment Date after such date on which Tenant has satisfied all such Remaining Obligations. (d) Landlord and Tenant acknowledge and agree, that pursuant and subject to the terms of Section 18(d) of the Master Lease, Master Landlord may be required to convey the West Java Premises and/or Gibraltar Premises to Landlord. In the event that, pursuant to the provisions of Section 18 of the Master Lease, Master Landlord conveys the Gibraltar Premises to Landlord, Landlord shall promptly thereafter convey the Gibraltar Premises to Tenant pursuant to a quitclaim deed. Notwithstanding the foregoing, such conveyance by Landlord to Tenant is and shall be contingent upon: (i) Tenant not being in default under this Sublease at the time of such conveyance, and (ii) the payment by Tenant to Landlord of a sum equal to the Termination Amount plus any other amounts paid by Landlord to Master Landlord under Section 18, Section 20 and other applicable provisions of the Master Lease with respect to the Gibraltar Premises (i.e., if Master Landlord conveys only the Gibraltar Premises to Landlord, then Tenant shall pay to Landlord a sum equal to the aggregate amounts and other moneys paid by Landlord to Master Landlord with respect to the Gibraltar Premises under the Master Lease, and if Master Landlord conveys both the West Java Premises and Gibraltar Premises to Landlord, then Tenant shall pay to Landlord a sum equal to 45% of the aggregate amounts and other moneys paid by Landlord to Master Landlord with respect to the West Java Premises and Gibraltar Premises under the Master Lease). 28 19. Restoration. ----------- (a) Escrow Holder (or Lender if required by any Mortgage) shall hold any Net Award in excess of $250,000 in a fund (the "Restoration Fund") and disburse amounts from the Restoration Fund only in accordance with the following conditions: (i) prior to commencement of restoration, (A) the architects, general construction contract, general contractor and plans and specifications for the restoration shall have been approved by Master Landlord and Landlord, such approval not to be unreasonably withheld, (B) Master Landlord, Landlord and Lender shall be provided with mechanics' lien insurance (if available) and performance and payment bonds reasonably acceptable to Master Landlord and Landlord which insure satisfactory completion of and payment for the restoration, are in an amount and form and have a surety acceptable to Master Landlord and Landlord, and name Master Landlord, Landlord and Lender as additional dual obligees, and (C) appropriate waivers of mechanics' and materialmen's liens shall have been filed; (ii) at the time of any disbursement, no Event of Default shall exist and no mechanics' or materialmen's liens shall have been filed against any of the Leased Premises and remain undischarged; (iii) disbursements shall be made from time to time in an amount not exceeding the cost of the work completed since the last disbursement, upon receipt of (A) satisfactory evidence, including architects' certificates, of the stage of completion, the estimated total cost of completion and performance of the work to date in a good and workmanlike manner in accordance with the contracts, plans and specifications, (B) waivers of liens, (C) contractors' and subcontractors' sworn statements as to completed work and the cost thereof for which payment is requested, (D) a satisfactory bringdown of title insurance and (E) other evidence of cost and payment so that Master Landlord, Landlord and Lender can verify that the amounts disbursed from time to time are represented by work that is completed, in place and free and clear of mechanics' and materialmen's lien claims; (iv) each request for disbursement shall be accompanied by a certificate of Tenant, signed by the president or a vice president of Tenant, describing the work for which payment is requested, stating the cost incurred in connection therewith, stating that Tenant has not previously received payment for such work and, upon completion of the work, also stating that the work has been fully completed and complies with the applicable requirements of this Sublease; (v) Master Landlord or Landlord may retain ten percent (10%) of the Restoration Fund until the restoration is fully completed; (vi) the Restoration Fund shall not be commingled with other funds and shall bear interest at the short term rate of interest then generally available from Lender or through Escrow Agent for such escrow arrangements; and (vii) such other reasonable conditions as Lender may impose. 29 (b) Prior to commencement of restoration and at any time during restoration, if the estimated cost of completing the restoration work free and clear of all liens, as determined by Master Landlord and Landlord, exceeds the amount of the Net Award available for such restoration, the amount of such excess shall, upon demand by Master Landlord or Landlord, be paid by Tenant to Escrow Holder to be added to the Restoration Fund. Any sum so added by Tenant which remains in the Restoration Fund upon completion of restoration shall be refunded to Tenant. For purposes of determining the source of funds with respect to the disposition of funds remaining after the completion of restoration, the Net Award shall be deemed to be disbursed prior to any amount added by Tenant. (c) If any sum remains in the Restoration Fund after completion of the restoration and any refund to Tenant pursuant to Paragraph 19(b), such sum shall be retained by Master Landlord or Landlord or, if required by a Note or Mortgage, paid by Master Landlord or Landlord to a Lender. 20. Intentionally Omitted. --------------------- 21. Assignment and Subletting; Prohibition against Leasehold Financing. ------------------------------------------------------------------ (a) (i) Tenant shall have the right, upon thirty (30) days prior written notice to Master Landlord, Landlord and Lender, with no consent of Master Landlord or Landlord or Lender being required or necessary ("Preapproved ----------- Assignment") to assign this Sublease (A) as specifically permitted in Section 1 - - ---------- of Exhibit "G" or (B) to any Person that, immediately following such assignment has a publicly traded unsecured senior debt rating of "BBB" or better from Moody's Investors Services, Inc. or a rating of "Baa" or better from Standard & Poor's Corporation, and in the event all of such rating agencies cease to furnish such ratings, then a comparable rating by any rating agency reasonably acceptable to Master Landlord, Landlord and Lender. (i) (ii) Any assignment or sublease of this Sublease except for a Preapproved Assignment shall require the prior written consent of Master Landlord, Landlord and Lender. Such prior written consent by Landlord shall not be unreasonably withheld. Tenant shall, not less than ninety (90) days prior to the date on which it desires to make an assignment or sublease, submit to Master Landlord, Landlord and Lender information regarding the following with respect to the assignee or sublessee (the "Criteria") : (i) credit, (ii) capital structure, (iii) management, (iv) operating history, (v) proposed use of the Leased Premises, and (vi) risk factors associated with the proposed use of the Leased Premises by the proposed assignee or sublessee, taking into account factors such as environmental concerns, product liability and the like. Master Landlord, Landlord and Lender shall review the Criteria, advise Tenant no later than the fifteenth (15th) day following receipt of the Criteria if additional information is required and shall approve or disapprove the assignee no later than the thirtieth (30th) day following receipt of all required information, and Master Landlord, Landlord and Lender shall be deemed to have acted reasonably in granting or withholding consent if such grant or disapproval is based on their review of the Criteria. Any purported assignment that is not a Preapproved Assignment or otherwise consented to under this Paragraph 21(a) shall be null and void. Landlord shall have no liability for Master Landlord's failure to review the Criteria or provide any consent required hereunder by the due dates set forth above. 30 (b) Tenant shall have the right, without obtaining the consent of Master Landlord or Landlord, to have under sublease at any time up to and including but not in excess of twenty-five percent (25%) of the net leaseable space in the Leased Premises. Any sublease that, when added to all other subleases then in effect, would result in more than twenty-five percent (25%) of the leaseable area of the Leased Premises being under sublease at any one time shall require the prior written approval of Master Landlord, Landlord and Lender which shall not be unreasonably withheld. (c) If Tenant assigns all its rights and interest under this Sublease, the assignee under such assignment shall expressly assume all the obligations of Tenant hereunder, actual or contingent, including obligations of Tenant which may have arisen on or prior to the date of such assignment, by a written instrument delivered to Master Landlord and Landlord at the time of such assignment. Each sublease of the Leased Premises shall be subject and subordinate to the provisions of this Sublease and the Master Lease and shall be for a term that expires no later than one (1) day prior to the expiration of the Term and two (2) days prior to the expiration of the Master Lease Term. No assignment or sublease shall affect or reduce any of the obligations of Tenant hereunder, and all such obligations shall continue in full force and effect as obligations of a principal and not as obligations of a guarantor, as if no assignment or sublease had been made. No assignment or sublease shall impose any additional obligations on Landlord under this Sublease. (d) Tenant shall, within ten (10) days after the execution and delivery of any assignment or sublease, deliver a duplicate original copy thereof to Master Landlord and Landlord which, in the event of an assignment, shall be in recordable form. (e) As security for performance of its obligations under this Sublease, Tenant hereby grants, conveys and assigns to Landlord all right, title and interest of Tenant in and to all subleases now in existence or hereafter entered into for any or all of the Leased Premises, any and all extensions, modifications and renewals thereof and all rents, issues and profits therefrom. Landlord hereby grants to Tenant a license to collect and enjoy all rents and other sums of money payable under any sublease of any of the Leased Premises, provided, however, that Landlord shall have the absolute right at any time following the occurrence of an Event of Default to revoke said license and to collect such rents and sums of money and to retain the same. Tenant shall not consent to, cause or allow any modification or alteration of any of the terms, conditions or covenants of any of the subleases or the termination thereof, without the prior written approval of Landlord, which approval shall not be unreasonably withheld, nor shall Tenant accept any rents more than thirty (30) days in advance of the accrual thereof nor do nor permit anything to be done, the doing of which, nor omit or refrain from doing anything, the omission of which, will or could be a breach of or default in the terms of any of the subleases. (f) Tenant shall not have the power to mortgage, pledge or otherwise encumber its interest under this Sublease or any sublease of the Leased Premises, and any such mortgage, pledge or encumbrance made in violation of this Paragraph 21 shall be void. (g) Landlord may transfer its interest in this Sublease at any time without Tenant's consent to any third party (each a "Third Party Purchaser"). --------------------- In the event of any such transfer, Tenant shall attorn to any Third Party Purchaser as Landlord so long as such Third Party 31 Purchaser and Landlord notify Tenant in writing of such transfer and the Third Party Purchaser agrees to be bound by the terms of this Sublease applicable to Landlord. At the request of Landlord, Tenant will execute such documents confirming the agreement referred to above and such other agreements as Landlord may reasonably request, provided that such agreements do not increase the liabilities and obligations of Tenant hereunder. 22. Events of Default. ----------------- (a) The occurrence of any one or more of the following (after expiration of any applicable cure period as provided in Paragraph 22 (b)) shall, at the sole option of Landlord, constitute an "Event of Default" under this Sublease: (i) a failure by Tenant to make any payment of any Monetary Obligation, regardless of the reason for such failure; (ii) a failure by Tenant duly to perform and observe, or a violation or breach of, any other provision hereof not otherwise specifically mentioned in this Paragraph 22(a); (iii) any representation or warranty made by Tenant herein or in any certificate, demand or request made pursuant hereto proves to be materially incorrect, now or hereafter, in any material respect; (iv) Tenant shall (A) voluntarily be adjudicated a bankrupt or insolvent, (B) seek or consent to the appointment of a receiver or trustee for itself or for the Leased Premises, (C) file a petition seeking relief under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, (D) make a general assignment for the benefit of creditors, or (E) admit in writing its inability to pay its debts as they mature; (v) a court shall enter an order, judgment or decree appointing, without the consent of Tenant, a receiver or trustee for it or for the Leased Premises or approving a petition filed against Tenant which seeks relief under the bankruptcy or other similar laws of the United States, any state or any jurisdiction, and such order, judgment or decree shall remain undischarged or unstayed sixty (60) days after it is entered; (vi) the Leased Premises shall have been vacated for a period of more than one (1) year or the Leased Premises shall have been abandoned; (vii) Tenant shall be liquidated or dissolved or shall begin proceedings towards its liquidation or dissolution; (viii) the estate or interest of Tenant in the Leased Premises shall be levied upon or attached in any proceeding and such estate or interest is about to be sold or transferred or such process shall not be vacated or discharged within sixty (60) days after it is made; (ix) a failure by Tenant to perform or observe, or a violation or breach of, or a misrepresentation by Tenant under, any provision of any Assignment or any other written 32 document between Tenant and Lender or specifically for the benefit of Lender that is executed by Tenant, if such failure, violation, breach or misrepresentation gives rise to a default beyond any applicable cure period with respect to any Loan and the Lender commences to exercise its remedies under the documents evidencing and securing such Loan; (x) a failure by Tenant to maintain in effect any license or permit necessary for the use, occupancy or operation of the Leased Premises; or (xi) The breach of any Covenant shall occur. (b) No notice or cure period shall be required in any one or more of the following events: (A) the occurrence of an Event of Default under clause (i) (except as otherwise set forth below) , (iii), (iv), (v), (vi), (vii), (viii), (ix), or (xi) of Paragraph 22 (a); (B) the default consists of a failure to provide any insurance as required by and in accordance with Paragraph 16 (a) (i) or (a) (iv) that does not substantially comply with the requirements thereof or an assignment or sublease entered into in violation of Paragraph 21; or (C) the default is such that any delay in the exercise of a remedy by Landlord could reasonably be expected to cause material and irreparable harm to Landlord. If the default consists of the failure to pay any Monetary Obligation under clause (i) of Paragraph 22(a), the applicable cure period shall be three (3) days from the date on which notice is received by Tenant, but Landlord shall not be obligated to give notice of, or allow any cure period for, any default in the payment of Basic Rent more than one (1) time within any consecutive twelve (12) month period. If the default consists of a default under clause (ii) or (x) of Paragraph 22 (a) , other than the events specified in clauses (B) and (C) of the first sentence of this Paragraph 22(b), the applicable cure period shall be twenty (20) days from the date on which notice is received by Tenant or, if the default cannot be cured within such twenty (20) day period and delay in the exercise of a remedy would not cause any material adverse harm to Landlord or any of the Leased Premises, the cure period shall be extended for the period required to cure the default (but such cure period, including any extension, shall not in the aggregate exceed one hundred twenty (120) days), provided that Tenant shall commence to cure the default within the said twenty-day period and shall actively, diligently and in good faith proceed with and continue the curing of the default until it shall be fully cured. The notices described in this Paragraph 22 (b) are in lieu of and not in addition to the notice under California Civil Code 1161. 23. Remedies and Damages Upon Default. --------------------------------- (a) If an Event of Default shall have occurred and is continuing, Landlord shall have the right, at its sole option, then or at any time thereafter, to exercise its remedies and to collect damages from Tenant in accordance with this Paragraph 23, subject in all events to applicable Law, without demand upon or notice to Tenant except as otherwise provided in Paragraph 22 (b) and this Paragraph 23. (i) Landlord may give Tenant notice of Landlord's intention to terminate this Sublease on a date specified in such notice and upon such date, this Sublease, the estate hereby granted and all rights of Tenant hereunder shall expire and terminate, provided, that if and only if the Event of Default that gave rise to such notice is the failure to pay Rent as and when due such termination shall be of no force and effect if Tenant cures such Event of Default 33 within three (3) days after receipt of such notice from Landlord. Upon such termination, Tenant shall immediately surrender and deliver possession of the Leased Premises to Landlord in accordance with Paragraph 26. If Tenant does not so surrender and deliver possession of all of the Leased Premises, Landlord may repossess any of the Leased Premises not surrendered, with legal process, by summary proceedings, ejectment or any other lawful means or procedure. Upon or at any time after taking possession of any of the Leased Premises, Landlord may, by peaceable means or legal process, remove any Persons or property therefrom. Landlord shall be under no liability for or by reason of any such entry, repossession or removal. Notwithstanding such entry or repossession, Landlord may collect the damages set forth in Paragraph 23(c). (ii) After repossession of any of the Leased Premises pursuant to clause (i) above, Landlord shall have the right to relet any of the Leased Premises to such tenant or tenants, for such term or terms, for such rent, on such conditions and for such uses as Landlord in its sole discretion may determine, and collect and receive any rents payable by reason of such reletting. Landlord may make such Alterations in connection with such reletting as it may deem advisable in its sole discretion. Notwithstanding any such reletting, Landlord may collect the damages set forth in Paragraph 23(c). (b) In addition to its other rights under this Sublease, Landlord has the remedy described in California Civil Code Section 1951.4 which provides substantially as follows: Landlord may continue the Master Lease in effect after Tenant's breach and abandonment and recover the Rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations. In accordance with California Civil Code Section 1951.4 (or any successor statute), Tenant acknowledges that in the event Tenant breaches this Sublease and abandons the Leased Premises, this Sublease shall continue in effect for so long as Landlord does not terminate Tenant's right to possession, and Landlord may enforce all of its rights and remedies under this Sublease, including the right to recover the Rent as it becomes due under this Sublease. Tenant acknowledges that the limitations on subletting and assignment set forth in Paragraph 21 are reasonable. Acts of maintenance or preservation or efforts to relet the Leased Premises or the appointment of a receiver upon initiative of Landlord to protect Landlord's interest under this Sublease shall not constitute a termination of Tenant's right to possession. (c) If Landlord elects to terminate this Sublease upon the occurrence of an Event of Default, Landlord may collect from Tenant damages computed in accordance with the following provisions in addition to Landlord's other remedies under this Sublease: (i) the worth at the time of award of any unpaid Rent which has been earned at the time of such termination; plus (ii) the worth at the time of the award of the amount by which any unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus 34 (iv) any other reasonable cost necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Sublease or which in the ordinary course of things would be likely to result therefrom including, without limitation, brokerage commissions, the cost of repairing and reletting the Leased Premises and reasonable attorneys' fees; plus (v) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable state law. Damages shall be due and payable from the date of termination. For purposes of clauses (i) and (ii) of this Paragraph, the "worth at the time of award" shall be computed by adding interest at the Default Rate to the past due Rent. For the purposes of clause (iii) of this Paragraph 23 (c), the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus one percent (1%). (d) Landlord shall be entitled to apply the Security Deposit to any amounts due under Paragraph 23 (a) or 23 (c) if this Sublease shall be terminated, or, if this Sublease shall remain in full force and effect, to any amounts due under Paragraph 23 (b) and in either event in the following order (i) to past due Basic Rent and (ii) to cure any other monetary Event of Default. (e) Notwithstanding anything to the contrary herein contained, in lieu of or in addition to any of the foregoing remedies and damages, Landlord may exercise any remedies and collect any damages available to it at law or in equity. If Landlord is unable to obtain full satisfaction pursuant to the exercise of any remedy, it may pursue any other remedy which it has hereunder or at law or in equity. (f) If any Law shall validly limit the amount of any damages provided for herein to an amount which is less than the amount agreed to herein, Landlord shall be entitled to the maximum amount available under such Law. (g) No termination of this Sublease, repossession or reletting of any of the Leased Premises, exercise of any remedy or collection of any damages pursuant to this Paragraph 23 shall relieve Tenant of any Surviving Obligations. (h) WITH RESPECT TO ANY REMEDY OR PROCEEDING OF LANDLORD HEREUNDER, LANDLORD AND TENANT WAIVE ANY RIGHT TO A TRIAL BY JURY. Landlord and Tenant agree that this Sublease constitutes a written consent to waiver of trial by jury pursuant to the provisions of California Code of Civil Procedure Section 631, and each of Landlord and Tenant does appoint the other Person as its true and lawful attorney-in-fact, which appointment is coupled with an interest, and does hereby authorize and empower the other Person, in its name, place and stead, to file this Sublease with the clerk of any court of competent jurisdiction as statutory written consent to waiver of trial by jury. (i) Upon the occurrence of any Event of Default, Landlord shall have the right (but no obligation) to perform any act required of Tenant hereunder and, if performance of such 35 act requires that Landlord enter the Leased Premises, Landlord may enter the Leased Premises for such purpose., (j) No failure of Landlord (i) to insist at any time upon the strict performance by Tenant of any provision of this Sublease or (ii) to exercise any option, right, power or remedy contained in this Sublease shall be construed as a waiver, modification or relinquishment thereof. A receipt by Landlord of any sum in satisfaction of any Monetary Obligation with knowledge of the breach of any provision hereof shall not be deemed a waiver of such breach, and no waiver by Landlord of any provision hereof shall be deemed to have been made unless expressed in a writing signed by Landlord. No failure of Tenant (i) to insist at any time upon the strict performance by Landlord of any provision of this Sublease or (ii) to exercise any option, right, power or remedy contained in this Sublease shall be construed as a waiver, modification or relinquishment thereof except with respect to Tenant's extension option(s) ------ under Paragraph 5(b) of this Sublease or except as otherwise expressly provided ------ to the contrary elsewhere in this Sublease. (k) Tenant hereby waives and surrenders, for itself and all those claiming under it, including creditors of all kinds, (i) any right and privilege which it or any of them may have under any present or future Law to redeem any of the Leased Premises or to have a continuance of this Sublease after termination of this Sublease or of Tenant's right of occupancy or possession pursuant to any court order or any provision hereof if the Event of Default is an Event of Default under Paragraph 22 (a) (iv) or 22 (a)(xi), and (ii) the benefits of any present or future Law which exempts property from liability for debt or for distress for rent. (l) Except as otherwise provided herein, all remedies are cumulative and concurrent and no remedy is exclusive of any other remedy. Each remedy may be exercised at any time an Event of Default has occurred and is continuing and may be exercised from time to time. No remedy shall be exhausted by any exercise thereof. 24. Notices. All notices, demands, requests, consents, approvals, offers, ------- statements and other instruments or communications required or permitted to be given pursuant to the provisions of this Sublease shall be in writing and shall be deemed to have been given and received for all purposes when delivered in person or by Federal Express or other reliable 24-hour delivery service or five (5) business days after being deposited in the United States mail, by registered or certified mail, return receipt requested, postage prepaid, addressed to the other party at its address stated above or when delivery is refused. A copy of any notice given by Tenant to Landlord shall simultaneously be given by Tenant to Dewey Ballantine LLP, 333 South Hope Street, 30th Floor, Los Angeles, California 90071, Attention: Rafael A. Stone, Esq. A copy of any notice given by Landlord to Tenant shall simultaneously be given by Landlord to Smith, Anderson, Blount, Dorsett, Mitchell & Jernigan, L.L.P., 2500 First Union Capitol Center, Raleigh, North Carolina 27601, Attention: Stephen T. Parascandola, Esq. For the purposes of this Paragraph, any party may substitute another address stated above (or substituted by a previous notice) for its address by giving fifteen (15) days' notice of the new address to the other party, in the manner provided above. 25. Estoppel Certificate. At any time upon receipt of not less than ten ------------------- (10) days' prior written request by either Landlord or Tenant (the "Requesting ---------- Party") to the other party (the ----- 36 "Responding Party"), the Responding Party shall deliver to the Requesting Party ---------------- a statement in writing, executed by an authorized officer of the Responding Party, certifying (a) that, except as otherwise specified, this Sublease is unmodified and in full force and effect, (b) the dates to which Basic Rent, Additional Rent and all other Monetary Obligations have been paid, (c) that, to the knowledge of the signer of such certificate and except as otherwise specified, no default by either Landlord or Tenant exists hereunder, (d) such other matters as the Requesting Party may reasonably request, and (e) if Tenant is the Responding Party, that, except as otherwise specified, there are no proceedings pending or, to the knowledge of the signer, threatened, against Tenant before or by any court or administrative agency which, if adversely decided, would materially and adversely affect the financial condition and operations of Tenant. Any such statements by the Responding Party may be relied upon by the Requesting Party, any Person whom the Requesting Party notifies the Responding Party in its request for the certificate is an intended recipient or beneficiary of the certificate, Master Landlord, any Lender or their assignees and by any prospective purchaser or mortgagee of any of the Leased Premises. Any certificate required under this Paragraph 25 and delivered by Tenant shall state that, in the opinion of each person signing the same, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to the subject matter of such certificate, and shall briefly state the nature of such examination or investigation. 26. Surrender. Upon the expiration or earlier termination of this --------- Sublease, Tenant shall peaceably leave and surrender the Leased Premises to Landlord in the same condition in which the Leased Premises was at the commencement of this Sublease, except as repaired, rebuilt, restored, altered, replaced or added to as permitted or required by any provision of this Sublease, and except for ordinary wear and tear and damage by Casualty or a Taking if Landlord rejects Tenant's offer under Paragraph 18 hereof. Upon such surrender, Tenant shall (a) remove from the Leased Premises all property which is owned by Tenant or third parties other than Landlord and (b) repair any damage caused by such removal. Property not so removed shall become the property of Landlord, and Landlord may thereafter cause such property to be removed from the Leased Premises. The cost of removing and disposing of such property and repairing any damage to any of the Leased Premises caused by such removal shall be paid by Tenant to Landlord upon demand. Landlord shall not in any manner or to any extent be obligated to reimburse Tenant for any such property which becomes the property of Landlord pursuant to this Paragraph 26. 27. No Merger of Title. There shall be no merger of the leasehold estate ------------------ created by this Sublease with the fee estate in any of the Leased Premises by reason of the fact that the same Person may acquire or hold or own, directly or indirectly, (a) the leasehold estate created hereby or any part thereof or interest therein and (b) the fee estate in any of the Leased Premises or any part thereof or interest therein, unless and until all Persons having any interest in the interests described in (a) and (b) above which are sought to be merged shall join in a written instrument effecting such merger and shall duly record the same. 28. Books and Records. ----------------- (a) Tenant shall keep adequate records and books of account with respect to the finances and business of Tenant generally and with respect to the Leased Premises, in accordance with generally accepted accounting principles ("GAAP") consistently applied, and 37 shall permit Master Landlord, Landlord and Lender by their respective agents, accountants and attorneys, upon reasonable notice to Tenant, to visit and inspect the Leased Premises and examine (and make copies of) the records and books of account and to discuss the finances and business with the officers of Tenant, at such reasonable times as may be requested by Master Landlord, Landlord or Lender. Upon the request of Master Landlord, Landlord or Lender (either telephonically or in writing), Tenant shall provide the requesting party with copies of any information to which such party would be entitled in the course of a personal visit. (b) Tenant shall deliver to Master Landlord, Landlord and to Lender, within ninety (90) days of the close of each fiscal year, annual audited financial statements of Tenant prepared by a firm of nationally recognized independent certified public accountants. Tenant shall also furnish to Landlord within forty-five (45) days after the end of each of the three remaining quarters unaudited financial statements and all other quarterly reports of Tenant, certified by Tenant's chief financial officer, and all filings, if any, of Form 10-K, Form 10-Q and other required filings with the Securities and Exchange Commission pursuant to the provisions of the Securities Exchange Act of 1934, as amended, or any other Law. All financial statements of Tenant shall be prepared in accordance with GAAP consistently applied. All annual financial statements shall be accompanied (i) by an opinion of said accountants stating that (A) there are no qualifications as to the scope of the audit and (B) the audit was performed in accordance with GAAP and (ii) by the affidavit of the president or a vice president of Tenant, dated within five (5) days of the delivery of such statement, stating that (C) the affiant knows of no Event of Default, or event which, upon notice or the passage of time or both, would become an Event of Default which has occurred and is continuing hereunder or, if any such event has occurred and is continuing, specifying the nature and period of existence thereof and what action Tenant has taken or proposes to take with respect thereto and (D) except as otherwise specified in such affidavit, that Tenant has fulfilled all of its obligations under this Sublease which are required to be fulfilled on or prior to the date of such affidavit. 29. Determination of Value. ---------------------- (a) Whenever a determination of Fair Market Value is required pursuant to any provision of this Sublease, or under the Master Lease with respect to the Leased Premises, such Fair Market Value shall be determined in accordance with the following procedure: (i) Landlord and Tenant shall endeavor to agree upon such Fair Market Value within thirty (30) days after the date (the "Applicable Initial Date") on which Landlord provides Tenant with notice of its intention to redetermine Fair Market Value pursuant to Paragraph 20(c). Landlord and Tenant shall endeavor to agree on Fair Market Rental Value on the date (also, an "Applicable Initial Date") which is six (6) calendar months prior to the expiration of the then current Term unless Tenant has failed to previously exercise its option to extend the Term pursuant to Paragraph 5(b). Upon reaching such agreement, the parties shall execute an agreement setting forth the amount of such Fair Market Value or Fair Market Rental Value. (ii) If the parties shall not have signed such agreement within thirty (30) days after the Applicable Initial Date, Tenant shall within fifty (50) days after the Applicable Initial Date select an appraiser and notify Landlord in writing of the name, address 38 and qualifications of such appraiser. Within twenty (20) days following Landlord's receipt of Tenant's notice of the appraiser selected by Tenant, Landlord shall select an appraiser and notify Tenant of the name, address and qualifications of such appraiser. Such two appraisers shall endeavor to agree upon Fair Market Value or Fair Market Rental Value based on a written appraisal made by each of them as of the Relevant Date (and given to Landlord by Tenant). If such two appraisers shall agree upon a Fair Market Value or Fair Market Rental Value, the amount of such Fair Market Value or Fair Market Rental Value as so agreed shall be binding and conclusive upon Landlord and Tenant. (iii) If such two appraisers shall be unable to agree upon a Fair Market Value or Fair Market Rental Value within twenty (20) days after the selection of an appraiser by Landlord, then such appraisers shall advise Landlord and Tenant of their respective determinations of Fair Market Value or Fair Market Rental Value and shall select a third appraiser to make the determination of Fair Market Value or Fair Market Rental Value. The selection of the third appraiser shall be binding and conclusive upon Landlord and Tenant. (iv) If such two appraisers shall be unable to agree upon the designation of a third appraiser within ten (10) days after the expiration of the twenty (20) day period referred to in clause (iii) above, or if such third appraiser does not make a determination of Fair Market Value or Fair Market Rental Value within twenty (20) days after his selection, then such third appraiser or a substituted third appraiser, as applicable, shall, at the request of either party hereto (with respect to the other party), be appointed by the President or Chairman of the American Arbitration Association in New York, New York. The determination of Fair Market Value or Fair Market Rental Value made by the third appraiser appointed pursuant hereto shall be made within twenty (20) days after such appointment. (v) If a third appraiser is selected, Fair Market Value or Fair Market Rental Value shall be the average of the determination of Fair Market Value or Fair Market Rental Value made by the third appraiser and the determination of Fair Market Value or Fair Market Rental Value made by the appraiser (selected pursuant to Paragraph 29(a)(ii) hereof) whose determination of Fair Market Value or Fair Market Rental Value is closest to the total dollar value to that of the third appraiser. Such average shall be binding and conclusive upon Landlord and Tenant. (vi) All appraisers selected or appointed pursuant to this Paragraph 29(a) shall (A) be independent qualified MAI appraisers, (B) have no right, power or authority to alter or modify the provisions of this Sublease, (C) utilize the definition of Fair Market Value or Fair Market Rental Value hereinabove set forth, and (D) be licensed in the State if the State provides for or requires such registration. (vii) The Cost of the procedure described in this Paragraph 29(a) above shall be borne by Tenant. (b) If, by virtue of any delay, Fair Market Value is not determined by the expiration or termination of the then current Term, then the date on which the Term would otherwise expire or terminate shall be extended with respect to the Leased Premises to the date specified for termination in the particular provision of this Sublease pursuant to which the 39 determination of Fair Market Value is being made. If, by virtue of any delay, Fair Market Rental Value is not determined by the expiration or termination of the then current Term, then until Fair Market Rental Value is determined, Tenant shall continue to pay Basic Rent during the succeeding Renewal Term in the same amount which it was obligated under this Sublease to pay prior to the commencement of the Renewal Term. When Fair Market Rental Value is determined, the appropriate Basic Rent shall be calculated retroactive to the commencement of the Renewal Term and Tenant shall either receive a refund from Landlord (in the case of an overpayment) or shall pay any deficiency to Landlord (in the case of an underpayment). (c) In determining Fair Market Value as defined in clause (b) of the definition of Fair Market Value, the appraisers shall add (a) the present value of the Basic Rent for the remaining Term then in effect (with assumed increases in the CPI to be determined by the appraisers) using a discount rate (which may be, but shall not be required to be, determined by an investment banker retained by any appraiser electing to seek such opinion) based on the creditworthiness of Tenant and (b) the present value of the Leased Premises as of the end of such Term (without assuming the Term has been extended). The appraisers shall further assume that no default then exists under the Lease, that Tenant has complied (and will comply) with all provisions of the Lease, and that Tenant has not violated (and will not violate) any of the Covenants. (d) In determining Fair Market Rental Value, the appraisers shall determine with respect to the Leased Premises the amount that a willing tenant would pay for, and a willing landlord of the Leased Premises would accept, at arm's length for the Leased Premises, taking into account comparable buildings and also taking into account: (a) the age, quality and condition (as required by the Lease) of the Improvements; (b) that the Leased Premises will be leased as a whole or substantially as a whole to single user; (c) a lease term of five (5) years; (d) an absolute triple net lease; and (e) such other items that professional real estate appraisers customarily consider. 30. Non-Recourse as to Landlord. --------------------------- (a) Anything contained herein to the contrary notwithstanding, any claim based on or in respect of any liability of Landlord under this Sublease shall be enforced only against the Leased Premises and not against any other assets, properties or funds of (a) Landlord, (b) any affiliate, director, officer, shareholder, general partner, limited partner, principal, employee, attorney, or agent of Landlord (or any legal representative, heir, estate, successor or assign of any of them), (c) any predecessor or successor partnership or corporation (or other entity) of Landlord, or any of its general partners, either directly or through Landlord or its general partners or any predecessor or successor partnership or corporation or their shareholders, officers, directors, employees or agents (or other entity), (d) Master Landlord or any of its directors, officers, shareholders, general partners, limited partners, principals, employees, attorneys, or agents (or any legal representative, heir, estate, successor or assign of any of them), or (e) any other Person. (b) Notwithstanding the foregoing, Tenant shall not be precluded from instituting legal proceedings for the purpose of making a claim against Landlord on account of an alleged 40 violation of Landlord's obligation under this Sublease, subject, however, to Paragraph 30(a) above. (c) The provisions of this Section 30 shall not terminate or otherwise limit Landlord's liability for breaches of its obligations under the Asset Purchase Agreement. 31. Financing. If Master Landlord or Landlord desires to obtain or --------- refinance any Loan, Tenant shall negotiate in good faith with Master Landlord and/or Landlord concerning any request made by any Lender or proposed Lender for changes or modifications in this Sublease. With respect to any Loan obtained or refinanced by Landlord, Tenant shall be obligated to negotiate in good faith changes or modifications in this Sublease to the extent that such changes or modifications do not have a material adverse effect on Tenant's rights or liabilities under this Sublease. In particular, Tenant shall agree, upon request of Master Landlord and/or Landlord, to supply any such Lender with such notices and information as Tenant is required to give to Master Landlord or Landlord hereunder and to extend the rights of Master Landlord and Landlord hereunder to any such Lender and to consent to such financing if such consent is requested by such Lender. Tenant shall provide any other reasonable consent or statement and shall execute any and all other reasonable documents that such Lender requires in connection with such financing, including any environmental indemnity agreement (so long as it is not more burdensome than the provisions relating to environmental matters set forth in this Sublease) and subordination, non-disturbance and attornment agreement, so long as the same do not adversely affect any right, benefit or privilege of Tenant under this Sublease or increase Tenant's obligations under this Sublease. Such subordination, non-disturbance and attornment agreement may require Tenant to confirm that (a) Lender and its assigns will not be liable for any misrepresentation, act or omission of Master Landlord or Landlord and (b) Lender and its assigns will not be subject to any counterclaim, demand or offset which Tenant may have against Master Landlord or Landlord. 32. Subordination. This Sublease and Tenant's interest hereunder shall ------------- be subordinate to any Mortgage or other security instrument securing a Loan hereafter placed upon the Leased Premises by Master Landlord or Landlord, and to any and all advances made or to be made thereunder, to the interest thereon, and all renewals, replacements and extensions thereof, provided that any such Mortgage or other security instrument (or a separate instrument in recordable form such as a subordination, non-disturbance and attornment agreement duly executed by the holder of any such Mortgage and Tenant and delivered to Tenant) shall provide for the recognition of this Sublease and all of Tenant's rights hereunder, including, without limitation, application of the Net Award in accordance with the terms of this Sublease unless and until an Event of Default has occurred and is continuing or Landlord shall have the right to terminate this Sublease pursuant to any applicable provision hereof. 33. Financial Covenants. Tenant hereby covenants and agrees to comply ------------------- with the Covenants. 34. Right to Vacate. Tenant shall have the right to vacate the Leased --------------- Premises; provided that (i) Tenant shall notify Landlord and Lender within ten (10) days after vacation of the Leased Premises by Tenant, (ii) Tenant shall make reasonable good faith efforts to sublet the Leased Premises, which sublease or subleases shall be subject to the provisions of Paragraph 21(b) 32 hereof, and (iii)Tenant shall continue to perform all of its obligations under this Lease, including its obligation to maintain the Leased Premises and to pay all Rent as and when due hereunder. If at any time during the Term the Leased Premises shall be vacant for twelve (12) consecutive months, then on the first day of the thirteenth (13th) month that the Leased Premises is vacant Tenant shall cause the Leased Premises to cease to be vacant. 35. Tax Treatment; Reporting. Landlord and Tenant each acknowledge that ------------------------ each shall treat this transaction as a true lease for state law purposes and shall report this transaction as a lease for Federal income tax purposes. For Federal income tax purposes each shall report this Sublease as a true lease with Landlord as the owner of the Leased Premises and Equipment and Tenant as the lessee of such Leased Premises and Equipment including: (1) treating Landlord as the owner of the property eligible to claim depreciation deductions under Section 167 or 168 of the Internal Revenue Code of 1986 (the "Code") with respect to the Leased Premises and Equipment, (2) Tenant reporting its Rent payments as rent expense under Section 162 of the Code, and (3) Landlord reporting the Rent payments as rental income. 36. Intentionally Omitted. --------------------- 37. Security Deposit. ---------------- (a) Concurrently with the execution of this Sublease, Tenant shall deliver to Landlord cash (U.S. dollars) in the amount of One Hundred Fifty One Thousand One Hundred Sixty Four and 08/100ths Dollars ($151,164.08) (the "Security Deposit"). The Security Deposit shall be security for the payment by ---------------- Tenant of the Rent and all other charges or payments to be paid hereunder and the performance of the covenants and obligations contained herein and shall be held by Landlord or, if applicable, any Lender of Landlord, as security for Tenant's obligations under this Sublease. Landlord or such Lender, as the case may be, shall invest the Security Deposit in such investment vehicle as is designated by Tenant and approved by Landlord and such Lender, which approval shall not be unreasonably withheld, subject to the following: (i) attached to this Sublease as Exhibit "F" is a list of approved investments and each such ---------- investment is deemed to be approved by Landlord and such Lender; (ii) the Security Deposit shall be invested in one investment vehicle that is held in the name of the Landlord or such Lender; (iii) Tenant may require that the Security Deposit be transferred or reinvested from one approved investment vehicle to another, but no more frequently than one time in any 12-month period during the term of the Lease; (iv) if Landlord or such Lender reasonably determine at any time that the liquidation value of the investment vehicle in which the Security Deposit has been invested is less than the required principal amount of the Security Deposit, then within two (2) business days after demand therefor, Tenant shall deposit in cash with the holder of the Security Deposit an amount in cash which, when added to the reasonably estimated liquidation value of the investment vehicle, is equal to the required amount of the Security Deposit, which cash deposit shall be returned to Tenant when the liquidation value of the investment equals or exceeds the required amount of the Security Deposit; and (v) Tenant shall pay all transaction costs reasonably incurred by Landlord or such Lender in investing the Security Deposit in accordance with the instructions of Tenant. (b) Landlord shall have the right to assign the Security Deposit to its Lender or 42 any other holder of a Mortgage during the term of the applicable Loan, so long as such Lender or such other holder of a Mortgage agrees in writing that it shall have all of the rights and obligations of Landlord with respect to the Security Deposit, provided that any portion of the Security Deposit applied by such Lender shall, with respect to Tenant, be deemed applied as provided in Paragraph 23 (d) hereof. Tenant covenants and agrees to execute such agreements, consents and acknowledgments as may be reasonably requested by Landlord and such Lender from time to time to acknowledge and perfect such assignment. 38. Miscellaneous. (a) The Paragraph headings in this Sublease are used only for convenience in finding the subject matters and are not part of this Sublease or to be used in determining the intent of the parties or otherwise interpreting this Sublease. (b) As used in this Sublease, the singular shall include the plural and any gender shall include all genders as the context requires and the following words and phrases shall have the following meanings: (i) "including" shall mean "including without limitation"; (ii) "provisions" shall mean "provisions, terms, agreements, covenants and/or conditions"; (iii) "lien" shall mean "lien, charge, encumbrance, title retention agreement, pledge, security interest, mortgage and/or deed of trust"; (iv) "obligation" shall mean "obligation, duty, agreement, liability, covenant and/or condition"; (v) "any of the Leased Premises" shall mean "the Leased Premises or any part thereof or interest therein"; (vi) "any of the Land" shall mean "the Land or any part thereof or interest therein"; (vii) "any of the Improvements" shall mean "the Improvements or any part thereof or interest therein"; (viii) "any of the Equipment" shall mean "the Equipment or any part thereof or interest therein"; and (ix) "any of the Adjoining Property" shall mean "the Adjoining Property or any part thereof or interest therein". (c) Any act which Landlord is permitted to perform under this Sublease may be performed at any time and from time to time by Landlord or any person or entity designated by Landlord. Each appointment of Landlord as attorney-in-fact for Tenant hereunder is irrevocable and coupled with an interest. Except with respect to any assignment of this Sublease or sublet that is not otherwise specifically permitted hereunder or for which a reasonableness standard is not specifically required for Landlord's consent, Landlord shall not unreasonably withhold or delay its consent whenever such consent is required under this Sublease. Time is of the essence with respect to the performance by Tenant of its obligations under this Sublease. (d) Landlord shall in no event be construed for any purpose to be a partner, joint venturer or associate of Tenant or of any subtenant, operator, concessionaire or license of Tenant with respect to any of the Leased Premises or otherwise in the conduct of their respective businesses. (e) This Sublease and any documents which may be executed by Tenant on or about the effective date hereof at Landlord's request constitute the entire agreement between the parties and supersede all prior understandings and agreements, whether written or oral, between the parties hereto relating to the Leased Premises and the transactions provided for herein. Landlord and Tenant are business entities having substantial experience with the subject matter of this Sublease and have each fully participated in the negotiation and drafting of this Sublease. 43 Accordingly, this Sublease shall be construed without regard to the rule that ambiguities in a document are to be construed against the drafter. (f) This Sublease may be modified, amended, discharged or waived only by an agreement in writing signed by the party against whom enforcement of any such modification, amendment, discharge or waiver is sought. (g) The covenants of this Sublease shall run with the land and bind Tenant, its successors and assigns and all present and subsequent encumbrancers and subtenants of any of the Leased Premises, and shall inure to the benefit of Landlord, its successors and assigns. If there is more than one Tenant, the obligations of each shall be joint and several. (h) Notwithstanding any provision in this Sublease to the contrary, all Surviving Obligations of Tenant shall survive the expiration or termination of this Sublease with respect to the Leased Premises. (i) If any one or more of the provisions contained in this Sublease shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Sublease, but this Sublease shall be construed as if such invalid, illegal or unenforceable provision had never been contained herein. (j) All exhibits attached hereto are incorporated herein as if fully set forth. (k) This Sublease shall be governed by and construed and enforced in accordance with the Laws of the State. (l) Tenant hereby waives the provisions of California Civil Code Sections 1941 and 1942. Landlord and Tenant waive the provisions of California Civil Code Sections 1932 and 1933, and of California Code of Civil Procedure Section 1265.130. (m) As a condition precedent to the effectiveness of this Sublease and to the performance by Landlord of its obligations hereunder, Tenant shall cause Cree to concurrently herewith execute and deliver to and for the benefit of Landlord a Guaranty of Lease in the form attached hereto as Exhibit "H". - - ---------- (n) Tenant acknowledges and agrees that it is subleasing the Leased Premises from Landlord subject to all of the rights and interests of the Master Landlord in and to the Leased Premises arising under the Lease, including, without limitation, rights of inspection and rights to notice of various matters, events, circumstances and materials, all as granted to Master Landlord under the Lease. In no event shall Tenant prohibit or otherwise limited the Master Landlord from exercising or receiving the benefit of any of its rights arising under the Master Lease with respect to the Leased Premises, including, without limitation, Master Landlord's rights to inspection of the Leased Premises and information related thereof, regardless of whether or not rights are provided for under this Sublease. (o) Notwithstanding any provision set forth herein that may be construed to the contrary, in no event may Tenant renew or extend the Term of this Sublease for a period which is longer than the Term (as defined in the Lease) of the Lease. 44 (p) Landlord represents and warrants to Tenant the following: (a) Landlord is a corporation duly formed, validly existing and in good standing under the laws of the State of California, (ii) Landlord has all requisite corporate power and authority to execute and deliver this Sublease and perform Landlord's obligations hereunder, and this Sublease has been duly executed and delivered by Landlord and constitutes the valid and binding agreement of Landlord enforceable in accordance with its terms, (iii) the execution and performance of this Sublease will not conflict with or constitute a default by Landlord under any other agreement to which Landlord is a party or is otherwise bound, or any order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over Landlord, except where such conflict or default would not have a material adverse effect on the ability of Landlord to perform its obligations hereunder, (iv) no consent from or notice to any federal, state or local court or federal, state, or local governmental bureau, department, commission or agency, or any person or entity whether or not governmental in character (other than Master Landlord and the Lender of Master Landlord), is required to permit Landlord to execute, deliver and perform under this Sublease in accordance with its terms, (v) the Master Lease has not been amended or supplemented other than as disclosed to Tenant, (vi) to Landlord's actual knowledge (as defined in Section 15 of this Sublease), the Master Lease has not been terminated and is in full force and effect, and (vii) to Landlord's actual knowledge (as defined in Section 15 of this Sublease), Landlord has not received any written notice from Master Landlord of any uncured default on Landlord's part under the Master Lease. Tenant represents and warrants to Landlord the following: (a) Tenant is a corporation duly formed, validly existing and in good standing under the laws of the State of North Carolina, (b) Tenant is in good standing and is qualified to conduct business under the laws of the State of California, (c) Tenant has all requisite corporate power and authority to execute and deliver this Sublease and perform Tenant's obligations hereunder, and this Sublease has been duly executed and delivered by Tenant and constitutes the valid and binding agreement of Tenant enforceable in accordance with its terms, (d) the execution and performance of this Sublease will not conflict with or constitute a default by Tenant under any agreement to which Tenant is a party or is otherwise bound, or any order or regulation of any court, regulatory body, administrative agency or governmental body having jurisdiction over Tenant, except where such conflict or default would not have a material adverse effect on the ability of Tenant to perform its obligations hereunder, and (e) no consent from or notice to any federal, state or local court or federal, state, or local governmental bureau, department, commission or agency, or any person or entity whether or not governmental in character (other than Master Landlord), is required to permit Tenant to execute, deliver and perform under this Sublease in accordance with its terms. [signatures on next page] IN WITNESS WHEREOF, Landlord and Tenant have caused this Sublease to be duly executed under seal as of the day and year first above written. LANDLORD: SPECTRIAN CORPORATION, a California corporation By:__________________________________ Name:_______________________________ Title:________________________________ TENANT: ZOLTAR ACQUISITION, INC., a North Carolina corporation to be known as UltraRF, Inc. By:__________________________________ Name:_______________________________ Title:________________________________ 46 EXHIBIT A LEASED PREMISES (160 Gibraltar Court Premises) All that certain real property situate in the City of Sunnyvale, County of Santa Clara, State of California, described as follows: Parcel B, as shown on that Parcel Map filed for record in the office of the Recorder of the County of Santa Clara, State of California on January 31, 1977, in Book 388 of Maps, page(s) 32. 47 EXHIBIT B MACHINERY AND EQUIPMENT All fixtures, machinery, apparatus, equipment, fittings and appliances of every kind and nature whatsoever now or hereafter affixed or attached to or installed in any of the Leased Premises (except as hereafter provided), including all electrical, anti-pollution, heating, lighting (including hanging fluorescent lighting), incinerating, power, air cooling, air conditioning, humidification, sprinkling, plumbing, lifting, cleaning, fire prevention, fire extinguishing and ventilating systems, devices and machinery and all engines, pipes, pumps, tanks (including exchange tanks and fuel storage tanks), motors, conduits, ducts, steam circulation coils, blowers, steam lines, compressors, oil burners, boilers, doors, windows, loading platforms, lavatory facilities, stairwells, fencing (including cyclone fencing), passenger and freight elevators, overhead cranes and garage units, together with all additions thereto, substitutions therefor and replacements thereof required or permitted by this Sublease which were leased by Master Landlord to Landlord under the Master Lease and are situated upon the Leased Premises as of the Commencement Date. 48 EXHIBIT B-1 TENANT'S PROPERTY ----------------- Tenant's Property shall mean all "Acquired Assets" (as defined in the Asset Purchase Agreement) Tenant's Property shall not include any of the following: (a) Mechanical/HVAC equipment including Scrubber, Acid Neutralization System, Water Deionization System, Chiller, Emergency Generator and CO2 tank; (b) Water, environmental and piping systems which are and shall be Equipment; and (c) any Equipment owned by Landlord or owned by Master Landlord and not leased to Landlord under the Master Lease (whether or not described on Exhibit B). 49 EXHIBIT C PERMITTED ENCUMBRANCES ---------------------- 1. General and Special City and/or County taxes for the fiscal year 2000-2001, payable but not yet due. 2. Lien of supplemental taxes, if any, assessed pursuant to the provisions of Chapter 3.5 (commencing with Section 75) of the Revenue and Taxation Code of the State of California. 3. Easement Deed to the City of Sunnyvale, recorded October 9, 1964 in Book 6695, page 415. 4. Easement Deed to the City of Sunnyvale, recorded October 9, 1964 in Book 6695, page 437. 5. Easement Deed to the City of Sunnyvale, recorded September 2, 1966 in Book 7494, page 638, as modified by Quitclaim Deed from the City of Sunnyvale to Moffett Park Associates, recorded October 24, 1967 in Book 7903, page 280. 6. Agreement between the City of Sunnyvale and Moffett Park Associates, recorded November 2, 1966 in Book 7552, page 688; as amended, recorded April 21, 1967 in Book 7700, page 638; and as amended, recorded February 23, 1968 in Book 8034, page 631. 7. Declaration of Protective Covenants by Moffett Industrial Park No. 1, recorded January 5, 1968 in Book 7985, page 605; as amended, recorded September 27, 1968 in Book 8277, page 704; and as assigned, recorded January 17, 1977 in Book C541, page 367. 8. Easement to Pacific Gas and Electric Company, recorded January 31, 1973 in Book O217, page 330. 9. Notice Affecting Real Property - Waiver of Construction Credits, recorded September 28, 1976 in Book C307, page 346. 10. Ingress and Egress for Driveway Easement which have not been reserved or conveyed of record. 11. Easement Deed to the City of Sunnyvale, recorded January 28, 1977 in Book C565, page 679. 12. Access easement shown on plat recorded in Maps 388, page 32. 13. Easement Deed to Santa Clara County Transit District, recorded April 8, 1997 as Instrument No. 13664365. 50 14. The following matters shown on the ALTA/ALCM Land Title Survey prepared by Kier & Wright Civil Engineers & Surveyors, Inc., dated November 1996, last revised April 10, 1997, and bearing Job No. 85020-3. a. The fact that a concrete curb encroach onto said lands 1.08 feet. Affects the Southeasterly portion of Parcel One. b. The fact that there is a sign located near the most Southerly corner of Parcel One. c. The fact that there are water valve, fire service box, water meter and anti syph valves located on or near the Southeasterly boundary of Parcel One. d. The fact that there are traffic signals and traffic boxes located near the most Easterly corner of Parcel One. e. The fact that there are P.G. & E; Pacific Telephone and Telegraph, Telephone, Transformer and Street Light Boxes located on or near the Northeasterly boundary of Parcel One. f. The fact that there is a service pedestal located in the Northeasterly portion of Parcel One. g. The fact that there are two 0.7 wide walls located in the Northeasterly portion of Parcel One. h. The fact that there is an electrolier located in the Northwesterly portion of Parcel One. i. The fact that there are irrigation boxes located in the Northwesterly portion of Parcel One. j. The fact that there is a nitrogen line located in the Northerly and Westerly portion of Parcel Two. k. The fact that there is a gas line located in the Northerly portion of Parcel Two. 15. Deed of Trust to Spec (CA) QRS 12-20, Inc., recorded April 14, 1997 under Serial No. 13671353. 16. Assignment of Rents to State Farm Life Insurance Company, recorded April 14, 1997 as Instrument No. 13671354. 17. Unrecorded Lease between Spec (CA) QRS 12-20, Inc. and Spectrian Corporation, recorded November 19, 1996 under Serial No. 13528640, by the provision of an Agreement between Spectrian Corporation, Spec (CA) QRS 12-20, Inc. and State Farm Life Insurance Company, recorded April 14, 1997 as Instrument No. 13671355. 51 18. Easement Deed by and between Gibraltar Court Associates, LLC and Site One, LLC, recorded December 16, 1999 as Instrument No. 15092766. 52 EXHIBIT D BASIC RENT PAYMENTS 1. Basic Rent. ---------- (a) Initial Term. Subject to the adjustments provided for in ------------ Paragraphs 2, 3 and 4 below, Basic Rent payable in respect of the Term shall be $906,984.48 per annum, payable quarterly in advance on each Basic Rent Payment Date, in equal installments of $226,746.12 each. (b) Renewal Term. Subject to the adjustments provided for in ------------ Paragraphs 2, 3 and 4 below, per annum Basic Rent for each Renewal Term shall be an amount equal to the greater of $18.03 per sq. ft. triple-net (which shall be not less than 50,311 square feet for the Leased Premises) or the Fair Market Rental Value as of the first day of the applicable Renewal Term, as determined in accordance with Paragraph 29 of the Lease. 2. CPI Adjustments to Basic Rent; Arbitration of Disputes. The Basic ------------------------------------------------------ Rent shall be subject to adjustment, in the manner hereinafter set forth, for increases in the index known as United States Department of Labor, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers, United States City Average, All Items (1982-84=100) ("CPI") or the successor index that most closely approximates the CPI. If the CPI shall be discontinued with no successor or comparable successor index, Landlord and Tenant shall attempt to agree upon a substitute index or formula, but if they are unable to so agree, then the matter shall be determined by arbitration in accordance with the rules of the American Arbitration Association then prevailing in New York City. Any decision or award resulting from such arbitration shall be final and binding upon Landlord and Tenant and judgment thereon may be entered in any court of competent jurisdiction. In no event will the Basic Rent as adjusted by the CPI adjustment be less than the Basic Rent in effect for the three (3) year period immediately preceding such adjustment or, with respect to each Renewal Term, be less than the Basic Rent determined for such Renewal Term (as described in Paragraph 1(b) above). 3. Arbitration of Disputes. NOTICE: BY INITIALLING IN THE SPACE ----------------------- BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN PARAGRAPH 2 ABOVE DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALLING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL UNLESS THOSE RIGHTS ARE ----- SPECIFICALLY INCLUDED IN PARAGRAPH 2 ABOVE. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. 53 WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN PARAGRAPH 2 ABOVE TO NEUTRAL ARBITRATION." _________________ ________________ LANDLORD TENANT 4. Effective Date of CPI Adjustments. Basic Rent shall not be --------------------------------- adjusted to reflect changes in the CPI until the third (3rd) anniversary of the Basic Rent Payment Date (as defined in the Master Lease) on which the first full quarterly installment of Master Lease Basic Rent was due and payable from Landlord to Master Landlord under the Master Lease (the "First Full Basic Rent --------------------- Payment Date"). As of the third (3rd) anniversary of the First Full Basic Rent - - ------------ Payment Date under the Master Lease and thereafter on the sixth (6th), ninth (9th) and twelfth (12th) anniversaries of the First Full Basic Rent Payment Date under the Master Lease, Basic Rent (as defined in this Sublease) shall be adjusted to reflect increases in the CPI during the most recent three (3) year period immediately preceding each of the foregoing dates (each such date being hereinafter referred to as "Basic Rent Adjustment Date"). If the Initial Term of the Sublease is renewed, then as of the third (3rd) anniversary of the date on which the first full quarterly installment of Master Lease Basic Rent shall be due and payable for the corresponding Renewal Term (as defined in the Master Lease) under the Master Lease (each such date also a "First Full Basic Rent Payment Date"), Basic Rent (as defined under this Sublease) shall be adjusted to reflect increases in the CPI during the first three (3) years of applicable Renewal Term under this Sublease (each such date also a "Basic Rent Adjustment Date"). 5. Method of Adjustment for CPI Adjustment. --------------------------------------- (a) As of each Basic Rent Adjustment Date, the Basic Rent in effect immediately prior to such date shall be multiplied by seventy-five percent (75%) of the Aggregate CPI Increase (as hereinafter defined) and the product of such multiplication shall be added to the Basic Rent in effect immediately prior to such Basic Rent Adjustment Date. "Aggregate CPI Increase" shall mean the product of the sums of one (1) plus each of the compounded increases (but not decreases) in the Relevant CPI (as hereinafter defined) for each of the three (3) 12-month periods ending on the first, second and third anniversaries (each such anniversary being a "Calculation Date") of the first full Basic Rent Payment Date (in the case of ---------------- the First Basic Rent Adjustment Date) or the preceding Basic Rent Adjustment Date (in the case of each subsequent Basic Rent Adjustment Date) over the Relevant CPI for the previous 12-month period (each an "Annual Increase") from --------------- which product shall be subtracted one (1); provided, that if the Annual Increase for any 12-month period is greater than 4.5%, then the Annual Increase for such 12-month period shall be deemed to be 4.5%. The Relevant CPI for the 12-month period ending on any Calculation Date shall be equal to the average CPI for the three (3) calendar months published on or before the forty-fifth day preceding such Calculation Date (the "Prior Months"), and the Relevant CPI for each of the preceding 12-month periods shall be equal to the average CPI for the three (3) months of such 12-month period which correspond to the Prior Months. 54 By way of example and not of limitation, if, immediately prior to the Basic Rent Adjustment Date occurring on the ninth (9th) anniversary of the First Full Basic Rent Payment Date, Basic Rent is $100 and the increases in the Relevant CPI for the three (3) preceding years are 2%, 0% and 12%, respectively, the Aggregate CPI Increase will be as follows: (1.02 x 1.0 x 1.045) = 1.0659 - 1 = .0659 x .75 or .0494; then, .0494 x $100 = $4.94; then $100 + $4.94 = $104.94, which is the new Basic Rent. Said another way, .0494 + 1 = 1.0494; then, $100 x 1.0494 = $104.94, which is the new Basic Rent. (b) Notice of the new annual Basic Rent shall be delivered to Tenant on or before the tenth (10th) day preceding each Basic Rent Adjustment Date. 6. Basic Rent Corresponds to Master Lease Basic Rent. Notwithstanding ------------------------------------------------- anything set forth in this Sublease that may be construed to the contrary, in no event shall the Basic Rent due from Tenant during the Term of this Sublease, including, without limitation, any Renewal Term, as such Basic Rent may be adjusted from time to time by the CPI adjustment provided for hereunder, be less than forty-five percent (45%) of the Master Lease Basic Rent (as the same may be adjusted from time to time under the Master Lease) due from Landlord to Master Landlord for the Gibraltar Premises and the West Java Premises under the Master Lease for the corresponding portion of the Term (as defined in the Master Lease) thereunder, including, without limitation, any Renewal Term (as defined under the Master Lease) thereunder. 55 EXHIBIT E FLOOR AMOUNT Prior to From and after 12/1/2001 12/1/2001 Leased Premises $7,939,791 $7,312,500 56 EXHIBIT F APPROVED INVESTMENTS (A) U.S. government obligations. (B) Certificates of Deposit issued by one of the twenty (20) largest U.S. banks. (C) Corporate bonds having an AAA or better rating. 57 EXHIBIT G FINANCIAL COVENANTS 1. Mergers and Sale of Assets. -------------------------- (a) Tenant shall not consolidate with or merge with any other corporation unless, immediately following such consolidation or merger, the surviving corporation shall have, on a pro-forma basis and, after giving effect thereto, an Adjusted Consolidated Tangible Net Worth of not less than the Adjusted Consolidated Tangible Net Worth of Tenant and its Consolidated Subsidiaries immediately prior to such merger or consolidation. (b) Tenant shall not, in a single transaction or a series of related transactions, sell, convey, transfer, abandon or lease all or substantially all of its assets to any Person except for a sale, transfer, conveyance, lease or other disposition to a Person that shall assume the obligations and liabilities of Tenant under this Sublease and that, immediately following such sale, transfer or conveyance, and after given effect thereto, has an Adjusted Consolidated Tangible Net Worth of not less than Thirty Million Dollars ($30,000,000). 2. Restricted Payments. Tenant will not, directly or indirectly make, ------------------- or cause or permit any Subsidiary of Tenant to make, any Restricted Payment, unless at the time thereof, and after giving effect thereto: (a) no Event of Default shall have occurred and be continuing; and (b) Tenant's Adjusted Consolidated Tangible Net Worth equals or exceeds $40,150,000 at the end of the month preceding such payment. 3. Definitions. For the purpose of this Exhibit "G" the following ----------- terms shall have the following meanings: "Adjusted Consolidated Tangible Net Worth" shall mean, at any date, the tangible net worth of any Person and its consolidated Subsidiaries on a consolidated basis, determined in accordance with GAAP. "GAAP" shall mean generally accepted accounting principles as in effect from time to time in the United States of America, applied on a consistent basis. "Person" shall mean an individual, partnership, association, corporation or other entity. "Restricted Payment" shall mean and include (a) any direct or indirect purchase, redemption or other acquisition or retirement for value of any equity security of Tenant or any option, warrant or right to acquire any such equity security, or any security convertible into or exchangeable for any such equity security by any Person other than Cree, and (b) any dividend, distribution, whether in cash or property and whether direct or indirect, to or for the benefit any Person (other than Cree) holding an equity interest in the Tenant or any affiliate of any such Person (other than Cree). 58 "Subsidiary" of any Person means a corporation a majority of the capital stock of which is at the time owned, or the management of which is otherwise controlled, directly or indirectly, through one or intermediaries, or both, by such Person. 59 EXHIBIT H GUARANTY OF LEASE (Attached) 60 EX-10.50 4 0004.txt PAYMENT AND PERFORMANCE GUARANTY OF SUBLEASE EXHIBIT 10.50 PAYMENT AND PERFORMANCE GUARANTY OF SUBLEASE -------------------------------------------- (Zoltar Acquisition, Inc. Sublease) THIS PAYMENT AND PERFORMANCE GUARANTY OF SUBLEASE (this "Guaranty") is made as of December ___, 2000, by CREE, INC., a North Carolina corporation ("Guarantor"), in favor of SPECTRIAN CORPORATION, a California corporation ("Landlord"). R E C I T A L S: ---------------- A. Pursuant to that certain Sublease Agreement dated as of even date herewith (the "Sublease"), between Landlord, as lessor, and Zoltar Acquisition, Inc., a North Carolina corporation to be known as UltraRF, Inc., as lessee ("Tenant"), Landlord has agreed to sublease to Tenant the premises located at 160 Gibraltar Court, Sunnyvale, California, and more particularly described therein. B. As a condition to entering into the Sublease, Landlord has required that Guarantor guarantee the Transaction Obligations (as defined below), now existing or hereafter incurred, owing to Landlord pursuant to the Transaction Documents (as defined below), including, without limitation, the Sublease. C. Guarantor acknowledges and agrees that it will benefit materially from Landlord entering into the Sublease with Tenant. AGREEMENT --------- NOW, THEREFORE, in consideration of the foregoing Recitals, and in order to induce Landlord to enter into the Sublease, and as security for the Transaction Obligations, and for other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, Guarantor agrees and covenants with Landlord and represents and warrants to Landlord as follows: 1. Certain Definitions. Capitalized terms which are used in this ------------------- Guaranty without definition shall have the meanings set forth below: 1.1 "Transaction Documents" means collectively, the Sublease --------------------- and all of the other documents now or hereafter executed by Tenant in connection with the Sublease. Notwithstanding the foregoing, Transaction Documents shall not include that certain Asset Purchase Agreement dated as of November 20, 2000, by and among Guarantor, Tenant and Landlord, nor any of the other documents included in the definition of "Transaction Agreements" under such Asset Purchase Agreement. 1.2 "Transaction Obligations" means each and every covenant ----------------------- and obligation of Tenant to Landlord created in or arising under the Sublease and each of the other Transaction Documents, including, but not limited to, the payment of all rent, property taxes, insurance premiums, amounts owing under any indemnities, and any and all other charges or sums, or any portion thereof, to accrue or become due from Tenant to Landlord pursuant to the terms of the Sublease. 2. Guaranty of Transaction Obligations. Subject to the terms of this ----------------------------------- Guaranty, Guarantor hereby unconditionally and irrevocably guarantees to Landlord (a) the due, regular, and punctual payment and performance of the Transaction Obligations including, but not limited to (i) the performance of all obligations of the Tenant under the Sublease, and (ii) the indemnity obligations of the Tenant under the Sublease and all other Transaction Documents (which guaranty shall survive the termination of the Sublease concurrently with the survival of such indemnity obligations); (b) upon any failure of the Tenant to timely perform any of the Transaction Obligations, the payment and reimbursement of all costs and expenses incurred by Landlord, directly or indirectly, in performing such Transaction Obligations (but Landlord shall not be required to perform such Transaction Obligations); and (c) all costs, reasonable attorneys' fees, and expenses that may be incurred by Landlord by reason of a default by the Tenant under any of the Transaction Documents, including fees and expenses in any appellate or bankruptcy proceedings. Upon the occurrence of a "Default" or any "Event of Default" pursuant to or under any of the Transaction Documents, Guarantor unconditionally and irrevocably promises to promptly pay to Landlord such amounts as are necessary to cure the Default or Event of Default, or at the option of Landlord, Guarantor agrees to pay such amounts as are necessary to perform the outstanding Transaction Obligations in full to the satisfaction of the terms of the applicable Transaction Documents, including, without limitation, the Sublease. This Guaranty is unconditional and Guarantor agrees that Landlord, upon the occurrence of Default or an Event of Default pursuant to any of the Transaction Documents, shall not be required to assert any claim or cause of action against the Tenant or anyone else, or against any property or, if applicable, collateral, before asserting any claim or cause of action against Guarantor under this Guaranty. This is a guaranty of payment and performance and not of collection only. Notice of acceptance of this Guaranty is hereby waived by Guarantor. Except to the extent the Sublease expressly requires Landlord to provide to Guarantor copies of any notice delivered by Landlord to Tenant, notice of any Default or Event of Default under the Transaction Documents is also hereby waived by Guarantor. Except to the extent the Sublease expressly requires Landlord to provide to Guarantor copies of any notice delivered by Landlord to Tenant, presentment, protest, demand, and notice of protest and demand, and notice of receipt of any and all collateral, and of the exercise of possessory remedies or foreclosure on any and all collateral received by Landlord from the Tenant, Guarantor or any other party are hereby waived. All settlements, compromises, compositions, accounts stated, and agreed balances in good faith between any primary or secondary obligors on any accounts received as collateral shall be binding upon Guarantor. This Guaranty shall not be affected, modified, or impaired by the voluntary or involuntary liquidation, dissolution, sale, or other disposition of all or substantially all of the assets, marshalling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangements, composition with creditors or readjustment of, or other similar proceedings affecting the Tenant or Guarantor, or any of the assets belonging 2 to any of them, nor shall this Guaranty be affected, modified, or impaired by the invalidity of any or all of the Transaction Documents. Upon the consent of Guarantor (which consent Guarantor shall not unreasonably withhold or delay), and without affecting or limiting Guarantor's liability hereunder, Landlord may: (a) grant the Tenant extensions of time for performance of the Transaction Obligations or any part hereof; (b) renew any of the Transaction Obligations; (c) renew or extend the term of the Sublease; (d) grant the Tenant extensions of time for performance of agreements or other indulgences; (e) at any time release any or all of the Collateral, or any mortgage, deed of trust or security interest in any Collateral, that now or hereafter secures any of the Transaction Obligations; (f) compromise, settle, release, or terminate any or all of the obligations, covenants, or agreements of the Tenant under the Transaction Documents; (g) at any time release any other guarantors from their guarantees of any of the Transaction Obligations; and (h) modify or amend any obligation, covenant, or agreement as set forth in the Transaction Documents (and such amendments shall nevertheless be binding upon Guarantor). Notwithstanding the foregoing, Guarantor hereby declares that it consents (and shall be deemed to have, at all times hereafter, consented) to any and all renewals and extensions of the term of the Sublease made pursuant to any provision of the Sublease existing as of the date hereof. This Guaranty shall continue to be effective, or be reinstated, as the case may be, if at any time any whole or partial payment or performance of any Transaction Obligations is or is sought to be rescinded or must otherwise be restored or returned by Landlord upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of the Tenant, Guarantor or any other party which has guaranteed the Transaction Obligations, upon or as a result of the appointment of a receiver, intervenor, or conservator of, or trustee or similar officer for, the Tenant, any of Guarantor or any other party which has guaranteed the Transaction Obligations of or for any substantial part of its or his/her property, or otherwise, all as though such payments and performance had not been made. This Guaranty shall not be affected in any way by the transfer or other disposition of any Collateral described in and granted to Landlord pursuant to the Transaction Documents, whether by deed, operation of law, or otherwise. Furthermore, this 3 Guaranty shall be of full force and effect (a) for the entire term of the Sublease, as the same may be extended from time to time with or without the consent of Guarantor, and (b) following the termination of the Sublease so long as Tenant shall have any obligation thereunder which survive the termination of the Sublease. 3. Representations and Warranties of Guarantor. To induce Landlord ------------------------------------------- to enter into the Sublease, Guarantor represents and warrants to Landlord as follows: (a) Power to Incur Obligations. Guarantor has the requisite -------------------------- power and authority to enter into this Guaranty and to consummate the transactions contemplated hereby. The execution and delivery of this Guaranty by Guarantor, and the consummation of the transactions contemplated hereby, have been duly and validly authorized. (b) Conflicts. The execution and delivery of this Guaranty by --------- Guarantor and the consummation by Guarantor of the transactions contemplated hereby will not: (i) violate any provision of the charter documents or the by- laws of Guarantor; or (ii) violate any law, government regulation, decree or judgment applicable or relating to Guarantor. (c) SEC Documents. Guarantor has filed all required forms, ------------- reports, schedules, statements and other documents (including exhibits and other information incorporated therein) with the SEC since April 20, 1995 through the date hereof (collectively, the "Guarantor SEC Reports"). As of their respective dates, or, if amended, as of the date of the last such amendment, each Guarantor SEC Report, (i) was prepared in all material respects with the applicable requirements of the Securities Act, the Exchange Act, and the rules and regulations thereunder applicable to such Guarantor SEC Reports and (ii) at the time they were filed did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. (d) Consent. The execution and delivery of this Guaranty by ------- Guarantor and the consummation by Guarantor of the transactions contemplated hereby will not: (i) require the consent of other party and the consent, license, approval or authorization of any governmental authority or agency, or (ii) require any filing with, or permit, consent or approval of, or the giving of any notice to, any governmental or regulatory body, agency or authority, except where the failure to make such filing, or obtain such permit, consent or approval, or give such notice would not have a material adverse effect (a) on the business, properties, assets, liabilities, operations, results of operations or condition (financial or otherwise) of Guarantor, taken as a whole, or (b) on the ability of Guarantor to perform its obligations under or to consummate the transactions contemplated by this Guaranty. (e) Due Execution and Enforcement. This Guaranty constitutes ----------------------------- the legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer and other similar laws affecting creditors' rights generally from time to time in effect and to general principles of equity (including, without limitation, concepts of materiality, 4 reasonableness, good faith and fair dealing) regardless of whether considered in a proceeding in equity or at law. 4. Bankruptcy No Discharge; Repayments. So long as any of the ----------------------------------- obligations guaranteed hereunder shall be owing to Landlord, Guarantor shall not, without the prior written consent of Landlord, commence or join with any other party in commencing any bankruptcy, reorganization or insolvency proceedings of or against Tenant. Guarantor understands and acknowledges that by virtue of this Guaranty, it has specifically assumed any and all risks of a bankruptcy or reorganization case or proceeding with respect to Tenant. As an example and not by way of limitation, a subsequent modification of the Transaction Obligations in any reorganization case concerning Tenant shall not affect the obligation of Guarantor to pay and perform the Transaction Obligations in accordance with their original terms. In any bankruptcy or other proceeding in which the filing of claims is required by law, Guarantor shall file all claims which Guarantor may have against Tenant relating to any indebtedness of Tenant to Guarantor and shall assign to Landlord all rights of Guarantor thereunder. If Guarantor does not file any such claim, Landlord, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Landlord's discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Landlord's nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Landlord or its nominee shall have the right, in its reasonable discretion, to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Landlord the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Landlord all of Guarantor's rights to any such payments or distributions; provided, however, Guarantor's obligations hereunder shall not be satisfied except to the extent that Landlord receives cash by reason of any such payment or distribution. If Landlord receives anything hereunder other than cash, the same shall be held as collateral for amounts due under this Guaranty. Notwithstanding anything to the contrary herein, the liability of Guarantor hereunder shall be reinstated and revised, and the rights of Landlord shall continue, with respect to any amount at any time paid by or on behalf of Tenant on account of the Transaction Obligations which Landlord shall restore or return by reason of the bankruptcy, insolvency or reorganization of Tenant or for any other reasons, all as though such amount had not been paid. 5. Affirmative Covenants of Guarantor. Guarantor covenants and ---------------------------------- agrees that so long as any of the Transaction Obligations are outstanding, Guarantor shall comply with each of the following affirmative covenants: (a) Performance of Transaction Obligations. Subject to the -------------------------------------- terms of this Guaranty, upon the occurrence of any breach, violation, default or event of default under any of the Transaction Documents, Guarantor shall duly and punctually perform or cause to be performed all Transaction Obligations then outstanding. 6. Intentionally Omitted. --------------------- 5 7. Events of Default. Guarantor's violation of or failure to timely ----------------- perform or observe any covenant or condition set forth herein which is not cured within any applicable cure period as set forth herein or, if no cure period is specified therefor, is not cured within ten (10) days of Guarantor's receipt of Landlord's written notice to Guarantor of such default, or the material falsity of any representation or warranty herein or in any financial statement, certificate or other information heretofore or hereafter provided by Guarantor to Landlord, shall constitute an "Event of Default" hereunder and under each of the Transaction Documents. The foregoing provision or any other provision requiring or providing for notice or demand from Landlord is deemed eliminated if Landlord is prevented from giving such notice or demand by bankruptcy of the Tenant or Guarantor or by reason of other applicable law, and the Event of Default shall occur on the occurrence of such event or condition if not cured within any applicable period measured from the occurrence of such event or condition rather than from notice or demand. 8. Waiver and Subordination. Guarantor expressly subordinates and ------------------------ defers his or its respective rights to subrogation, reimbursement, contribution or indemnity with respect to performance by Guarantor of the Transaction Obligations, until such time as Landlord receives performance in full of the Transaction Obligations. Furthermore, upon the occurrence of an Event of Default or Default under the Sublease or any of the other Transaction Documents, Guarantor agrees not to accept any payment or satisfaction of any kind of indebtedness of the Tenant to Guarantor or any security for such indebtedness. If Guarantor should receive any such payment, satisfaction or security for any indebtedness of the Tenant to Guarantor, Guarantor agrees to deliver the same promptly to Landlord in the form received, endorsed, or assigned as may be appropriate for application on account of, or as security for, the Transaction Obligations and until so delivered, agree to hold the same in trust for Landlord. 9. Successors and Assigns. This Guaranty shall be binding upon, and ---------------------- inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors, and assigns. 10. Severability. In the event that any provision hereof is deemed ------------ to be invalid by reason of the operation of any law or by reason of the interpretation placed thereon by any court, this Guaranty shall be construed as not containing such provision, and the invalidity of such provision shall not affect other provisions hereof which are otherwise lawful and valid and which shall remain in full force and effect. 11. Notices. Any notice or other communication required or permitted ------- to be given pursuant to this Guaranty or by applicable law shall be in writing and shall be deemed received (a) on the date delivered, if delivered in person to the person or department specified below, (b) three (3) business days after depositing the same in the U.S. Mail, certified or registered, with return receipt requested, or (c) one (1) day following the date deposited with Federal Express or other national overnight carrier, and in each case addressed as follows: 6 If to the Landlord: Spectrian Corporation 350 West Java Drive Sunnyvale, CA 94089 Attn: Michael D. Angel With a copy to: Dewey Ballantine LLP 333 South Hope Street 30th Floor Los Angeles, CA 90071 Attn: Rafael A. Stone, Esq. If to Guarantors: Cree, Inc. 4600 Silicon Drive Durham, North Carolina 27703 Attn: Adam H. Broome, General Counsel and Secretary with a copy to: Smith, Anderson, Dorsett, Mitchell & Jernigan L.L.P. 2500 First Union Capitol Center Raleigh, North Carolina 27601 Attn: Gerald F. Roach Any party may change its address to another single address by notice given as herein provided, except that any change of address must be actually received in order to be effective. 12. Waivers. ------- 12.1 General. The failure by Landlord at any time or times ------- hereafter to require strict performance by Guarantor of any of the provisions, warranties, terms, and conditions contained herein or in any other agreement, document, or instrument now or hereafter executed by Guarantor and delivered to Landlord shall not waive, affect, or diminish any right of Landlord hereafter to demand strict compliance or performance therewith and with respect to any other provisions, warranties, terms, and conditions contained in such agreements, documents, and instruments, and any waiver of any Event of Default or Default shall not waive or affect any other Event of Default or Default, whether prior or subsequent thereto and whether of the same or a different type. None of the warranties, conditions, provisions, and terms contained in this Guaranty or in any agreement, document, or instrument now or hereafter executed by Guarantor and delivered to Landlord shall be deemed to have been waived by any act or knowledge of Landlord, its agents, officers, or employees, but only by an instrument in writing, signed by an officer of Landlord, and directed to Guarantor specifying such waiver. 12.2 Waiver of Suretyship Provisions. Guarantor hereby ------------------------------- waives any and all suretyship defenses or defenses in the nature thereof without in any manner limiting any other provisions of this Guaranty. Guarantor agrees that its waiver of suretyship defenses and rights includes without limitation all suretyship defenses and rights of every nature otherwise available under California law and the laws of any other state, including, without limitation, all defenses 7 and rights arising under Sections 2787 through 2855 of the California Civil Code (the "Suretyship Provisions") and any successor provisions to those Sections. Without limiting the generality of the foregoing, Guarantor hereby acknowledges its understanding that the Suretyship Provisions provide various partial or complete defenses to the recovery by Landlord from Guarantor and/or grant Guarantor rights the enforcement of which could reduce or eliminate entirely Guarantor's liability hereunder to Landlord. Among the defenses and rights contained in the Suretyship Provisions are the following: (i) Section 2809 of the Civil Code, which provides, in part, that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (ii) Section 28 10 of the Civil Code, which provides, in part, that a surety is not liable if for any reason other than the mere personal disability of the principal there is no liability upon the part of the principal at the time of execution of the contract, or the liability of the principal thereafter ceases; (iii) Section 2819 of the Civil Code, which provides, in part,, that a surety is exonerated if the creditor alters the original obligation of the principal without the consent of the surety; (iv) Section 2845 of the Civil Code, which provides, in part, that a surety is exonerated to the extent that the creditor fails to proceed against the principal, or to pursue any other remedy in the creditor's power which the surety cannot pursue and which would lighten the surety's burden; (v) Section 2846 of the Civil Code, which provides that a surety may compel his principal to perform the obligation when due; (vi) Section 2847 of the Civil Code, which provides, in part, that if a surety satisfies the principal obligation, or any part thereof, the principal is obligated to reimburse the surety for the amounts paid by the surety; (vii) Section 2848 of the Civil Code which provides, in part, that a surety, upon satisfying the obligation of the principal, is entitled to enforce remedies which the creditor then has against the principal; (viii) Section 2849 of the Civil Code, which provides, in part, that a surety is entitled to the benefit of security held by the creditor for the performance of the principal obligation held by the creditor; and (ix) Section 2850 of the Civil Code, which provides, in part, that whenever the property of a surety is hypothecated with property of the principal, the surety is entitled to have the property of the principal first applied to the discharge of the obligation. Notwithstanding the benefits to Guarantor of the foregoing rights and defenses, Guarantor hereby specifically waives such rights and defenses. 13. Expenses. If, at any time or times hereafter an Event of Default -------- occurs hereunder or under any of the Transaction Documents, and Landlord employs counsel (i) to advise or provide other representation with respect to this Guaranty or any other agreement, document, or instrument heretofore, now, or hereafter executed by Guarantor and delivered to Landlord with respect to the Tenant or the Transaction Obligations, or (ii) to commence, defend, or intervene, file a petition, complaint, answer, motion, or any other pleading or to take any other action in or with respect to any suit or proceeding relating to this Guaranty or any other agreement, instrument, or document heretofore, now, or hereafter executed by Guarantor and delivered to Landlord with respect to the Tenant or the Transaction Obligations, or (iii) to represent Landlord in any litigation with respect to the affairs of Guarantor or to enforce any rights of Landlord or obligations of Guarantor or any other person, firm, or corporation that may be obligated to Landlord by virtue of this Guaranty, or any other agreement, document, or instrument heretofore or hereafter delivered to Landlord by or for the benefit of Guarantor with respect to the Tenant or the Transaction Obligations, then in any such events, all of the reasonable attorneys' fees actually incurred arising from such services, including fees in any appellate or bankruptcy proceedings, 8 and any other expenses, costs, and charges relating to this Guaranty, the Tenant or the Transaction Obligations shall constitute additional obligations of Guarantor payable on demand. 14. Singular and Plural. Singular terms shall include the plural ------------------- forms, and vice versa. 15. Entire Agreement: Counterparts. This Guaranty constitutes the ------------------------------- entire agreement and supersedes all prior agreements and understandings both oral and written, between the parties with respect to the subject matter hereof. This Agreement may be executed in counterparts which together shall constitute one instrument. It shall not be necessary for all parties to sign the same counterpart. 16. CONTROLLING LAW. THE VALIDITY, INTERPRETATION, ENFORCEMENT, AND --------------- EFFECT OF THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED ACCORDING TO THE LAWS OF THE STATE OF CALIFORNIA 17. Consent to Jurisdiction. The parties hereby agree that the ----------------------- United States District Court and California State Court sitting in San Francisco, California, shall have exclusive jurisdiction to hear and determine any claims or disputes pertaining directly or indirectly to this Guaranty. 18. WAIVER OF JURY TRIAL. GUARANTOR HEREBY WAIVES ANY RIGHT TO TRIAL -------------------- BY JURY ON ANY CLAIM, COUNTERCLAIM, SETOFF, DEMAND, ACTION OR CAUSE OF ACTION (A) ARISING OUT OF OR IN ANY WAY RELATED TO THIS GUARANTY OR THE SUBLEASE, OR (B) IN ANY WAY CONNECTED WITH OR PERTAINING OR RELATED TO OR INCIDENTAL TO ANY DEALINGS OF LANDLORD WITH THE TENANT OR GUARANTOR WITH RESPECT TO THE TRANSACTION DOCUMENTS OR IN CONNECTION WITH THIS GUARANTY OR THE EXERCISE OF ANY PARTY'S RIGHTS AND REMEDIES UNDER THIS GUARANTY OR OTHERWISE, OR THE CONDUCT OR THE RELATIONSHIP OF THE PARTIES HERETO, IN ALL OF THE FOREGOING CASES WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE. GUARANTOR AGREES THAT LANDLORD MAY FILE A COPY OF THIS GUARANTY WITH ANY COURT AS WRITTEN EVIDENCE OF THE KNOWING, VOLUNTARY, AND BARGAINED AGREEMENT OF GUARANTOR TO IRREVOCABLY WAIVE ITS RIGHTS TO TRIAL BY JURY AS AN INDUCEMENT OF LANDLORD TO ENTER INTO THE SUBLEASE, AND THAT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ANY DISPUTE OR CONTROVERSY WHATSOEVER (WHETHER OR NOT MODIFIED HEREIN) BETWEEN GUARANTOR AND LANDLORD SHALL INSTEAD BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A JUDGE SITTING WITHOUT A JURY. [Signature on next page.] 9 IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the day and year first above written. GUARANTOR: CREE, INC., a North Carolina corporation By:_________________________________ Name:_______________________________ Title:________________________________ 10 EX-10.51 5 0005.txt STANDARD INDUSTRIAL/COMMERCIAL NET LEASE EXHIBIT 10.51 STANDARD INDUSTRIAL/COMMERCIAL NET LEASE 1. Basic Provisions ("Basic Provisions"). ------------------------------------- 1.1 Parties: This Lease ("Lease"), dated for reference purposes only October 13, 2000 made by and between CSS Properties II, LLC ------------------------ ------------------------ ("Lessor") and (Lessee"), Spectrian Corporation (collectively the -------------------------------- "'Parties," or individually a "Party"). 1.2 (a) Premises: That Building, including all improvements therein or to be provided by Lessor under the terms of this Lease and the Improvement Agreement attached hereto as Exhibit A, commonly known by the street address of Glenn Drive, located in the City of Folsom, County of Sacramento, - - ------------------ ------------ ------------- State of California, with zip code 95630, as outlined on the Building --------------- ---------- Shell Plans (as defined in Section 1.E of the Improvement Agreement attached hereto as Exhibit A) ("Premises"). The "Building" is that certain building containing the Premises and is generally described as (describe briefly the nature of the building) approximately 13,380 square feet of an approximately ------------------------------------------------------ 13,380 square foot building. In addition to Lessee's rights to use and occupy - - ----------------------------- the Premises as hereinafter specified, Lessee shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to the roof, exterior walls or utility raceways of the Building or to any other buildings in the Industrial Center. The Premises, the Building, the Common Areas, the land upon which they are located, along with all other buildings and improvements thereon, are herein collectively referred to as the "Industrial Center." (Also see Paragraph 2.) (b) Parking: 52 unreserved vehicle parking spaces ("Unreserved ------ Parking Spaces"); and 0 , reserved vehicle parking spaces (Reserved Parking ------ Spaces). (Also see paragraph 2.6) 1.3 Term Seven (7) Years plus One (1) Month ("Original Term") ------------------------------------ commencing April 1, 2001 "Commencement Date") and ending April 30, 2008 -------------------- ("Expiration Date"). (Also see Paragraph 3.) 1.4 Early Possession: N/A ("Early Possession Date"). (Also see ----- Paragraphs 3.2 and 3.3.) 1.5 Base Rent: $17,394.00 per month ("Base Rent"), payable on the ------------ 1st day of each month commencing May 1, 2001. (Also see Paragraph 4.) - - ---- ------------- [ ] If this box is checked, this lease provides for the Base Rent to be adjusted per addendum One , attached hereto. ------- 1.6 (a) Base Rent Paid Upon Execution: $17,394.00 as Base Rent for ------------- the period May 2001. -------- (b) Lessee's Share of Common Area Operating Expenses: see addendum -------------- ("Lessee's Share"). 1.7 Security Deposit: $19,204.00 ("Security Deposit"). (Also see -------------- Paragraph 5.) 1.8 Permitted Use: General and Executive Offices and any other lawful use ------------------------------------------------------- [Permitted Use"). (Also see Paragraph 6.) 1.9 Insuring Party. Lessor is the "Insuring Party." (Also see Paragraph -------------- 8.) 1.10 Real Estate Brokers. The following real estate broker(s) (collectively, the "Brokers") and brokerage relationships exist in this transaction and are consented to by the Parties (check applicable boxes): [X] Cemo Commercial, Inc. represents Lessor exclusively ("Lessor's Broker"); --------------------- [ ] Cornish & Carey Commercial represents Lessee exclusively ("Lessee's -------------------------- Broker"); [ ] -------------------------- represents both Lessor and Lessee ("Dual Agency"). (Also see Paragraph 15.) (b) Payment to Brokers. Upon the execution of this Lease by both ------------------ Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares as they may mutually designate in writing, a fee as set forth in a separate written agreement between Lessor and said Broker(s) (or in the event there is no separate written agreement between Lessor and said Broker(s), the sum of $ per agreement ) for brokerage services rendered by said Broker(s) - - ---------------------- in connection with this transaction. 1.11 Addenda and Exhibits. Attached hereto is an Addendum or Addenda -------------------- consisting of Paragraphs 50 through 60 and a Second Addendum to Lease, the ---- ---- Improvement Agreement and the Hazardous Materials List, all of which constitute a part of this Lease. 1.12 Applicable Laws. Applicable Laws shall mean the Americans with --------------- Disabilities Act and applicable zoning, municipal, county, state and federal laws, ordinances and regulations and any covenants or restrictions of record (collectively, "Applicable Laws"). 2. Premises, Parking and Common Areas. ---------------------------------- 2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby leases ------- from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of square footage set forth in this Lease, or that may have been used in calculating rental and/or Common Area Operating Expenses, is an approximation which Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is not subject to revision whether or not the actual square footage is more or less. 2.2 Condition. Lessor shall deliver the Premises to Lessee clean and --------- free of debris on the Commencement Date and warrants to Lessee that the existing plumbing, electrical systems, fire sprinkler system, lighting, air conditioning and heating systems and loading doors, and the roof, if any, in the Premises, other than those constructed by Lessee, shall be in good operating condition on the Commencement Date. If a non-compliance with said warranty exists as of the Commencement Date, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within one (1) year after the Commencement Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. 2.3 Compliance with Covenants, Restrictions and Building Code. Lessor --------------------------------------------------------- warrants that any improvements (other than those constructed by Lessee or at Lessee's direction but including those that are the subject of the Improvement Agreement) on or in the Premises which have been constructed or installed by Lessor or with Lessor's consent or at Lessor's direction shall comply with all applicable covenants or restrictions of record and applicable building codes, regulations and ordinances in effect on the Commencement Date. Lessor further warrants to Lessee that Lessor has no knowledge of any claim having been made by any governmental agency that a violation or violations of applicable building codes, regulations, or ordinances exist with regard to the Premises as of the Commencement Date. Said warranties shall not apply to any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do not comply with said warranties, Lessor shall, except as otherwise provided in this Lease, promptly after receipt of written notice from Lessee given within one (1) year following the Commencement Date and setting forth with specificity the nature and extent of such non- compliance, take such action, at Lessor's expense, as may be reasonable or appropriate to rectify the non-compliance. 2.4 Acceptance of Premises. Lessee hereby acknowledges that neither ---------------------- Lessor, nor any of Lessor's agents, has made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. 2.5 Lessee as Prior Owner/Occupant. The warranties made by Lessor in ------------------------------ this Paragraph 2 shall be of no force or affect if immediately prior to the date set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In such event, Lessee shall, at Lessee's sole cost and expense, correct any non-compliance of the Premises with said warranties. 1 of 12 2.6 Vehicle Parking. Lessee shall be entitled to use the number of --------------- Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the Common Areas designated by Lessor for parking. Lessee shall not use more parking spaces than said number. Said parking spaces shall be used for parking by vehicles no larger than full-size passenger automobiles or pick-up trucks, herein called "Permitted Siz e Vehicles". Vehicles other than Permitted Size Vehicles shall be parked and loaded or unloaded as directed by Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.) Landlord shall provide no less than four (4) spaces per 1,000 rentable square feet of the Premises. (a) Lessee shall not permit or allow any vehicles that belong to or are controlled by Lessee or Lessee's employees, suppliers, shippers, customers, contractors or invitees to be loaded, unloaded, or parked in areas other than those designated by Lessor for such activities. (b) If Lessee permits or allows any of the prohibited activities described in this Paragraph 2.6, then Lessor shall have the right, upon one (1) business day's notice, in addition to such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the reasonable cost to Lessee, which cost shall be immediately payable upon demand by Lessor. (c) Lessor shall at the Commencement Date of this Lease, provide the parking facilities required by Applicable Law, and in no event shall Lessor oversubscribe parking. 2.7 Common Definition. The term "Common Areas" is defined as all areas ----------------- and facilities outside the Premises and within the exterior boundary line of the Industrial Center and interior utility raceways within the Premises that are provided and designated by the Lessor from time to time for the general non-exclusive use of Lessor, Lessee and other lessees of the Industrial Center and their respective employees, agents, suppliers, shippers, customers, contractors and invitees, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas. 2.8 Common Areas - Lessee's Rights. Lessor hereby grants to Lessee, for ------------------------------ the benefit of Lessee and its employees, agents, suppliers, shippers, contractors, customers and invitees, during the term of this Lease, the, non- exclusive right to use, in common with others entitled to such use, the Common Areas, subject to any rights, powers, and privileges reserved by Lessor under the terms hereof or under the terms of any rules and regulations or restrictions governing the use of the Industrial Center. Under no circumstances shall the right herein granted to use the Common Areas be deemed to include the right to store any property, temporarily or permanently, in the Common Areas. Any such storage shall be permitted only by the prior written consent of Lessor or Lessor's designated agent, which consent shall not be unreasonably withheld or delayed. In the event that any unauthorized storage shall occur then Lessor shall have the right, upon one (1) business day's notice, in addition to such other rights and remedies that it may have but in accordance with Applicable Laws, to remove the property and charge the reasonable cost to Lessee, which cost shall be immediately payable upon demand by Lessor. 2.9 Common Areas - Rules and Regulations. Lessor or such other person(s) ------------------------------------ as Lessor may appoint shall have the exclusive control and management of the Common Areas and shall have the right, from time to time, to establish, modify, amend and enforce reasonable Rules and Regulations with respect thereto in accordance with Paragraph 39. Lessee agrees to abide by and conform to all such Rules and Regulations, and to cause its employees, suppliers, shippers, customers, contractors and invitees to so abide and conform. Lessor shall not be responsible to Lessee for the non-compliance with said rules and regulations by other lessees of the Industrial Center. 2.10 Common Areas - Changes. Lessor shall have the right, in Lessor's ---------------------- reasonable discretion, from time to time: (a) To make changes to the Common Areas, including, without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, loading and unloading areas, ingress, egress, direction of traffic, landscaped areas, walkways and utility raceways; (b) To close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; (c) To add additional buildings and improvements to the Common Areas; (d) To use the Common Areas while engaged in making additional improvements, repairs or alterations to the Industrial Center, or any portion thereof; and (e) To do and perform such other acts and make such other changes in, to or with respect to the Common Areas and Industrial Center as Lessor may, in the exercise of sound business judgment, deem to be appropriate. 3. Term. ---- 3.1 Term. The Commencement Date, Expiration Date and Original Term of ---- this Lease are as specified in Paragraph 1.3. 3.2 Early Possession. If an Early Possession Date is specified in ---------------- Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the Early Possession Date but prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early occupancy. All other terms of this Lease, however, (including but not limited to the obligations to pay Lessee's Share of Common Area Operating Expenses and to carry the insurance required by Paragraph 8) shall be in effect during such period. Any such early possession shall not affect nor advance the Expiration Date of the Original Term. 2.3 Delay In Possession. If for any reason Lessor cannot deliver ------------------- possession of the Premises to Lessee by the Early Possession Date, if one is specified in Paragraph 1.4, or if no Early Possession Date is specified, by the Commencement Date, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease, or the obligations of Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not, except as otherwise provided herein, be obligated to pay rent or perform any other obligation of Lessee under the terms of this Lease until Lessor delivers possession of the Premises to Lessee. If possession of the Premises is not delivered to Lessee on July 1, 2001, Lessee may, at its option, by notice in writing to Lessor, cancel this Lease, in which event the parties shall be discharged from all obligations hereunder and Lessor shall promptly return to Lessee the Security Deposit and any advance payment of Rent or other related monies with respect to this Lease. Except as may be otherwise provided, and regardless of when the Original Term actually commences, if possession is not tendered to Lessee when required by this Lease and Lessee does not terminate this Lease, as aforesaid, the period free of the obligation to pay Base Rent, if any, that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to the period during which the Lessee would have otherwise enjoyed under the terms hereof, but minus any days of delay caused by the acts, changes or omissions of Lessee. 4. Rent. ---- 4.1 Base Rent. Lessee shall pay Base Rent and other rent or charges to --------- Lessor in lawful money of the United States, without offset or deduction, on or before the day on which it is due under the terms of this Lease. Base Rent and all other rent and charges for any period during the term hereof which is for less than one full month shall be prorated based upon the actual number of days of the month involved. Payment of Base Rent and other charges shall be made to Lessor at its address stated herein or to such other persons or at such other addresses as Lessor may from time to time designate in writing to Lessee. 4.2 Common Area Operating Expenses. Lessee shall pay to Lessor during ------------------------------ the term hereof, in addition to the Base Rent, Lessee's Share (as specified in Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined, during each calendar year of the term of this Lease, in accordance with the following provisions: (a) "Common Area Operating Expenses" are defined, for purposes of this Lease, as all costs incurred by Lessor relating to the ownership and operation of the Industrial Center, including, but not limited to, the following: (i) The operation, repair and maintenance, in neat, clean, good order and condition, of the following: Page 2 of 12 (aa) The Common Areas, including parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area lighting facilities, fences and gates. (bb) Exterior signs and any tenant directories (cc) Fire detection and sprinkler systems. (ii) The cost of water, gas, electricity and telephone to service the Common Areas. (iii) Trash disposal, property management and security services. (iv) Real Property Taxes (as defined in Paragraph 10.2) to be paid by Lessor for the Building and the Common Areas under Paragraph 10 hereof. (v) The cost of the premiums for the insurance policies maintained by Lessor under Paragraph 8 hereof. (vi) Any deductible portion of an insured loss concerning the Building or the Common Areas not to exceed $10,000 per occurrence. (vii) Any other services to be provided by Lessor that are stated elsewhere in this Lease to be a Common Area Operating Expense. (b) Any Common Area Operating Expenses and Real Property Taxes that are specifically attributable to the Building or to any other building in the Industrial Center or to the operation, repair and maintenance thereof, shall be allocated entirely to the Building or to such other building. However, any Common Area Operating Expenses and Real Property Taxes that are not specifically attributable to the Building or to any other building or to the operation, repair and maintenance thereof, shall be equitably allocated by Lessor to all buildings in the Industrial Center. (c) The inclusion of the improvements, facilities and services set forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon Lessor to either have said improvements or facilities or to provide those services unless the Industrial Carrier already has the same. Lessor already provides the services, or Lessor has agreed elsewhere in this Lease to provide the same or some of them. (d) Lessee's Share of Common Area Operating Expenses shall be payable by Lessee within thirty (30) days after a reasonably detailed statement of actual expenses is presented to Lessee by Lessor. At Lessor's option, however, an amount may be estimated by Lessor of Lessee's Share of annual Common Area Operating Expenses and the same shall be payable monthly, as Lessor shall designate, during each 12-month period of the Lease term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to Lessee within sixty (60) days after the expiration of each calendar year a reasonably detailed statement showing Lessee's Share of the actual Common Area Operating Expenses incurred during the preceding year. If Lessee's payments under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as indicated on said statement, Lessee shall be promptly credited (or reimbursed, if the Lease has expired) the amount of such over-payment against Lessee's Rent next becoming due. It Lessee's payments under this Paragraph 4.2(d) during said preceding year were less than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor the amount of the deficiency within thirty (30) days after delivery by Lessor to Lessee of said statement. 5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's ---------------- execution hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's faithful performance of Lessee's obligations under this Lease. If Lessee fails to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, cost, expense, loss or damage (including attorneys' fees) which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of said Security Deposit, Lessee shall within ten (10) days after written request therefore deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. Lessor shall not be required to keep all or any part of the Security Deposit separate from its general accounts. Lessor shall, at the expiration or earlier termination of the term hereof and after Lessee has vacated the Premises, return to Lessee (or, at Lessee's request, to the last assignee, if any, of Lessee's interest herein), that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be hold in trust, to bear interest or other increment for its use, or to be prepayment for any monies to be paid by Lessee under this Lease. 6. Use. --- 6.1 Permitted Use. ------------- (a) Lessee shall use and occupy the Premises only for the Permitted Use set forth in Paragraph 1.8, or any other legal use, which is reasonably comparable thereto, and for no other purpose without Lessor's prior written consent which Lessor shall not unreasonably withhold or delay. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates waste or a nuisance, or that unreasonably disturbs owners and/or occupants of, or causes damage to the Premises or neighboring premises or properties. (b) Lessor hereby agrees to not unreasonably withhold or delay its consent to any written request by Lessee, Lessee's assignees or subtenants, and by prospective assignees and subtenants of Lessee, its assignees and subtenants, for a modification of said Permitted Use, so long as the same will not adversely impact the structural integrity of the improvements on the Premises or in the Building or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises or the Building and the improvements thereon, and is otherwise permissible pursuant to this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within five (5) business days after such request give a written notification of same, which shall include an explanation of Lessor's reasonable objections to the change in use. 6.2 Hazardous Substances. -------------------- (a) Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature, quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, is either: (i) potentially injurious to the public health, safety or welfare, the environment, or the Premises; (ii) regulated or monitored by any governmental authority; or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substance shall include, but not be limited to, hydrocarbons, petroleum, gasoline, crude oil or any products or by-products thereof. Lessee shall not engage in any activity in or about the Premises which constitutes a Reportable Use (as hereinafter defined) of Hazardous Substances without the express prior written consent of Lessor and compliance in a timely manner (at Lessee's sole cost and expense) with all Applicable Requirements (as defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and (iii) the presence in, on or about the Premises of a Hazardous Substance with respect to which any Applicable Laws require that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may, without Lessor's prior consent, but in compliance with all Applicable Requirements, use any ordinary and customary materials reasonably required to be used by Lessee in the normal course of the Permitted Use, so long as such use is not a Reportable Use and does not expose the Premises or neighboring properties to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. Lessor hereby approves of Lessee's use of the substances listed on the Hazardous Materials List attached hereto as Exhibit B. (b) Duty to Inform Lessor. If Lessee knows (or has reasonable cause to --------------------- believe as a result of its business operations in the Premises) that a Hazardous Substance has come to be located in, on, under or about the Premises or the Building, other than as previously consented to by Lessor, Lessee shall immediately give Lessor written notice thereof, together with a copy of any statement, report, notice, registration, application, permit, business plan, license, claim, action, or proceeding given to, or received from, any governmental authority or private party concerning the presence, spill, release, discharge of, or exposure to, such Hazardous Substance including but not limited to all such documents as may be involved in any Reportable Use involving the Premises. Lessee shall not release or spill any Hazardous Substance in, on, under or about the Premises (including, without limitation, through the plumbing or sanitary sewer system) in violation of Applicable Requirements. (c) Indemnification. Lessee shall indemnify, protect, defend and hold --------------- Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all damages, liabilities, judgments, costs, claims, liens, expenses, penalties, loss of permits and attorneys' and consultants' fees arising out of or involving any Hazardous Substance released or emitted in violation of Applicable Requirements by Lessee or by anyone under Lessee's control. Lessee's obligations under this Paragraph 6.2(c) shall include, but not be limited to, the effects of any contamination or injury to Page 3 of 12 person, property or the environment created by Lessee, and the cost of investigation (including consultants' and attorneys' fees and testing), removal, remediation, restoration and/or abatement thereof, or of any contamination therein involved, and shall survive the expiration or earlier termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement. 6.3 Lessee's Compliance with Requirements. Lessee shall, at Lessee's ------------------------------------- sole cost and expense, fully, diligently and in a timely manner, comply with all 'Applicable Requirements," which term is used in this Lease to mean all laws, rules, regulations, ordinances, directives, covenants, easements and restrictions of record, permits, the requirements of any applicable fire insurance underwriter or rating bureau, relating in any manner to the Premises (including but not limited to matters pertaining to (i) industrial hygiene, (ii) the use, generation, manufacture, production, installation, maintenance, removal, transportation, storage, spill, or release of any Hazardous Substance by Lessee), now in effect or which may hereafter come into effect. Lessee shall, within five (5) business days after receipt of Lessor's written request, provide Lessor with copies of all documents and information, including but not limited to permits, registrations, manifests, applications, reports and certificates, evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving failure by Lessee or the Premises to comply with any Applicable Requirements. 6.4 Inspection; Compliance with Law. Lessor, Lessor's agents, employees, ------------------------------- contractors and designated representatives, and the holders of any mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall have the right to enter the Premises at any time in the case of an emergency, and otherwise at reasonable times upon one (1) business day's notice to Lessee, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee with this Lease and all Applicable Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to employ experts and/or consultants in connection therewith to advise Lessor with respect to Lessee's activities, including but not limited to Lessee's installation, operation, use, monitoring, maintenance, or removal of any Hazardous Substance on or from the Premises. The costs and expenses of any such inspections shall be paid by the party requesting same, unless a Default or Breach of this Lease by Lessee or a violation of Applicable Requirements or a contamination, caused or materially contributed to by Lessee, is found to exist or to be imminent, or unless the inspection is requested or ordered by a governmental authority as the result of any such existing or imminent violation or contamination. In such case, Lessee shall upon request reimburse Lessor or Lessor's Lender, as the case may be, for the reasonable costs and expenses of such inspections. 7. Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations. --------------------------------------------------------------------------- 7.1 Lessee's Obligations. -------------------- (a) Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole cost and expense and at all times, keep the Premises and every part thereof in good order, condition and repair (whether or not such portion of the Premises requiring repair, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, without limiting the generality of the foregoing, all equipment or facilities specifically serving the Premises, such as plumbing, heating, air conditioning, ventilating, electrical, lighting facilities, boilers, fired or unfired pressure vessels, fire hose connections if within the Premises, fixtures, interior walls, interior surfaces of exterior walls, ceilings, floors, windows, doors, plate glass, but excluding any items which are the responsibility of Lessor pursuant to Paragraph 7.2 below. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. (b) Lessee shall, at Lessee's sole cost and expense, procure and maintain a contract, with copies to Lessor, in customary form and substance for and with a contractor specializing and experienced in the inspection, maintenance and service of the heating, air conditioning and ventilation system for the Premises. However, Lessor reserves the right, upon notice to Lessee, in the event Lessee fails to retain such contractor itself to procure and maintain the contract for the heating, air conditioning and ventilating systems, and it Lessor so elects, Lessee shall reimburse Lessor, upon demand, for the reasonable cost thereof. (c) If Lessee breaches Lessee's obligations under this Paragraph 7.1, Lessor may enter upon the Premises after thirty (30) days' prior written notice to Lessee (except in the case of an emergency, in which case no notice shall be required), perform such obligations on Lessee's behalf, and put the Premises In good order, condition and repair, in accordance with Paragraph 13.2 below. 7.2 Lessor's Obligations. Subject to the provisions of Paragraphs 2.2 -------------------- (Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9 (Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and repair with respect to the Premises the foundations, exterior walls, structural condition of interior bearing walls, roof, exterior roof membrane, fire sprinkler and/or standpipe and hose (if located in the Common Areas) or other automatic fire extinguishing system including fire alarm and/or smoke detection systems and equipment, fire hydrants, parking lots, walkways, parkways, driveways, landscaping, fences, signs and utility systems serving the Common Areas and all parts thereof, as well as providing the services for which there is a Common Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated to paint the interior surfaces of exterior walls nor shall Lessor be obligated to maintain, repair or replace windows, doors or plate glass of the premises. Lessee expressly waives the benefit of any statute now or hereafter in effect which would otherwise afford Lessee the right to make repairs at Lessor's expense or to terminate this Lease because of Lessor's failure to keep the Building, Industrial Center or Common Areas in good order, condition and repair. 7.3 Utility Installations, Trade Fixtures, Alterations. -------------------------------------------------- (a) Definitions; Consent Required. The term "Utility Installations" ----------------------------- is used in this Lease to refer to all air lines, power panels, electrical distribution, security, fire protection systems, communications wiring/cabling, lighting fixtures, heating, ventilating and air conditioning equipment, plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment, which can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements on the Premises, which are provided by Lessor under the terms of this Lease, other than Utility Installations or Trade Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be made any Alterations or Utility Installations in, on, under or about the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations and Alterations to the interior of the Premises without Lessor's consent but upon notice to Lessor, so long as they are not visible from the outside of the Premises, do not involve puncturing, relocating or removing the roof or any existing load bearing walls, or changing or interfering with the fire sprinkler or fire detection systems and the cost thereof, does not exceed $10,000 per project. (b) Consent. Any Alterations or Utility Installations that Lessee ------- shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. All consents given by Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent, shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits required by governmental authorities; (ii) the furnishing of copies of such permits together with a copy of the plans and specifications for the Alteration or Utility Installation to Lessor prior to commencement of the work thereon; and (iii) the compliance by Lessee with all conditions of said permits in a prompt and expeditious manner. Any Alterations or Utility Installations by Lessee during the term of this Lease shall be done in a good and workmanlike manner, with good and sufficient materials, and be in compliance with all Applicable Requirements. Lessee shall promptly upon completion thereof furnish Lessor with as-built plans and specifications therefor. Lessor may, (but without obligation to do so) condition its consent to any requested Alteration or Utility Installation that costs $10,000 or more upon Lessee's providing Lessor with a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation. (c) Lien Protection. Lessee shall pay when due all claims for labor --------------- or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than five (5) days' notice prior to the commencement of any work in, on, or about the Premises, and Lessor shall have the right to post notices of non-responsibility in or on the Premises as provided by law. If Lessee shall, in good faith, contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense, defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against the Lessor or the Premises. If Lessor shall require, Lessee shall furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one times the amount of such contested lien claim or demand, indemnifying Lessor against liability for the same, as required by law for the holding of the Premises free from the effect of such lien or claim. 7.4 Ownership, Removal, Surrender, and Restoration. ---------------------------------------------- Page 4 of 12 (a) Ownership. Subject to Lessor's right to require their removal --------- and to cause Lessee to become the owner thereof as hereinafter provided in this Paragraph 7.4, all Alterations and Utility Installations made to the Premises by Lessee shall be the property of and owned by Lessee, but considered a part of the Premises. Lessor may, at anytime and at its option, elect in writing to Lessee to be the owner of all or any specified part of the Lessee-Owned Alterations and Utility Installations. Unless otherwise instructed per Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility Installations shall, at the expiration or earlier termination of this Lease, become the property of Lessor and remain upon the Premises and be surrendered with the Premises by Lessee. (b) Removal. Unless otherwise agreed in writing, Lessor may require ------- that any or all Lessee-Owned Alterations or Utility Installations be removed by the expiration or earlier termination of this Lease, notwithstanding that their installation may have been consented to by Lessor. Lessor may require the removal at any time of all or any part of any Alterations or Utility Installations made without the required consent of Lessor. (c) Surrender/Restoration. Lessee shall surrender the Premises by --------------------- the end of the last day of the Lease term or any earlier termination date, clean and free of debris and in good operating order, condition and state of repair, ordinary wear and tear, casualty and condemnation excepted. Ordinary wear and tear shall not include any damage or deterioration that would have been prevented by standard maintenance practice or by Lessee performing all of its obligations under this Lease. Except as otherwise agreed or specified herein, the Premises, as surrendered, shall include the Alterations and Utility Installations. The obligation of Lessee shall include the repair of any damage occasioned by the installation, maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and Lessee-Owned Alterations and Utility Installations, as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or ground water contaminated by Lessee, all as may then be required by Applicable Requirements. Lessee's Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee subject to its obligation to repair and restore the Premises per this Lease. 8. Insurance; Indemnity. -------------------- 8.1 Payment of Premiums. The cost of the premiums for the insurance ------------------- policies maintained by Lessor under this Paragraph 8 shall be a Common Area Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods commencing prior to, or extending beyond, the term of this Lease shall be prorated to coincide with the corresponding Commencement Date or Expiration Date. 8.2 Liability Insurance. ------------------- (a) Carried by Lessee. Lessee shall obtain and keep in force during the term of this Lease a Commercial General Liability policy of insurance protecting Lessee, Lessor and any Lender(s) whose names have been provided to Lessee in writing (as additional insureds) against claims for bodily injury, personal injury and property damage based upon, involving or arising out of the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $1,000,000 per occurrence. The policy shall include coverage for liability assumed under this Lease as an "Insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance required by this Lease or as carried by Lessee shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance to be carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess only. (b) Carried by Lessor. Lessor shall also maintain liability insurance described in Paragraph 8.2(a) above, in addition to and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein. 8.3 Property lnsurance - Building, Improvements and Rental Value. ------------------------------------------------------------ (a) Building and Improvements. Lessor shall obtain and keep in force ------------------------- during the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and to any Lender(s), insuring against loss or damage to the Building for the full replacement cost thereof, including the Tenant Improvements. Such insurance shall be for full replacement cost, as the same shall exist from time to time. Lessee-Owned Alterations and Utility Installations, Trade Fixtures and Lessee's personal property shall be insured by Lessee pursuant to Paragraph 8.4. Lessor's policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake), including coverage for any additional costs resulting from debris removal and reasonable amounts of coverage for the enforcement of any ordinance or law regulating the reconstruction or replacement of any undamaged sections of the Building required to be demolished or removed by reason of the enforcement of any building, zoning, safety or land use laws as the result of a covered loss, but not including plate glass insurance. Said policy or policies shall also contain an agreed valuation provision in lieu of any co-insurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. (b) Rental Value. Lessor shall also obtain and keep in force during ------------ the term of this Lease a policy or policies in the name of Lessor, with loss payable to Lessor and any Lender(s), insuring the loss of the full rental and other charges payable by all lessees of the Building to Lessor for one year (including all Real Property Taxes, insurance costs, all Common Area Operating Expenses and any scheduled rental increases). Said insurance may provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of rental revenues from the dale of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected rental income, Real Property Taxes, insurance premium costs and other expenses, if any, otherwise payable, for the next 12-month period. Common Area Operating Expenses shall include any deductible amount not to exceed $10,000 per occurrence in the event of such loss. (c) Adjacent Premises. Lessee shall pay for any increase in the ----------------- premiums for the property insurance of the Building and for the Common Areas or other buildings in the Industrial Center if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises other than for the Permitted Use. (d) Lessee's Improvements. Since Lessor is the Insuring Party, --------------------- Lessor shall not be required to insure Lessee-Owned Alterations and Utility Installations unless the item in question has become the property of Lessor under the terms of this Lease. 8.4 Lessee's Property Insurance. Subject to the requirements of --------------------------- Paragraph 8.5, Lessee at its cost shall either by separate policy or, at Lessor's option, by endorsement to a policy already carried, maintain insurance coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about the Premises similar in coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage with a deductible not to exceed $50,000 per occurrence. The proceeds from any such insurance may be used by Lessee for the replacement of personal property and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request from Lessor, Lessee shall provide Lessor with written evidence that such insurance is in force. 7.5 Insurance Policies. Insurance required hereunder shall be in ------------------ companies duly licensed to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of 'Best's Insurance Guide." Lessee shall not do or permit to be done anything, which shall invalidate the insurance policies, referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7) days after the earlier of the Early Possession Date or the Commencement Date, copies of, or certificates evidencing the existence and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be cancelable or subject to reduction except after thirty-(30) days' prior written notice to Lessor. Lessee shall at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or 'insurance binders' evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. 8.6 Waiver of Subrogation. Notwithstanding anything to the contrary in --------------------- this Lease, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages (whether in contract or in tort) against the other, for loss or damage to their property arising out of or incident to the perils required to be insured against under Paragraph 8 or which would normally be covered under so called "all-risk" insurance. The effect of such releases and waivers of the right to recover damages shall not be limited by the amount of insurance carried or required, or by any deductibles applicable thereto. Lessor and Lessee agree to have their respective insurance companies issuing property damage insurance waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby. 8.7 Indemnity. Except for Lessor's negligence and/or breach of express --------- warranties, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, loss of permits, Page 5 of 12 attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with, any negligent or intentional act, omission or neglect of Lessee, its agents, contractors, employees or invitees, and out of any Default or Breach by Lessee in the performance in a timely manner of any obligation on Lessee's part to be performed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action or proceeding involved therein, and whether or not (in the case of claims made against Lessor) litigated and/or reduced to judgment. In case any action or proceeding be brought against Lessor by reason of any of the foregoing matters, Lessee upon notice from Lessor shall defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be so indemnified. 8.8 Exemption of Lessor from Liability. Except to the extent of ---------------------------------- Landlord's negligence or willful misconduct, Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, whether said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not. Lessor shall not be liable for any damages arising from any act or neglect of any other lessee of Lessor nor from the failure by Lessor to enforce the provisions of any other lease in the Industrial Center. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom. 9. Damage or Destruction. --------------------- 9.1 Definitions. ----------- (a) "Premises Partial Damage" shall mean damage or destruction to the ----------------------- Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is less than fifty percent (50%) of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (b) "Premises Total Destruction" shall mean damage or destruction to the -------------------------- Premises, other than Lessee-Owned Alterations and Utility Installations, the repair cost of which damage or destruction is fifty percent (50%) or more of the then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures) immediately prior to such damage or destruction. (c) "Insured Loss" shall mean damage or destruction to the Premises, other ------------ than Lessee-Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage limits involved. (d) "Replacement Cost" shall mean the cost to repair or rebuild the ---------------- Building and improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of applicable building codes, ordinances or laws, and without deduction for depreciation. (e) "Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises. 9.2 Premises Partial Damage - Insured Loss. If Premises Partial Damage -------------------------------------- that is an Insured Loss occurs, unless caused by a willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense and this Lease shall continue in full force and effect), then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in full force and effect. In the event, however, that there is a shortage of insurance proceeds and such shortage is due to the fact that, by reason of the unique nature of the improvements in the Premises, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects of the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, Lessor shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within said period, Lessor may nevertheless elect by written notice to Lessee within ten (10) days thereafter to make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect. If Lessor does not receive such funds or assurance within such ten (10) day period, and if Lessor does not so elect to restore and repair, then this Lease shall terminate sixty (60) days following the occurrence of the damage or destruction. Unless otherwise agreed, Lessee shall in no event have any right to reimbursement from Lessor for any funds contributed by Lessee to repair any such damage or destruction provided that Lessor repairs the damage. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party. 9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage that is ------------------------------- not an Insured Loss occurs, Lessor may at Lessor's option, either (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) give written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give such notice of Lessor's intention to terminate this Lease, Lessee shall have the right within ten (10) days after the receipt of such notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage totally at Lessee's expense and without reimbursement from Lessor. Lessee shall provide Lessor with the required funds or satisfactory assurance thereof within thirty (30) days following such commitment from Lessee. In such event this Lease shall continue in full force and affect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the funds or assurance thereof within the times specified above, this Lease shall terminate as of the date specified in Lessor's notice of termination. 9.4 Total Destruction. Notwithstanding any other provision hereof, if ----------------- Premises Total Destruction occurs (including any destruction required by any authorized public authority), this Lease shall terminate sixty (60) days following the date of such Premises Total Destruction, whether or not the damage or destruction is an Insured Loss or was caused by a negligent or willful act of Lessee. In the event, however, that the damage or destruction was caused by the willful act of Lessee, Lessor shall have the right to recover Lessor's damages for the replacement cost of the Building. 9.5 Damage Near End of Term. If at any time during the last six (6) ----------------------- months of the term of this Lease there is damage for which the cost to repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor or Lessee may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving written notice to the other of such party's election to do so within thirty (30) days after the date of occurrence of such damage. Provided, however, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by (a) exercising such option, and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) as would otherwise be required under Sections 9.2 and 9.3 needed to make the repairs on or before the earlier of (i) the date which is ten (10) days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's expense repair such damage as soon as reasonably possible and this Lease shall continue in full force and affect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate as of the date set forth in the first sentence of this Paragraph 9.5. 9.6 Abatement of Rent; Lessee's Remedies. ------------------------------------ (a) In the event of Premises Partial Damage the Base Rent, Common Area Operating Expenses and other charges, if any, payable by Lessee hereunder for the period during which such damage or condition, its repair, remediation or restoration continues, shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired. Except for abatement of Base Rent, Common Area Operating Expenses and other charges, if any, as aforesaid, all other obligations of Lessee hereunder shall be performed by Lessee, and Lessee shall have no claim under this Lease against Lessor for any damage suffered by reason of any such damage, destruction, repair, remediation or restoration. Page 6 of 12 (b) If Lessor shall be obligated to repair or restore the Premises under the provisions of this Paragraph 9 and shall not commence, in a substantial and meaningful way, the repair or restoration of the Premises within sixty (60) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice of Lessee's election to terminate this Lease on a date not less than sixty (60) days following the giving of such notice. If Lessee gives such notice to Lessor and such Lenders and such repair or restoration is not commenced within thirty (30) days after receipt of such notice, this Lease shall terminate as of the date specified in said notice. If Lessor or a Lender commences the repair or restoration of the Premises within thirty (30) days after the receipt of such notice, this Lease shall continue in full force and effect. "Commence" as used in this Paragraph 9.6 shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever occurs first. 9.7 Termination - Advance Payments. Upon termination of this Lease ------------------------------ pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment made by Lessee to Lessor and so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor under the terms of this Lease. 9.8 Waiver of Statutes. Lessor and Lessee agree that the terms of this ------------------ Lease shall govern the effect of any damage to or destruction of the Premises and the Building with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent it is inconsistent herewith. 10. Real Property Taxes. ------------------- 10.1 Payment of Taxes. Lessor shall pay its share of the Real Property ---------------- Taxes, as defined in Paragraph 10.2, applicable to the Industrial Center, and except as otherwise provided in Paragraph 10.3, any such amounts shall be included in the calculation of Common Area Operating Expenses in accordance with the provisions of Paragraph 4.2. 10.2 Real Property Tax Definition. As used herein, the term "Real ---------------------------- Property Taxes" shall include any form of real estate tax or assessment, general, special, ordinary or extraordinary, and any commercial rental tax, improvement bond or bonds, levy or tax (other than inheritance, personal income, gift, transfer or estate taxes) imposed upon the Industrial Center by any authority having the direct or indirect power to tax, including any city, state or federal government, or any school, agricultural, sanitary, fire, street, drainage, or other improvement district thereof, levied against any legal or equitable interest of Lessor in the Industrial Center or any portion thereof, Lessor's right to rent or other income therefrom. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring, or changes in Applicable Law taking effect, during the term of this Lease, including but not limited to a change in the improvements thereon, the execution of this Lease, or any modification, amendment or transfer thereof, and whether or not contemplated by the Parties. In calculating Real Property Taxes for any calendar year, the Real Property Taxes for any real estate tax year shall be included in the calculation of Real Property Taxes for such calendar year based upon the number of days which such calendar year and tax year have in common. 9.3 Additional Improvements. Common Area Operating Expenses shall not include Real Property Taxes specified in the tax assessor's records and work sheets as being caused by additional improvements placed upon the Industrial Center by other lessees or by Lessor for the exclusive enjoyment of such other lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at the time Common Area Operating Expenses are payable under Paragraph 4.2, Lessee's pro rata of any increase in Real Property Taxes if assessed solely by reason of Alterations, Trade Fixtures or Utility Installations placed upon the Premises by Lessee or at Lessee's request. 10.4 Joint Assessment. If the Building is not separately assessed, Real ---------------- Property Taxes allocated to the Building shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Lessor's reasonable determination thereof, in good faith, shall be conclusive. 10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency all ----------------------- taxes assessed against and levied upon Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee contained in the Premises or stored within the Industrial Center. When possible, Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade Fixtures, furnishings, equipment and all other personal property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within thirty (30) days after receipt of a written statement setting forth the taxes applicable to Lessee's property. 11. Utilities. Lessee shall pay directly for all utilities and services --------- supplied to the Premises, including but not limited to electricity, telephone, security, gas and cleaning of the Premises, together with any taxes thereon. In the event any such utilities or services are not separately metered to the Premises or separately billed to the Premises, Lessee shall pay to Lessor a reasonable proportion to be determined by Lessor of all such charges jointly metered or billed with other premises in the Building, in the manner and within the time periods set forth in Paragraph 4.2(d). 12. Assignment and Subletting. ------------------------- 12.1 Lessor's Consent Required. ------------------------- (a) Lessee shall not voluntarily assign, transfer, mortgage or otherwise transfer or encumber (collectively, 'assign') or sublet all or any part of Lessee's interest in this Lease or in the Premises without Lessor's prior written consent given under and subject to the terms of Paragraph 35. (b) An assignment or subletting of Lessee's interest in this Lease without Lessor's specific prior written consent shall, at Lessor's option, be void. (c) Lessee's remedy for any breach of this Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief. 12.2 Terms and Conditions Applicable to Assignment and Subletting. ------------------------------------------------------------ (a) Regardless of Lessor's consent, any assignment or subletting shall not (i) be effective without the express written assumption by such assignee of the obligations of Lessee under this Lease, (if) release Lessee of any obligations hereunder, nor (iii) alter the primary liability of Lessee for the payment of Base Rent and other sums due Lessor thereunder or for the performance of any other obligations to be performed by Lessee under this Lease. (b) Lessor may accept any rent or performance of Lessee's obligations from any person other than Lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of any rent for performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for the Default or Breach by Lessee of any of the terms, covenants or conditions of this Lease. (c) The consent of Lessor to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting by Lessee or to any subsequent or successive assignment or subletting by the assignee or subleases. (d) In the event of any Default or Breach of Lessee's obligation under this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of the Lessee's obligations under this Lease, including any subleases, without first exhausting Lessor's remedies against any other person or entity responsible therefor to Lessor, or any security held by Lessor. (e) Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or subleases, including but not limited to the intended use and/or required modification of the Premises, if any, together with a non- refundable deposit of $1,000, as reasonable consideration for Lessor's considering and processing the request for consent. Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested by Lessor. (f) Any assignee of, or subleases under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed, for the benefit of Lessor, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee as it applies to the subleased premises during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented in writing. Page 7 of 12 11.3 Additional Terms and Conditions Applicable to Subletting. The -------------------------------------------------------- following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this Lease whether or not expressly incorporated therein: (a) Lessor shall not, by reason of any other assignment of such sublease to Lessor, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Lessor and shall pay such rents and other charges to Lessor without any obligation or right to inquire as to whether such Breach exists and notwithstanding any notice from or claim from Lessee to the contrary. Lessee shall have no right or claim against such sublessee, or, until the Breach has been cured, against Lessor, for any such rents and other charges so paid by said sublessee to Lessor. (b) In the event of a Breach by Lessee in the performance of its obligations under this Lease, Lessor, at its option and without any obligation to do so, may require any sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any other prior defaults or breaches of such sublessor under such sublease. (c) (c)Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Lessor herein. (d) No sublessee under a sublease approved by Lessor shall further assign or sublet all or any part of the Premises without Lessor's prior written consent. (e) Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. 13. Default; Breach; Remedies. ------------------------- 13.1 Default; Breach. A "Default" by Lessee is defined as a failure by --------------- Lessee to observe, comply with or perform any of the terms, covenants, conditions or rules applicable to Lessee under this Lease. A "Breach" by Lessee is defined as the occurrence of any one or more of the following Defaults, and, where a grace period for cure after notice is specified herein, the failure by Lessee to cure such Default prior to the expiration of the applicable grace period, and shall entitle Lessor to pursue the remedies set forth in Paragraphs 13.2 and/or 13.3: (a) The abandonment of the Premises. (b) Except as expressly otherwise provided in this Lease, the failure by Lessee to make any payment of Base Rent, Lessee's Share of Common Area Operating Expenses, or any other monetary payment required to be made by Lessee thereunder as and when due, the failure by Lessee to provide Lessor with reasonable evidence of insurance or surety bond required under this Lease, or the failure of Lessee to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of five (5) days following written notice thereof by or on behalf of Lessor to Lessee. (c) A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 39 hereof that are to be observed, complied with or performed by Lessee, other than those described in Subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice thereof by or on behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (d) The occurrence of any of the following events: (i) the making by Lessee of any general arrangement or assignment for the benefit of creditors; (ii) Lessee's becoming a "debtor' as defined in 11 U.S. Code Section 1 01 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days; provided, however, in the event that any provision of this Subparagraph 13.1(a) is contrary to any applicable law, such provision shall be of no force or effect, and shall not affect the validity of the remaining provisions. (e) The discovery by Lessor that any financial statement of Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially intentionally false. 13.2 Remedies. If Lessee fails to perform any affirmative duty or -------- obligation of Lessee under this Lease, within the time periods set forth above after written notice to Lessee (or in case of an emergency, without notice), Lessor may at its option (but without obligation to do so), perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The reasonable costs and expenses of any such performance by Lessor shall be due and payable by Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its own option, may require all future payments to be made under this Lease by Lessee for the following six (6) months to be made only by cashier's check. In the event of a Breach of this Lease by Lessee (as defined in Paragraph 13.1), with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy which Lessor may have by reason of such Breach, Lessor may: (a) Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease and the term hereof shall terminate and Lessee shall immediately surrender possession of the Premises to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the worth at the time of the award of the unpaid rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District in which the Premises are located at the time of award plus one percent (1 %). Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of this Lease shall not waive Lessor's right to recover damages under this Paragraph 13.2. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding the unpaid rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit for such rent and/or damages. (b) Continue the Lease and Lessee's right to possession in effect (in California under California Civil Code Section 1951.4) after Lessee's Breach and recover the rent as it becomes due, provided Lessee has the right to sublet or assign, subject only to reasonable limitations. Lessor and Lessee agree that the limitations on assignment and subletting in this Lease are reasonable. Acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver to protect the Lessor's interest under this Lease, shall not constitute a termination of the Lessee's right to possession. (c)Pursue any other remedy now or hereafter available to Lessor under the laws or judicial decisions of the state wherein the Premises are located. (d) The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises. 13.3 Late Charges. Lessee hereby acknowledges that late payment by ------------ Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, Page 8 of 12 processing and accounting charges, and late charges which may be imposed upon Lessor by the terms of any ground lease, mortgage or dead of trust covering the Premises. Accordingly, if any installment of rent or other sum due from Lessee shall not be received by Lessor or Lessor's designee within ten (10) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a late charge equal to five percent (5%) of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of late payment by Lessee. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent Lessor from exercising any of the other rights and remedies granted hereunder. 13.4 Breach by Lessor. Lessor shall not be deemed in breach of this Lease ---------------- unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph 13.4, a reasonable time shall in no event be more than thirty (30) days after receipt by Lessor, and by any Lender(s) whose name and address shall have been furnished to Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days after such notice are reasonably required for its performance, then Lessor shall not be in breach of this Lease if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion. 14. Condemnation. If the Premises or any portion thereof are taken under the ------------ power of eminent domain or sold under the threat of the exercise of said power (all of which are herein called '"condemnation"), this Lease shall terminate as to the part so taken as of the date the condemning authority takes title or possession, whichever first occurs. It more than ten percent (10%) of the floor area of the Premises, or more than twenty-five percent (25%) of the portion of the Common Areas designated for Lessee's parking, is taken by condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. It Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Rent shall be reduced by the extent to which Lessee's use of the Premises is diminished. No reduction of Base Rent shall occur if the condemnation does not apply to any portion of the Premises or the parking. Any award for the taking of all or any part of the Premises under the power of eminent domain or any payment made under threat of the exercise of such power shall be the property of Lessor (whether such award shall be made as compensation for diminution of value of the leasehold or for the taking of the fee, or as severance damages) less payment to Lessee for Lessee's relocation expenses and/or loss of Lessee's Trade Fixtures, the unamortized value of any tenant improvements paid for by Tenant and the "bonus value" of this Lease (i.e. the difference between the Rent payable hereunder and the then fair market rental value of the Premises) for the remainder of the Term. In the event that this Lease is not terminated by reason of such condemnation, Lessor shall to the extent of its net severance damages received, over and above Lessee's Share of the legal and other expenses incurred by Lessor in the condemnation matter, repair any damage to the Premises caused by such condemnation authority. 15. Brokers' Fees. ------------- 15.1 Procuring Cause. The Broker(s) named in Paragraph 1.10 is/are the --------------- procuring cause of this Lease. 15.2 Additional Terms. Unless Lessor and Broker(s) have otherwise agreed ---------------- in writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in Paragraph 37.1) granted under this Lease or any Option subsequently granted, or (b) if Lessee acquires any rights to the Premises or other premises in which Lessor has an interest, or (c) if Lessee remains in possession of the Premises with the consent of Lessor after the expiration of the term of this Lease after having failed to exercise an Option, or (d) if said Brokers are the procuring cause of any other lease or sale entered into between the Parties pertaining to the Premises and/or any adjacent property in which Lessor has an interest, or (a) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then as to any of said transactions, Lessor shall pay said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect at the time of the execution of this Lease. 15.3 Assumption of Obligations. Any buyer or transferee of Lessor's ------------------------- interest in this Lease, whether such transfer is by agreement or by operation of law, shall be deemed to have assumed Lessor's obligation under this Paragraph 15. Each Broker shall be an intended third party beneficiary of the provisions of Paragraph 1.10 and of this Paragraph 15 to the extent of its interest in any commission arising from this Lease and may enforce that right directly against Lessor and its successors. 15.4 Representations and Warranties. Lessee and Lessor each represent and ------------------------------ warrant to the other that it has had no dealings with any person, firm, broker or finder other than as named in Paragraph 1.10(a) in connection with the negotiation of this Lease and/or the consummation of the transaction contemplated hereby, and that no broker or other person, firm or entity other than said named Broker(s) is entitled to any commission or finder's fee in connection with said transaction. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, and/or attorneys' fees reasonably incurred with respect thereto. 16. Tenancy and Financial Statements. -------------------------------- 16.1 Tenancy Statement. Each Party (as "Responding Party") shall within ----------------- ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in a form similar to the then most current "Tenancy Statement" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party. 16.2 Financial Statement. If Lessor desires to finance, refinance, or ------------------- sell the Premises or the Building, or any part thereof, Lessee shall deliver to any potential lender or purchaser designated by Lessor such financial statements of Lessee as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth. 17. Lessor's Liability. The term "Lessor" as used herein shall mean the owner ------------------ or owners at the time in question of the fee title to the Premises. In the event of a transfer of Lessor's title or interest in the Premises or in this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor at the time of such transfer or assignment. Except as provided in Paragraph 15.3, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid and the written assumption by such transferee of Lessor's obligations hereunder, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. 18. Severability. The invalidity of any provision of this Lease, as ------------ determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof. 19. Interest on Past-Due Obligations. Any monetary payment due Lessor -------------------------------- hereunder, other than late charges, not received by Lessor within ten (10) days following the date on which it was due, shall bear interest from the date due at the prime rate charged by the largest state chartered bank in the state in which the Premises are located plus two percent (2%) per annum, but not exceeding the maximum rate allowed by law, in addition to the potential late charge provided for in Paragraph 13.3. 20. Time of Essence. Time is of the essence with respect to the performance --------------- of all obligations to be performed or observed by the Parties under this Lease. 21. Rent Defined. All monetary obligations of Lessee to Lessor under the ------------ terms of this Lease are deemed to be rent. 22. No Prior or other Agreements; Broker Disclaimer. This Lease contains all ------------------------------------------------ agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. 23. Notices. ------- 22.1 Notice Requirements. All notices required or permitted by this Lease ------------------- shall be in writing and may be delivered in person (by hand or by messenger or courier service) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, and shall be deemed sufficiently given if served in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be Page 9 of 12 that Party's address for delivery or mailing of notice purposes. Either Party may by written notice to the other specify a different address for notice purposes, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for the purpose of mailing or delivering notices to Lessee. A copy of all notices required or permitted to be given to Lessor hereunder shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate by written notice to Lessee. 23.2 Date of Notice. Any notice sent by registered or certified mail, -------------- return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given three (3) business days after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or overnight courier that guarantees next day delivery shall be deemed given twenty-four (24) hours after delivery of the same to the United States Postal Service or courier. If notice is received on a Saturday or a Sunday or a legal holiday, it shall be deemed received on the next business day. 24. Waivers. No waiver by either party of the Default or Breach of any term, ------- covenant or condition hereof by the other, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by the other of the same or any other term, covenant or condition hereof. Either party's consent to, or approval of, any such act shall not be deemed to render unnecessary the obtaining of such party's consent to, or approval of, any subsequent or similar act by the other, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. Regardless of Lessor's knowledge of a Default or Breach at the time of accepting rent, the acceptance of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of any provision hereof. Any payment given Lessor by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment. 25. Recording. Either Lessor or Lessee shall, upon request of the other, --------- execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees or taxes applicable thereto. 26. No Right To Holdover. Lessee has no right to retain possession of the -------------------- Premises or any part thereof beyond the expiration or earlier termination of this Lease. In the event that Lessee holds over in violation of this Paragraph 26 then the Base Rent payable from and after the time of the expiration or earlier termination of this Lease shall be increased to one hundred twenty-five percent (125%) of the Base Rent applicable during the month immediately preceding such expiration or earlier termination. Nothing contained herein shall be construed as a consent by Lessor to any holding over by Lessee. 27. Cumulative Remedies. No remedy or election hereunder shall be deemed ------------------- exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity. 28. Binding Effect; Choice of Law. This Lease shall be binding upon the ----------------------------- Parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located. 29. Subordination; Attornment; Non-Disturbance. 29.1 Subordination. This Lease and any Option granted hereby shall be ------------- subject and subordinate to any ground lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed by Lessor upon the real property of which the Premises are a part, to any and all advances made on the security thereof, and to all renewals, modifications, consolidations, replacements and extensions thereof. Lessee agrees that the Lenders holding any such Security Device shall have no duty, liability or obligation to perform any of the obligations of Lessor under this Lease, but that in the event of Lessor's default with respect to any such obligation, Lessee will give any Lender whose name and address have been furnished Lessee in writing for such purpose notice of Lessor's default pursuant to Paragraph 13.5. It any Lender shall elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device and shall give written notice thereof to Lessee, this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof. 29.2 Attornment. Subject to the non-disturbance provisions of Paragraph ---------- 29.3, Lessee agrees to attorn to a Lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior lessor or with respect to events occurring prior to acquisition of ownership except for ongoing defaults (such as a continuing failure to repair and maintain the Premises), (ii) be subject to any offsets or defenses which Lessee might have against any prior lessor, or (iii) be bound by prepayment of more than one month's rent- 29.3 Non-Disturbance. With respect to Security Devices entered into by --------------- Lessor after the execution of this lease, Lessee's subordination of this Lease shall be subject to receiving assurance (a 'non-disturbance agreement") from the Lender that Lessee's possession and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. 28.4 Self-Executing. The agreements contained in this Paragraph 29 shall -------------- be effective without the execution of any further documents; provided, however, that upon written request from Lessor or a Lender in connection with a sale, financing or refinancing of Premises, Lessee and Lessor shall execute such further writings, in a commercially reasonable form, as may be reasonably required to separately document any such subordination or non-subordination, attainment and/or non-disturbance agreement as is provided for herein. 30. Attorneys' Fees. If any Party or Broker brings an action or proceeding to --------------- enforce the terms hereof or declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fee award shall not be computed in accordance with any court fee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall be entitled to attorneys'' fees, costs and expenses incurred in preparation and service of notices of Default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach. Broker(s) shall be intended third party beneficiaries of this Paragraph 30. 31. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's agents ------------------------------------------ shall have the right to enter the Premises at any time, in the case of an emergency, and otherwise at reasonable times upon (1) business day's notice to Lessee for the purpose of showing the same to prospective purchasers, lenders, or, in the last six (6) months of the Term, lessees, and making such alterations, repairs, improvements or additions to the Premises or to the Building, as Lessor may reasonably deem necessary. Lessor may at any time place on or about the Premises or Building any ordinary "For Sale' signs and Lessor may at any time during the last one hundred eighty (180) days of the term hereof place on or about the Premises any ordinary 'For Lease' signs. All such activities of Lessor shall be without abatement of rent or liability to Lessee. 32. Auctions. Lessee shall not conduct, nor permit to be conducted, either -------- voluntarily or involuntarily, any auction upon the Premises without first having obtained Lessor's prior written consent. Notwithstanding anything to the contrary in this Lease, Lessor shall not be obligated to exercise any standard of reasonableness in determining whether to grant such consent. 33. Signs. Lessee shall not place any sign upon the exterior of the Premises ----- or the Building, except that Lessee may, with Lessor's prior written consent, install (but not on the roof) such signs as are reasonably required to advertise Lessee's own business so long as such signs are in a location reasonably designated by Lessor and comply with Applicable Requirements and the signage criteria established for the Industrial Center by Lessor. The installation of any sign on the Premises by or for Lessee shall be subject to the provisions of Paragraph 7 (Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations). 34. Termination; Merger. Unless specifically stated otherwise in writing by ------------------- Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, Lessor shall, in the event of any such surrender, termination or cancellation, have the option to continue any one or all of any existing subtenancies. Lessor's failure within ten (10) days following any such event to make a written election to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest. Page 10 of 12 35. Consents. -------- (a) Except for Paragraph 32 hereof (Auctions) or as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to attorneys' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent pertaining to this Lease or the Premises, including but not limited to consents to an assignment a subletting shall be paid by Lessee to Lessor upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment of this Lease or subletting of the Premises by Lessee shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. (b) All conditions to Lessor's consent authorized by this Lease are acknowledged by Lessee as being reasonable. The failure to specify herein any particular condition to Lessor's consent shall not preclude the impositions by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. 36. Quiet Possession. Upon payment by Lessee of the rent for the Premises and ---------------- the performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease, Lessee shall have quiet possession of the Premises for the entire term hereof subject to all of the provisions of this Lease. 37. Options. ------- 37.1 Definition. As used in this Lease, the word "Option" has the ---------- following meaning: (a) the right to extend the term of this Lease or to renew this Lease or to extend or renew any lease that Lessee has on other property of Lessor; (b) the right of first refusal to lease the Premises or the right of first offer to lease the Premises or the right of first refusal to lease other property of Lessor or the right of first offer to lease other property of Lessor; (c) the right to purchase the Premises or the right of first refusal to purchase the Premises, or the right of first offer to purchase the Premises, or the right to purchase other property of Lessor, or the right of first refusal to purchase other property of Lessor, or the right of first offer to purchase other property of Lessor. 36.2 Options Personal to Original Lessee. The Options, if any, herein granted to Lessee are not assignable, apart from an assignment of this Lease, and no Option may be separated from this Lease in any manner, by reservation or otherwise. 37.3 Multiple Options. In the event that Lessee has any multiple Options ---------------- to extend or renew this Lease, a later option cannot be exercised unless the prior Options to extend or renew this Lease have been validly exercised. 38. Effect of Default on Options. ---------------------------- (a) Lessee shall have no right to exercise an Option, notwithstanding any provision in the grant of Option to the contrary: (i) during the period commencing with the giving of any notice of Default under Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during the period of time any monetary obligation due Lessor from Lessee is unpaid (without regard to whether notice thereof is given Lessee), or (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three (3) or more notices of separate monetary Defaults under Paragraph 13.1 during the twelve (I 2) month period immediately preceding the exercise of the Option, whether or not the Defaults are cured. (b) The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a) 39. Rules and Regulations. Lessee agrees that it will abide by, and keep and --------------------- observe all reasonable rules and regulations ('Rules and Regulations') which Lessor may make from time to time for the management, safety, care, and cleanliness of the grounds, the parking and unloading of vehicles and the preservation of good order, as well as for the convenience of other occupants or tenants of the Building and the Industrial Center and their invitees. 40. Security Measures. Lessee hereby acknowledges that the rental payable to ----------------- Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties. 41. Reservations. Lessor reserves the right, from time to time, to grant, ------------ without the consent or joiner of Lessee, such easements, rights of way, utility raceways, and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights of way, utility raceways, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions. 42. Performance Under Protest. It at any time a dispute shall arise as to any ------------------------- amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment 'under protest' and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay under the provisions of this Lease. 43. Authority. If either Party hereto is a corporation, trust, or general or --------- limited partnership, such entity represents and warrants that each individual executing this Lease on behalf of such entity is duly authorized to execute and deliver this Lease on its behalf. 44. Conflict. Any conflict between the printed provisions of this Lease and -------- the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions. 45. Offer. Preparation of this Lease by either Lessor or Lessee or Lessor's ----- agent or Lessee's agent and submission of same to Lessee or Lessor shall not be deemed an offer to lease. This Lease is not intended to be binding until executed and delivered by all Parties hereto. 46. Amendments. This Lease may be modified only in writing, signed by the ---------- parties in interest at the time of the modification. The Parties shall amend this Lease from time to time to reflect any adjustments that are made to the Base Rent or other rent payable under this Lease. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by an institutional insurance company or pension plan Lender in connection with the obtaining of normal financing or refinancing of the property of which the Premises are a part. 47. Multiple Parties. Except as otherwise expressly provided herein, if more ---------------- than one person or entity is named herein as either Lessor or Lessee, the obligations of such multiple parties shall be the joint and several responsibility of all persons or entities named herein as such Lessor or Lessee. LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES. IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED. The parties hereto have executed this Lease at the place and on the dates specified above their respective signatures. Page 11 of 12 Executed at: Executed at ---------------------- ------------------------ on: on: ------------------------------- ------------------------------ By LESSOR: CSS Properties II, LLC By LESSEE: Spectrian Corporation ------------------------ ------------------------- By: By: ------------------------------- ------------------------------- Name Printed: Sammy F. Cemo Name Printed: ---------------------- --------------------- Page 12 of 12 EXHIBIT A --------- IMPROVEMENT AGREEMENT This Improvement Agreement ("Agreement") is dated for reference purposes only as of December __, 2000 and is made by and between CSS PROPERTIES, II, L.L.C. ("Lessor") and SPECTRIAN CORPORATION ("Lessee") in connection with that certain Lease ("Lease") of even date herewith between Lessor and Lessee affecting certain real property commonly known as Glenn Drive, in the City of Folsom, County of Sacramento, State of California. Lessor and Lessee hereby agree as follows: 1. DEFINITIONS: Throughout this Agreement, the following terms shall have ----------- the following meanings: A. Architect: The term "Lessor's Architect" shall mean Michael --------- Riedinger (Building Shell) and the term "Lessee's Architect" shall mean Stafford Space Planning (Interior Improvements). B. Building: The term "Building" shall mean the Building Shell and -------- the Interior Improvements. C. Building Plans: The term "Building Plans" shall mean the Building -------------- Shell Plans and Final Interior Improvement Plans, as the same may be modified from time to time by change orders issued and approved by the parties in accordance with this Agreement. D. Building Shell: The term "Building Shell" shall mean (i) a -------------- concrete tilt-up one (1) story building containing approximately thirteen thousand three hundred eighty (13,380) square feet of floor space (measured from the exterior of the walls, doors and windows and, if recessed, to the drip line), which shall be constructed by Lessor for Lessee strictly in accordance with the Building Shell Plans, as defined in Section 1.E, (ii) all parking areas, driveways, sidewalks, utility installations, exterior lighting, decorative water facilities, irrigation systems, landscaping, and other outside area improvements specified on the Building Plans; and (iii) all other on-site and off-site improvements required by any governmental agency as a condition of its issuance of any approval for construction of the Building Shell or the Interior Improvements (including road widening, resurfacing and striping, signalization, sidewalks, curbs, lighting and other improvements). E. Building Shell Plans: The term "Building Shell Plans" shall mean -------------------- those plans and specifications for the Building Shell prepared by Michael Riedinger, dated April 3, 2000, consisting of pages 1-24. F. Final Interior Improvement Plans: The term "Final Interior -------------------------------- Improvement Plans" shall mean those plans, specifications, and working drawings for the Interior Improvements prepared by Lessee and approved by the parties in accordance with this Agreement. G. General Contractor: The term "General Contractor" shall mean the ------------------ general contractor selected by Lessor subject to Lessee's approval as set forth in Section 3.A hereof and retained by Lessor to construct the Building Shell and the Interior Improvements pursuant to this Agreement. H. Interior Improvements: The term "Interior Improvements" shall --------------------- mean all partitions, windows, interior non-load-bearing walls, wall coverings, HVAC equipment, lighting, finished ceilings, interior utility fixtures, telephone and data cabling and wiring, electrical runs and other improvements and fixtures installed in the Building Shell to the extent that such improvements and fixtures are specified on the Final Interior Improvement Plans. I. Interior Improvement Costs: The term "Interior Improvement Costs" -------------------------- shall mean the sum of the following: (1) payments to the General Contractor and its subcontractors for labor and materials furnished pursuant to any construction contract for construction of the Interior Improvements, which is entered into by Lessor and approved by Lessee in accordance with this Agreement; (2) reasonable fees paid to architects, engineers and other construction professionals (other than employees of Lessor) for services required in connection with the design and construction of the Interior Improvements; (3) fees paid by Lessee to architects, space planners, designers, inspectors and other construction professionals; (4) utility connection charges incurred by Lessee; (5) permit and license fees paid by Lessee for use and occupancy permits required for Lessee to occupy the Premises; and (6) the amounts paid to governmental authorities or agencies for inspections and issuance of building permits and approvals for the Interior Improvements (but not that portion of such amounts applicable to, or based on the value of, the Building Shell). In no event shall Interior Improvement Costs include (i) charges and expenses for changes to the Building Plans which have not been approved by Lessee; (ii) wages, labor and overhead for overtime and premium time; (iii) additional costs and expenses incurred by Lessor on account of any contractor's or subcontractor's default or construction defects; (iv) principal, interest and fees for construction and permanent financing; (v) offsite management or other general overhead costs incurred by Lessor; (vi) bond premiums; (vii) costs for which Lessor has a right of reimbursement from others (including, without limitation, insurers and warrantors); (viii) the cost of bringing the Building and the Premises into compliance with applicable building codes, environmental laws, and other statutes, laws, rules and regulations; (ix) restoration costs in excess of insurance proceeds as a consequence of casualties; (x) penalties and late charges attributable to Lessor's failure to pay other Interior Improvement Costs; and (xi) attorneys', experts' and other fees and costs in connection with contracts and disputes; all of which shall be the sole obligation of Lessor. Trade fixtures of Lessee shall not be included in the Interior Improvement Costs but shall be the obligation of the Lessee. J. Preliminary Interior Improvement Plans: The term "Preliminary -------------------------------------- Interior Improvement Plans" shall mean those plans and specifications for the Interior Improvements prepared and approved by the parties in accordance with this Agreement. - 2 - K. Substantial Completion: The terms "Substantial Completion" (and ---------------------- "Substantially Completed") shall mean that (i) all necessary governmental approvals for occupancy of the Building for Lessee's Intended Use have been obtained (including a final "sign-off" and, if applicable, a certificate of occupancy); (ii) Lessee has had five (5) days to install its Trade Fixtures in the Building; (iii) prior to the General Contractor's installation of sheet rock or other similar construction material or of General Contractor's closing- up the walls, Lessor has provided Lessee with access to the phone and electrical rooms, as well as a commercially reasonable amount of time, to install Lessee's data and telecommunications wiring and cable; (iv) all utilities are hooked up and available for use; (v) the Lessor's Architect has certified that the Building has been constructed in accordance with the Building Plans; (vi) all incomplete or defective construction, which interferes with Lessee's use of the Building, has been remedied and repaired; and (vii) Lessor has delivered possession of the Building to Lessee. L. Lessee's Contribution: The term "Lessee's Contribution" is --------------------- defined in paragraph 5A. 2. BUILDING PLANS: -------------- A. Building Shell Plans: Lessor has provided Lessee with a complete -------------------- set of the Building Shell Plans. B. Preliminary Plans For Interior Improvements: Lessor hereby ------------------------------------------- approves of Lessee's space plan dated November 15, 2000, prepared by Stafford Space Planning. On or before December 13, 2000 Lessee shall cause to be prepared and delivered to Lessor fully engineered construction drawings for the construction of the Interior Improvements for Lessor's approval, which approval shall not be unreasonably withheld. If Lessor fails to approve or disapprove the proposed final plans within five (5) days following delivery of the final plans to Lessor, the final plans proposed by Lessee shall be deemed to be the approved Final Interior Improvement Plans for the purposes of this Agreement. If Lessor disapproves the proposed final plans in any respect, it shall deliver to Lessee its written proposal for required changes and the parties shall negotiate in good faith to reach agreement on the final plans. C. Application For Approvals: Lessor shall use its best efforts to ------------------------- obtain all governmental approvals and permits necessary for construction of the Building in accordance with Building Plans. D. Termination: If the parties are unable to agree upon the Final ----------- Interior Improvement Plans on or before January 15, 2001, or if all permits required for construction of the Building have not been issued on or before March 1, 2001, then Lessee, in its sole discretion, may terminate this Agreement and the Lease by giving Lessor written notice. E. Changes to Building Plans after Final Approval: Neither party ---------------------------------------------- shall have the right to require extra work or make any modifications with respect to the construction of the Building, without the prior written consent of the other party as to any change, provided, however, that Lessor shall have the right to make changes to the Building Shell Plans, so long as the cost of - 3 - implementing each such change shall not exceed $2500 individually and so long as the aggregate cost of all such changes made to the Building Shell Plans shall not exceed $10,000. Lessor shall promptly provide Lessee with copies of any such changes made to the Building Shell Plans. Notwithstanding the foregoing, Lessor shall have no right to make any changes to the Building Shell Plans that could have a material adverse effect on the Building, including, without limitation, the structural integrity of the Building, the fire and life safety systems and all other operating systems and utility installations in the Building without first obtaining Lessee's written consent. The parties shall confer and negotiate in good faith to reach agreement on such requested changes. 3. CONSTRUCTION CONTRACT: --------------------- A. Selection of General Contractor: Lessor shall cause at least ------------------------------- three (3) general contractors to bid for construction of the Interior Improvements. All bids shall be opened simultaneously. Lessor may select the "General Contractor" to construct the Building; provided that Lessee approves Lessor's selection, which approval shall not be unreasonably withheld. Notwithstanding Lessee's right to approve the General Contractor, the General Contractor shall be the contractor only of Lessor, and Lessee shall have no liability to the General Contractor under any construction contract or otherwise with respect to the Building. 4. COMMENCEMENT AND COMPLETION OF BUILDING: --------------------------------------- A. Lessor's Obligation to Construct the Building: As soon as the --------------------------------------------- Building Plans have been approved, all necessary governmental approvals and permits have been obtained, and the bids have been accepted, Lessor shall cause construction of the Building Shell and the Interior Improvements to be commenced and diligently prosecuted to completion, so that the Building will be Substantially Complete by April 1, 2001. B. Delivery of Possession: When the Building is Substantially ---------------------- Complete, Lessor shall deliver possession of the Building to Lessee. However, Lessee shall have no obligation to accept possession of the Building or commence payment of rent until the later of (i) the date the Building is Substantially Complete, or (ii) April 1, 2001, provided, however, that Lessor is providing Lessee with one (1) month's free rent pursuant to the terms of the Lease. 5. PAYMENT OF CONSTRUCTION COSTS: ----------------------------- A. Lessee's Contribution to Interior Improvement Costs: (1) Lessor shall pay and be solely responsible for all costs to design, construct and develop the Building Shell. Lessee's only obligation to pay any cost of constructing the Building shall be limited to the positive difference, if any, between the total Interior Improvement Costs and the Interior Improvement Allowance, such difference being referred to herein as the "Lessee's Contribution." The parties acknowledge that Lessee shall have no obligation to pay any cost of constructing any portion of the Building in excess of the Lessee's Contribution. Lessee shall pay the Lessee's Contribution as follows: (a) Lessor shall cause the Lessor's Architect and the General Contractor both to certify to Lessee when construction of the Interior Improvements is - 4 - twenty-five percent (25%) complete, fifty percent (50%) complete, and seventy- five (75%) complete. Lessee shall pay Lessor within fifteen (15) days after Lessee has received such certifications from both the Lessor's Architect and the General Contractor in each instance, twenty-five percent (25%) of the aggregate Lessee's Contribution, which shall be calculated based upon the Interior Improvement Costs. Within thirty (30) days after the Interior Improvements are Substantially Complete and the amount of all Interior Improvement Costs have been finally determined as provided below, Lessee shall pay Lessor any portion of the Lessee's Contribution that remains due and unpaid. Failure of Lessee to make timely payments to Lessor as provided herein and under applicable notice and cure provisions of the Lease shall constitute a default under the Lease, and in such event, Lessor shall be entitled to enforce all of its rights and remedies under the Lease. (2) As soon as possible after commencement of the Lease, Lessee shall designate as Lessee's property Interior Improvements having a cost approximately equal to the Lessee's Contribution. Property designated as Lessee's property under the terms of this paragraph shall constitute Lessee's property for purposes of the Lease, and Lessee shall be entitled to all investment tax credit, depreciation, and other tax attributes relating to such property. At the expiration or sooner termination of the Lease, all Interior Improvements not designated as Lessee's property under this paragraph shall be surrendered to Lessor in accordance with the terms of the Lease. (3) When the Interior Improvements are Substantially Completed, Lessor shall submit to Lessee a final and detailed accounting of all Building Shell and Interior Improvement Costs paid by Lessor, certified to be true and correct by Lessor's financial officers. Lessee may audit the books, records, and supporting documents of Lessor to the extent necessary to determine the accuracy of such accounting during normal business hours after giving Lessor at least forty-eight (48) hours written notice. Lessee shall bear the cost of such audit, unless such audit discloses that Lessor has overstated the total costs by more than two percent (2%) of the actual amount of such costs, in which event Lessor shall pay the costs of Lessee's audit. Lessor shall promptly refund any overpayments to Lessee. B. Financing of Building: If Lessor has not closed a commitment for --------------------- financing sufficient to complete construction of the Building as provided in this Agreement and delivered a copy of such financing documents to Lessee by February 15, 2001, or, if such commitment has not closed such that Lessor can provide Lessee with such documents, Lessor has, in lieu of such documents, provided Lessee, by February 15, 2001, with financial documentation, in a form acceptable to Lessee, which evidences the ability of Lessor to finance the Building Shell and Interior Improvement work, then in such event Lessee may terminate this Agreement and the Lease by giving Lessor written notice. 6. LESSEE'S RIGHT TO ENTER: Lessee, and its authorized representatives, ----------------------- shall have the right to enter the Building at all reasonable times for the purpose of inspecting the progress of construction of the Building Shell and the Interior Improvements. The General Contractor shall give Lessee at least sixty (60) days prior written notice of its estimated date for Substantial Completion of - 5 - the Building, so that Lessee may cause its fixtures and equipment to be ordered. When construction of the Building has proceeded to the point where Lessee's work of installing its fixtures and equipment in the Building can be commenced in accordance with good construction practice, the General Contractor also shall notify Lessee to that effect. 7. CONSTRUCTION WARRANTY FOR THE BUILDING: Notwithstanding anything to -------------------------------------- the contrary in the Lease, effective upon delivery of the Building to Lessee, Lessor does hereby warrant (i) that the Building Shell and the Interior Improvements were constructed in accordance with all Applicable Laws, as defined in the Lease, including all applicable covenants, conditions or restrictions and the rules, regulations, codes, statutes, ordinances, and laws of all governmental and quasi-governmental authorities having jurisdiction over the Building, (ii) that the Building Shell and Interior Improvements were constructed in accordance with the Building Plans and in a good and workmanlike manner; (iii) that all material and equipment installed in the Building conformed to the Building Plans, was new and otherwise of good quality and was installed in accordance with all vendor's and manufacturer's specifications, instructions and requirements; and (iv) that all material and equipment installed in the Building has been paid for and is free of liens, security interests or chattel mortgages. All construction, product and equipment warranties and guarantees obtained by Lessor shall, to the extent obtainable, provide that such warranties and guarantees shall also run to the benefit of Lessee and its successors and assigns. Lessee shall have the benefit of any construction, product and equipment warranties and guarantees in favor of Lessor that would assist Lessee in correcting defects and in discharging any of Lessee's obligations regarding the repair and maintenance of the Premises. Upon written request by Lessee, Lessor shall inform Lessee of all written construction, product and equipment warranties and guarantees in favor of Lessor which affect the Building. Lessor shall cooperate with Lessee in enforcing such warranties and guarantees and in bringing any suit that may be necessary to enforce liability (i) at Lessor's sole expense with regard to any defect for which Lessor is responsible under this paragraph 7 or under the Lease, and (ii) also with regard to any defect for which Lessor is not responsible under this paragraph 7 or under this Lease so long as Lessee pays all costs reasonably incurred by Lessor in doing so. Notwithstanding anything to the contrary contained in the Lease or this Agreement, Lessee's acceptance of the Building shall not be deemed a waiver of the foregoing warranty, and Lessor shall promptly repair all violations of the warranty set forth in this paragraph at its sole cost and expense. 8. DELIVERY OF POSSESSION, PUNCH LIST AND ACCEPTANCE AGREEMENT: As soon ----------------------------------------------------------- as the Building is Substantially Completed and Lessor has given Lessee reasonable prior written notice of the time and date therefor, Lessor and Lessee shall together walk through the Premises and inspect all of the Building. After such inspection has been completed, each party shall sign an acceptance agreement, which shall (i) include a list of all "punch list" items which the parties agree are to be corrected by Lessor and (ii) shall state the Commencement Date. Lessor shall use reasonable efforts to complete and/or repair such "punch list" items within thirty (30) days after executing the acceptance agreement. The parties' preparation of such a "punch list" and execution of an acceptance agreement shall not, however, be deemed an acceptance by Lessee of the Building as complete or free from defects and shall not in any way affect Lessor's warranty obligations under this Agreement. - 6 - 9. DELIVERY OF DOCUMENTS: Lessor shall deliver to Lessee (i) within --------------------- thirty (30) days after the same is obtained by Lessor, any temporary or permanent certificates of occupancy issued by the City of Folsom with respect to any of the Building; (ii) within sixty (60) days after Substantial Completion of the Building, a complete "as-built" set of Mylar reproducible Building Plans reflecting all approved changes in the work; and (iii) within thirty (30) days after Substantial Completion of the Building, complete maintenance and operating manuals for all the equipment, fixtures and systems that are part of the Building. 10. RISK OF LOSS: Risk of loss of the Building prior to the Commencement ------------ Date of the Lease shall be borne by Lessor. At all times prior to the Commencement Date of the Lease, Lessor at its sole cost and expense shall maintain so-called contingent liability and broad form "builder's risk" insurance with coverage in an amount equal to the replacement cost of the Building Shell plus the Interior Improvement Costs. The insurance policy (i) shall be in a form reasonably satisfactory to Lessee, (ii) shall be carried with a company reasonably acceptable to Lessee, (iii) shall provide that such policy shall not be subject to cancellation or change except after at least ten (10) days prior written notice to Lessee, and (iv) shall contain a "cross liability" provision insuring Lessor and Lessee against any loss caused by the negligence of the other party. Lessee shall be designated as a named insured on said insurance policy and the "deductible" thereunder shall not exceed Ten Thousand Dollars ($10,000). If the Building is damaged or destroyed prior to the Commencement Date of the Lease, Lessee shall have the right to terminate the Lease, if the Building, in the reasonable opinion of the Lessor's Architect, cannot be Substantially Complete prior to May 1, 2001. If the Lease is so terminated, Lessee shall be entitled to that amount of the builder's risk insurance proceeds equal to the amount, if any, paid by Lessee for construction of the Interior Improvements prior to the termination date. If the Building is damaged or destroyed and the Lease is not terminated pursuant to the terms of the Lease or this Agreement, Lessor shall promptly and diligently complete construction of the Building in accordance with this Agreement and all insurance proceeds with respect to the loss shall be paid to the contractors completing the Building as the work progresses in accordance with customary institutional lending practices. 11. RIGHTS UPON TERMINATION: If the Lease is terminated pursuant to any ----------------------- provision of this Agreement, then in addition to all other amounts due Lessee hereunder, all security deposits, prepaid rent, and other monies paid by Lessee under the terms of the Lease or this Agreement (including, without limitation, the Lessee's Contribution) shall be returned to Lessee upon demand and, thereupon, neither party shall have any further rights or obligations under the terms of the Lease or this Agreement. 12. MISCELLANEOUS: Time is of the essence of this Agreement. This ------------- Agreement is the result of negotiations among and has been reviewed by all parties. Accordingly, this Agreement shall be deemed to be the product of both parties hereto, and no ambiguity shall be construed in favor of or against either party. This Agreement may not be modified or amended, nor may any provision hereof be waived, except in a writing signed by the parties to this Agreement. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. The captions used in this Agreement are for convenience only and shall not be considered in interpreting this Agreement. All - 7 - capitalized terms used, but not defined, in this Agreement shall have the meanings ascribed to them in the Lease. In the event of any conflict between the terms of this Agreement and the Lease, this Agreement shall prevail. - 8 - IN WITNESS WHEREOF, the parties hereto have executed this Agreement intending to be bound thereby. LESSOR: LESSEE: - - ------ ------ CSS PROPERTIES II, L.L.C. SPECTRIAN CORPORATION By: By: ------------------------------ ----------------------------- Title: Title: ---------------------------- -------------------------- By: By: ------------------------------ ----------------------------- Title: Title: ---------------------------- -------------------------- - 9 - FIRST ADDENDUM TO THAT CERTAIN LEASE DATED OCTOBER 13, 2000 BY AND BETWEEN CSS PROPERTIES II, LLC, AS LANDLORD SPECTRIAN, AS TENANT 50. RENT ---- Rent shall be on a "triple-net" basis. LEASE PERIOD COSTS MONTHLY RENT ESTIMATED TRIPLE-NET ------------------- ------------ ------------------- Apr 1, 2001 - Apr 30, 2001 Abated Abated May 1, 2001 - Apr 30, 2002 $17,394.00 $ .22 per SF May 1, 2002 - Apr 30, 2003 $17,742.00 May 1, 2003 - Apr 30, 2004 $18,097.00 May 1, 2004 - Apr 30, 2005 $18,459.00 May 1, 2005 - Apr 30, 2006 $18,828.00 May 1, 2006 - Apr 30, 2007 $19,204.00 May 1, 2007 - Apr 30, 2008 $19,589.00 51. TRIPLE-NET COSTS ---------------- Triple-Net costs are estimated to initially be approximately $.22 per square foot per month ($2,943.60 for the 13,380 square feet). These costs are paid monthly in addition to the rent above. 52. TENANT IMPROVEMENTS ------------------- Tenant Improvement Allowance will be $28.00 per square foot. Square footage, to be measured by Architect, shall be measured from the outside of the outside walls (drip line) and to the middle of interior demising walls that divide Tenant from other building tenants. The allowance shall be used for architect/engineering, governmental fees, HVAC units and construction of interior improvements. Any above standard improvements in lighting, HVAC zoning and electrical distribution will be included in the Tenant Improvement Allowance. Any costs exceeding this amount shall be paid by Lessee within 30 calendar days after billing by Lessor. 53. TENANT IMPROVEMENT PLANNING AND CONSTRUCTION -------------------------------------------- See Exhibit A. Construction management services will be provided at no ---------- cost to the Tenant. 54. ELECTRICAL ---------- The Building shell includes 800AMP, 277/480 volt power. 55. PHONE AND LAN ROOMS ------------------- Landlord shall provide access to the phone and electrical rooms to pull cable thirty (30) days prior to lease commencement. 56. OPTION TO RENEW --------------- Provided that Lessee is not then in default in the performance of the lease beyond applicable notice and cure periods, Lessee shall have the option to renew this lease for two - five year periods, with all other items and conditions of the Lease applicable during the option period (the "Extension Option"). Each option can be exercised: (i) at the lesser of 95% of the then current fair market monthly rent ("Market Rent") for the Premises as of the commencement date of the applicable extended term, as determined by the agreement of the parties, or if the parties cannot agree within sixty (60) days prior to the commencement of such extended term, then by appraisal pursuant to Paragraph 56 of the Second Addendum to Standard Industrial/Commercial Net Lease or (ii) a continuation of existing terms with two (2%) percent annual increases. The Market Rent shall not include the value of any improvements or alterations paid for by Lessee and installed after the Commencement Date. To exercise this option, Lessee must notify Lessor, in writing no later than six (6) months prior to end of lease term. If Lessee does not so timely notify Lessor, the option to renew is canceled and, subject to Paragraph 57 below, Lessee shall vacate the subject space by April 30, 2007. 57. HOLD OVER EXTENSION OPTION -------------------------- Tenant shall have the option to extend the primary term for six (6) one month periods with a four (4) month notice in writing for each one (1) month period at a rate of one hundred and twenty five (125%) percent of the Base Rent of the last year of the lease. 58. ANTENNA/MICROWAVE/SATELITE DISH -------------------------------- Tenant may install a dish (not to exceed 24" in diameter) on the rooftop at the Tenant's expense and with the City approval if needed. Tenant shall be responsible for returning roof to original condition upon termination of lease. 1 of 2 59. BROKER ------ Sammy F. Cemo is the owner of the brokerage firm Cemo-Commercial, Inc. and also is a partner in the Glenn Drive Technology Park project. 58. PAYMENTS -------- Payments are to be made payable to: CSS Properties II, LLC/Glen Drive Property Mgmt and mailed c/o Cemo Commercial 4962 Robert J. Mathews Pkwy El Dorado Hills, CA 95762 Landlord: CSS Properties II, LLC Tenant: Spectrian ---------------------- -------------------------- By: By: ------------------------- -------------------------- Print: Sammy F. Cemo Print: ------------------------- -------------------------- Date: Date: ------------------------- -------------------------- 2 of 2 SECOND ADDENDUM TO STANDARD INDUSTRIAL/ COMMERCIAL NET LEASE -------------------- THIS SECOND ADDENDUM TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE (this "Addendum") is made by and between CSS Properties II, L.L.C. ("Lessor") and Spectrian Corporation ("Lessee"), to be a part of that certain Lease of even date herewith between Lessor and Lessee concerning premises located at Glenn Drive, Folsom, California (the "Premises"), as amended by the First Addendum to Lease between Lessor and Lessee of even date (such Lease, as amended by the First Addendum, being referred to as the "Lease"). All terms with initial capital letters used herein as defined terms shall have the meanings ascribed to them in the Lease unless specifically defined herein. Lessor and Lessee agree that, notwithstanding anything to the contrary in the Lease, the Lease is hereby modified and supplemented as set forth below. 1.3 Term. The Lease shall commence (the "Commencement Date") on the later ---- of (a) April 1, 2001; or (b) the date by which all of the following have occurred: (i) Lessor has substantially completed the work that is the subject of the Improvement Agreement; (ii) Lessor has delivered legal possession of the Premises to Lessee in the required condition; and (iii) Lessor has obtained all approvals and permits from the appropriate governmental authorities required for the legal occupancy of the Premises for the Permitted Use. The Lease shall be signed by all parties on or before December 5, 2000. In the event the Premises cannot be delivered as described above by May 1, 2000, Tenant shall be entitled to one (1) day free rent for each day late. For each day that this Lease is executed by Lessee after December 1, 2000, the penalty start date will adjust accordingly. If (i) Lessor has not received, by March 1, 2001, a building permit from the City of Folsom for the improvement work; or (iii) Lessor has not commenced construction of the improvement work by April 15, 2001, then, in addition to Lessee's other rights or remedies, Lessee may terminate the Lease by written notice to Lessor, whereupon any monies previously paid by Lessee to Lessor shall be reimbursed to Lessee. Lessor shall deliver possession of the Premises to Lessee in good, vacant, broom clean condition, with all building systems in good working order and in compliance with all laws. 2.10 Common Areas, Reservations. Lessor shall not (a) modify the Common -------------------------- Areas, (b) grant any easements, rights of way, utility raceways or dedications, or (c) record any Parcel Maps or restrictions, if such actions would unreasonably interfere with Lessee's use of the Premises or parking rights or increase the obligations or decrease the rights of Lessee under the Lease. In taking such actions, Lessor shall at all times use its best efforts to minimize any disruption to Lessee. 4.2 (a) Common Area Operating Expenses. "Common Area Operating Expenses" ------------------------------ shall not include and Lessee shall in no event have any obligation to perform or to pay directly, or to reimburse Lessor for, all or any portion of the following repairs, maintenance, improvements, replacements, premiums, claims, losses, fees, charges, costs and expenses (collectively, "Costs"): (a) Costs occasioned by the act, omission or violation of any Applicable Law by Lessor, any other occupant of the Industrial Center, or their respective agents, employees or contractors; (b) Costs occasioned by casualties or by the exercise of the power of eminent domain; (c) Costs to correct any construction defect in the Industrial Center or to comply with any Applicable Law applicable to the Industrial Center on the Commencement Date; (d) Costs of any improvement or redecorating of any portion of the Industrial Center not made available for Lessee's use; (e) Costs incurred in connection with negotiations or disputes with any other occupant of the Industrial Center and Costs arising from the violation by Lessor or any other occupant of the Industrial Center of the terms and conditions of any lease or other agreement; (f) Costs of earthquake, flood or pollution insurance, insurance deductibles in excess of $10,000 per occurrence, and co-insurance payments; (g) Costs incurred in connection with the presence of any Hazardous Substances, except to the extent caused by the release or emission of the Hazardous Substance in question by Lessee; (h) Costs which could properly be capitalized under generally accepted accounting principles; (i) Costs relating to the repair, maintenance and replacement of the structural elements of the Industrial Center; (j) interest, charges and fees incurred on debt, payments on mortgages and rent under ground leases; (k) any fee, profit or compensation retained by Lessor or its affiliates for management and administration of the Industrial Center in excess of the management fee which would be charged by a professional management service for operation of comparable projects in the vicinity of the Building; and (l)expense reserves. 4.2 (d) Common Area Operating Expenses-Audit Rights. Lessee may audit the ------------------------------------------- books, records and supporting documents of Lessor to the extent necessary to determine the accuracy of Lessor's statement of Common Area Operating Expenses under Section 4.2 of the Lease and any subsequent statement of Common Area Operating Expenses. Such audit, if any, will occur within one hundred eighty (180) days after Lessee receives such statement. Lessee shall bear the cost of such audit, unless such audit discloses that Lessor has overstated the total cost by more than three percent (3%) of the actual amount of such cost, and which event Lessor shall pay the cost of Lessee's audit. Lessor shall promptly refund any over charges to Lessee. 6.2 Hazardous Substances. To the best knowledge of Lessor, (a) no --------------------- Hazardous Substances are present on the Industrial Center or the soil, surface water or groundwater thereof, (b) no underground storage tanks or asbestos containing building materials are present on the Industrial Center, and (c) no action, proceeding, or claim is pending or threatened involving the Industrial Center concerning any Hazardous Substances or pursuant to any Applicable Laws or Requirements. Under no circumstance shall Lessee be liable for or indemnify Lessor from, and Lessor shall indemnify, defend and hold harmless Lessee, its agents, contractors, stockholders, directors, successors, representatives, and assigns from and against, all losses, costs, claims, liabilities and damages (including attorneys' and consultants' fees) of every type and nature, directly or indirectly arising out of or in connection with any Hazardous Substance present at any time on or about the Industrial Center, or the soil, air, improvements, groundwater or surface water thereof, or the violation of any Applicable Laws or Requirements, relating to any such Hazardous Substance, except to the extent that any of the foregoing actually results from the release or emission of Hazardous Substances on or about the Premises by Lessee or its agents or employees in violation of Applicable Laws or Requirements. Lessee shall be liable for and shall indemnify, defend and hold harmless Lessor, its agents, contractors, members, successors, representatives and assigns from and against all losses, costs, claims, liabilities and damages (including attorneys' and consultants' fees) of every type and nature, directly or indirectly arising out of or in connection with the release or emission of Hazardous Substances on or about the Premises caused by Lessee or its agents or employees in violation of Applicable Laws or Requirements. This Section 4 and Sections 6.2 and 6.3 of the Lease are the sole provisions of the Lease pertaining to Hazardous Substances and no other provisions shall be deemed to apply thereto. 6.3 Lessee's Compliance with Requirements. Lessee shall not be -------------------------------------- required to comply, cause the Premises to comply, or pay the cost of complying, and Lessor shall cause the Premises to comply with, any Applicable Laws or Requirements, unless such compliance is necessitated solely because of Lessee's particular use of the Premises. 7.2 Maintenance, Repairs Lessor shall perform and construct, and -------------------- Lessee shall have no responsibility to perform, construct or pay for, any repair, maintenance or improvement (a) necessitated by the acts or omissions of Lessor or any other occupant of the Industrial Center, or their respective agents, employees or contractors; (b) occasioned by fire, acts of God or other casualty or by the exercise of the power of eminent domain; (c) required as a consequence of any violation of any Laws, as of the Commencement Date, or construction defects in the Premises, the Building or the Industrial Center; (d) for which Lessor has a right of reimbursement from others; (e) to any portion of the Building or Industrial Center outside of the demising walls of the Premises; (f) which could be treated as a "capital expenditure" under generally accepted accounting principles, except to the extent amortized over the useful life of the capital items in question; (g) to any electrical, water, sewer, and plumbing systems not specifically serving the Premises or the Building; and (h) to any heating, ventilating, air conditioning system to the extent not specifically serving the Premises. Notwithstanding the foregoing, Lessee shall pay Lessee's Share of the expenses described in (g) of the preceding sentence to the extent that such expenses are properly included in Common Area Operating Expenses or, subject to Paragraph 8.6 of the Lease, Lessee shall pay for all repair and damage occasioned by the willful misconduct or negligent acts of Lessee, its employees, agents, invitees and/or licensees. 7.3 Utility Installations, Trade Fixtures, Alterations. All --------------------------------------------------- Alterations, trade fixtures, furniture, equipment and other personal property installed in the Premises ("Lessee's Property") shall at all times be and remain Lessee's property. Except for Alterations which cannot be removed without structural injury to the Premises, at any time Lessee may remove Lessee's Property from the Premises, provided that Lessee repairs all damage caused by such removal. Lessor shall have no right to require Lessee to remove any Alterations unless it notifies Lessee, at the time it consents to such Alteration, that it shall require such Alteration to be removed. 7.4 Surrender, Restoration. Lessee's obligation to surrender the ----------------------- Premises shall be fulfilled if Lessee surrenders possession of the Premises in the condition existing at the Commencement Date, except ordinary wear and tear, acts of God, casualties, condemnation, Hazardous Substances (other than those released or emitted by Lessee in violation of Applicable Law) and Alterations removal of which Lessor has not, in advance, required. 8.7 Indemnity. Lessor shall not be released or indemnified from, ---------- and shall indemnify, defend, protect and hold harmless Lessee from, any damages, liabilities, losses, claims, attorneys' fees, consultants' fees, costs or expenses arising from the negligence or willful misconduct of Lessor or its agents, contractors, licensees or invitees, Lessor's violation of Applicable Law, or a breach of Lessor's obligations or representations under the Lease. 9. Damage or Destruction. If the Premises are damaged by any peril and ---------------------- Lessor does not elect to terminate the Lease or is not entitled to terminate the Lease, Lessee may terminate the Lease, by delivery to Lessor of a written notice, if the Premises cannot be or are not fully repaired by Lessor within one hundred twenty (120) days after the damage or destruction. If the Lease is not terminated by Lessor or Lessee as provided herein, Lessor shall restore the Premises to the condition in which they existed immediately prior to the casualty. 10. Real Property Taxes. Lessee shall not be required to pay any -------------------- portion of any tax or assessment expense (a)levied on Lessor's rental income, unless such tax or assessment expense is imposed in lieu of real property taxes; (b)in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest permitted term; (c) imposed on land and improvements other than the Industrial Center; or (d) resulting from a change of ownership or transfer of any or all of the Industrial Center. 11. Utilities. If there occurs any interruption of utilities or ---------- other services required to be provided to the Premises, interference with access to the Premises, imposition of legal restrictions or the presence of any Hazardous Substances which does not result from Lessee's release or emission of such Hazardous Substances, which in any of the foregoing cases interferes with Lessee's use of the Premises for seven (7) days in any thirty (30) day period, then Lessee shall be entitled to an equitable abatement of rent to the extent of the interference with Lessee's use of the Premises occasioned thereby. If the interference persists for more than thirty (30) days in any ninety (90)day period, Lessee shall have the right to terminate the Lease. 12. Assignment and Subletting. Without releasing Lessee of its -------------------------- obligations under the Lease, Lessee, without Lessor's prior written consent, may sublet the Premises or assign the Lease to: (a)an entity controlling, controlled by or under common control with Lessee; (b)an entity related to Lessee by merger, consolidation, non-bankruptcy reorganization or government action; or (c)a purchaser of substantially all of Lessee's assets located at the Premises ("Permitted Transfer"). A transfer of Lessee's capital stock shall not be deemed an assignment, subletting or other transfer of the Lease or the Premises. Any Permitted Transfer shall not be subject to any rights of recapture or rent profit-sharing provision. 30. Subordination. Within thirty (30) days of the Commencement Date -------------- of this Lease, Lessor shall obtain from any lenders of the Premises a written agreement in form reasonably satisfactory to Lessee providing for non- disturbance of Lessee's interests under the Lease in the event of a foreclosure of the lender's security interest. Further, the subordination of the Lease to an instrument of security shall be conditioned upon Lessee's receipt from any such lenders such a non-disturbance agreement. 32. Lessor's Access. Any entry by Lessor and Lessor's agents shall ---------------- comply with Lessee's reasonable security measures and shall not impair Lessee's operations more than reasonably necessary. 36. Consents. Whenever the Lease requires an approval, consent, --------- designation, determination, selection or judgment by either Lessor or Lessee, such approval, consent, designation, determination, selection or judgment and any conditions imposed thereby shall be reasonable and shall not be unreasonably withheld or delayed and, in exercising any right or remedy hereunder, each party shall at all times act reasonably and in good faith. 41. Rules and Regulations. Lessee shall not be required to comply with ---------------------- any new rule or regulation unless the same applies non-discriminatorily to all occupants of the Industrial Center, does not unreasonably interfere with Lessee's use of the Premises or Lessee's parking rights and does not materially increase the obligations or decrease the rights of Lessee under the Lease. 56. Option to Renew. If it becomes necessary to determine the Market ---------------- Rate by appraisal, real estate appraiser(s), all of whom shall be Members of the Appraisal Institute and who have at least five (5) years experience appraising similar space located in the vicinity of the Premises shall be appointed and shall act in accordance with the following procedures: (i) If the parties are unable to agree on the Market Rate within the allowed time, either party may demand an appraisal by giving written notice to the other party, which demand to be effective must state the name, address and qualifications of an appraiser selected by the party demanding an appraisal (the "Notifying Party"). Within ten (10) days following the Notifying Party's appraisal demand, the other party (the "Non-Notifying Party") shall either approve the appraiser selected by the Notifying Party or select a second properly qualified appraiser by giving written notice of the name, address and qualification of such appraiser to the Notifying Party. If the Non-Notifying Party fails to select an appraiser within the ten (10) day period, the appraiser selected by the Notifying Party shall be deemed selected by both parties and no other appraiser shall be selected. If two appraisers are selected, they shall select a third appropriately qualified appraiser. If the two appraisers fail to select a third qualified appraiser, the third appraiser shall be appointed by the then presiding judge of the county where the Premises are located upon application by either party. (ii) If only one appraiser is selected, that appraiser shall notify the parties in simple letter form of its determination of the Market Rate within fifteen (15) days following his selection, which appraisal shall be conclusively determinative and binding on the parties as the appraised Market Rate. If multiple appraisers are selected, the appraisers shall meet not later than ten (10) days following the selection of the last appraiser. At such meeting the appraisers shall attempt to determine the Market Rate as of the commencement date of the extended term by the agreement of at least two (2) of the appraisers. If two (2) or more of the appraisers agree on the Market Rate at the initial meeting, such agreement shall be determinative and binding upon the parties hereto and the agreeing appraisers shall, in simple letter form executed by the agreeing appraisers, forthwith notify both Landlord and Tenant of the amount set by such agreement. If multiple appraisers are selected and two (2) appraisers are unable to agree on the Market Rate, all appraisers shall submit to Landlord and Tenant an independent appraisal of the Market Rate in simple letter form within twenty (20) days following appointment of the final appraiser. The parties shall then determine the Market Rate by averaging the appraisals; provided that any high or low appraisal, differing from the middle appraisal by more than ten percent (10%) of the middle appraisal, shall be disregarded in calculating the average. (iii) If only one appraiser is selected, then each party shall pay one-half of the fees and expenses of that appraiser. If three appraisers are selected, each party shall bear the fees and expenses of the appraiser it selects and one-half of the fees and expenses of the third appraiser. 63. Reasonable Expenditures. Any expenditure by a party permitted or ----------------------- required under the Lease, for which such party is entitled to demand and does demand reimbursement from the other party, shall be limited to the fair market value of the goods and services involved, shall be reasonably incurred and shall be substantiated by documentary evidence available for inspection and review by the other party or its representative during normal business hours. LESSOR: LESSEE: CSS PROPERTIES II, L.L.C. SPECTRIAN CORPORATION By: By: ------------------------------ ----------------------------- Name: Name: ---------------------------- --------------------------- Its: Its: ---------------------------- ---------------------------- -----END PRIVACY-ENHANCED MESSAGE-----