-----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, O8CB73zSktO3Dztqhvn0/tT7zz6HGfPMqkXTAK7asPxnkPulslE9WUjLoaB8S9l0 sHaxtxQoP/6aGxW6wxGzbQ== 0001095811-01-002021.txt : 20010409 0001095811-01-002021.hdr.sgml : 20010409 ACCESSION NUMBER: 0001095811-01-002021 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CRAY INC CENTRAL INDEX KEY: 0000949158 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 930962605 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-26820 FILM NUMBER: 1589371 BUSINESS ADDRESS: STREET 1: 411 FIRST AVE SOUTH STREET 2: SUITE 600 CITY: SEATTLE STATE: WA ZIP: 98104-2860 BUSINESS PHONE: 2067012000 MAIL ADDRESS: STREET 1: 411 FIRST AVE SOUTH STREET 2: SUITE 600 CITY: SEATTLE STATE: WA ZIP: 98104-2860 FORMER COMPANY: FORMER CONFORMED NAME: TERA COMPUTER CO \WA\ DATE OF NAME CHANGE: 19950809 10-K 1 v71068e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31, 2000 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 [ ] 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: 0-26820 CRAY INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) WASHINGTON 93-0962605 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 411 FIRST AVENUE SOUTH, SUITE 600, SEATTLE, WASHINGTON 98104-2860 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (206) 701-2000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT: COMMON STOCK, $.01 PAR VALUE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the Common Stock held by non-affiliates of the Registrant as of March 19, 2001 was approximately $65,600,000, based upon the last sale price of $1.78 reported for such date on the Nasdaq National Market System. As of March 19, 2001, there were 39,375,541 shares of Common Stock issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement to be delivered to shareholders in connection with the Registrant's Annual Meeting of Shareholders to be held on May 16, 2001, are incorporated by reference into Part III. 2 CRAY INC FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000 INDEX
Page ---- PART I Item 1. Business 3 Item 2. Properties 20 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 20 Item E.O. Executive Officers of the Company 21 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters 23 Item 6. Selected Financial Data 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 29 Item 8. Financial Statements and Supplementary Data 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 31 PART III Item 10. Directors and Executive Officers of the Company 32 Item 11. Executive Compensation 32 Item 12. Security Ownership of Certain Beneficial Owners and Management 32 Item 13. Certain Relationships and Related Transactions 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 33
2 3 FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including any projections of earnings, revenues, or other financial items; any statements of the plans, strategies, and objectives of management for future operations; any statements concerning proposed new products, services, or developments; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. The risks, uncertainties and assumptions referred to above include the timely development, production and acceptance of products and services and their features; the level of governmental support for supercomputers; our dependency on third-party suppliers to build and deliver necessary components; our need for additional credit and financial facilities; the challenge of managing asset levels, including inventory; the difficulty of keeping expense growth at modest levels while increasing revenue; our ability to retain and motivate key employees; and other risks that are described from time to time in our Securities and Exchange Commission reports, including but not limited to the items discussed in "Factors That Could Affect Future Results" set forth in "Business" in Item 1 below in this report, and in subsequently filed reports. We assume no obligation to update these forward-looking statements. GENERAL On April 1, 2000, we acquired the operating assets of the Cray Research business unit from Silicon Graphics, Inc. ("SGI"), and changed our corporate name from Tera Computer Company to Cray Inc. With that acquisition we changed from a development stage company with 125 employees (almost all located in Seattle, Washington), limited revenue and one product under development, to a company with nearly 900 employees located in over 20 countries, ongoing sales of supercomputer systems with several products in development, major manufacturing operations, an established service organization and substantial inventory. For these reasons, period to period comparisons that include periods prior to April 1, 2000, are not indicative of future results. Discussions that relate to periods prior to April 1, 2000, refer to our operations as Tera Computer Company and discussions relating to periods after April 1, 2000, refer to our combined operations as Cray Inc. PART I ITEM 1. BUSINESS INTRODUCTION We design, build, sell and service high performance computer systems, commonly known as supercomputers. We have leading edge technology, multiple product platforms, nearly 900 employees, a substantial worldwide installed base of computers, major manufacturing and 3 4 service capabilities and extensive global customer relationships. We believe that our current products and those under development represent the future of supercomputing. We were incorporated under the laws of the State of Washington in December 1987. Our corporate headquarters offices are located at 411 First Avenue South, Suite 600, Seattle, Washington, 98104-2860, and our telephone number is (206) 701-2000. PRODUCT OFFERINGS AND THE HIGH PERFORMANCE COMPUTER MARKET Since the pioneering Cray 1(R) system arrived in 1976, supercomputers--defined simply as the most powerful class of computers at any point in time--have contributed substantially to the advancement of knowledge and the quality of human life. Problems of major economic, scientific and strategic importance typically are addressed by supercomputers years before becoming tractable on less-capable systems. For scientific applications, the increased need for computing power has been driven by highly challenging problems that can be solved only through numerically intensive computation. For engineering applications, high performance computers boost productivity and decrease the time to market for companies and products in a broad range of industries. The U.S. Government has recognized that the continued development of high performance computer systems, which typically sell for mutiple millions of dollars each, is of critical importance to the economic, scientific and strategic competitiveness of the United States. In conjunction with some of the world's most creative scientific and engineering minds, these formidable tools already have made automobiles safer and more fuel-efficient; located new deposits of oil and gas; saved lives and property by predicting severe storms; created new materials and life-saving drugs; powered advances in electronics and visualization; safeguarded national security; and unraveled mysteries ranging from protein-folding mechanisms to the shape of the universe. Applications promising future competitive and scientific advantage create a demand for more supercomputer power--10 to 1,000 times greater than anything available today, according to users. Automotive companies are targeting increased passenger cabin comfort, improved safety and handling. Aerospace firms envision more-efficient planes and space vehicles. The petroleum industry wants to "see" subsurface phenomena in greater detail. Urban planners hope to ease traffic congestion. Integrated digital imaging and virtual surgery--including simulated sense of touch--are high on the wish list in medicine. The sequencing of the human genome promises to open an era of burgeoning research and commercial enterprise in the life sciences. Our customized supercomputer products provide high bandwidth and other capabilities needed for exploiting new and existing market opportunities. Among supercomputer vendors, we offer the largest variety of products in order to address the broadest range of customer requirements and market segments. 4 5 Vector Supercomputer Systems. For certain important classes of scientific and industrial applications, vector supercomputer systems remain unequaled. Starting in 1976, Cray Research pioneered the use of vector systems in a variety of market sectors. Vector systems typically use a moderate number (one to 64) of custom processors, each of which is two to 100 times faster in practice than the fastest commercially available microprocessors at any time. Earlier, vector systems effectively were the only type of system available and therefore dominated the supercomputer market. In the past decade, supercomputers employing alternative designs ("architectures"), including the Cray T3E(TM) highly parallel system and others, have emerged to capture substantial marketshare. Today, increasingly powerful vector systems remain an important market factor and are typically reserved for the most demanding class of applications and workloads. Our vector systems include unique features, traditionally employed by classified government customers, that in preliminary tests have demonstrated substantial performance advantages over microprocessor-based systems for mainstream problem solving in the emerging bioninformatics market. The same unique, hard-to-replicate features will be included in our forthcoming Cray MTA-2 systems. The Cray SV1ex(TM) system, scheduled for availability in mid-2001, provides substantial enhancements to the predecessor Cray SV1(TM) product. These enhancements elevate this product line from a successful upgrade path for midrange and prior-generation high-end Cray vector supercomputers, to a product that for important, non-bandwidth-intensive applications is expected to perform well as current high-end systems. The system's clock rate, at 500 megahertz, is the fastest of any currently available supercomputer, vector or non-vector; and the Cray SV1ex system's cachebased memory, unique among vector supercomputers, significantly improves performance for problems that make good use of cache memory. The targeted selling focus for the SV1ex systems is 8 to 64 gigaflops (billions of calculations per second), with typical selling prices ranging from $1 million to $2 million. We expect to sell some Cray SV1ex systems larger than 64 gigaflops. In February 2001 we signed an agreement with NEC Corporation to distribute and service NEC SX-5(TM) vector supercomputers and their successors. This agreement provides us with exclusive distribution and servicing rights in the United States, Canada and Mexico, and non-exclusive rights in the rest of the world. The SX-5 computers are the world's current best-selling high-end, high-bandwidth vector supercomputers, with a strong installed base in industry, government and academia. Current duties under a U.S. anti-dumping ruling effectively prohibit the importation of these computers into the U.S. We have requested that the U.S. Government remove these duties. Assuming that these duties are removed as expected, we plan on marketing NEC SX-5 series computers to customers with a need for high-end, high-bandwidth vector supercomputers, particularly in the United States. The targeted selling focus for the SX-5 supercomputers will be from 10 to 160 gigaflops, with expected selling prices ranging from $1.5 million to $15 million. Microprocessor-based Highly Parallel Systems. In recent years highly parallel supercomputer products have captured substantial market share by providing greater performance and price/performance on a range of applications for which vector supercomputers are less well suited. Highly parallel supercomputers typically link together tens, hundreds or thousands of 5 6 standard microprocessors to act either concurrently on multiple tasks, or in concert on a single computationally-intensive task. In these systems, each processor typically is directly connected to its own private ("distributed" or "local") memory and the programmer must manage the movement of data among memory units. As a result, computer systems relying on this architecture can be difficult to program and are most suited for applications that can be partitioned easily into discrete tasks that do not need to communicate often with each other and do not require the high memory and interconnect system bandwidth of supercomputers such as the forthcoming Cray SV2(TM), NEC SX-5 and Cray MTA-2 systems. The Cray T3E system, introduced in 1996 and able to employ up to 2,048 processors, is widely recognized as the first technically and commercially successful highly parallel system. The Cray T3E holds the world record for actual ("sustained") performance on a real application and was named "Supercomputer Product of the Year" for the year 2000 by the readers of Scientific Computing & Instrumentation magazine. We expect continued strong demand for T3E systems in 2001, driven by the product's proven superiority among highly parallel systems in handling large, complex applications and workloads. In May 2000 we sold an 816-processor T3E system upgrade to the U.S. Army High Performance Computing Research Center for $18.5 million. In August 2000, we sold the first enhanced Cray T3E-1350 system, totaling 136 processor, to Phillips Petroleum Company. We recently sold and installed a T3E system with teraflop capacity to the U.S. Department of Defense for approximately $21 million. In January 2001, we announced plans to introduce the Cray SuperCluster(R) series, a product line designed to extend the leadership of the Cray T3E system while exploiting commercially available third-party technologies to a greater degree. With the SuperCluster system, we plan to address market demand for COTS (commercial-off-the-shelf) clusters with higher capabilities than those available today, especially by leveraging the approximately $45 million software investment that has made the Cray T3E system the most scalable, usable system in its category. In addition to our own significant software contribution, we plan to use leading commercial off-the-shelf components, including Alpha processor technology from API Networks, advanced Linux system software and the highly scalable Myrinet cluster-interconnect network from Myricom. Over the next two years, we plan to add advanced data center management capabilities to the SuperCluster operating system, leveraging the Cray T3E software investment. Target markets for the SuperCluster systems include government, scientific research and select industries, such as petroleum and the life sciences. Unlike our vector and multithreaded architecture products, the SuperCluster is aimed at scalar applications and workloads, and at the growing number of customers and new prospects considering microprocessor-based COTS clusters. The SuperCluster is targeted for first customer ship in the second half of 2001. Cray SV2 System. We are currently developing the revolutionary Cray SV2 system, which incorporates in its design both vector processing capabilities from the long line of Cray Research vector systems, and highly parallel capabilities analogous to those of our T3E system. The SV2 is an "extreme performance" supercomputer aimed at the high end of the vector processing market and the high end of the market for highly parallel systems. The SV2 has been under development since 1997, and first customer ship is scheduled for the second half of 2002. 6 7 Our expected selling focus for the SV2 is 200 gigaflops to multiple tens of teraflops (trillions of calculations per second). The U.S. Government is providing substantial funding support for the development of the SV2 system and conducts rigorous progress reviews on a quarterly basis. Our SV2 development has satisfactorily completed all quarterly reviews to date. Multithreading Systems. Tera Computer Company was originally formed to pursue a significant breakthrough in high-performance computing by developing a scalable, uniform shared memory, latency tolerant system that utilizes a multithreaded architecture and a high bandwidth interconnection system. In the past year we have been heavily engaged in reimplementing the MTA system from gallium arsenide technology to more-mainstream CMOS (complementary metal-oxide silicon) technology. In January 2001 we announced a $5.4 million contract from Logicon, a Northrup Grumman company, to deliver a 28-processor, all-CMOS MTA-2 system to the Naval Research Laboratory in the fourth quarter of 2001, with substantial upgrade options over a four-year period. The Naval Research Laboratory plans to make this system available for investigative purposes to its own researchers and to the Department of Defense national research community. With the MTA-2 system, we are targeting customers in the defense community, in scientific research--including burgeoning new life sciences field such as bioinformatics, and in advanced imaging. The MTA-2 is aimed at new applications not well served by vector or highly parallel systems, such as dynamically adaptive meshes, data sorting and problems benefiting from advanced scalability, large uniform shared memory and easier parallel programming. The MTA-2 has shown a significant performance advantage, for example, on so-called Monte Carlo codes used in a wide range of sectors, from nuclear physics to medicine to finance. SOFTWARE We offer UNIX-based operating systems, compiler software and diagnostic tools. We currently support multiple operating systems, including UNICOS/mk(TM) in the T3E, UNICOS(TM) in the SV1 and earlier vector processing systems, a UNIX-based system called MTX(TM) for the Cray MTA system. The SuperCluster operating system will be based on open-source version of LINUX with extensions to support high performance computing in a production environment, while the SV2 operating system will be UNIX-based with common UNICOS extensions. The NEC SX-5 systems and its successors use NEC's SUPER-UX(TM) operating system, which is also based on UNIX. We continue to design and build highly optimizing programming environments, performance management diagnostic software products that allow our customers to obtain maximum benefit from our systems. In addition to supporting third-party applications, we also research advanced algorithms and other approaches to improving application performance. We also purchase or license software technologies from third parties when necessary to provide appropriate support to our customers, while focusing on our own resources where we add the highest value. 7 8 MAINTENANCE AND SUPPORT Our extensive world-wide maintenance and support systems provide us with a competitive advantage. Our employees providing these services include field service engineers, product and applications specialists and product support engineers. They are usually based at customer sites. We currently have approximately 100 support personnel in the field in the U.S., another 100 support personnel in other countries and 90 employees providing central support services based in Chippewa Falls, Wisconsin, including extensive data center operations. Support services are provided under separate maintenance contracts with our customers. These contracts generally provide for support services on an annual basis, although some cover multiple years. While most customers pay support monthly, others pay on a quarterly or annual basis. In the nine months of our combined operations in 2000, our support revenues exceeded $71 million. At year-end we had deferred support revenue in excess of $15 million representing prepaid support. SALES AND MARKETING We primarily sell our system products through our direct sales force which operates throughout the United States and in all significant international markets. We serve smaller international markets through representatives and distributors. We have 60 sales staff, including sales representatives, sales managers, pre-sale analysts and administrative personnel located in the United States and 28 sales staff located internationally. Information with respect to our international operations and export sales is set forth in Note 14 to the Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K. No single end-user customer accounted for 10% or more of our revenue for each of the last three years, but agencies of the United States government, both directly and indirectly through system integrators and other resellers, accounted for approximately 54% of our 2000 revenue. RESEARCH AND DEVELOPMENT We are committed to leadership in the high performance computer market. Our leadership depends on successful development and introduction of new products and enhancements to existing products. Prior to April 2000, our primary research and development activity was the design of the hardware components and software required for our MTA system. Since April 2000 we have continued development of the MTA system, the development of the enhancements to the Cray T3E system and Cray SV1 series leading to the SV1ex, and the development of the SV2 system. We expect that the SuperCluster system will involve software development with minimal hardware engineering, and we do not anticipate any development expenditures on the NEC SX-5 and successor SX systems 8 9 Our research and development expenses, net of governmental funding, were $13.7 million in 1998, $15.2 million in 1999 and $48.4 million in 2000 (of which $43.9 was spent in the nine months of combined operations). These amounts represent 687%, 720% and 41% (including 37% in the nine months of combined operations), respectively, of total revenue. While we will be required to continue to devote a substantial portion of our resources to research and development activities, our goal is to have research and development expenses represent approximately 15 -- 18% of revenue. We expect to achieve this goal primarily by increasing revenue while holding research and development expenditures to modest increases. MANUFACTURING While we design many of the hardware components for all of our products, we subcontract the manufacture of these components, including integrated circuits, printed circuit boards, flex circuits, memory modules, machined enclosures and support structures, cooling systems, high performance cables and other items to third-party suppliers. Our strategy is to avoid the large capital commitment and overhead associated with establishing full-scale manufacturing facilities and to maintain the flexibility to adopt new technologies as they become available without the risk of equipment obsolescence. We perform final system integration and testing, and design and maintain our system software internally. Our manufacturing facilities are located in Chippewa Falls, Wisconsin. We maintain a development and support capability in Seattle, Washington. At December 31, 2000, we had 160 full-time employees in manufacturing, with 137 located in Chippewa Falls, Wisconsin. Our systems incorporate components that are available from one or limited sources. Key components that are sole-sourced include our integrated circuits, flex circuits and memory products. We have chosen to deal with sole sources in these cases because of specific technologies, economic advantages and other factors. We also have sole or limited sources for less critical components, such as peripherals, power supplies and chassis. Reliance on single or limited source vendors involves several risks, including the possibility of shortages of key components, long lead times, reduced control over delivery schedules and changes in direction by vendors. COMPETITION The high performance computer market is intensely competitive. The barriers to entry are high, as is the cost of remaining competitive. Our competitors can be divided into two general categories: established companies that are well-known in the high performance computer market and new entrants capitalizing on developments in architecture or techniques to increase computer performance through linking together clusters or networks of micro processor based systems - -- servers, workstations or personal computers. 9 10 Participants in the market include IBM, Fujitsu, Ltd., Hitachi, Ltd., and NEC Corporation. To date, the Japanese suppliers, as a group, have been largely unsuccessful in the U.S. high performance computer market but have been enjoying success in foreign markets. Once our distribution agreement with NEC becomes effective, we will have exclusive rights to market NEC vector processing supercomputers in North America; we have non-exclusive rights to market these computers elsewhere, which means we would be competing with NEC in the rest of the world. We compete with these companies by offering systems with superior performance, coupled with our excellent post-sale service capabilities and established customer relationships. A number of companies, including IBM, Silicon Graphics, Inc., Hitachi, Ltd., Fujitsu, Ltd., Sun Microsystems, Inc., Hewlett-Packard Corporation and Compaq Computer Corporation, offer clusters or other highly parallel systems for the high performance market. While our T3E system competes primarily on performance, we expect that our SuperCluster system will compete on price/performance, more extensive software capabilities and superior post-sale service. Each of our competitors named above has substantially greater engineering, manufacturing, marketing and financial resources than we do. INTELLECTUAL PROPERTY We attempt to protect our trade secrets and other proprietary rights through formal agreements with our employees, customers, suppliers and consultants, and through patent protection. Although we intend to protect our rights vigorously, there can be no assurance that our contractual and other security arrangements will be successful. There can be no assurance that such arrangements will not be terminated or that we will be able to enter into similar arrangements on favorable terms if required in the future. In addition if such agreements were breached, there can be no assurance that we would have adequate remedies for any breach. Although we have not been a party to any material intellectual property litigation, third parties may assert proprietary rights claims covering certain of our products and technologies. We have a number of patents relating to our hardware and software systems. We license certain patents and other intellectual property from Silicon Graphics, Inc., as part of our acquisition of the Cray Research operations. These licenses contain restrictions on use of the underlying technology, generally limiting the use to historic Cray products, vector processor computers and the Cray SV2 system. Our general policy is to seek patent protection for those inventions and improvements likely to be incorporated into our products and services or to give us a competitive advantage. While we believe our patents and applications have value, no single patent is in itself essential to us as a whole or to any of our key products. Any of our proprietary rights could be challenged, invalidated or circumvented and may not provide significant competitive advantage. There can be no assurance that the steps we take will be adequate to protect or prevent the misappropriation of our intellectual property. Litigation may be necessary in the future to enforce patents we obtain, and to protect copyrights, trademarks, trade secrets and know-how we own. Such litigation, if necessary, could result in substantial expense to us and a diversion of our efforts. EMPLOYEES As of December 31, 2000, we employed 886 employees (compared to 123 at the end of 1999 as Tera Computer Company) on a full-time basis, of whom 303 were in development and 10 11 engineering, 160 were in manufacturing, 88 were in sales and marketing, 290 in field service and 45 were in administration. We also employed 57 individuals on a part-time or temporary basis or as interns. We have no collective bargaining agreement with our employees. We have never experienced a work stoppage and believe that our employee relations are excellent. FACTORS THAT COULD AFFECT FUTURE RESULTS The following factors should be considered in evaluating our business, operations and prospects and may affect our future results and financial condition. LACK OF CUSTOMER ORDERS FOR OUR EXISTING SV1 AND T3E PRODUCTS AND OUR INABILITY TO SELL OUR PRODUCTS AT EXPECTED PRICES WOULD ADVERSELY AFFECT OUR PROSPECTS. We will depend on sales of our current products, the Cray SV1 series and T3E systems, for significant product revenue in 2001. To obtain these sales, we need to assure our customers of product performance and our ability to service these products. Most of our potential customers already own or lease very high-performance computer systems. Some of our competitors may offer trade-in allowances or substantial discounts to potential customers, and we may not be able to match these sales incentives. We may be required to provide discounts to make sales or to provide lease financing for our products, which would result in a deferral of our receipt of cash for such systems. These developments would limit our revenue and resources and would adversely affect our profitability and operations. OUR INABILITY TO OVERCOME THE TECHNICAL CHALLENGES OF COMPLETING THE DEVELOPMENT OF OUR SYSTEMS COULD CAUSE OUR BUSINESS TO FAIL. We expect that our success in 2002 and following years depends upon completing the development of the SuperCluster, the MTA-2 and the SV2 systems. These development efforts are lengthy and technically challenging processes, and require a significant investment of capital, engineering and other resources. Delays in completing the design of the hardware components or software of these systems or in integrating the full systems could materially and adversely affect our business and results of operations. We are dependent on our vendors to manufacture components for our systems, and few companies can meet our design requirements. Their inability to manufacture our components to our designs will adversely affect the completion of these products. From time to time during the development process we have had, and in the future we may have, to redesign certain components because of previously unforeseen design flaws. We also may find certain flaws, or "bugs," in our system software which require correction. Redesign work may be costly and cause delays in the development of these systems, and could affect adversely their success as commercial products. 11 12 LACK OF GOVERNMENT SUPPORT FOR SUPERCOMPUTER SYSTEMS WOULD ADVERSELY AFFECT OUR BUSINESS AND INCREASE OUR CAPITAL REQUIREMENTS. We have targeted U.S. and foreign government agencies and research laboratories as important sales prospects for all of our products. In addition, a few of these agencies fund a portion of our development efforts. The U.S. government historically has facilitated the development of, and has constituted a market for, new and enhanced very high- performance computer systems. The failure of U.S. and foreign government agencies to purchase additional very high-performance computer systems or to continue to fund these development efforts, due to lack of funding, change of priorities or for any other reason, would materially and adversely affect our results of operations and increase our need for capital. PROPOSALS AND PURCHASES BASED ON THEORETICAL PEAK PERFORMANCE ADVERSELY AFFECT OUR PROSPECTS. Our high-performance systems are designed to provide high actual sustained performance on difficult computational problems. Many of our competitors offer systems with higher theoretical peak performance numbers, although their actual sustained performance frequently is a small fraction of their theoretical peak performance. Nevertheless, many requests for proposals, primarily from governmental agencies in the U.S. and elsewhere, have criteria based on theoretical peak performance. Until these criteria are changed, we are foreclosed from bidding or proposing our systems on such proposals, which adversely affects our revenue potential. FAILURE TO OBTAIN RENEWAL OF SERVICE CONTRACTS WOULD ADVERSELY AFFECT OUR REVENUES AND EARNINGS. High-performance computer systems are typically sold with maintenance service contracts. These contracts generally are for annual periods, although some are for multi-year periods. We have been performing most of the services under the existing SGI maintenance contracts as a sub-contractor to SGI and are in the process of novating these contracts to us. As these contracts expire, we need to sell new maintenance service contracts to these customers. A significant portion of these contracts include prepaid service amounts. If customers do not renew their maintenance service contracts with us, our revenues, earnings and cash resource would be adversely affected. OUR RELIANCE ON THIRD-PARTY SUPPLIERS POSES SIGNIFICANT RISKS TO OUR BUSINESS AND PROSPECTS. We subcontract the manufacture of substantially all of our hardware components for all of our products, including integrated circuits, printed circuit boards, flex circuits and power supplies, on a sole or limited source basis to third-party suppliers. The SuperCluster system will be built entirely from commercial off-the-shelf components on a sole-source basis. In addition we use a contract manufacturer to assemble our SV1 and T3E components, and plan to do so for our MTA-2 and SV-2 systems also. 12 13 We are exposed to substantial risks because of our reliance on these and other limited or sole source suppliers. For example: - - if a reduction or interruption of supply of our components occurred, it could take us a considerable period of time to identify and qualify alternative suppliers to redesign our products as necessary and to recommence manufacture of the redesigned components; - - if we were ever unable to locate a supplier for a component, we would be unable to assemble and deliver our products; - - one or more suppliers may make strategic changes in their product lines, which may result in the delay or suspension of manufacture of our components or systems; and - - some of our key suppliers are small companies with limited financial and other resources, and consequently may be more likely to experience financial difficulties than larger, well- established companies. THE ABSENCE OF THIRD-PARTY APPLICATION SOFTWARE COULD ADVERSELY AFFECT OUR ABILITY TO MAKE COMMERCIAL SALES OF OUR NEW SYSTEMS. In order to make sales in the automotive, aerospace, chemistry and other engineering and commercial markets, we must be able to attract independent software vendors to port their software application programs so that they will run on our systems. The relatively low volume of supercomputer sales makes it difficult for us to attract these vendors. We also modify and rewrite third-party software applications to run on our systems and so facilitate the expansion of our potential markets. There can be no assurance that we will be able to induce independent software vendors to rewrite their applications, or that we will successfully rewrite third-party applications for use on our systems. FAILURE TO OBTAIN CREDIT FACILITIES MAY RESTRICT OUR OPERATIONS. While we have obtained a secured credit facility based on domestic accounts receivables and maintenance revenue, we are seeking additional credit facilities, such as bank lines of credit, vendor credit and capitalized equipment lease lines. The absence of a consistent record of revenue and earnings makes obtaining such facilities more difficult; if we obtain such facilities, they may have high interest rates, contain restrictions on our operations and require security. Failure to obtain such credit facilities may limit our planned operations and our ability to acquire needed infrastructure and other capital items and would adversely affect our cash reserves and increase our need for capital. OUR QUARTERLY PERFORMANCE MAY VARY SIGNIFICANTLY AND COULD CAUSE OUR STOCK PRICE TO BE VOLATILE. One or a few system sales may account for a substantial percentage of our quarterly and annual revenue. This is due to the high average sales price of our products, particularly the Cray T3E system, and the expected high average sales prices for our MTA-2 and SV2 systems, and the timing of purchase orders and product acceptances. Because a number of our prospective customers receive funding from the U.S. or foreign governments, the timing of orders from such customers may be subject to the 13 14 appropriation and funding schedules of the relevant government agencies. The timing of orders and shipments also could be affected by other events outside our control, such as: - - changes in levels of customer capital spending; - - the introduction or announcement of competitive products; - - the availability of components; - - timing of the receipt of necessary export licenses; or - - currency fluctuations and international conflicts or economic crises. Because of these factors, revenue, net income or loss and cash flow are likely to fluctuate significantly from quarter to quarter. THE COST OF SERVICE OF THE T90 INSTALLED BASE WILL ADVERSELY AFFECT OUR EARNINGS. Certain components in the T90 vector computers sold by SGI prior to our acquisition of the Cray Research operations have an unusually high failure rate. The cost of servicing the T90 computers exceeds the related service revenue. We are continuing to take action that commenced prior to the acquisition to address this problem, and have recorded a warranty reserve to provide for anticipated future losses on the T90 maintenance service contracts. OUR UNCERTAIN PROSPECTS FOR EARNINGS COULD ADVERSELY AFFECT AN INVESTMENT IN US. While we have had a substantial increase in revenue with the acquisition of the Cray business operations, whether we will continue to achieve earnings will depend upon a number of factors, including: - - our ability to market and sell our existing products, the SV1 and T3E, and complete the development of the SV1ex, SuperCluster, MTA-2, and SV2 systems; - - the level of revenue in any given period; - - the cost of servicing the T90 installed base; - - the terms and conditions of sale or lease for our products; and - - our expense levels, particularly for research and development and manufacturing and service costs. U.S. EXPORT CONTROLS COULD HINDER OUR ABILITY TO MAKE SALES TO FOREIGN CUSTOMERS AND OUR FUTURE PROSPECTS. The U.S. Government regulates the export of high-performance computer systems such as our products. Delay or 14 15 denial in the granting of any required licenses could adversely affect our ability to make sales to certain foreign customers, thereby eliminating an important source of potential revenue. A SUBSTANTIAL NUMBER OF OUR SHARES ARE ELIGIBLE FOR FUTURE SALE AND COULD DEPRESS MARKET PRICES OF OUR STOCK AND HINDER OUR ABILITY TO OBTAIN ADDITIONAL FINANCING. Sale of a substantial number of our shares of common stock in the public market or the prospect of such sales could materially and adversely affect the market price of our common stock. As of December 31, 2000, we had outstanding: - - 35,280,785 shares of common stock; - - warrants to purchase 14,801,096 shares of common stock; - - 8% Convertible Promissory Notes due March 31, 2001, in the principal amount of $494,291, convertible at $5.00 per share into 98,858 shares of common stock; and - - stock options to purchase an aggregate of 8,224,005 shares of common stock, of which 2,428,813 options were then exercisable. Almost all of our outstanding shares of common stock may be sold without substantial restrictions. All of the shares purchased under the options are available for sale in the public market, subject in some cases to volume and other limitations. Sales in the public market of substantial amounts of our common stock, including sales of common stock issuable upon the exercise of warrants and options, could depress prevailing market prices for the common stock. Even the perception that such sales could occur may impact market prices. In addition, the existence of outstanding warrants and options may prove to be a hindrance to our future equity financings. Further, the holders of the warrants and options may exercise them at a time when we would otherwise be able to obtain additional equity capital on terms more favorable to us. Such factors could materially and adversely affect our ability to meet our capital needs. ADDITIONAL FINANCINGS MAY BE DILUTIVE TO EXISTING SHAREHOLDERS. Over the next twelve months our significant cash requirements relate to operational expenses, consisting primarily of personnel costs, costs of inventory and third-party engineering expenses, and acquisition of capital goods. We expect that anticipated product sales and maintenance services over the next twelve months will generate positive cash flow. We secured a $15 million credit facility in March 2001, and expect that the NEC distribution agreement will be completed in the second quarter of 2001, at which time NEC will invest $25 million in us. At any particular time, given the high average selling price of our products, our capital position is impacted by the timing of particular product sales, and the receipt of prepaid maintenance. In addition delays in the completion of the SV1ex system and the development of the MTA-2 and SuperCluster systems, all planned to be completed in 2001, or delays in the SV2 development program may require additional capital earlier than planned. In order to provide sufficient working capital and 15 16 enhance our capital position, we may raise additional equity and/or debt capital through utilization of our shelf registration statement covering $20 million of common stock, private placements and/or enhanced credit facilities. Financings may not be available to us when needed or, if available, may not be available on satisfactory terms and may be dilutive to our shareholders. WE MAY BE UNABLE TO ATTRACT, RETAIN AND MOTIVATE KEY PERSONNEL, AND AS A RESULT WE MAY NOT BE ABLE TO GROW AS WE EXPECT OR EFFECTIVELY IMPLEMENT OUR BUSINESS PLAN. Our success also depends in large part upon our ability to attract, retain and motivate highly skilled management, technical and marketing and sales personnel. Competition for highly skilled management, technical, marketing and sales personnel is intense, and we may not be successful in attracting and retaining such personnel. In particular we have an ongoing project to add software developers to assist our development efforts. We have no employment contracts with any of our employees. OUR STOCK PRICE MAY BE VOLATILE. The trading price of our common stock is subject to significant fluctuations in response to, among other factors: - - changes in analysts' estimates; - - our future capital raising activities; - - announcements of technological innovations by us or our competitors; and - - general conditions in the high-performance computer industry. In addition, the stock market has been and is subject to price and volume fluctuations that particularly affect the market prices for small capitalization, high technology companies like ourselves. WE MAY NOT BE ABLE TO KEEP UP WITH RAPID TECHNOLOGICAL CHANGE. Our market is characterized by rapidly changing technology, accelerated product obsolescence and continuously evolving industry standards. Our success will depend upon our ability to enhance our current products, to complete development of the SuperCluster, the MTA-2 and the SV2 systems and to develop successor systems in the future. We will need to introduce new products and features in a timely manner to meet evolving customer requirements. We may not succeed in these efforts. Our business and results of operations will be materially and adversely affected if we incur delays in developing our products or if such products do not gain broad market acceptance. In addition, products or technologies developed by others may render our products or technologies noncompetitive or obsolete. WE MAY BE UNABLE TO COMPETE SUCCESSFULLY IN THE HIGH- PERFORMANCE COMPUTER MARKET. The performance of our products may not be competitive with the computer systems offered by our competitors, and we may not compete successfully over time against new entrants or innovative competitors at the lower end of the 16 17 market. Furthermore, periodic announcements by our competitors of new high-performance computer systems and price adjustments may materially and adversely affect customer demand for our products. Our competitors are established companies that are well known in the high-performance computer market, including IBM, Sun Microsystems, Compaq Computer, Hewlett-Packard, Silicon Graphics, NEC Corporation, Fujitsu and Hitachi. Each of these competitors has broader product lines and substantially greater research, engineering, manufacturing, marketing and financial resources than we do. In addition we compete with new entrants capitalizing on developments in parallel processing and increased computer performance through networking and clustering systems. To date, these products have been limited in applicability and scalability and can be difficult to program. A breakthrough in architecture or software technology could make parallel systems more attractive to potential customers. Such a breakthrough would materially and adversely affect our ability to sell our products and the receipt of revenue. WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY INFORMATION AND RIGHTS ADEQUATELY. We rely on a combination of patent, copyright and trade secret protection, non-disclosure agreements and licensing arrangements to establish, protect and enforce our proprietary information and rights. We have a number of patents and have additional applications pending. There can be no assurance, however, that patents will be issued from the pending applications or that any issued patents will protect adequately those aspects of our technology to which such patents will relate. Despite our efforts to safeguard and maintain our proprietary rights, we cannot be certain that we will succeed in doing so or that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technologies. Although we are not a party to any present litigation regarding proprietary rights, third parties may assert intellectual property claims against us in the future. Such claims, if proved, could materially and adversely affect our business and results of operations. In addition, even meritless claims would require management attention and would cause us to incur significant expense to defend. The laws of certain countries do not protect intellectual property rights to the same extent or in the same manner as do the laws of the United States. Although we continue to implement protective measures and intend to defend our proprietary rights vigorously, these efforts may not be successful. OUR ABILITY TO BUILD CERTAIN PRODUCTS IS LIMITED BY OUR AGREEMENT WITH SGI, WHICH MAY LIMIT OUR ABILITY TO COMPETE WITH SGI AND OTHER COMPANIES. The Technology Agreement pursuant to which we acquired and licensed patent, know-how and other intellectual property rights from SGI contains restrictions on our ability to develop certain products, including specified successors to the T3E 17 18 system, and restrictions on the use of other technology, such as SGI's IRIX operating system in the SV2. IT MAY BECOME MORE DIFFICULT TO SELL OUR STOCK IN THE PUBLIC MARKET. Our common stock is quoted on the Nasdaq National Market. In order to remain listed on this market, the Company must meet Nasdaq's listing maintenance standards. If the bid price of our common stock falls below $5.00 for an extended period, or we are unable to continue to meet Nasdaq's standards for any other reason, our common stock could be delisted from the Nasdaq National Market. If our common stock were delisted, we likely would seek to list the common stock on the Nasdaq SmallCap Market or for quotation on the American Stock Exchange or a regional stock exchange. However, listing or quotation on these markets or exchanges could reduce the liquidity for our common stock. If our common stock were not listed or quoted on another market or exchange, trading of our common stock would be conducted in our over-the-counter market on an electronic bulletin board established for unlisted securities or in what are commonly referred to as the "pink sheets." As a result, an investor would find it more difficult to dispose of, or to obtain accurate quotations for the price of, the common stock. In addition, a delisting from the Nasdaq National Market and failure to obtain listing or quotation on such other market or exchange would subject our securities to so-called "penny stock" rules that impose additional sales practice and market-making requirements on broker-dealers who sell and/or make a market in such securities. Consequently, removal from the Nasdaq National Market and failure to obtain listing or quotation on another market or exchange could affect the ability or willingness of broker-dealers to sell and/or make a market in our common stock and the ability of purchasers of our common stock to sell their securities in the secondary market. In addition, if the market price of our common stock falls to below $5.00 per share, we may become subject to certain penny stock rules even if our common stock is still quoted on the Nasdaq National Market. While such penny stock rules should not affect the quotation of our common stock on the Nasdaq National Market, such rules may further limit the market liquidity of our common stock and the ability of investors to sell our common stock in the secondary market. PROVISIONS IN OUR AGREEMENT WITH SILICON GRAPHICS MAKE IT MORE DIFFICULT FOR SPECIFIED COMPANIES TO ACQUIRE US. The Asset Purchase Agreement with SGI pursuant to which we purchased the Cray Research business assets contains provisions restricting our ability to transfer the Cray Research business assets. Sales of these assets to Hewlett-Packard, Sun Microsystems, IBM, Compaq Computer, NEC or Gores Technology Group, or their affiliates, are prohibited until the earlier of March 31, 2003 or if SGI were sold. In addition, we must give SGI a right of first refusal for any sale of these assets to other purchasers for such period or earlier, if over a period of four fiscal quarters the revenue from product sales of Cray products is less than 50% of our total revenue. 18 19 PROVISIONS OF OUR ARTICLES AND BYLAWS COULD MAKE A PROPOSED ACQUISITION THAT IS NOT APPROVED BY OUR MANAGEMENT MORE DIFFICULT. Provisions of our Restated Articles of Incorporation and Restated Bylaws could make it more difficult for a third party to acquire us. These provisions could limit the price that investors might be willing to pay in the future for our common stock. For example, our Articles and Bylaws provide for: - - a staggered Board of Directors, so that only three of nine directors are elected each year; - - removal of a director only for cause and only upon the affirmative vote of not less than two-thirds of the shares entitled to vote to elect directors; - - the issuance of preferred stock, without shareholder approval, with rights senior to those of the common stock; - - no cumulative voting of shares; - - calling a special meeting of the shareholders only upon demand by the holders of not less than 30% of the shares entitled to vote at such a meeting; - - amendments to the Restated Articles of Incorporation require the affirmative vote of not less than two-thirds of the outstanding shares entitled to vote on the amendment, unless the amendment was approved by a majority of "continuing directors" (as that term is defined in our Articles); - - special voting requirements for mergers and other business combinations, unless the proposed transaction was approved by a majority of continuing directors; - - special procedures must be followed in order to bring matters before our shareholders at our annual shareholders' meeting; and - - special procedures must be followed in order for nominating members for election to the Board of Directors. WE DO NOT ANTICIPATE DECLARING ANY DIVIDENDS. We have never paid any dividends on our common stock and we intend to continue our policy of retaining any earnings to finance the development and expansion of our business. 19 20 ITEM 2. PROPERTIES The Company's principal properties are as follows:
Approximate Location of Property Uses of Facility Square Footage - -------------------- ----------------- -------------- Chippewa Falls, Wisconsin Manufacturing, 222,000 engineering, development, service, and warehouse Seattle, Washington Executive offices, MTA 85,000 hardware and software development Mendota Heights, Minnesota Hardware and software 40,000 development, sales and marketing operations
We lease the properties described above except that we own 179,000 square feet of manufacturing, office and warehouse space in Chippewa Falls, Wisconsin. We also lease a total of approximately 10,654 square feet primarily for sales and service offices in various domestic locations. In addition, various foreign sales and service subsidiaries have leased an aggregate of approximately 22,720 square feet of office space. We believe our facilities are adequate to meet our needs in 2001. ITEM 3. LEGAL PROCEEDINGS We are not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of our shareholders during the fourth quarter of 2000. 20 21 ITEM E.O. EXECUTIVE OFFICERS OF THE COMPANY Our executive officers as of March 19, 2001, were as follows:
NAME AGE POSITION ---- --- -------- Burton J. Smith 60 Chief Scientist and Director James E. Rottsolk 56 Chief Executive Officer, President and Chairman Rene' G. Copeland 53 Vice President - Sales and Marketing Kenneth W. Johnson 58 Vice President - Finance, Chief Financial Officer, and Secretary David R. Kiefer 52 Vice President - Hardware Development Brian D. Koblenz 40 Vice President - Software Development Gerald E. Loe 51 Vice President - Worldwide Service John D. Neale 59 Vice President - Human Resources Douglas C. Ralphs 42 Vice President - Controller Katherine L. Rowe 44 Vice President - Manufacturing Richard M. Russell 56 Vice President - International
Burton J. Smith is one of our co-founders and has been our Chief Scientist and a Director since our inception in 1987. He is a recognized authority on high performance computer architecture and programming languages for parallel computers, and is the principal architect of the MTA system. Mr. Smith was a Fellow of the Supercomputing Research Center (now Center for Computing Sciences), a division of the Institute for Defense Analyses, from 1985 to 1988. He was honored in 1990 with the Eckert-Mauchly Award given jointly by the Institute for Electrical and Electronic Engineers and the Association for Computing Machinery, and was elected a Fellow of both organizations in 1994. Mr. Smith received S.M., E.E. and Sc.D. degrees from the Massachusetts Institute of Technology. James E. Rottsolk is one of our co-founders and has served as our Chief Executive Officer, President and a Director since our inception in 1987. He became Chairman of the Board in December 2000. Prior to 1987, Mr. Rottsolk served as an executive officer with several high technology start-up companies. Mr. Rottsolk received a B.A. degree from St. Olaf College and A.M. and J.D. degrees from the University of Chicago. Rene' G. Copeland joined us as Vice President -- Sales and Marketing in February 2000. From 1998 to joining us, Mr. Copeland worked at IBM, where he served as the Manager of the World-Wide Manufacturing Segment for the RS6000 SP Supercomputer. Prior to joining IBM, Mr. Copeland held a variety of senior management, marketing and sales positions at Silicon Graphics, Inc., and Cray Research, Inc. Mr. Copeland graduated from the U.S. Military Academy at West Point with a B.S. Electrical Engineering, and received a M.B.A. from the University of Chicago. Kenneth W. Johnson joined us in September 1997 as Vice President - Finance, Chief Financial Officer and Secretary. Prior to joining us, Mr. Johnson practiced law in Seattle for twenty years with Stoel Rives LLP and predecessor firms, where his practice emphasized corporate finance. Mr. Johnson received an A.B. degree from Stanford University and a J.D. degree from Columbia University Law School. Brian D. Koblenz served as our Group Leader, Languages and Compilers, from 1990 until May 1994, when he assumed his present position as Vice President -- Software Development. Prior to joining us, Mr. Koblenz was Principal Software Engineer at Digital Equipment Corporation from 1986 to 1989. He was lead designer of Digital's high performance vector 21 22 FORTRAN compiler and participated in the Alpha architecture and VAX vectorization efforts. He received a B.S. from the University of Vermont and a M.S. from the University of Washington. David R Kiefer joined us as Vice President - Hardware Engineering in April 2000. From 1996 to 2000, Mr. Kiefer was Director of Hardware Engineering at the Cray Research operations of Silicon Graphics, Inc. Prior to joining Silicon Graphics, he held a variety of engineering and engineering management positions with Univac and Cray Research, Inc. Mr. Kiefer received his B.S. in Electrical Engineering from the University of Wisconsin. Gerald E. Loe joined us in 1992 as Vice President - Hardware Engineering and Manufacturing. He was named Vice President -- Hardware Engineering in 1996, and Vice President -- Worldwide Service in April 2000. Prior to joining us, he was Vice President of Operations at Siemens Quantum Inc., a high-end radiology ultrasound company, from 1989 to 1992. Mr. Loe received a B.S.M.E. from the Massachusetts Institute of Technology and a M.B.A. from Harvard Business School. John D. Neale joined us as Vice President -- Human Resources in December 2000. He served in various positions with Battelle Memorial Institute in Columbus, Ohio, from 1988 to 2000, most recently as Director of Human Resources. From 1974 to 1988, Mr. Neale held various managerial positions with components of General Electric Co. He received a Masters in Industrial Relations at the University of Wisconsin and his undergraduate degree at St. Francis College in Ft. Wayne, Indiana. Douglas C. Ralphs joined us as Vice President -- Corporate Controller in November 2000. He was chief financial officer at Interpoint, Inc. from 1998 until he joined us, and held various financial management positions at Itron, Inc. from 1989 to 1998, serving as treasurer from 1997 to 1998. He previously held financial positions with Hewlett-Packard Co. and Morrison Knudsen. He received a M.B.A. from the University of Chicago and a B.A. from Boise State University. Katherine L. Rowe joined us as Director of Manufacturing in 1994 and was named Vice President - Manufacturing in 1996. Prior to joining us, Ms. Rowe was an Engineering Manager at ELDEC Corporation, an aerospace electronics company, and was Manufacturing Manager and Project Manager in new product development at Physio-Control Corporation, a medical electronics company. She received her S.M. from Massachusetts Institute of Technology and her B.S.M.E. from Purdue University. Richard M. Russell joined us as Director of New Business Development in 1995 and was named Vice President - Marketing in March 1998. In February 2000 he was appointed Vice President -- International. Prior to joining us, he worked in a variety of sales and marketing positions at several high technology companies, including Cray Research, Inc. from 1976 through 1990 and Kendall Square Research Corporation from 1991 through 1994. Mr. Russell was educated in England. 22 23 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the Nasdaq National Market under the symbol CRAY; prior to April 1, 2000, our stock traded under the symbol TERA. On March 19, 2001, we had 39,375,541 shares of common stock outstanding that were held by 763 holders of record. We have not paid cash dividends on our common stock. We currently anticipate that we will retain all available funds for use in our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future. In addition our credit facilities restrict our ability to pay cash dividends. The quarterly high, low and closing sales prices of our common stock for the periods indicated are as follows:
1999 2000 ------------------------------- --------------------------------- High Low Close High Low Close ------ ------- ----- ------ ------- ------- First Quarter 9 3/4 4 7 1/4 11 1/2 4 1/8 6 7/16 Second Quarter 7 4 1/2 5 1/2 6 7/8 3 3 7/16 Third Quarter 6 3/16 2 7/8 4 1/8 7 5/8 3 9/32 4 15/32 Fourth Quarter 5 5/8 2 15/16 4 1/2 4 1/2 1 1/8 1 1/2
On March 19, 2001, the closing sale price for the common stock was $1.78. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. 23 24 ITEM 6. SELECTED FINANCIAL DATA Financial data for fiscal year 2000 in the following table includes nine months of activity of the Cray Research business acquired on April 1, 2000. (In thousands, execpt for per share amounts and statistical data)
Years Ended December 31, 1996 1997 1998 1999 2000 -------- -------- -------- -------- --------- Operating Data: Product Revenue $ $ $ 1,274 $ 1,794 $ 46,617 Service Revenue 714 320 71,455 Cost of Product Revenue 3,759 15,165 32,505 Cost of Service Revenue 584 273 34,077 Research and Development 10,319 13,142 13,664 15,216 48,426 Net Loss (12,077) (15,755) (19,803) (34,532) (25,388) Comprehensive Loss (18,806) (18,672) (20,736) (34,647) (25,516) Net Loss per Common Share $ (3.53) $ (2.13) $ (1.70) $ (1.74) $ (0.78) Weighted Average Outstanding Shares 5,321 8,785 12,212 19,906 32,699 Balance Sheet Data: Cash and Cash Equivalents $ 929 $ 13,329 $ 3,162 $ 10,069 $ 4,626 Working Capital (22) 14,342 7,269 9,208 (28,205) Warranty Reserves, Long-term Portion 14,285 Capital Leases, Long-term Portion 114 532 573 390 284 Notes Payable, Long-term Portion 1,022 254 Total Assets 4,617 20,859 20,288 23,410 136,193 Redeemable Securities 9,478 Shareholders' Equity 1,128 6,368 11,889 14,307 36,147 Statistical Data: Number of Full-time Employees 61 84 109 123 886
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS PRELIMINARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below includes "forward- looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, and is subject to the safe harbor created by that Section. Factors that realistically could cause results to differ materially from those projected in the forward looking statements are set forth in this section and under "Business - --Factors That Could Affect Future Results." The following discussion should also be read in conjunction with the Financial Statements and accompanying Notes thereto. 24 25 OVERVIEW We design, develop, market and service high-performance computer systems, commonly known as supercomputers. We presently market two computer systems, the Cray SV1 and T3E, and provide maintenance services to the world-wide installed base of these and earlier models of Cray computers. We are developing enhancements to the Cray SV1, and we are developing three new computer systems, the MTA-2, based on our multithreaded architecture system, the Super Cluster, a highly parallel system using leading commercial off-the-shelf components, and the SV2, which will combine elements of the SV1 and T3E computers. In 2000 we largely were involved in the separation of the Cray Research operations from those of SGI and integrating them with our own. This process included establishing separate network, communications and other infrastructure services, reconstituting the marketing and sales operations, setting up subsidiary operations for international sales and services, implementing new operational policies and procedures, and identifying and filling openings in management, administration and other areas. We have experienced net losses in each year of operations. We incurred net losses of approximately $25.4 million in 2000, $34.5 million in 1999 and $19.8 million in 1998. We recognize revenue from sales of our computer systems upon acceptance by the customer, although depending on sales contract terms, revenue may be recognized when title passes upon shipment or may be delayed until funding is certain. We recognize service revenue from the maintenance of our computer systems ratably over the term of each maintenance agreement. Factors that should be considered in evaluating our business, operations and prospects and that may affect our future results and financial condition are set forth above, beginning on page 11. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998. With the acquisition of the Cray Research business unit on April 1, 2000, period-to-period comparisons of our operating results that include periods prior to the acquisition are not indicative of results for any future period. REVENUE. We had revenue from product sales of $46.6 million for 2000, up from $1.8 million in 1999 and $1.3 million in 1998. Product revenue represented 39% of total revenues for 2000 and consisted primarily of $19.1 million for our SV1 product line and $27.3 million for our T3E product line. 1999 revenues included $1.7 million from the upgrade of the MTA system at the San Diego Supercomputer Center ("SDSC") to eight processors, and 1998 revenues included $1.3 million from the sale of the two-processor MTA system to SDSC, our first revenue as Tera Computer Company from product sales. 25 26 We had service revenue of $71.5 million for 2000, up from $320,000 in 1999 and $714,000 in 1998. Services are provided under separate maintenance contracts with our customers. These contracts generally provide for maintenance services for one year, although some are for multi-year periods. The overall increase in service revenue is due to the acquisition of the Cray product line and related service business in April 2000. We expect service revenue to decline slowly over the next year or so as older systems are withdrawn from service and then to stabilize as our new systems are placed in service. Service revenue represented 61% of total revenues for 2000. OPERATING EXPENSES. Cost of product revenue was $32.5 million for 2000, $15.2 million for 1999 and $3.8 million for 1998. Cost of product revenue for 2000 represented 70% of product revenue for 2000. The high cost of product revenue in 2000 is due to the age of the SV1 and T3E product lines and inventory adjustments for SV1 and MTA gallium arsenide parts. Cost of product revenue was high in 1999 and 1998 as a percentage of the revenue due to the inclusion of manufacturing costs and inventory adjustments relating to the MTA product line and favorable pricing terms provided to our first MTA customer. Cost of service revenue was $34.1 million for 2000, $273,000 for 1999 and $584,000 for 1998. Cost of service revenue for 2000 was net of $18.4 of warranty reserve utilization. Cost of service revenue represented 48% of service revenues for 2000. Research and development expenses reflect our costs associated with the enhancements to the Cray SV1 and T3E systems and the development of the MTA and SV2 systems, including related software development. These costs also include personnel expenses, allocated overhead and operating expenses, software, materials and engineering expenses, including payments to third parties. These costs are offset in part by governmental development funding. Net research and development expenses were $48.4 million in 2000, $15.2 million for 1999 and $13.7 million for 1998. Research and development expenses in 2000 represented 41% of revenue. We expect that research and development expenses will decrease slightly in 2001, with increases in engineering personnel, principally software engineers, being offset by decreases in third-party non-recurring engineering expenses as we complete development of the MTA-2 and SV-2 systems. In subsequent years, unless we obtain additional governmental development funding to replace funding for projects as they are completed, the net amount of research and development expenditures will increase. Over time, with receipt of increased revenue from products currently under development and sales of the NEC SX-5 series of computers, we expect research and development expenses to decrease as a percentage of overall revenue. Marketing and sales expense were $14.4 million in 2000, $2.5 million in 1999 and $1.8 million in 1998. The increase in these expenses for 2000 over 1999 was due to the acquisition of the Cray Research business unit, which required us to re-establish the Cray sales and customer support staff and increase expenditures in connection with sales and marketing, benchmarks and development of third party applications software. The increase in these expenses for 1999 over 1998 was due largely to higher wages and operating costs. General and administrative expenses were $7.0 million for 2000, $3.1 million in 1999 and $2.1 million in 1998. The increase in these expenses for 2000 over 1999 was due to the 26 27 acquisition of the Cray Research operations, which required us to add managerial and administrative staff and increases in legal, accounting and consulting expenses in connection with establishing foreign operations and implementing new accounting systems. The increase in 1999 expenses over 1998 was due largely to higher wages, and operating costs associated with being a publicly owned company. General and administrative expenses are expected to increase as we complete our administrative staffing, but should decline as a percentage of revenue. We incurred amortization expense of $5.2 million in 2000 primarily related to the goodwill and intangible assets from the acquisition of the Cray Research business unit. INTEREST INCOME (EXPENSE). Interest income was $690,000 for 2000, $537,000 for 1999, and $366,000 for 1998, reflecting the Company's increased cash position due to the sales of equity securities in the first quarter of 2000, and in 1999 and 1998. Interest expense was $2.4 million for 2000, $815,000 for 1999 and $189,000 for 1998. The increase in 2000 was largely due to imputed interest expense of $1.4 million for 2000 on the non-interest bearing note issued to SGI, a non-cash interest expense of approximately $336,000 associated with the value of the conversion feature of certain investor promissory notes, a non-cash expense of $200,000 for the value of warrants issued in conjunction with investor promissory notes and $92,000 of interest paid on a line of credit. The increase in 1999 was largely due to a non-cash interest expense of approximately $278,000 associated with the value of the conversion feature of certain convertible promissory notes issued in the first quarter of 1999. The 1999 results also include a non-cash expense for the value of detachable warrants issued in conjunction with convertible promissory notes, of which $249,000 was recognized upon conversion in the second quarter of 1999. TAXES. We made a provision of $831,000 for international income taxes in 2000. As of December 31, 2000, we had net operating loss carry-forwards of approximately $119.4 million which expire in years 2003 through 2020, if not utilized. PREFERRED STOCK. In the second quarter of 1999, all of our outstanding preferred stock was converted to common stock. The dividends for 1998 were accrued on our Series A Convertible Preferred Stock, and were higher than that accrued during the comparable period of 1999 because we had more shares of Preferred Stock then outstanding. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents totaled $4.6 million at December 31, 2000 compared to $10.1 million at December 31, 1999. Restricted cash balances, which serve as collateral for capital 27 28 equipment loans and leases, totaled $761,000 at December 31, 2000, and $1.1 million at December 31, 1999. Net cash provided by operating activities was $5.1 million for the year ended December 31, 2000, compared to net cash used of $26.3 million in 1999. On a pro forma basis, in the nine months subsequent to the Cray acquisition we had net cash provided by operating activities of $13.7 million. For 2000, net operating cash flows were primarily attributed to increases in depreciation and amortization, accounts payable and deferred revenue offset in part by increases in accounts receivable and warranty reserves. Net cash used in investing activities was approximately $57.4 million for the year ended December 31, 2000, compared to $427,000 for 1999. In 2000, we paid a total of $50.2 million to SGI to acquire the Cray Research business unit. We also spent $5.8 million on fixed assets, primarily consisting of computer hardware and software and electronic test equipment. Net cash provided by financing activities was $47.0 million for the year ended December 31, 2000, compared to $33.6 million for 1999. In 2000, we raised $25.2 million in a private placement of 5.2 million shares of common stock and $8.9 million from the exercise of common stock warrants. We also raised $12.5 million through the issuance of promissory notes to two investors, retiring $4.2 million of these notes by year-end through conversion into common stock. Subsequent to December 31, 2000, we have paid the remaining $8.3 million principal amount and interest through sales of common stock to the investors. Over the next twelve months our significant cash requirements relate to operational expenses, consisting primarily of personnel costs, costs of inventory and third-party engineering expenses, and acquisition of property and equipment. These expenses include our commitments to acquire components and manufacturing and engineering services. We expect that anticipated product sales and maintenance services over the next twelve months will generate positive cash flow from operations. We secured a $15 million credit facility in March 2001, and expect that the NEC distribution agreement will be completed in the second quarter of 2001, at which time NEC will invest $25 million in us. At any particular time, given the high average selling price of our products, our cash position is affected by the timing of product sales and the receipt of prepaid maintenance revenue. In addition, delays in the development of the SV1ex, MTA-2 and SuperCluster systems, all planned to be completed in the next twelve months, and the SV2 system may require additional capital earlier than planned. While we believe our cash resources will be adequate for the next 12 months, we may need to raise additional equity and/or debt capital through our shelf registration statement, private placements and/or enhanced credit facilities. If we are successful in our product development and market conditions were favorable, we may wish to consider financings to enhance our cash position and working capital position. Financings may not be available to us when needed or, if available, may not be available on satisfactory terms and may be dilutive to our shareholders. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in June 1998, which is effective for the 28 29 Company beginning January 1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. Since we do not currently hold any derivative instruments, SFAS No. 133 is not expected to have any impact on the consolidated financial statements. In December 1999, the United States Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which was required to be adopted in the Company's fourth fiscal quarter of 2000. SAB No. 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. The adoption of SAB No. 101 did not have a material impact on the consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of Accounting Principles Board (APB) Opinion No. 25, which addresses certain accounting issues which arose under the previously established accounting principles relating to stock-based compensation. The adoption of this interpretation did not have a material effect on the Company's consolidated financial statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Substantially all of our cash equivalents and marketable securities are held in money market funds or commercial paper of less than 90 days that is held to maturity. Accordingly, we believe that the market risk arising from our holdings of these financial instruments is minimal. We sell our products primarily in North America, but with significant sales in Asia and Europe. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Our products are generally priced in U.S. dollars, and a strengthening of the dollar could make our products less competitive in foreign markets. While we commonly sell products with payments in U.S. dollars, our product sales contracts occasionally call for payment in foreign currencies and to the extent we do so, we are subject to foreign currency exchange risks. We believe that a 10% change in foreign exchange rates would not have a material impact on the financial statements. Our foreign maintenance contracts are paid in local currencies and provide a natural hedge against local expenses. To the extent that we wish to repatriate any of these funds to the United States, however, we are subject to foreign exchange risks. We do not hold any derivative instruments and have not engaged in hedging transactions. 29 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS* Consolidated Balance Sheets at December 31, 1999 and December 31, 2000................. F1 Consolidated Statements of Operations and Comprehensive Loss for each of the three years in the period ended December 31, 2000............... F2 Consolidated Statements of Shareholders' Equity for each of the three years in the period ended December 31, 2000.................................................. F3 Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2000.................................................. F4 Notes to Consolidated Financial Statements............................................. F5 Independent Auditors' Report........................................................... F22
- ---------- * The Financial Statements are located following page 38. 30 31 QUARTERLY FINANCIAL DATA (in thousands, except per share data) The following table presents unaudited quarterly financial information for the two years ended December 31, 2000. In the opinion of management, this information contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation thereof. The operating results are not necessarily indicative of results for any future periods.
1999 2000 -------------------------------------------- -------------------------------------------- For the Quarter Ended 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 ------- ------- -------- ------- ------- ------- -------- -------- Revenue $ 661 $ 260 $ 850 $ 343 $ 43 $50,973 $ 33,688 $ 33,368 Cost of Sales 3,017 1,785 9,039 1,597 2,029 27,503 18,426 18,624 Gross margin (2,356) (1,525) (8,189) (1,254) (1,986) 23,470 15,262 14,744 Research and Development 3,033 3,686 4,752 3,745 4,483 13,865 13,272 16,806 Marketing and Sales 632 545 611 729 768 2,822 4,397 6,378 General and Administrative 465 638 551 1,437 1,101 1,898 1,645 2,389 Net Loss (6,811) (6,672) (13,934) (7,115) (8,005) 2,661 (6,097) (13,947) Comprehensive loss (6,881) (6,717) (13,934) (7,115) (8,005) 2,661 (6,097) (13,875) Net Income (Loss) Per Common Share, Basic and Diluted $ (0.47) $ (0.40) $ (0.59) $ (0.29) $ (0.27) $ 0.08 $ (0.18) $ (0.41)
The Company's future operating results may be subject to quarterly fluctuations as a result of a number of factors, including the timing of deliveries of the Company's products. See "Business -- Factors That Could Affect Future Results." Quarter-to-quarter comparisons should not be relied upon as indicators of future performance. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 31 32 PART III Certain information required by Part III is omitted from this Report as we will file a definitive proxy statement for the Annual Meeting of Shareholders to be held on May 16, 2001, pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the Proxy Statement is incorporated herein by reference. Only those sections of the Proxy Statement which specifically address the items set forth herein are incorporated by reference. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information with respect to our Directors may be found under the captions "The Board of Directors" and "Election of Three Directors" in our Proxy Statement. Such information is incorporated herein by reference. Information with respect to Executive Officers may be found beginning on page 21 above, under the caption "The Executive Officers of the Company." Information with respect to compliance with Section 16(a) of the Exchange Act by the persons subject thereto may be found under the caption "Information About Our Common Stock Ownership" in the Proxy Statement and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information in the Proxy Statement set forth under the captions "How We Compensate Directors," "How We Compensate Executive Officers," "The Board of Directors" and "The Committees of the Board" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information in the Proxy Statement set forth under the caption "Information About Our Common Stock Ownership" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Transactions" in the Proxy Statement is incorporated herein by reference. 32 33 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) EXHIBIT LISTING 2.1 Asset Purchase Agreement between Silicon Graphics, Inc. and the Company, dated as of March 1, 2000(3) 2.2 Amendment No. 1 to the Asset Purchase Agreement between Silicon Graphics, Inc., and the Company, dated as of March 31, 2000(3) 2.3 Technology Agreement between Silicon Graphics and the Company, effective as of March 31, 2000(4) 2.4 Services Contract Agreement between Silicon Graphics, Inc. and the Company, dated as of March 31, 2000(4) 2.5 Transition Services Agreement between Silicon Graphics, Inc., and the Company, dated as of March 31, 2000(4) 3.1 Restated Articles of Incorporation(1) 3.2 Restated Bylaws 10.1 1988 Stock Option Plan(2) 10.2 1993 Stock Option Plan(2) 10.3 1995 Stock Option Plan(2) 10.4 1995 Independent Director Stock Option Plan(2) 10.5 1999 Stock Option Plan(5) 10.6 2000 Non-Executive Stock Option Plan(5) 10.7 Lease Agreement between Merrill Place, LLC and the Company, dated November 21, 1997(6) 10.8 Agreement between CIT Group/Business Credit, Inc. and the Company, dated June 29, 2000(1) 10.9 Fab I Building Lease Agreement between Union Semiconductor Technology Corporation and the Company, dated as of June 30, 2000. 10.10 Conference Center Lease Agreement between Union Semiconductor Technology Corporation and the Company, dated as of June 30, 2000. 10.11 Mendota Heights Office Lease Agreement between the Teachers Retirement System of the State of Illinois and the Company, dated as of August 10, 2000. 23.1 Independent Auditors' Consent
- ---------- (1) Incorporated by reference to the Company's Report on Form 10-Q as filed with the Commission on August 14, 2000. (2) Incorporated by reference to Form SB-2 Registration Statement, Registration No. 33-95460-LA, as filed with the Commission on August 3, 1995. (3) Incorporated by reference to the Company's Report on Form 8-K, as filed with the Commission on April 17, 2000 33 34 (4) Incorporated by reference to the Company's Report on Form 8-K, as filed with the Commission on May 15, 2000 (5) Incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 333-57970, as filed with the Commission on March 30, 2001 (6) Incorporated by reference to the Company's Report on Form 10-K, as filed with the Commission for the fiscal year ended December 31, 1997. (b) REPORTS ON FORM 8-K We filed no reports on Form 8-K in the fourth quarter of 2000. 34 35 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Seattle, State of Washington, on March 30, 2001. CRAY INC. By JAMES E. ROTTSOLK --------------------------------------- James E. Rottsolk Chief Executive Officer and President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of Company and in the capacities indicated on March 30, 2001.
Signature Title --------- ----- By JAMES E. ROTTSOLK Chief Executive Officer, --------------------------------- President and Chairman of James E. Rottsolk the Board of Directors By BURTON J. SMITH Chief Scientist and Director --------------------------------- Burton J. Smith By KENNETH W. JOHNSON Chief Financial Officer --------------------------------- Kenneth W. Johnson By DOUGLAS C. RALPHS Chief Accounting Officer --------------------------------- Douglas C. Ralphs By DAVID N. CUTLER Director --------------------------------- David N. Cutler By DANIEL J. EVANS Director --------------------------------- Daniel J. Evans By KENNETH W. KENNEDY Director --------------------------------- Kenneth W. Kennedy By STEPHEN C. KIELY Director --------------------------------- Stephen C. Kiely
35 36 By WILLIAM A. OWNES Director --------------------------------- William A. Owens By: TERREN S. PEIZER Director --------------------------------- Terren S. Peizer By DEAN D. THORNTON Director --------------------------------- Dean D. Thornton
36 37 EXHIBIT INDEX 2.1 Asset Purchase Agreement between Silicon Graphics, Inc. and the Company, dated as of March 1, 2000(3) 2.2 Amendment No. 1 to the Asset Purchase Agreement between Silicon Graphics, Inc., and the Company, dated as of March 31, 2000(3) 2.3 Technology Agreement between Silicon Graphics and the Company, effective as of March 31, 2000(4) 2.4 Services Contract Agreement between Silicon Graphics, Inc. and the Company, dated as of March 31, 2000(4) 2.5 Transition Services Agreement between Silicon Graphics, Inc., and the Company, dated as of March 31, 2000(4) 3.1 Restated Articles of Incorporation(1) 3.2 Restated Bylaws 10.1 1988 Stock Option Plan(2) 10.2 1993 Stock Option Plan(2) 10.3 1995 Stock Option Plan(2) 10.4 1995 Independent Director Stock Option Plan(2) 10.5 1999 Stock Option Plan(5) 10.6 2000 Non-Executive Stock Option Plan(5) 10.7 Lease Agreement between Merrill Place, LLC and the Company, dated November 21, 1997(6) 10.8 Agreement between CIT Group/Business Credit, Inc. and the Company, dated June 29, 2000(1) 10.9 Fab I Building Lease Agreement between Union Semiconductor Technology Corporation and the Company, dated as of June 30, 2000. 10.10 Conference Center Lease Agreement between Union Semiconductor Technology Corporation and the Company, dated as of June 30, 2000. 10.11 Mendota Heights Office Lease Agreement between the Teachers Retirement System of the State of Illinois and the Company, dated as of August 10, 2000. 23.1 Independent Auditors' Consent
- ---------- (1) Incorporated by reference to the Company's Report on Form 10-Q as filed with the Commission on August 14, 2000. (2) Incorporated by reference to Form SB-2 Registration Statement, Registration No. 33-95460-LA, as filed with the Commission on August 3, 1995. (3) Incorporated by reference to the Company's Report on Form 8-K, as filed with the Commission on April 17, 2000 37 38 (4) Incorporated by reference to the Company's Report on Form 8-K, as filed with the Commission on May 15, 2000 (5) Incorporated by reference to the Company's Registration Statement on Form S-8, Registration No. 333-57970, as filed with the Commission on March 30, 2001 (6) Incorporated by reference to the Company's Report on Form 10-K, as filed with the Commission for the fiscal year ended December 31, 1997. 38 39 CRAY INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands)
December 31, December 31, 1999 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 10,069 $ 4,626 Restricted cash 1,132 761 Accounts receivable 641 25,159 Inventory, net 4,513 23,637 Prepaid expenses and other assets 544 2,835 --------- --------- Total current assets 16,899 57,018 Property and equipment, net 5,829 25,535 Spares inventory, net 21,139 Goodwill and intangible assets, net 186 29,578 Other assets 496 2,923 --------- --------- TOTAL $ 23,410 $ 136,193 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,366 $ 16,247 Accrued payroll and related expenses 2,147 12,028 Accrued loss on purchase commitment 6,006 Other accrued liabilities 209 6,574 Deferred revenue 68 17,666 Current portion of warranty reserves 17,996 Current portion of obligations under capital leases 612 349 Current portion of notes payable 289 8,357 --------- --------- Total current liabilities 7,691 85,223 Warranty reserves 14,285 Obligations under capital leases 390 284 Notes payable 1,022 254 Commitments and contingencies Shareholders' equity: Common Stock, par $.01 - Authorized, 100,000 shares; issued and outstanding, 25,212 and 35,250 shares 111,443 158,799 Accumulated deficit (97,136) (122,524) Accumulated other comprehensive income: Cumulative currency translation adjustment (128) --------- --------- 14,307 36,147 --------- --------- TOTAL $ 23,410 $ 136,193 ========= =========
See accompanying notes. F-1 40 CRAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share data)
Years ended December 31, ----------------------------------- 1998 1999 2000 -------- -------- --------- Revenue: Product $ 1,274 $ 1,794 $ 46,617 Service 714 320 71,455 -------- -------- --------- Total revenue 1,988 2,114 118,072 -------- -------- --------- Operating expenses: Cost of product revenue 3,759 15,165 32,505 Cost of service revenue 584 273 34,077 Research and development 13,664 15,216 48,426 Marketing and sales 1,830 2,517 14,365 General and administrative 2,131 3,091 7,033 Amortization of goodwill and intangible assets 5,217 -------- -------- --------- Total operating expenses 21,968 36,262 141,623 -------- -------- --------- Loss from operations (19,980) (34,148) (23,551) Other income (expense), net (106) 675 Interest income (expense), net 177 (278) (1,681) -------- -------- --------- Loss before income taxes (19,803) (34,532) (24,557) Provision for income taxes 831 -------- -------- --------- Net loss (19,803) (34,532) (25,388) Preferred stock dividend (468) (115) Amortization of preferred stock discount (465) -------- -------- --------- Net loss for common shareholders (20,736) (34,647) (25,388) Other comprehensive income: Currency translation adjustment (128) -------- -------- --------- Comprehensive loss $(20,736) $(34,647) $ (25,516) ======== ======== ========= Basic and diluted net loss per common share $ (1.70) $ (1.74) $ (0.78) ======== ======== ========= Weighted average shares outstanding, basic and diluted 12,212 19,906 32,699 ======== ======== =========
See accompanying notes. F-2 41 CRAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Series B Convertible Preferred Stock Common Stock --------------------- ------------------------ Number of Number of Shares Amount Shares Amount --------- ------ --------- -------- BALANCE, January 1, 1998 $ 11,248 $ 49,168 Exercise of stock options 153 220 Exercise of warrants 433 125 Issuance of shares under Employee Stock Purchase Plan 30 271 Issuance of common stock for leasehold improvements 176 1,314 Issuance of common stock for services 3 27 Common stock issued in private placement 800 8,000 Issuance of common stock for prepaid rent 13 97 Conversion of Series A preferred shares 1,342 9,478 Issuance of Series B preferred stock, net of issuance costs of $326 6 5,674 Issuance of common stock for accrued dividends 6 45 Preferred stock dividend Net loss ------ ------ ------ -------- BALANCE, December 31, 1998 6 5,674 14,204 68,745 Issuance of shares under Employee Stock Purchase Plan 55 270 Preferred stock dividend distributed in common stock 36 190 Common stock issued in private placement, net of issuance costs of $1,378 7,685 33,148 Beneficial conversion feature in notes and interest expense recognized on convertible warrants 595 Conversion of Series B preferred shares (6) (5,674) 1,275 5,559 Issuance of shares under Company 401(k) Plan 36 144 Exercise of stock options 112 55 Exercise of warrants 1,375 14 Options issued for services 77 Warrants issued for services 602 Common stock issued in exchange for notes 434 2,046 Net loss ------ ------ ------ -------- BALANCE, December 31, 1999 25,212 111,443 Issuance of shares under Employee Stock Purchase Plan 179 754 Cash received on subscribed common stock 900 Common stock issued in private placement, net of issuance costs of $1,847 5,227 24,287 Beneficial conversion feature in notes and interest expense of $200 recognized on options 1,283 Common stock issued in exchange for notes, net of issuance costs of $294 1,671 3,906 Issuance of shares under Company 401(k) Plan 14 92 Exercise of stock options 69 182 Exercise of warrants 1,878 8,885 Options issued for services 156 Warrant issued for services 211 Issuance of common stock to SGI 1,000 6,700 Other comprehensive income: Cumulative currency translation adjustment Net loss ------ ------ ------ -------- BALANCE, December 31, 2000 $ 35,250 $158,799 ====== ====== ====== ========
Preferred Currency Stock Accumulated Translation Dividend Deficit Adjustment Total ---------- ----------- ------------ --------- BALANCE, January 1, 1998 $ $ (42,801) $ 6,367 Exercise of stock options 220 Exercise of warrants 125 Issuance of shares under Employee Stock Purchase Plan 271 Issuance of common stock for leasehold improvements 1,314 Issuance of common stock for services 27 Common stock issued in private placement 8,000 Issuance of common stock for prepaid rent 97 Conversion of Series A preferred shares 9,478 Issuance of Series B preferred stock, net of issuance costs of $326 5,674 Issuance of common stock for accrued dividends 45 Preferred stock dividend 75 75 Net loss (19,803) (19,803) ------ --------- ------ --------- BALANCE, December 31, 1998 75 (62,604) 11,890 Issuance of shares under Employee Stock Purchase Plan 270 Preferred stock dividend distributed in common stock (75) 115 Common stock issued in private placement, net of issuance costs of $1,378 33,148 Beneficial conversion feature in notes and interest expense recognized on convertible warrants 595 Conversion of Series B preferred shares (115) Issuance of shares under Company 401(k) Plan 144 Exercise of stock options 55 Exercise of warrants 14 Options issued for services 77 Warrants issued for services 602 Common stock issued in exchange for notes 2,046 Net loss (34,532) (34,532) ------ --------- ------ --------- BALANCE, December 31, 1999 (97,136) 14,307 Issuance of shares under Employee Stock Purchase Plan 754 Cash received on subscribed common stock 900 Common stock issued in private placement, net of issuance costs of $1,847 24,287 Beneficial conversion feature in notes and interest expense of $200 recognized on options 1,283 Common stock issued in exchange for notes, net of issuance costs of $294 3,906 Issuance of shares under Company 401(k) Plan 92 Exercise of stock options 182 Exercise of warrants 8,885 Options issued for services 156 Warrant issued for services 211 Issuance of common stock to SGI 6,700 Other comprehensive income: Cumulative currency translation adjustment (128) (128) Net loss (25,388) (25,388) ------ --------- ------ --------- BALANCE, December 31, 2000 $ $(122,524) $ (128) $ 36,147 ====== ========= ====== =========
See accompanying notes. F-3 42 CRAY INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1999, AND 2000 (in thousands)
1998 1999 2000 -------- -------- -------- Operating activities Net loss $(19,803) $(34,532) $(25,388) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 803 1,881 14,349 Amortization of goodwill and intangible assets 5,217 Loss on disposal of assets 3,289 Imputed interest on non interest bearing note 1,437 Beneficial conversion feature of notes payable 595 336 Non-cash warrant and option expense 602 567 Inventory write down 6,589 Cash provided (used) by changes in operating assets and liabilities, net of effects of the Cray Research acquisition: Accounts receivable (279) 78 (20,483) Inventory (5,955) (2,047) 2,681 Other assets (837) 467 (2,416) Accounts payable 3,332 (501) 11,587 Other accrued liabilities (49) 5,331 Accrued payroll and related expenses (169) 603 6,032 Warranty reserves (15,053) Deferred revenue 19 49 17,598 -------- -------- -------- Net cash provided by (used by) operating activities (22,889) (26,265) 5,084 Investing activities Cash used for acquisition (51,585) Purchases of property and equipment (2,076) (427) (5,835) -------- -------- -------- Net cash used by investing activities (2,076) (427) (57,420) Financing activities Restricted cash (1,132) 371 Related party (receivable)/payments 61 (34) (129) Issuance of notes payable 1,900 12,500 Issuance of common stock 8,860 33,488 26,033 Proceeds from exercise of options 55 182 Proceeds from exercise of warrants 8,885 Principal payments on bank note (71) (253) Sale of preferred stock 5,674 Capital leases 203 (607) (568) -------- -------- -------- Net cash provided by financing activities 14,798 33,599 47,021 -------- -------- -------- Effect of foreign exchange rate changes on cash and cash equivalents (128) Net increase (decrease) in cash and cash equivalents (10,167) 6,907 (5,443) Cash and cash eqivalents Beginning of period 13,329 3,162 10,069 -------- -------- -------- End of period $ 3,162 $ 10,069 $ 4,626 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest $ 202 $ 174 $ 347 Non-cash investing and financing activities Inventory reclassified to property and equipment 1,191 5,233 Common stock issued for acquisition of business 6,700 Fixed asset additions through common stock 1,314 164 Fixed asset additions through notes payable 933 Fixed asset additions through capital leases 493 199 Note payable converted to common stock 2,045 4,200 Accounts payable converted to notes 594 Stock dividends 250 190 Beneficial conversion feature on notes payable 1,083
See accompanying notes. F-4 43 CRAY INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($ TABLES IN THOUSANDS) NOTE 1 DESCRIPTION OF BUSINESS Cray Inc. ("Cray" or the "Company") (formerly "Tera Computer Company") designs, develops, markets and services high-performance computer systems, commonly known as supercomputers. The Company presently markets two computer systems, the Cray SV1 and T3E, and provides maintenance services to the installed base of these and earlier models of Cray computers. The Company is developing enhancements to the Cray SV1, and is developing three new computer systems, the MTA-2, based on the Company's multithreaded architecture system; the SuperCluster, a highly parallel system using leading commercial off-the-shelf components; and the SV2, which will combine elements of the SV1 and T3E computers. The Company has a net loss of $25.4 million for the year ended December 31, 2000. Management's plans project sufficient cash flows to finance its planned operations for the next twelve months. In addition, subsequent to December 31, 2000, the Company entered in to $15 million financing agreement. (See Note 15 -- Subsequent Events). The Company also plans on finalizing a distribution agreement with NEC, which will provide an equity investment of $25 million. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ACCOUNTING PRINCIPLES The consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been eliminated. Investments in affiliates which are not majority owned are reported using the equity method. BUSINESS COMBINATIONS For business combinations that have been accounted for under the purchase method of accounting, the Company includes the results of operations of the acquired business from the date of acquisition. Net assets of the companies acquired are recorded at their fair value at the date of acquisition. The excess of the purchase price over the fair value of tangible net assets acquired is included in goodwill and intangible assets in the accompanying consolidated balance sheets. F-5 44 USE OF ESTIMATES Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly liquid financial instruments that are readily convertible to cash and have original maturities of three months or less at the time of acquisition. RESTRICTED CASH Restricted cash consists of cash equivalents that serve as collateral pursuant to lease and indebtedness agreements entered into in 1999 for the acquisition of capital equipment. GOODWILL AND INTANGIBLE ASSETS Goodwill and intangible assets are amortized on a straight-line basis over five years. FAIR VALUES OF FINANCIAL INSTRUMENTS At December 31, 2000, the Company had the following financial instruments: cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable. The carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and notes payable approximates their fair value based on the liquidity of these financial instruments or based on their short-term nature. REVENUE RECOGNITION Cray generally recognizes revenue from product sales upon customer acceptance; however, depending on sales contract terms, revenue may be recognized upon shipment, or delayed until funding is definite. Service revenues from the maintenance of computers are recognized ratably over the term of the maintenance contract. Funds from maintenance contracts that are paid in advance are recorded as deferred revenue. FOREIGN CURRENCY TRANSLATION The functional currency of the Company's foreign subsidiaries is the local currency. Assets and liabilities of foreign subsidiaries are translated into US dollars at year-end exchange rates, and revenues and expenses are translated at average rates prevailing during the year. Translation adjustments are included in accumulated other comprehensive loss and as a separate component of shareholders' equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved, which have been insignificant, are included in the consolidated statements of operations. F-6 45 RESEARCH AND DEVELOPMENT Research and development costs include costs incurred in the development and production of the Company's hardware and software, costs incurred to enhance and support existing software features and expenses related to future implementations of systems. Research and development costs are expensed as incurred. Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, requires the capitalization of certain software product costs after technological feasibility of the software is established. Due to the relatively short period between the technological feasibility a product and completion of product development and the insignificance of related costs incurred during this period, no software development costs were capitalized. INVENTORIES Inventories are valued at the lower of cost (first-in, first-out) or market (LCM). The Company regularly evaluates the technological usefulness of various inventory components. When it is discovered that previously inventoried components do not function as intended in a fully operational system, the costs associated with these components are expensed. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the related assets, ranging from three to seven years. Equipment under capital leases is depreciated over the lease term. Leasehold improvements are amortized over the lesser of their estimated useful lives or the term of the lease. SPARES INVENTORY Spares inventory is stated at cost, less accumulated depreciation. Depreciation on spares inventory is computed using the straight-line method over the estimated useful lives of three or four years. IMPAIRMENT OF LONG-LIVED ASSETS Pursuant to SFAS No. 121, management periodically evaluates long-lived assets, consisting primarily of property and equipment and goodwill and intangible assets, to determine whether there has been any impairment of these assets and the appropriateness of their remaining useful lives. The Company evaluates impairment whenever events or changes in circumstances indicate that the carrying amount of the Company's assets might not be recoverable. Accordingly, during 2000, the Company recorded an impairment loss of $3.3 million on certain obsolete fixed assets included in cost of product sales in the Consolidated Statement of Operations and Comprehensive Loss. F-7 46 INCOME TAXES The Company accounts for income taxes under SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform with the current-year presentation. NET LOSS PER SHARE Basic and diluted net loss per share is computed based on the weighted average number of shares of common stock outstanding. Net loss per share has been computed in accordance with SFAS No. 128, Earnings per Share. Under the provisions of SFAS No. 128, basic net loss per share is computed by dividing the net comprehensive loss for the period by the weighted average number of common shares outstanding. Common stock equivalent shares related to stock options, warrants and shares subject to repurchase are excluded from the calculation as their effect is antidilutive. Accordingly, basic and diluted net loss per share are equivalent. SEGMENT INFORMATION The Company has organized and managed its operations in a single operating segment providing global sales and service of high performance computers. See note 14 -- Segment Information. WARRANTY RESERVE Certain components in the T90 vector computers sold by Silicon Graphics Inc. ("SGI") prior to the Company's acquisition of the Cray Research operations have an unusually high failure rate. The cost of servicing the T90 computers exceeds the related service revenues. The Company is continuing to take action that commenced prior to the acquisition to address this problem, and has recorded a reserve to provide for anticipated future losses on the T90 maintenance service contracts. Included in warranty reserves at December 31, 2000, is an accrual of $31.5 million for estimated losses on service contracts covering the Cray Business' T90 product line. The reserve is calculated as the excess of estimated service costs over estimated service revenues for the term of the related contracts. Estimated service costs include cost of repair parts, direct costs of service, indirect labor, and overhead allocations based on management estimates of time dedicated to service T-90 contracts. Stated contract terms are adjusted for management estimates of when T-90 products will be replaced before the expiration of the service contract term. A summary of warranty reserve is as follows (in thousands): F-8 47
Balance Balance December 31, 2000 2000 December 31, 1999 Additions Deductions 2000 ------------ --------- ----------- ------------ Warranty Reserve $ -- $47,461 $(15,180) $32,281 ==== ======= ======== =======
RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, in June 1998, which is effective for the Company beginning January 1, 2001. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. Since the Company does not currently hold any derivative instruments, SFAS No. 133 is not expected to have any impact on the consolidated financial statements. In December 1999, the United States Securities and Exchange Commission (SEC) released Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, which was required to be adopted in the Company's fourth fiscal quarter of 2000. SAB No. 101 provides guidance on revenue recognition and the SEC staff's views on the application of accounting principles to selected revenue recognition issues. The adoption of SAB No. 101 did not have a material impact on the consolidated financial statements. In March 2000, the FASB issued Interpretation No. 44 (FIN 44), Accounting for Certain Transactions Involving Stock Compensation--an Interpretation of Accounting Principles Board (APB) Opinion No. 25, which addresses certain accounting issues which arose under the previously established accounting principles relating to stock-based compensation. The adoption of this interpretation did not have a material effect on the Company's consolidated financial statements. F-9 48 NOTE 3 PROPERTY AND EQUIPMENT, NET A summary of property and equipment is as follows (in thousands):
December 31, ----------------------- 1999 2000 -------- -------- Land $ $ 139 Building 8,130 Furniture and equipment 736 1,504 Computer equipment 8,458 28,754 Leasehold improvements 1,974 2,309 -------- -------- 11,168 40,836 Accumulated depreciation (5,339) (15,301) -------- -------- Property and equipment, net $ 5,829 $ 25,535 ======== ========
NOTE 4 INVENTORY, NET A summary of inventory is as follows (in thousands):
December 31, ----------------------- 1999 2000 -------- -------- Components and subassemblies $ 8,044 $ 14,884 Work in process 806 10,148 Finished goods 1,137 936 -------- -------- 9,987 25,968 LCM adjustment (5,474) (2,331) -------- -------- Inventory, net $ 4,513 $ 23,637 ======== ========
Balance Balance December 31, 2000 2000 December 31, 1999 Additions Deductions 2000 ------------- ---------- ----------- ------------- LCM adjustment $5,474 $3,200 $(6,343) $2,331 ====== ====== ======== ======
F-10 49 NOTE 5 SPARES INVENTORY, NET A summary of spares inventory is as follows (in thousands):
December 31, ------------------- 1999 2000 ----- -------- Spares inventory $ -- $ 27,697 Accumulated depreciation -- (6,558) ----- -------- Spares inventory, net $ -- $ 21,139 ===== ========
NOTE 6 ACQUISITION The Company acquired certain assets of the Cray Research business unit from Silicon Graphics, Inc. ("SGI") on April 1, 2000, in exchange for cash of $15.0 million, the issuance of one million shares of common stock valued at $6.7 million, and the issuance of a $35.3 million non-interest bearing promissory note. Commencing April 1, 2000, the Company has included the results of operations of the Cray Research business unit in its consolidated results of operations. The Company has accounted for this transaction under the purchase method of accounting in accordance with the APB Opinion No. 16. Under the purchase method of accounting, the purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The following table summarizes the purchase accounting for the acquisitions (in thousands): Current and long term assets $ 80,165 Goodwill and intangible assets 34,906 Liabilities assumed (58,223) -------- Net assets acquired 56,848 Less: acquisition costs (1,326) -------- Purchase price $ 55,522 ========
The following table presents the results of operations of the Company on a pro forma basis. These results are based on the individual historic results of the Company and the Cray Research business unit and reflect adjustments to give effect to the acquisitions as if they had occurred at the beginning of the periods presented (in thousands): F-11 50
December 31, ---------------------- 1999 2000 -------- -------- (unaudited) Revenue $287,771 $183,820 ======== ======== Net income $ 31,536 $ 5,142 ======== ======== Basic and diluted net income per common share $ 1.51 $ 0.16 ======== ======== Weighted average shares used to compute basic and diluted net income per common share 20,906 32,949 ======== ========
NOTE 7 RELATED PARTY TRANSACTIONS During 2000, the Company accepted promissory notes in the aggregate principal amount of $326,000 as collateral for payment by the Company of option exercises and federal income taxes due from the exercise of employee stock options. These notes replaced promissory notes in the aggregate principal amount of $341,000 originally issued during 1999. The notes are due and payable in twelve months and bear interest at a rate of 5.74% per year. These notes and the unpaid accrued interest are secured by a pledge of shares of Cray's common stock. The Company's rights to payment are not limited to such security. The options exercised under these notes are considered to be variable employee stock options under current accounting literature. Accordingly, compensation is recognized to the extent the fair value of the Company's stock exceeds the options' exercise price. The Company also has an unsecured promissory note in the aggregate principal amount of $138,000 from the Chief Executive Officer of the Company. The note is due and payable on March 31, 2001, including accrued interest at a rate of 9.5%. The Company recorded interest income of $1,100 for year ended December 31, 2000, on the note. The note was paid in full on February 6, 2001. The Company paid fees of $1.8 million as part of a private placement completed in February 2000 to a company whose Chairman, CEO and principal shareholder is one of the Company's directors. As part of a common stock purchase agreement in October and December 2000 (See Note 12 -- Shareholders' Equity) the Company has accrued fees of $294,000 to a company whose Chairman, CEO and principal shareholder is one of the Company's directors. NOTE 8 LEASE AGREEMENTS The Company leases certain property and equipment under capital leases pursuant to master equipment lease agreements. Under such agreements, the Company has acquired computer and other equipment in the amount of $1,856,000 and $2,114,000, for which $1,023,000 and $1,550,000 of accumulated depreciation was recorded as of December 31, 1999, and 2000, respectively. F-12 51 Minimum lease commitments are (in thousands):
Capital Operating leases leases ------ -------- 2001 $403 $ 3,474 2002 218 3,529 2003 88 3,013 2004 5 3,083 2005 2,929 Thereafter 8,251 ---- ------- 714 $24,279 ======= Less amounts representing interest (81) ---- $633 ====
Rent expense for 1998, 1999, and 2000 was $961,000, $1,929,000 and $2,520,000, respectively. NOTE 9 COMMITMENTS The Company is contractually committed to acquire components, and manufacturing and engineering services totaling $16.3 million. Commitments are for goods and services to be provided to Cray by either specific dates or by achieving milestones identified in the contracts. NOTE 10 FEDERAL INCOME TAXES Due to continued losses from operations, there has been no provision for federal income taxes for any period. The provision for income taxes consisted of (in thousands):
December 31, ---------------------- 1998 1999 2000 ----- ---- ---- Federal: Current $ $ $ Deferred State: Current Deferred Foreign: Current 831 Deferred ---- ---- ---- Total provision for income taxes $ $ $831 ==== ==== ====
F-13 52 The Company did not pay any income taxes in 1998,1999 and 2000 due to losses from operations. In 2000, the company purchased the assets of the Cray Research business unit from SGI. Consequently, this is the Company's first year with foreign income tax liabilities. Loss before provision for income taxes consisted of (in thousands):
December 31, ------------------------------------ 1998 1999 2000 -------- ------- ------- United States $(19,803) $(34,532) $(27,219) International 1,831 -------- -------- -------- $(19,803) $(34,532) $(25,388) ======== ======== ========
The following table reconciles the federal statutory income tax rate to the Company's effective tax rate.
1998 1999 2000 ------ ------ ------ Federal income tax rate -34.00% -34.00% -34.00% State taxes Foreign taxes 3.27% Other 0.82% Effect of net operating loss carryfoward and valuation allowance 33.18% 34.00% 34.00% ------ ------ ------ Effective income tax rate 3.27% 0.00% 0.00% ====== ====== ======
Deferred income taxes reflect the net tax effects of temporary differences between the tax basis of assets and liabilities and the corresponding financial statement amounts. Significant components of the Company's deferred income tax assets are as follows: F-14 53
1999 2000 -------- -------- Warranty reserve $ 68 $ 10,976 Inventory reserve 1,862 699 Accrued compensation 246 735 Stock issued for services 231 Fixed assets 123 3,340 Research and experimentation 3,022 4,541 Net operating loss carryfowards 29,986 40,587 State tax loss carryfowards 1,577 1,500 -------- -------- Net deferred tax assets 37,115 62,378 Valuation allowance for deferred tax assets (37,115) (62,378) -------- -------- Deferred tax balance $ $ ======== ========
As of December 31, 1998, 1999 and 2000, the Company had federal net operating loss carryforwards of approximately $60.7 million, $88.3 million and $119.4 million, respectively. The Company also had federal research and experimentation tax credit carryforwards of approximately $2.5 million, $3.0 million and $4.5 million, respectively. The net operating loss credit carryforwards will expire at various dates beginning in 2003 through 2020 if not utilized. The utilization of the federal net operating loss and credit carryforwards are subject to annual limitations due to ownership changes of stock in prior years. The Company has fully reserved its deferred tax assets. Management believes sufficient uncertainty exists regarding the realizability of the deferred tax assets such that a full valuation allowance is required. The net change in the valuation allowance during the years ended December 31, 1999 and 2000 was $13.0 million and $25.3 million, respectively. F-15 54 NOTE 11 NOTES PAYABLE Notes payable consists of the following at December 31, 1999 and 2000 (in thousands except origional principal and discount amounts):
1999 2000 -------- -------- Note payable to bank, dated August 31, 1999, original principal of $544,000, interest at 10.48%, due August 31, 2002, secured by equipment $ 492 $ 323 Note payable to bank, dated October 7, 1999, original principal of $389,000, interest at 8.71%, due October 7, 2002, secured by equipment 370 249 Convertible note payable to vendor, dated March 25, 1999, original principal of $494,000, interest at 8.00%, due March 31, 2001, unsecured, net of remaining discount of $45,000 and $8,000 for 1999 and 2000, respectively 449 486 Notes payable to investors, dated October 18, 2000, original principal of $7,500,000, interest at 6.00%, due February 1, 2001, unsecured. (Note 12) 3,300 Notes payable to investors, dated December 12, 2000, original principal of $5,000,000, interest at 6.00%, due April 3, 2001, unsecured, net of discount of $747,000. (Note 12) 4,253 -------- -------- 1,311 8,611 Less current portion (289) (8,357) -------- -------- Total long-term notes payable $ 1,022 $ 254 ======== ========
The aggregate maturities of notes payable for the years 2001 through 2002 are as follows: $8,357,000 and $254,000. The Company has an unused $5,000,000 revolving credit agreement. The agreement contains a minimum tangible net capital covenant with which the Company was not in compliance at December 31, 2000. Subsequent to December 31, 2000, the Company has entered into a new credit agreement. See note 15 -- Subsequent Events. NOTE 12 SHAREHOLDERS' EQUITY COMMON STOCK PURCHASE AGREEMENTS: In October and December 2000, the Company agreed to issue shares of common stock to certain investors covered by the Company's F-16 55 shelf registration statement and to apply the purchase price for the shares against repayment of principal and interest on certain notes payable. Through December 2000, the Company repaid $4.2 million of the notes by delivering an aggregate of 1,671,094 shares of common stock at an average price of $2.51 per share, which reflects an 8% discount from the daily volume weighted average trading price for the Company's stock. Unless the Company prepays the notes, it will repay the remaining $8.3 million of the notes by issuing additional shares of common stock to the investors, using a 9% discount from the average of the daily volume weighted average trading prices over the period from the first week of January through March 2001. SHAREHOLDER WARRANTS: At December 31, 2000, the Company had outstanding and exercisable warrants to purchase an aggregate of 14,801,096 shares of common stock, as follows:
Shares of Exercise Price Expiration Common Stock per share Date of Warrants ------------- -------------- ------------------ 90,488 $6.00 December 31, 2001 97,208 $6.00 February 28, 2002 282,500 $3.94 April 21, 2002 7,311,055 $4.72 June 21, 2002 155,000 $4.50 June 25, 2002 87,500 $6.00 December 23, 2002 80,672 $4.72 September 28, 2003 100,000 $6.00 January 20, 2004 200,000 $4.72 March 9, 2004 25,000 $5.16 March 9, 2004 1,111,111 $4.72 March 9, 2004 100,000 $6.00 March 30, 2004 14,829 $5.00 March 31, 2004 5,801 $6.00 November 7, 2005 524 $6.00 May 21, 2006 5,139,408 $2.53 June 21, 2009 ---------- 14,801,096 ==========
For expense recorded in the three years ended December 31, 2000, warrants were valued at their fair values using the Black-Scholes model based on the volatility of the Company's stock, the contractual life of the warrants, and the risk-free rate of return. As part of a financing completed on June 21, 1999, the Company issued a warrant to a director of the Company, in exchange for cash of $200,000, exercisable for a minimum of 1,591,723 shares of common stock. In 2000, the number of shares subject to this warrant increased to 10% of the Company's issued and outstanding shares, on a fully diluted basis, with certain limited exceptions to 5,139,408 shares. STOCK OPTION PLANS: The Company has six stock option plans that provide for option grants to employees, directors and others. Four of these plans, the 1988 Employee F-17 56 Stock Option Plan, the 1993 Employee Stock Option Plan, the 1995 Employee Stock Option Plan, and the 1995 Independent Director Stock Option Plan were terminated by the Board of Directors in 1995 and 1999. Options granted under the Company's option plans generally vest over four years or as otherwise determined by the plan administrator. Options to purchase shares expire no later than ten years after the date of grant. A summary of Cray's stock option activity and related information follows:
Outstanding Weighted Weighted Average Average Options Exercise Options Exercise Outstanding Price Exercisable Price ----------- ------------ ----------- --------- Balance, January 1, 1998 2,035,905 $4.37 931,309 $3.25 Granted 742,090 8.44 Exercised (153,234) 1.43 Canceled (41,725) 6.61 --------- Balance, December 31, 1998 2,583,036 5.68 1,158,125 4.15 Granted 1,320,439 5.17 Exercised (107,513) 0.56 Canceled (100,616) 4.65 --------- Balance, December 31, 1999 3,695,346 5.68 1,158,125 5.29 Granted 4,924,513 5.48 Exercised (69,479) 2.69 Canceled (326,375) 5.16 --------- Balance, December 31, 2000 8,224,005 $5.61 2,428,813 $5.59 ========= Available for grant at December 31, 2000 6,535,839 =========
Outstanding and exercisable options by price range as of December 31, 2000 are as follows:
Options Outstanding Options Exercisable - ------------------------------------------------------------ ---------------------- Weighted Weighted Weighted Range of Average Average Average Exercise Price Number Remaining Exercise Number Exercise Per Share Outstanding Life (Years) Price Exercisable Price ---------------- ----------- ------------ -------- ----------- -------- $ 0.35 - $ 3.00 256,782 5.3 $1.89 148,448 $ 1.64 3.01 - 6.00 5,445,424 8.3 4.88 1,574,596 5.11 6.01 - 9.00 2,512,799 8.5 7.54 699,769 7.44 9.01 - 12.00 -- -- -- -- -- 12.01 - 15.00 9,000 7.3 13.69 6,000 13.69 --------------- --------- --- ----- --------- ------ $ 0.35 - $15.00 8,224,005 8.3 $5.61 2,428,813 $ 5.59 =============== ========= === ===== ========= ======
In 1996, the Company established an Employee Stock Purchase Plan (1996 ESPP). The maximum number of shares of the Company's common stock that employees may F-18 57 acquire under the 1996 ESPP is 1,000,000 shares. Eligible employees are permitted to acquire shares of the Company's common stock through payroll deductions not exceeding 15% of base wages. The purchase price per share under the 1996 ESPP is the lower of (a) 85% of the fair market value of the Company's Common Stock at the beginning of each six month offering period or (b) the fair market value of the Common Stock at the end of each six month offering period. FAIR VALUE INFORMATION: The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations in accounting for its stock option and purchase plans. Had compensation cost for the Company's stock option plans and its stock purchase plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's net loss for common stock and net loss per common share for the years ended December 31, 1998, 1999, and 2000 would have been increased to the pro forma amounts indicated below: Net loss for common shareholders (in thousands):
1998 1999 2000 -------- -------- -------- As reported $(20,736) $(34,647) $(25,388) Pro forma $(22,933) $(37,444) $(41,971)
Basic and diluted net loss per common share:
1998 1999 2000 -------- -------- -------- As reported $ (1.70) $ (1.74) $ (0.78) Pro forma $ (1.88) $ (1.88) $ (1.28)
The weighted average Black-Scholes value of options granted under the stock option plans during 1998, 1999, and 2000 was $9.35, $4.42, and $5.29. Fair values were estimated as of the dates of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: no dividend yield, expected volatility of 94%, 85 % and 98% for 1998, 1999, and 2000, respectively, risk-free interest rate of 5.7%, 5.4%, and 5.2% for 1998, 1999 and 2000, respectively, and an expected term of 9.6, 8.4, and 8.4 years for 1998, 1999, and 2000, respectively. NOTE 13 401(k) PLAN The Company has a defined contribution retirement plan covering substantially all employees that provides for voluntary salary deferral contributions on a pre-tax basis in accordance with Section 401(k) on the Internal Revenue Code of 1986, as amended. The Company may make voluntary matching contributions in amounts determined F-19 58 annually by the Board of Directors. Defined contribution pension expense was $139,000, $183,000 and $713,000 for 1998, 1999, and 2000, respectively. NOTE 14 SEGMENT INFORMATION SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments and for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions on allocating resources and assessing performance. Cray's chief decision-maker, as defined under SFAS No. 131, is the Chief Executive Officer and the executive management team. As of December 31, 2000, Cray operates in one business segment: global sales and service of high performance computers. Revenue from U.S. Government agencies or commercial customers primarily serving the U.S. Government totaled approximately $63.4 million in 2000. The Company's significant operations outside the United States include sales and service offices in Europe, the Middle East, and Africa (EMEA), Japan, and Asia Pacific (Australia, Korea, China and Taiwan). Intercompany transfers between operating segments and geographic areas are primarily accounted for at prices that approximate arm's length transactions. Geographic revenue and long-lived assets related to operations as of and for the year ended December 31, 2000, were as follows:
United Asia States EMEA Japan Pacific Total ------- ------- ------- ------- ------- Product revenue $46,617 $ -- $ -- $ -- $46,617 ======= ======= ======= ======= ======= Service revenue $43,926 $17,706 $ 7,015 $ 2,808 $71,455 ======= ======= ======= ======= ======= Long lived assets $69,009 $ 5,245 $ 3,406 $ 1,515 $79,175 ======= ======= ======= ======= =======
No prior year comparative information has been presented as the Company did not have significant operations outside the United States prior to the Cray Research acquisition on April 1, 2000. NOTE 15 SUBSEQUENT EVENTS In February 2001 the Company signed a distribution agreement with NEC Corporation to distribute and service NEC SX-5 vector processor computers and its successors. This F-20 59 agreement provides the Company with exclusive distribution and servicing in the United States, Canada and Mexico, and non-exclusive rights in the rest of the world. Current duties under the U.S. anti-dumping laws effectively prohibit the importation of these computers into the U.S. The Company has requested that the U.S. Government remove these duties. Assuming these duties are removed as expected, the Company plans on marketing NEC SX-5 series computers to customers and industries with a need for significant performance improvements, particularly in the United States. As part of the agreement, NEC will invest $25 million of cash in Cray, in exchange for 3,125,000 non-voting, preferred shares, convertible into Cray common stock at a fixed conversion price of $8.00 per share. In March 2001, the Company entered into a credit agreement with Foothill Capital Corporation. This line of credit replaced the Company's existing credit agreement in place at December 31, 2000. The credit agreement makes available $15 million through March 2004. The credit agreement provides $7.5 million of borrowings in the form of a revolving line of credit based on eligible domestic and foreign product accounts receivable, and $7.5 million of borrowings in the form of a term loan. Borrowings under the credit agreement are secured by property, plant and equipment and bear interest at the prime rate plus 2% for the revolving line of credit and at the prime rate plus 3.25% for the term loan. The credit agreement contains financial covenants relating to tangible net worth, EBITDA and domestic service revenue. F-21 60 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Cray Inc. Seattle, Washington We have audited the accompanying consolidated balance sheets of Cray Inc. (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Cray Inc. as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Seattle, Washington February 9, 2001 (March 28, 2001 as to Note 15) F-22 EX-3.2 2 v71068ex3-2.txt EXHIBIT 3.2 1 EXHIBIT 3.2 RESTATED BYLAWS OF CRAY INC. SECTION 1 SHAREHOLDERS AND SHAREHOLDERS' MEETINGS 1.1 Annual Meeting. The annual meeting of the shareholders of this corporation (the "Corporation") for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held each year at the principal office of the Corporation, or at some other place either within or without the State of Washington as designated by the Board of Directors, on the day and at the time specified in Exhibit A, which is attached hereto and incorporated herein by this reference, or on such other day and time as may be set by the Board of Directors. If the specified day is a Sunday or a legal holiday, then the meeting will take place on the next business day at the same time or on such other day and time as may be set by the Board of Directors. 1.2 Special Meetings. Special meetings of the shareholders for any purpose or purposes may be called at any time by the President or a majority of the Board of Directors. Further, for so long as the Corporation is a "public company" under Title 23B RCW, a special meeting of the shareholders shall be held if the holders of not less than 30% of all the votes entitled to be cast on the issue proposed to be considered at such special meeting have dated, signed and delivered to the Secretary one or more written demands for such meeting, describing the purpose or purposes for which it is to be held; provided, however, that if the Corporation is not a "public company" under Title 23B RCW, the percentage of votes required to call a special meeting shall be 25%. The meetings shall be held at such time and place as the Board of Directors may prescribe, or, if not held upon the request of the Board of Directors, at such time and place as may be established by the President or by the Secretary in the President's absence. 1.3 Notice of Meetings. Written notice of the place, date and time of the annual shareholders' meeting and written notice of the place, date, time and purpose or purposes of special shareholders' meetings shall be delivered not less than 10 (or, if required by Washington law, 20) or more than 60 days before the date of the meeting, either personally, by facsimile, or by mail, or in any other manner approved by law, by or at the direction of the President or the Secretary, to each shareholder of record entitled to notice of such meeting. Mailed notices shall be deemed to be delivered when deposited in the mail, first-class postage prepaid, correctly addressed to the shareholder's address shown in the Corporation's current record of shareholders. Notice given in any other manner shall be deemed effective when dispatched to the shareholder's address, telephone number or other number appearing on the records of the Corporation. -1- 2 1.4 Waiver of Notice. Except where expressly prohibited by law or the Restated Articles of Incorporation, notice of the place, date, time and purpose or purposes of any shareholders' meeting may be waived in a signed writing delivered to the Corporation by any shareholder at any time, either before or after the meeting. Attendance at the meeting in person or by proxy waives objection to lack of notice or defective notice of the meeting unless the shareholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. A shareholder waives objection to consideration of a particular matter at a meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented. 1.5 Shareholders' Action Without a Meeting. The shareholders may take any action without a meeting that they could properly take at a meeting, if one or more written consents setting forth the action so taken are signed by all of the shareholders entitled to vote with respect to the subject matter and are delivered to the Corporation for inclusion in the minutes or filing with the corporate records. If required by Washington law, all nonvoting shareholders must be given written notice of the proposed action at least 10 days before the action is taken, unless such notice is waived in a manner consistent with these Bylaws. Actions taken under this section are effective when all consents are in the possession of the Corporation, unless otherwise specified in the consent. A shareholder may withdraw consent only by delivering a written notice of withdrawal to the Corporation prior to the time that all consents are in the possession of the Corporation. 1.6 Telephone Meetings. Shareholders may participate in a meeting of shareholders by means of a conference telephone or any similar communications equipment that enables all persons participating in the meeting to hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 1.7 List of Shareholders. At least 10 days before any shareholders' meeting, the Secretary of the Corporation or the agent having charge of the stock transfer books of the Corporation shall have prepared an alphabetical list of the names of the shareholders on the record date who are entitled to notice of a shareholders' meeting, arranged by voting group, and within each voting group, by class or series of shares, and showing the address of and number of shares held by each shareholder. 1.8 Quorum and Voting. The presence in person or by proxy of the holders of a majority of the votes entitled to be cast on a matter at a meeting shall constitute a quorum of shareholders for that matter. If a quorum exists, action on a matter shall be approved by a voting group if the votes cast within a voting group favoring the action exceed the votes cast within the voting group opposing the action, unless a greater number of affirmative votes is required by the Restated Articles of Incorporation or by Washington law. If the Restated Articles of incorporation or Washington law provide for voting by two or more voting groups -2- 3 on a matter, action on a matter is taken only when voted upon by each of those voting groups counted separately. Action may be taken by one voting group on a matter even though no action is taken by another voting group. 1.9 Adjourned Meetings. If a shareholders' meeting is adjourned to a different place, date or time, whether for failure to achieve a quorum or otherwise, notice need not be given of the new place, date or time if the new place, date or time is announced at the meeting before adjournment. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in these Bylaws, that determination shall apply to any adjournment thereof, unless Washington law requires fixing a new record date. If Washington law requires that a new record date be set for the adjourned meeting, notice of the adjourned meeting must be given to shareholders as of the new record date. Any business may be transacted at an adjourned meeting that could have been transacted at the meeting as originally called. 1.10 Proxies. A shareholder may appoint a proxy to vote or otherwise act for the shareholder by signing an appointment form, either personally or by an agent. No appointment shall be valid after 11 months from the date of its execution unless the appointment form expressly so provides. An appointment of a proxy is revocable unless the appointment is coupled with an interest. No revocation shall be effective until written notice thereof has actually been received by the Secretary of the Corporation or any other person authorized to tabulate votes. 1.11 Business for Shareholders' Meetings. 1.11.1 Business at Annual Meetings. (a) In addition to the election of directors, other proper business may be transacted at an annual meeting of shareholders, provided that such business is properly brought before such meeting. To be properly brought before an annual meeting business must be (i) brought by or at the direction of the Board or (ii) brought before the meeting by a shareholder by inclusion in the Corporation's proxy statement pursuant to the provisions of Rule 14a-8 under Section 14 of the Securities Exchange Act of 1934, as amended, or any successor provision, when and if such Rule is applicable thereto, or if such business is not so included in the Corporation's proxy statement, only pursuant to written notice thereof in accordance with subsection 1.12 hereof, and received by the Secretary not fewer than 60 nor more than 90 days prior to the date of such annual meeting (or, if less than 60 days' notice or prior public disclosure of the date of the annual meeting is given or made to the shareholders, not later than the close of business on the tenth business day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs). (b) Any such shareholder notice shall set forth (i) the name and address of the shareholder proposing such business; (ii) a representation that the shareholder is entitled to vote at such meeting; (iii) a statement of the -3- 4 number of shares of the Corporation which are beneficially owned by the shareholder and the date upon which such shares were acquired; (iv) a representation that the shareholder intends to appear in person or by proxy at the meeting to propose such business; and (v) as to each matter the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, the language of the proposal (if appropriate), and any material interest of the shareholder in such business. (c) No business shall be conducted at any annual meeting of shareholders except in accordance with this subsection 1.11.1. If the facts warrant, the Board, or the chairman of an annual meeting of shareholders, may determine and declare that (i) a proposal does not constitute proper business to be transacted at the meeting or (ii) the business was not properly brought before the meeting in accordance with the provisions of this subsection 1.11.1 and if, in either case, it is so determined, any such business shall not be transacted. 1.11.2 Business at Special Meetings. At any special meeting of the shareholders, only business within the purpose or purposes described in the meeting notice required by Section 1.3 may be conducted. 1.12 Notice to Corporation. Any written notice required to be delivered by a shareholder to the Corporation pursuant to section 1.2 or section 1.11 hereof must be given, either by personal delivery or by registered or certified mail, postage prepaid, to the Secretary at the Corporation's principal office. SECTION 2 BOARD OF DIRECTORS 2.1 Number and Qualification. The business affairs and property of the Corporation shall be managed under the direction of a Board of Directors, the number of members of which is hereby set at nine (9). A member of the Board of Directors does not need to be a shareholder of the Corporation or a Washington resident. 2.2 Election-Term of Office. 2.2.1 The directors shall be elected by the shareholders at each annual shareholders' meeting or at a special shareholders' meeting called for such purpose. 2.2.2 The Board of Directors shall be divided into three classes of directors, with said classes to be as equal in number as may be possible. Initially, two directors shall be assigned to Class 1, two directors shall be assigned to Class 2, and two directors shall be assigned to Class 3. Any director or directors in excess of the number divisible by three shall be first assigned to Class 1 and any additional -4- 5 director shall be assigned to Class 2, as the case may be. (For example, if there are eight directors, the seventh director shall be in Class 1 and the eighth director in Class 2.) At the first election of directors to such classified Board of Directors, each Class 1 Director shall be elected to serve until the next ensuing annual meeting of shareholders, each Class 2 Director shall be elected to serve until the second ensuing annual meeting of shareholders and each Class 3 Director shall be elected to serve until the third ensuing annual meeting of shareholders. At each annual meeting of shareholders following the meeting at which the Board of Directors is initially classified, the number of directors equal to the number of directors in the class whose term expires at the time of such meeting shall be elected to serve until the third ensuing annual meeting of shareholders. Notwithstanding any of the foregoing provisions of this Section 2, directors shall serve until their successors are elected and qualified or until their earlier death, resignation or removal from office, or until there is a decrease in the number of directors; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. 2.2.3 The term of office of a director shall commence effective immediately upon election, unless otherwise specified in a resolution approved by the shareholders in connection with the election of such director. Directors shall serve until their successors are elected and qualified or until their earlier death, resignation or removal from office, or until there is a decrease in the authorized number of directors; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of any incumbent director. 2.3 Nominations. 2.3.1 Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors by the shareholders. Nominations for the election of directors may be made (a) by or at the direction of the Board or (b) by any shareholder of record entitled to vote for the election of directors at such meeting; provided, however, that a shareholder may nominate persons for election as directors only if written notice (in accordance with section 1.12 hereof) of such shareholder's intention to make such nominations is received by the Secretary not later than (i) with respect to an election to be held at an annual meeting of the shareholders, not fewer than 60 nor more than 90 days prior to the date of such annual meeting (or, if less than 60 days' notice or prior public disclosure of the date of the annual meeting is given or made to the shareholders, not later than the close of business on the tenth business day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made, whichever first occurs) and (ii) with respect to an election to be held at a special meeting of the shareholders for the election of directors, the close of business on the tenth business day following the date on which notice of such meeting is first mailed to shareholders. 2.3.2 Any such shareholder's notice shall set forth (a) the name and address of the shareholder who intends to make a nomination; (b) a -5- 6 representation that the shareholder is entitled to vote at such meeting; (c) a statement of the number of shares of the Corporation which are beneficially owned by the shareholder and the dates upon which such shares were acquired; (d) a representation that the shareholder intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (e) as to each person the shareholder proposes to nominate for election or reelection as a director, the name and address of such person and such other information regarding such nominee as would be required in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had such nominee been nominated by the Board, and a description of any arrangements or understandings, between the shareholder and such nominee and any other persons (including their names), pursuant to which the nomination is to be made; and (f) the consent of each such nominee to serve as a director if elected. 2.3.3 If the facts warrant, the Board, or the chairman of a shareholders' meeting at which directors are to be elected, shall determine and declare that a nomination was not made in accordance with the foregoing procedure and, if it is so determined, the defective nomination shall be disregarded. The right of shareholders to make nominations pursuant to the foregoing procedure is subject to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation. The procedures set forth in this section 2.3 for nomination for the election of directors by shareholders are in addition to, and not in limitation of, any procedures now in effect or hereafter adopted by or at the direction of the Board or any committee thereof. 2.4 Removal. 2.4.1 Any director or the entire Board of Directors may be removed only for cause and only by the holders of not less than two-thirds of the shares entitled to elect the director or directors whose removal is sought. Such action may only be taken at a special meeting of the shareholders called expressly for that purpose, provided that notice of the proposed removal, which shall include a statement of the charges alleged against the director, shall have been duly given to the shareholders together with or as a part of the notice of the meeting. 2.4.2 The vacancy created by the removal of a director under this section 2.4 shall be filled only by a vote of the holders of two-thirds of the shares then entitled to elect the director removed. Such vote may be taken at the same meeting at which the removal of such director was accomplished, or at such later meeting, annual or special, as the shareholders may decide. 2.5 Vacancies. Subject to the provisions of section 2.4 hereof and unless the Restated Articles of Incorporation provide otherwise, vacancies in the Board of Directors, whether caused by resignation, death, retirement, disqualification, increase in the number of directors, or otherwise, may be filled for the remainder of the term by the Board of Directors, by the shareholders, or, if the directors in office constitute less than a quorum of the Board of Directors, by an -6- 7 affirmative vote of a majority of the remaining directors. The term of a director elected to fill a vacancy expires upon the election and qualification of his or her successor. A vacancy that will occur at a specific later date may be filled before the vacancy occurs, but the new director may not take office until the vacancy occurs. 2.6 Quorum and Voting. At any meeting of the Board of Directors, the presence in person (including presence by electronic means such as a telephone conference call) of a majority of the number of directors presently in office shall constitute a quorum for the transaction of business. Notwithstanding the foregoing, in no case shall a quorum be less than one-third of the authorized number of directors. If a quorum is present at the time of a vote, the affirmative vote of a majority of the directors present at the time of the vote shall be the act of the Board of Directors and of the Corporation except as may be otherwise specifically provided by the Restated Articles of Incorporation, by these Bylaws, or by law. A director who is present at a meeting of the Board of Directors when action is taken is deemed to have assented to the action taken unless: (a) the director objects at the beginning of the meeting, or promptly upon his or her arrival, to holding it or to transacting business at the meeting; (b) the director's dissent or abstention from the action taken is entered in the minutes of the meeting; or (c) the director delivers written notice of his or her dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation within a reasonable time after adjournment of the meeting. The right of dissent or abstention is not available to a director who votes in favor of the action taken. 2.7 Regular Meetings. Regular meetings of the Board of Directors shall be held at such place, date and time as shall from time to time be fixed by resolution of the Board. 2.8 Special Meetings. Special meetings of the Board of Directors may be held at any place and at any time and may be called by the Chairman of the Board, the President, Vice President, Secretary or Treasurer, or any two or more directors. 2.9 Notice of Meetings. 2.9.1 Unless the Restated Articles of Incorporation provide otherwise, any regular meeting of the Board of Directors may be held without notice of the date, time, place, or purpose of the meeting. Any special meeting of the Board of Directors must be preceded by at least two days' notice of the date, time, and place of the meeting, but not of its purpose, unless the Restated Articles of Incorporation or these Bylaws require otherwise. Each director shall have a mailing address, telephone number and facsimile number on record with the Corporation for purposes of receiving notice. 2.9.2 Notice may be given personally, by facsimile, by mail, or in any other manner allowed by law. Oral notice shall be sufficient only if a written record of such notice is included in the Corporation's minute book. Notice shall be -7- 8 deemed effective at the earliest of: (a) receipt; (b) delivery to the proper address or telephone number of the director as shown in the Corporation's records; or (c) three days after its deposit in the United States mail, as evidenced by the postmark, if correctly addressed and mailed with first-class postage prepaid. 2.9.3 Notice of any meeting of the Board of Directors may be waived by any director at any time, by a signed writing, delivered to the Corporation for inclusion in the minutes, either before or after the meeting. Attendance or participation by a director at a meeting shall constitute a waiver of any required notice of the meeting unless the director promptly objects to holding the meeting or to the transaction of any business on the grounds that the meeting was not lawfully convened and the director does not thereafter vote for or assent to action taken at the meeting. 2.10 Directors' Action Without A Meeting. The Board of Directors or a committee thereof may take any action without a meeting that it could properly take at a meeting if one or more written consents setting forth the action are signed by all of the directors, or all of the members of the committee, as the case may be, either before or after the action is taken, and if the consents are delivered to the Corporation for inclusion in the minutes or filing with the corporate records. Such action shall be effective upon the signing of a consent by the last director to sign, unless the consent specifies a later effective date. 2.11 Committees of the Board of Directors. The Board of Directors, by resolutions adopted by a majority of the members of the Board of Directors in office, may create from among its members one or more committees and shall appoint the members thereof. Each such committee must have two or more members, who shall be directors and who shall serve at the pleasure of the Board of Directors. Each committee of the Board of Directors may exercise the authority of the Board of Directors to the extent provided in its enabling resolution and any pertinent subsequent resolutions adopted in like manner, provided that the authority of each such committee shall be subject to applicable law. Each committee of the Board of Directors shall keep regular minutes of its proceedings and shall report to the Board of Directors when requested to do so. 2.12 Telephone Meetings. Members of the Board of Directors or of any committee appointed by the Board of Directors may participate in a meeting of the Board of Directors or committee by means of a conference telephone or similar communications equipment that enables all persons participating in the meeting to hear each other during the meeting. Participation by such means shall constitute presence in person at a meeting. 2.13 Chairman. The Board may elect from among its members a Chairman of the Board who shall have such duties as the Board of Directors may from time to time prescribe but not as an officer of the Corporation. -8- 9 2.14 Compensation of Direct. The Board of Directors may fix the compensation of directors as such and may authorize the reimbursement of their expenses. SECTION 3 OFFICERS 3.1 Officers Enumerated--Election. The officers of the Corporation shall consist of such officers and assistant officers as may be designated by resolution of the Board of Directors. The officers may include a President, a Chief Scientist, one or more Vice Presidents, a Secretary, a Treasurer, and any assistant officers. The officers shall hold office at the pleasure of the Board of Directors. Unless otherwise restricted by the Board of Directors, the President may appoint any assistant officer, the Secretary may appoint one or more Assistant Secretaries, and the Treasurer may appoint one or more Assistant Treasurers; provided that any such appointments shall be recorded in writing in the corporate records. 3.2 Qualifications. None of the officers of the Corporation need be a director. Any two or more corporate offices may be held by the same person. 3.3 Duties of the Officers. Unless otherwise prescribed by the Board of Directors, the duties of the officers shall be as follows: 3.3.1 President. The President shall be the chief executive officer of the Corporation, unless some other officer is so designated by the Board , and shall exercise the usual executive powers pertaining to the office of President. The President shall perform such other duties as the Board of Directors may from time to time designate. In addition, if there is no Secretary in office, the President shall perform the duties of the Secretary. 3.3.2 Chief Scientist. The Chief Scientist, if one is appointed by the Board, shall be responsible for the scientific and technical activities of the Corporation, and shall have such other duties as the Board of Directors or President my from time to time designate. 3.3.3 Vice President. Each Vice President shall perform such duties as the Board of Directors may from time to time designate. In addition, in the absence or disability of the President, the Vice President (or if there is more than one Vice President, then in the order designated by the Board of Directors) shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all restrictions upon the President. 3.3.4 Secretary. The Secretary shall be responsible for and shall keep, personally or with the assistance of others, records of the proceedings of the directors and shareholders; authenticate records of the Corporation; attest all -9- 10 certificates of stock in the name of the Corporation; keep the corporate seal, if any, and affix the same to certificates of stock and other proper documents; keep a record of the issuance of certificates of stock and the transfers of the same; and perform such other duties as the Board of Directors may from time to time designate. 3.3.5 Treasurer. The Treasurer shall have the care and custody of, and be responsible for, all funds and securities of the Corporation and shall cause to be kept regular books of account. The Treasurer shall cause to be deposited all funds and other valuable effects in the name of the Corporation in such depositories as may be designated by the Board of Directors. In general, the Treasurer shall perform all of the duties incident to the office of Treasurer, and such other duties as from time to time may be assigned by the Board of Directors. 3.3.6 Assistant Officers. Assistant officers may consist of one or more Assistant Vice Presidents, one or more Assistant Secretaries, and one or more Assistant Treasurers. Each assistant officer shall perform those duties assigned to him or her from time to time by the Board of Directors, the President, or the officer who appointed him or her. 3.4 Vacancies. Vacancies in any office arising from any cause may be filled by the Board of Directors at any regular or special meeting. 3.5 Removal. Any officer or agent may be removed by action of the Board of Directors with or without cause, but any removal shall be without prejudice to the contract rights, if any, of the person removed. Election or appointment of an officer or agent shall not of itself create any contract rights. 3.6 Compensation. The compensation of all officers of the Corporation shall be fixed by the Board of Directors. -10- 11 SECTION 4 SHARES AND CERTIFICATES OF SHARES 4.1 Share Certificates. Share certificates shall be issued in numerical order, and each shareholder shall be entitled to a certificate signed by two officers of the Corporation, including the President, the Chief Scientist, any Vice President, the Secretary and the Treasurer. Share certificates may be sealed with the corporate seal, if any. Facsimiles of the signatures and seal may be used as permitted by law. Every share certificate shall state: (a) the name of the Corporation; (b) that the Corporation is organized under the laws of the State of Washington; (c) the name of the person to whom the share certificate is issued; (d) the number, class and series (if any) of shares that the certificate represents; and (e) if the Corporation is authorized to issue shares of more than one class or series, that upon written request and without charge, the Corporation will furnish any share holder with a full statement of the designations, preferences, limitations and relative rights of the shares of each class or series, and the authority of the Board of Directors to determine variations for future series. 4.2 Consideration for Shares. Shares of the Corporation may be issued for such consideration as shall be determined by the Board of Directors to be adequate. The consideration for the issuance of shares may be paid in whole or in part in cash, or in any tangible or intangible property or benefit to the Corporation, including but not limited to promissory notes, services performed, contracts for services to be performed, or other securities of the Corporation. Establishment by the Board of Directors of the amount of consideration received or to be received for shares of the Corporation shall be deemed to be a determination that the consideration so established is adequate. 4.3 Transfers. Shares may be transferred by delivery of the certificate, accompanied either by an assignment in writing on the back of the certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the record holder of the certificate. Except as otherwise specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the Corporation until the outstanding certificate therefor has been surrendered to the Corporation. -11- 12 4.4 Loss or Destruction of Certificates. In the event of the loss or destruction of any certificate, a new certificate may be issued in lieu thereof upon satisfactory proof of such loss or destruction, and upon the giving of security against loss to the Corporation by bond, indemnity or otherwise, to the extent deemed necessary by the Board of Directors, the Secretary, or the Treasurer. 4.5 Fixing Record Date. The Board of Directors may fix in advance a date as the record date for determining shareholders entitled: (a) to notice of or to vote at any shareholders' meeting or any adjournment thereof; (b) to receive payment of any share dividend; or (c) to receive payment of any distribution. The Board of Directors may in addition fix record dates with respect to any allotment of rights or conversion or exchange of any securities by their terms, or for any other proper purpose, as determined by the Board of Directors and by law. The record date shall be not more than 70 days and, in case of a meeting of shareholders, not less than 10 days (or such longer period as may be required by Washington law) prior to the date on which the particular action requiring determination of shareholders is to be taken. If no record date is fixed for determining the shareholders entitled to notice of or to vote at a meeting of shareholders, the record date shall be the date before the day on which notice of the meeting is mailed. If no record date is fixed for the determination of shareholders entitled to a distribution (other than one involving a purchase, redemption, or other acquisition of the Corporation's own shares), the record date shall be the date on which the Board adopted the resolution declaring the distribution. If no record date is fixed for determining shareholders entitled to a share dividend, the record date shall be the date on which the Board of Directors authorized the dividend. SECTION 5 BOOKS, RECORDS AND REPORTS 5.1 Records of Corporate Meetings, Accounting Records and Share Registers. 5.1.1 The Corporation shall keep, as permanent records, minutes of all meetings of the Board of Directors and shareholders, and all actions taken without a meeting, and all actions taken by a committee exercising the authority of the Board of Directors. The Corporation or its agent shall maintain, in a form that permits preparation of a list, a list of the names and addresses of its shareholders, in alphabetical order by class of shares, showing the number, class, and series, if any, of shares held by each. 5.1.2 The Corporation shall also maintain appropriate accounting records, and at its principal place of business shall keep copies of: (a) its Articles of Incorporation or restated Articles of Incorporation and all amendments in effect; (b) its Bylaws or restated Bylaws and all amendments in effect; (c) minutes of all shareholders' meetings and records of all actions taken without meetings for the past three years; (d) the year-end balance sheets and income statements for the past three fiscal years, -12- 13 prepared as required by Washington law; (e) all written communications to shareholders generally in the past three years; (f) a list of the names and business addresses of its current officers and directors; and (g) its most recent annual report to the Secretary of State. 5.2 Copies of Corporate Records. Any person dealing with the Corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the Board of Directors or shareholders, when certified by the Chairman of the Board, the President, the Chief Scientist, any Vice President, the Secretary or the Assistant Secretary. 5.3 Examination of Records. 5.3.1 A shareholder shall have the right to inspect and copy, during regular business hours at the principal office of the Corporation, in person or by his or her attorney or agent, the corporate records referred to in subsection 5.1.2 hereof if the shareholder gives the Corporation written notice of the demand at least five business days before the date on which the shareholder wishes to make such inspection. 5.3.2 In addition, if a shareholder's demand is made in good faith and for a proper purpose, a shareholder may inspect and copy, during regular business hours at a reasonable location specified by the Corporation, excerpts from minutes of any meeting of the Board of Directors, records of any action of a committee of the Board of Directors, minutes of any meeting of the shareholders, and records of actions taken by the shareholders or the Board of Directors without a meeting, to the extent not subject to inspection under subsection 5.3.1, accounting records of the Corporation, or the record of shareholders; provided that the shareholder shall have made a demand describing with reasonable particularity the shareholder's purpose and the records the shareholder desires to inspect, and provided further that the records are directly connected to the shareholder's purpose. 5.3.3 This section shall not affect any right of shareholders to inspect records of the Corporation that may be otherwise granted to the shareholders by law. 5.4 Financial Statements. Not later than four months after the end of each fiscal year, or in any event prior to its annual meeting of shareholders, the Corporation shall prepare a balance sheet and income statement in accordance with Washington law. The Corporation shall furnish a copy of each to any shareholder upon written request. SECTION 6 FISCAL YEAR The fiscal year of the Corporation shall be as set forth in Exhibit A. SECTION 7 -13- 14 CORPORATE SEAL The corporate seal of the Corporation, if any, shall be in the form shown on Exhibit A. SECTION 8 MISCELLANEOUS PROCEDURAL PROVISIONS The Board of Directors may adopt rules of procedure to govern any meetings of shareholders or directors to the extent not inconsistent with law, the Corporation's Restated Articles of Incorporation, or these Bylaws, as they are in effect from time to time. In the absence of any rules of procedure adopted by the Board of Directors, the chairman of the meeting shall make all decisions regarding the procedures for any meeting. SECTION 9 AMENDMENT OF BYLAWS The Board of Directors is expressly authorized to adopt, amend and repeal the Bylaws of the Corporation subject to approval by a majority of the Continuing Directors (as defined below); provided, however, the Board of Directors may not repeal or amend any bylaw that the shareholders have expressly provided may not be amended or repealed by the Board of Directors. The shareholders of the Corporation also have the power to adopt, amend or repeal the Bylaws of the Corporation by the affirmative vote of the holders of not less than two-thirds of the outstanding shares and, to the extent, if any, provided by resolution adopted by the Board of Directors authorizing the issuance of a class or series of Preferred Stock, by the affirmative vote of the holders of not less than two-thirds of the outstanding shares of Common Stock and/or of such class or series of Preferred Stock, voting as separate voting groups. "Continuing Directors" means any member of the Board of Directors (i) who was a member of the Board of Directors on August 31, 1995, or (ii) who is elected to the Board of Directors after August 31, 1995 after being nominated by a majority of the Continuing Directors voting separately and as a subclass of directors on such nomination. SECTION 10 INDEMNIFICATION OF DIRECTORS AND OTHERS 10.1 Grant of Indemnification. Subject to section 10.2, each person who was or is made a party or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any threatened, pending, or completed action, suit or -14- 15 proceeding, whether formal or informal, civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director of the Corporation or who, while a director of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee or agent of this or another corporation or of a partnership, joint venture, trust, other enterprise, or employee benefit plan, whether the basis of such proceeding is alleged action in an official capacity as a director or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by applicable law, as then in effect, against all expense, liability and loss (including attorneys' fees, costs, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, and such indemnification shall continue as to a person who has ceased to be a director and shall inure to the benefit of his or her heirs, executors and administrators. 10.2 Limitations on Indemnification. Notwithstanding section 10.1, no indemnification shall be provided hereunder to any such person to the extent that such indemnification would be prohibited by the Washington Business Corporation Act or other applicable law as then in effect, nor, except as provided in section 10.4 with respect to proceedings seeking to enforce rights to indemnification, shall the Corporation indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person except where such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. 10.3 Advancement of Expenses. The right to indemnification conferred in this section shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition, except where the Board of Directors shall have adopted a resolution expressly disapproving such advancement of expenses. 10.4 Right to Enforce Indemnification. If a claim under section 10.1 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, or if a claim for expenses incurred in defending a proceeding in advance of its final disposition authorized under section 10.3 is not paid within 60 days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. The claimant shall be presumed to be entitled to indemnification hereunder upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the required undertaking has been tendered to the Corporation), and thereafter the Corporation shall have the burden of proof to overcome the presumption that the claimant is so entitled. It shall be a defense to any such action (other than an action with respect to expenses authorized under section 10.3) that the claimant has not met the standards of conduct which make it permissible hereunder or under the Washington Business Corporation Act for the Corporation to -15- 16 indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. 10.5 Alternate Procedures. Pursuant to RCW 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this section are in lieu of the procedures required by RCW 23B.08.550 or any successor provision of the Washington Business Corporation Act. 10.6 Nonexclusivity. The right to indemnification and the advancement of expenses conferred in this section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Restarted Articles of Incorporation or the Bylaws of the Corporation, general or specific action of the Board, contract or otherwise. 10.7 Indemnification of Officers, Employees and Agents. The Corporation may, by action of its Board of Directors from time to time, provide indemnification and pay expenses in advance of the final disposition of a proceeding to officers, employees and agents of the Corporation on the same terms and with the same scope and effect as the provisions of this section with respect to the indemnification and advancement of expenses of directors of the Corporation or pursuant to rights granted pursuant to, or provided by, the Washington Business Corporation Act or on such other terms as the Board may deem proper. 10.8 Insurance and Other Security. The Corporation may maintain insurance, at its expense, to protect itself and any individual who is or was a director, officer, employee or agent of the Corporation or another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against or incurred by the individual in that capacity or arising from his or her status as an officer, director, agent, or employee, whether or not the Corporation would have the power to indemnify such person against the same liability under the Washington Business Corporation Act. The Corporation may enter into contracts with any director or officer of the Corporation in furtherance of the provisions of this section and may create a trust fund, grant a security interest or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this section. 10.9 Amendment or Modification. This section may be altered or amended at any time as provided in these Bylaws, but no such amendment shall have the effect of diminishing the rights of any person who is or was an officer or director as to any acts or omissions taken or omitted to be taken prior to the effective date of such amendment. 10.10 Effect of Section. The rights conferred by this section shall be deemed to be contract rights between the Corporation and each person who is or was a director or officer. The Corporation expressly intends each such person to rely on the rights conferred hereby in performing his or her respective duties on behalf of the Corporation. -16- 17 SECTION 11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS Unless otherwise restricted by the Board of Directors, the President, the Chief Scientist and any Vice President of the Corporation are each authorized to vote, represent and exercise an behalf of the Corporation all rights incident to any and all shares of other corporations standing in the name of the Corporation. This authority may be exercised by such officers either in person or by a duly executed proxy or power of attorney. -17- 18 EXHIBIT A Section 1.1. Date and time of annual shareholders' meeting: First Wednesday in May at such time as the Board of Directors shall direct. Section 6. Fiscal year: December 31 Section 7. Corporate Seal: None Date Restated Bylaws Adopted: July 31, 1995, as amended on June 25, 1999, December 14, 1999, January 14, 2000 and April 3, 2000. -18- EX-10.9 3 v71068ex10-9.txt EXHIBIT 10.9 1 EXHIBIT 10.9 FAB I BUILDING LEASE AGREEMENT THIS LEASE is entered into and made as of June 1, 2000 by and between UNION SEMICONDUCTOR TECHNOLOGY CORPORATION, a Delaware corporation ("Landlord"), and CRAY, INC., a Washington corporation ("Tenant"). WITNESSETH: Landlord, in consideration of the rents and covenants hereinafter set forth, does hereby demise, let and lease to Tenant, and Tenant does hereby hire, take and lease from Landlord, on the terms and conditions hereinafter set forth, the following described premises, to have and to hold the same, with all appurtenances specified herein, for the term hereinafter specified. 1.) DESCRIPTION OF THE PROJECT, PREMISES, PERSONAL PROPERTY AND COMMON AREAS. (a) Project. The "Project" consists of a multi-building project located in Chippewa Falls, Wisconsin, consisting of approximately seven & 8/10 (7.8) acres of land and four (4) buildings commonly referred to as (i) the Cray Conference Center containing approximately 5,480 square feet ("Conference Center"), (ii) the Development/ I.C. Fab I Building containing approximately 90,260 square feet ("Fab I Building"), (iii) the I.C. Fab II Building containing approximately 42,335 square feet ("Fab II Building"), and (iv) the 890 Building containing approximately 4,033 square feet ("890 Building") (referred to herein individually as a "Building" and collectively as the "Buildings"). As of the Commencement Date, the parties agree that the total square footage of the Buildings located within the Project is 142,108 square feet. A site plan of the project is attached hereto as Exhibit A. (b) Premises. The "Premises" will include approximately the second floor and portions of the first floor and basement of the Fab I Building, located at 900 Lowater Drive, Chippewa Falls, Wisconsin, and consists of a total of 41,304 square feet. The 41,304 square feet includes 38,508 square feet used exclusively by Tenant and 2,796 square feet as Tenant's portion of shared common space with Landlord. A floor plan of the Premises is attached hereto as Exhibit B. Landlord will occupy remaining portions of the Fab I Building, including the Fab I area on the first floor of the Fab I Building ("Fab I Area") and the New Tech Lab located within the basement of the Fab I Building ("NTL"). (c) Personal Property. During the Term, Tenant shall have the right to use, and shall maintain and repair, all personal property of Landlord currently located in the Premises. Upon expiration or earlier termination of the Lease, said personal property shall remain in the Premises and Tenant shall no longer have the right to use the same. All such personal property shall be surrendered to Landlord in the same condition as on the Commencement Date (as hereinafter defined), subject to ordinary and reasonable wear and tear. During the Term, Landlord shall maintain and repair, and shall not remove, any furniture and fixtures owned by Landlord and located within the common areas that are made available for use by Tenant hereunder. 2 (d) Common Areas. Tenant shall have the non-exclusive right to use all common areas of the Project, including, without limitation, sidewalks, driveways, parking areas, recreational facilities and other amenities, in accordance with the terms of this Lease. 2.) TERM (a) The term of this Lease (the "Term") shall be for twenty-four (24) months commencing on June 1, 2000 (the "Commencement Date") and ending on the second anniversary thereof (the "Expiration Date"), unless sooner terminated as provided in this Lease. (b) Landlord hereby grants to Tenant one (1) one year option to extend the Term upon the same terms and conditions of this Lease, except that Base Rent during such extended term shall be equal to one hundred five percent (105%) of the Base Rent payable during the last month of the then existing Term. Tenant may exercise any such option by delivering to Landlord written notice of exercise at least one hundred eighty (180) days prior to the end of the then existing Term. The Term may be extended at the end of the first extension for two (2) additional one year extensions, but only upon the written consent of both parties. The terms and conditions of this Lease, including the rent increase set forth above, shall apply during any such additional extensions. 3.) RENT (a) Base Rent. Tenant shall pay to Landlord, at the address listed in Section 25 below, Base Rent for the Premises in the amount of Three and 60/100 Dollars ($3.60) per square foot per year, which is equal to One Hundred Forty-Eight Thousand, Six Hundred Ninety-Four and 40/100 Dollars ($148,694.40), payable in equal monthly installments of Twelve Thousand Three Hundred Ninety-One and 20/100 Dollars ($12,391.20) in advance, on or before June 1, 2000 and continuing on or before the first day of each and every month thereafter throughout the Term. If the Commencement Date shall be a day other than the first day of a calendar month or the Expiration Date shall be a day other than the last day of a calendar month, the Base Rent installment for such first or last fractional month shall be prorated accordingly, based on a thirty (30) day calendar month. Tenant shall pay all Base Rent and all other amounts as shall become due from and payable by Tenant to Landlord under this Lease at the times and in the manner provided herein, without abatement and without notice, demand, setoff or counterclaim. (b) Taxes, Project Expenses and Building Expenses. Tenant shall pay as additional rent Tenant's Project Proportionate Share (as defined below) of all Project Expenses (as defined below), Tenant's Taxes Proportionate Share (as defined below) of all Taxes (as defined below), and Tenant's Building Proportionate Share (as defined below) of all Building Expenses (as defined below), which shall accrue and be due and payable from and after the Commencement Date as provided hereinbelow. (1) Definitions. a. "Tenant's Building Proportionate Share" shall be equal to the percentage determined by dividing the aggregate square footage of the Premises by the total -2- 3 square footage of the Fab I Building. As of the Commencement Date, Tenant's Building Proportionate Share shall be equal to 61.5%. Tenant's Building Proportionate Share shall be subject to adjustment during the Term in the event of a reduction in the square footage of the Premises. b. "Tenant's Taxes Proportionate Share" shall mean the percentage determined by dividing the then existing square footage of the Premises by the total square footage of all of the Buildings within the Project. As of the Commencement Date, Tenant's Taxes Proportionate Share shall be equal to 29.1 %. Tenant's Taxes Proportionate Share shall be subject to adjustment during the Term in the event of a reduction in the square footage of the Premises or an increase in the total square footage of the Project. c. "Tenant's Project Proportionate Share" shall mean the percentage determined by dividing the number of Tenant's employees in the Project by the total number of employees in the Project, wherein the total number of employees in the Project is comprised of both Tenant's and Landlord's employees. As of the Commencement Date, Tenant's Project Proportionate Share shall be equal to 50.0%. Tenant's Project Proportionate Share shall be subject to adjustment during the Term in the event of an increase or reduction in the number of either Tenant's or Landlord's number of employees in the Project relative to the total number of employees in the Project by 10% or more. d. "Taxes" shall mean all real estate taxes, installments of special assessments, sewer charges, transit taxes, taxes based upon receipt of rent and any other federal, state or local governmental charge, general, special, ordinary or extraordinary (excluding income, franchise, or other taxes based upon Landlord's income or profit, unless imposed in lieu of real estate taxes) which shall now or hereafter be levied, assessed or imposed against the Project and shall apply to said obligations at such time in which said obligations are accrued or levied. Taxes shall not include any additional taxes attributable to the improvement of any portion of the Project occupied by Landlord or any other occupants of the Project. e. "Project Expenses" shall mean all of Landlord's costs and expenses of operation and maintenance of the common areas of the Project, including, without limitation, the walkways, driveways, parking lots, landscaped areas and other amenities within the Project, as determined in accordance with generally accepted accounting principles or other recognized accounting practices, consistently applied, including costs (including attorneys' fees) incurred in connection with any good faith contest of Taxes; insurance premiums for the insurance required to be maintained by Landlord as provided herein and such other insurance as is otherwise typically maintained by owners of similar projects in the Chippewa Falls area; water, electrical and other utility charges serving the common areas of the Project (but excluding any charges for utilities serving any Building within the Project); fees and charges of any property manager or independent contractor who, under a contract with Landlord, maintains or repairs the Project (which shall not exceed the amount typically paid for property management of comparable properties in the Chippewa Falls area); landscape maintenance costs; costs for removal of trash and recyclables from exterior collection receptacles located within the Project; and costs for removal of snow from driveways, walkways and parking lots within the Project. Notwithstanding the preceding to the contrary, Project Expenses shall not include any costs -3- 4 incurred by Landlord in connection with the construction of any alterations, additions or improvements for the sole benefit of Landlord or other occupants of the Project; financing and refinancing costs, including interest on debts relating to mortgage loans and rental fees under any ground or underlying leases; business or income taxes; depreciation or amortization expense (except as provided below); costs in excess of the insurance deductible (which deductible shall in no event exceed $50,000.00) incurred by Landlord in connection with repairs and restorations following the occurrence of a casualty loss; leasing commissions and other costs of leasing incurred by Landlord; costs of restoring any Building or other improvements following a taking or transfer in lieu thereof; costs incurred by Landlord as a result of any improvements by Landlord required to cause the Project to comply with applicable laws, ordinances, building codes, rules or regulations; costs incurred as a result of the negligent or intentional acts of Landlord, other occupants of the Project or their respective employees, agents or contractors; and any costs which would be capitalized under generally accepted accounting principles (except as provided below). Except as otherwise provided above, and subject to Section 11 below, Project Expenses shall include the cost of necessary capital repairs and replacements to exterior common areas of the Project (excluding any Buildings), which shall be amortized monthly over the useful life of the capital item on a straight-line basis during the Term. f. "Building Expenses" shall mean all of Landlord's costs and expenses of operation and maintenance of the Fab I Building (excluding any Project Expenses) as determined in accordance with generally accepted accounting principles or other recognized accounting practices, consistently applied, including, without limitation, all costs and expenses incurred by Landlord in performing its obligations under Sections 7(a) and 10(b) below; costs incurred in providing card-key access to the Fab I Building; and costs of security services for common areas of the Fab I Building. Notwithstanding the preceding to the contrary, Building Expenses shall not include any costs incurred by Landlord in connection with the construction of any alterations, additions or improvements for the sole benefit of Landlord or other occupants of the Building or Project; financing and refinancing costs, including interest on debts relating to mortgage loans and rental fees under any ground or underlying leases; business or income taxes; depreciation or amortization expense (except as provided below); costs in excess of the insurance deductible (which deductible shall in no event exceed $50,000.00) incurred by Landlord in connection with repairs and restorations following the occurrence of a casualty loss; leasing commissions and other costs of leasing incurred by Landlord; costs of restoring any Building or other improvements following a taking or transfer in lieu thereof; costs incurred by Landlord as a result of any improvements required to cause the Fab I Building to comply with applicable laws, ordinances, building codes, rules or regulations; costs incurred as a result of the negligent or intentional acts of Landlord, other occupants of the Project or their respective employees, agents or contractors; and any costs which would be capitalized under generally accepted accounting principles (except as provided below). Except as otherwise provided above, and subject to Section 11 below, Building Expenses shall include the cost of necessary capital repairs and replacements to the Fab I Building, which shall be amortized monthly over the useful life of the capital item on a straight-line basis during the Term. (2) Payment of Taxes. Tenant shall pay to Landlord Tenant's Taxes Proportionate Share of all Taxes on or before the later of (i) the twentieth (20th) day prior to the date the applicable Taxes are due and payable or (ii) the tenth (10th) day following Landlord's -4- 5 written demand therefor (which demand shall be accompanied by a copy of the related tax bill or other accurate statement of the amount of the Taxes). If this Lease shall commence, expire or be terminated on any date other than the last day of a calendar year, then Tenant's Project Proportionate Share of Taxes for such partial calendar year shall be prorated on the basis of the number of days during the year this Lease was in effect in relation to the total number of days in such year. Subject to the foregoing and subject to rights of Landlord to contest or dispute Taxes, Landlord shall pay the Taxes to the applicable taxing authority(ies) on or before the date they are due and payable. (3) Payment of Project Expenses and Building Expenses. (a) Landlord shall deliver to Tenant a written estimate of the Project Expenses and Building Expenses and the portion payable by Tenant for the ensuing year or portion thereof. On or before the first day of each month during the Term, Tenant shall pay such estimated amount of Tenant's annualized share of such Project Expenses and Building Expenses in twelve (12) equal monthly installments, in advance. Following the expiration of each calendar year, Landlord shall furnish Tenant a statement showing in reasonable detail the actual Project Expenses and Building Expenses for the preceding calendar year. Within thirty (30) days after service of the aforementioned statement, Tenant shall pay to Landlord, or Landlord shall credit against the next rent payment or payments due from Tenant, as the case may be, the difference between Tenant's actual proportionate share of Project Expenses and Building Expenses for the preceding calendar year and the amount of Project Expenses and Building Expenses paid by Tenant during such year. If this Lease shall commence, expire or be terminated on any date other than the last day of a calendar year, then Tenant's proportionate share of Project Expenses and Building Expenses for such partial calendar year shall be prorated on the basis of the number of days during the year this Lease was in effect in relation to the total number of days in such year. Subject to the foregoing obligation of Tenant to pay Tenant's proportionate share of Project Expenses and Building Expenses, Landlord shall pay the Project Expenses and Building Expenses on or before the date they are due and payable. Tenant or its accountants shall have the right to inspect, at reasonable times and locations and in a reasonable manner, during the ninety (90) day period following the delivery of Landlord's statement of Project Expenses and Building Expenses for a given calendar year, such of Landlord's books and records as pertain to and contain information concerning such costs and expenses in order to verify the amounts thereof; unless Tenant takes written exception to any item within ninety (90) days after the furnishing of the statement, such statement shall be considered as final and accepted by Tenant; if Tenant shall dispute any item or items included in the determination of Landlord's Project Expenses and Building Expenses for a given calendar year, and such dispute is not resolved by the parties hereto within sixty (60) days after the date on which Tenant gives written notice to Landlord of the disputed items, then either party may, within thirty (30) days thereafter, request that a firm of certified public accountants mutually selected by Landlord and Tenant render an opinion as to whether or not the disputed item or items may properly be included in the determination of Landlord's Project Expenses and Building Expenses for such year; and the opinion of such firm on the matter shall be conclusive and binding upon the parties hereto; the fees and expenses incurred in obtaining such an opinion shall be borne by Tenant unless Landlord's statement contains errors aggregating more than five percent (5%) of the Project Expenses and Building Expenses. -5- 6 (b) Service Charge. Any sum not paid within thirty (30) days of the due date therefor shall bear interest at a rate equal to the greater of eighteen percent (18%) per annum or the then-current prime rate (as listed in the "Money Rates" section of the Wall Street Journal) plus two percent (2%) per annum (or such lesser percentage as may be the maximum amount permitted by law) from the date due until paid. 4.) TENANT FINISH IMPROVEMENTS Tenant accepts the Premises in "AS IS, with all faults" condition, with no representations or warranties of any kind by or on behalf of Landlord with regard to the Premises. Landlord shall have no obligation to construct any tenant improvements or make any other changes to the Premises except as expressly provided herein. 5.) CABLE PLANT (a) Tenant shall have the right, at its sole expense, to maintain and to exclusively use all existing cable plant and any related facilities and equipment located within the Fab I Building and the common areas of the Project. Tenant shall have the right to use such cable plant and such related facilities and equipment in the same manner in which the previous Tenant used the same after the sale and transfer of the Project from the previous Tenant to Landlord. (b) During the Term, Tenant shall have the right to access and exclusively use the computer room (B04) located in the basement of the Fab I Building. Tenant shall have the right to use such room and related facilities and equipment in the same manner in which the previous Tenant used the same after the sale and transfer of the Project from the previous Tenant to Landlord. (c) Within the first sixty (60) days of the Term, Landlord and Tenant shall meet and confer for purposes of reaching agreement on the location of voice and data closets ("I/S Closets") supporting their respective premises within the Fab I Building during the Term. Until such time as the parties have established the location of Tenant's I/S Closets for the remaining Term, Tenant shall have the right to access and exclusively use the then existing I/S Closets located within the Building. Upon reaching agreement with regard to the location of Tenant's I/S Closets for the remaining Term, Tenant shall have the right to access and exclusively use the same during the Term. 6.) USE OF THE PREMISES (a) Specific Use. The Premises shall be used exclusively for purposes of general, administrative and sales office, research and development, training, and for any other lawful purpose incidental thereto, and shall not be used for any other purpose. (b) Covenants Regarding Use. In connection with its use of the Premises, Tenant agrees to do the following: -6- 7 (1) Tenant shall use the Premises and conduct its business thereon and throughout the Project in a safe, careful, reputable and lawful manner; shall keep and maintain the Premises in as good a condition as they were on the Commencement Date, subject to ordinary and reasonable wear and tear, and shall make all necessary repairs to the Premises other than those which Landlord is obligated to make as provided elsewhere herein. (2) Tenant shall not commit, nor allow to be committed, in, on or about the Premises or the Project, any act of waste, including any act which might deface, damage or destroy the Fab I Building, Project or any part thereof; use or permit to be used on the Premises any equipment or other thing which might cause injury to person or property; permit any objectionable or offensive noise or odors to be emitted from the Premises. (3) Tenant shall not overload the floors of the Premises beyond their designed weightbearing capacity. (4) Tenant shall not use the Premises, nor allow the Premises to be used, for any purpose or in any manner which would invalidate any policy of insurance now or hereafter carried on the Project or increase the rate of premiums payable on any such insurance policy. Should Tenant fail to comply with this covenant, Landlord may require Tenant to reimburse Landlord as additional rent for any increase in premiums charged during the term of this Lease on the insurance carried by Landlord on the Premises and attributable to the use being made of the Premises by Tenant. (c) Compliance with Laws. Tenant shall not use or permit the use of any part of the Premises for any purpose prohibited by law. Tenant shall, at Tenant's sole expense, comply with all laws, statutes, ordinances, rules, regulations and orders of any federal, state, municipal or other governmental agency thereof having jurisdiction over and relating to the use of the Premises; provided, however, that Landlord shall be required to make any improvements or alterations to the Premises required to comply with any such laws, statutes, ordinances, rules, regulations or orders unless such repairs are required as a result of Tenant's specific use or improvement of the Premises from and after the Commencement Date. Without limiting the generality of the foregoing, Tenant shall pay the cost of ADA compliance for the Building or affected portion thereof if occasioned solely by Tenant's use or improvements. (d) Compliance with Project Rules and Regulations. Landlord and Tenant shall comply with and conform to the rules and regulations attached to this Lease, made a part hereof and marked Exhibit C. (e) Compliance with Zoning. Tenant knows the character of its operation in the Premises and that applicable zoning ordinances and regulations are of public record. Tenant shall have sole responsibility for its compliance therewith, and Tenant's inability so to comply shall not be cause for Tenant to terminate this Lease. -7- 8 7.) UTILITIES AND OTHER BUILDING SERVICES (a) Services to be Provided. Landlord shall furnish Tenant with the following utilities and building services to the extent reasonably necessary for Tenant's use and occupancy of the Premises or as may be required by law or directed by governmental authority: (1) Heating, ventilation, and air conditioning; (2) Electricity for lighting and operating business machines and equipment in the Premises; and (3) Water for lavatory and drinking purposes. (b) Additional Services. If Tenant uses any other utilities or building services in addition to those identified above or uses any of the above utilities or building services in frequency, scope, quality or quantities greater than normally required by Landlord within the Fab I Building, then the incremental cost thereof shall be borne by Tenant. If Landlord or any other tenant of the Fab I Building uses any other utilities or building services in addition to those identified above or uses any of the above utilities or building services in frequency, scope, quality or quantities greater than normally required by Tenant, then the incremental cost thereof shall be borne by Landlord or such other tenant and excluded from Project Expenses and Building Expenses. All utilities for the FAB I Area and NTL shall be separately metered, borne by Landlord and excluded from Project Expenses and Building Expenses, and the proportions of the parties' respective allocation of Building Expenses shall be adjusted to reflect such separate metering. (c) Interruption of Services. Tenant understands, acknowledges and agrees that any one or more of the utilities or building services identified above may be interrupted by reason of accident, emergency or other causes beyond Landlord's control, or may be discontinued or diminished temporarily by Landlord or other persons until certain repairs, alterations or improvements can be made; that Landlord does not represent or warrant the uninterrupted availability of such utilities or building services; and that any such interruption unless caused by the gross negligence or willful misconduct of Landlord shall not be deemed an eviction or disturbance of Tenant's right to possession, occupancy and use of the Premises or any part thereof, or render Landlord liable to Tenant in damages by abatement of rent or otherwise, or relieve Tenant from the obligation to perform its covenants under this Lease. 8.) PARKING Tenant and its employees, agents, contractors, invitees and guests shall have the non-exclusive right to park vehicles in the parking areas of the Project on an undesignated basis at no additional charge to Tenant or its employees, agents, contractors, invitees and guests. 9.) SIGNS Landlord and Tenant shall mutually agree on the signage to be retained or installed by Tenant in the Project from and after the Commencement Date. Tenant shall not inscribe, paint, -8- 9 affix or display any additional signs, advertisements, or notices without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Upon the expiration or early termination of this Lease, Tenant shall remove all of its signs and shall repair and restore any damage or injury in connection therewith, at Tenant's sole expense. Landlord shall have the right to erect and/or otherwise install such signage as may be reasonably required by Landlord including the right to use the existing boulevard pedestal located immediately north of the main entrance driveway to the Fab I Building, provided that such signage complies with city ordinances and other applicable laws and regulations. Landlord shall pay all costs and expenses for Landlord's signage. 10.) REPAIRS, MAINTENANCE, ALTERATIONS, IMPROVEMENTS AND FIXTURES (a) Repair and Maintenance of Project. Landlord shall maintain and repair the exterior common areas and facilities of the Project, including, without limitation, maintenance and repair of walkways, driveways, parking lots and landscaped areas; removal of trash and recyclables from exterior collection receptacles located within the Project; and removal of snow from driveways and parking lots within the Project. (b) Repair and Maintenance of Building. Landlord shall keep and maintain in good order, condition and repair the roof, roof membrane, exterior and interior load-bearing walls (including any plate glass windows comprising a part thereof), foundation, basement, and electrical and plumbing systems serving the Fab I Building (collectively, "Building Systems"), excluding any Building Systems located within or serving exclusively the Fab I Area or NTL; maintain and repair the HVAC equipment serving the Fab I Building, excluding chillers or other HVAC equipment serving exclusively the Fab I Area or NTL or installed for the sole purpose of operating trade fixtures and/or equipment located therein; maintain all elevators located within the Fab I Building; periodically wash exterior windows of the Fab I Building; replace all lamps, bulbs, starters and ballasts within the Fab I Building, excluding the Fab I Area and NTL and personal lamps of Tenant's employees; perform janitorial services within common areas of the Fab I Building, excluding the Fab I Area and NTL and such other portions of the Fab I Building occupied by Landlord or other occupants; and provide vending and coffee services within the common areas of the Fab I Building (which shall be billed in accordance with Tenant's Project Proportionate Share which is equal to 50% as of the Commencement Date) (c) Repair and Maintenance of Premises. Except as provided in Sections 10(a) and 10(b) hereof, Tenant shall, at its own expense, keep and maintain the Premises in good order, condition and repair at all times during the Term, subject to damage by casualty loss and Tenant shall promptly repair all damage to the Premises and replace or repair all damaged or broken furniture, fixtures, equipment and appurtenances with materials equal in quality and class to the original materials, and within any reasonable period of time. If in any one event the cost of such repair or replacement is estimated to exceed Ten Thousand and no/100 Dollars ($10,000.00), then such repair or replacement shall be subject to the reasonable approval of Landlord. If Tenant fails to do so, Landlord may, but need not make such repairs and replacements, and Tenant shall pay Landlord the cost thereof within thirty (30) days following Landlord's written demand therefor, plus an amount equal to fifteen percent (15%) of any costs -9- 10 or expenses paid by Landlord, in order to reimburse Landlord for overhead, general conditions, fees and other costs and expenses arising from Landlord's actions or involvement. (d) Alterations or Improvements. During the Term, Tenant shall have the right to make such alterations, additions or improvements to the Premises ("Improvements") as deemed necessary or desirable by Tenant, provided that such Improvements are constructed in accordance with the terms and conditions of this subsection (d); provided, however, Tenant shall not make any Improvements of a structural nature without obtaining Landlord's prior written consent. At the time Tenant desires to make any Improvements with a cost in excess of Ten Thousand and no/100 Dollars ($10,000.00), Tenant shall submit (i) a general plan or layout to Landlord for Landlord's review; (ii) an indication of any Structural Improvements which require Landlord's consent; and (iii) an express written notice that Landlord must notify Tenant within twenty (20) days if Landlord will require Tenant to remove such Improvements prior to the Expiration Date. Within fifteen (15) days following receipt of such plan and notice, Landlord shall notify Tenant in writing if Landlord objects to any such Improvements, in which case Tenant may not proceed, and/or if Landlord will require Tenant to remove such Improvements prior to the Expiration Date ("Removal Notice"). Tenant shall not have the right to make any Improvements to or on the common areas of the Project. All Improvements shall be made in compliance with all applicable laws and building codes, in a good and workmanlike manner and in quality equal to or better than the original construction of the Premises. Tenant shall promptly pay all costs attributable to such Improvements and shall indemnify, defend and hold harmless Landlord from and against any mechanic's liens or other liens or claims filed or asserted as a result thereof and against any costs or expenses which may be incurred as a result of building code violations attributable to such work. Tenant shall promptly repair any damage to the Premises or the Project caused during the construction of such Improvements. Landlord shall give proper notice to Tenant of any possible claim with respect to which Tenant's obligation to indemnify, defend and hold harmless Landlord may apply and Tenant shall have the right to defend any such claim with counsel of Tenant's choosing reasonably acceptable to Landlord. All Improvements made by Tenant to the Premises during the Term shall remain the property of Tenant and Tenant shall be entitled to all depreciation and amortization of costs in connection therewith. All property taxes attributable to such Improvements will be paid by Tenant and not included in Building Expenses. Prior to surrender of the Premises to Landlord, Tenant shall remove any Improvements identified by Landlord for removal in the Removal Notice and, at Landlord's request provided at least fifteen (15) days prior to the Expiration Date or earlier termination of the Lease, such other Improvements constructed by Tenant during the Term which were not submitted to Landlord for its prior review. Any damage caused by such removal shall be repaired at Tenant's cost and expense. Notwithstanding the preceding to the contrary, Tenant shall have no obligation to remove any Improvements that existed on the Commencement Date, or any Improvements that Tenant installed during the Term and which Landlord did not identify for removal following Landlord's review of the general plans. In the event Tenant so fails to remove any Improvements that Tenant is obligated to remove, Landlord may have same removed and the Premises so repaired at Tenant's expense. (e) Trade Fixtures. Any trade fixtures installed on the Premises by Tenant at its own expense during the Term, such as movable partitions, counters, shelving, showcases, mirrors and the like may, and, at the request of Landlord, shall be removed on the Expiration -10- 11 Date or earlier termination of this Lease, provided that Tenant is not then in default, that Tenant bears the cost of such removal, and further that Tenant repair at its own expense any and all damage to the Premises resulting from the original installation of and subsequent removal of such trade fixtures. If Tenant fails so to remove any and all such trade fixtures from the Premises on the Expiration Date or earlier termination of this Lease, all such trade fixtures shall become the property of Landlord unless Landlord elects to require their removal, in which case Tenant shall promptly remove same and restore the Premises to their prior condition. In the event Tenant so fails to remove same, Landlord may have same removed and the Premises so repaired at Tenant's expense. Any such work shall be conducted in a manner consistent with subsection (d) above. (f) Cabling. During the Term, Tenant shall have the right to install such cabling in the Premises as deemed necessary or desirable by Tenant, subject to the terms of this subsection (f). At the time Tenant desires to install any such cabling, Tenant shall submit (i) a general plan or layout to Landlord for Landlord's review and (ii) an express written notice that Landlord must notify Tenant within twenty (20) days if Landlord will require Tenant to remove such cabling prior to the Expiration Date. If, within fifteen (15) days following receipt of such plan and notice, Landlord notifies Tenant in writing that Landlord will require Tenant to remove such cabling prior to the Expiration Date, then Tenant shall remove such cabling identified by Landlord prior to the Expiration Date or earlier termination of the Lease. If Tenant fails to provide such plan and notice to Landlord prior to installation of the cabling, then Tenant shall be required to remove such cabling prior to the Expiration Date or earlier termination of the Lease, unless otherwise notified in writing by Landlord. If Tenant provided said plan and notice, but Landlord does not notify Tenant, then upon the Expiration Date or earlier termination of this Lease, such items shall be deemed to be part of the realty and the property of Landlord (and shall not be removed or disabled by Tenant). If Landlord so notifies Tenant to remove any or all of such items, and Tenant fails to remove the same upon the expiration or earlier termination of this Lease, then Landlord may have the same removed at Tenant's expense. Any such work shall be conducted in a manner consistent with subsection (d) above. 11.) FIRE OR OTHER CASUALTY; CASUALTY INSURANCE (a) Substantial Destruction of the Building. If the Fab I Building is substantially destroyed (which, as used herein, means destruction or damage to at least seventy-five percent (75%) of the Fab I Building) by fire or other casualty, either party hereto may, at its option, terminate this Lease by giving written notice thereof to the other party within sixty (60) days of such casualty. In such event, Base Rent and Additional Rent shall be apportioned to and shall cease as of the date of such casualty. If neither party exercises this option, then the Premises shall be reconstructed and restored, at Landlord's expense, to substantially the same condition as they were prior to the casualty. (b) Substantial Destruction of the Premises. If the Premises are substantially destroyed (which, as used herein, means destruction or damage to at least seventy-five percent (75%) of the Premises), or rendered wholly untenantable for the purpose for which they were leased, by fire or other casualty whether or not the Fab I Building is substantially destroyed as provided above, then the parties hereto shall have the following options: -11- 12 (1) Tenant may elect to terminate the Lease or to require that the Premises be reconstructed and restored, at Landlord's expense, to substantially the same condition as the Premises existed prior to the casualty, except for repair or replacement of Tenant's Improvements, Tenant's personal property, equipment and trade fixtures, which shall remain Tenant's responsibility. In the event that Tenant requires that the Premises be reconstructed and restored, Landlord shall not be required to expend for reconstruction and restoration any amount in excess of insurance proceeds received by Landlord as a result of such casualty loss. This option shall be exercised by Tenant giving written notice to Landlord within sixty (60) days after the date of the casualty, and this Lease shall continue in full force and effect for the balance of the Term upon the same terms, conditions and covenants as are contained herein. Base Rent and Additional Rent shall be equitably abated as of the date of such casualty. (2) If the casualty occurs during the last twelve (12) months of the Term, either party shall have the right and option to terminate its Lease as of the date of the casualty, which option shall be exercised by written notice to be given by either party to the other party within thirty (30) days therefrom. If this option is exercised, rent shall be apportioned to and shall cease as of the date of the casualty. (c) Partial Destruction of the Premises. (1) If the Premises are rendered partially untenantable for the purpose for which they were leased (which, as used herein, means the Premises are less than substantially destroyed, as defined in Section 11(b) above) by fire or other casualty, then such damaged part of the Premises shall be reconstructed and restored at Landlord's expense to substantially the same condition as it was prior to the casualty, except for repair or replacement of Tenant's Improvements, Tenant's personal property, equipment and trade fixtures, which shall remain Tenant's responsibility. Base Rent and Additional Rent shall be equitably abated as of the date of such casualty in proportion to the ratio between the number of square feet which is untenantable compared to the aggregate number of square feet comprising the Premises. Landlord shall use reasonable diligence in completing such reconstruction repairs, but in the event Landlord fails to complete the same within one hundred twenty (120) days from the date of the casualty, Tenant may, at its option, terminate this Lease upon giving Landlord written notice to that effect, whereupon both parties shall be released from all further obligations and liability hereunder. (2) If the casualty occurs during the last six (6) months of the Term, either party shall have the right and option to terminate its Lease as of the date of the casualty, which option shall be exercised by written notice to be given by either party to the other party within thirty (30) days therefrom. If this option is exercised, rent shall be apportioned to and shall cease as of the date of the casualty. (d) Casualty Insurance. (1) Landlord shall at all times during the Term, carry, as a Project Expense, a "Special Forms and Extended Perils" property insurance policy insuring the Project, including the Fab I Building, against loss or damage by fire or other casualty (namely, the perils -12- 13 against which insurance is afforded by the standard fire insurance policy and extended coverage endorsement) for the full replacement cost thereof; provided, however, that Landlord shall not be obligated to insure against any loss or damage to personal property (including, but not limited to, any furniture, machinery, equipment, goods or supplies) of Tenant or which Tenant may have on the Premises or any trade fixtures installed by or paid for by Tenant on the Premises or any additional improvements which Tenant may have constructed within the Premises. Such policy shall provide coverage against physical loss, damage and theft and the perils of fire and extended coverage, including, without limitation, theft, vandalism, malicious mischief, explosion, collapse and underground hazards, sprinkler leakage, water damage, storms, subsidence, sinkhole collapse, landslide, and debris removal. Such property insurance must be from insurance companies rated at least A:X in the latest Best's Insurance Guide. Upon request, Landlord shall furnish to Tenant a certificate evidencing the existence of such insurance coverage and endorsements to such coverage. If changes to Tenant's use or operation on the Premises, or any alterations or improvements made by Tenant pursuant to the provisions of Section 10(c) hereof result in an increase in the premiums charged during the Term on the casualty insurance carried by Landlord on the Project, then the cost of such increase in insurance premiums shall be borne by Tenant, who shall reimburse Landlord for the same as additional rent after being billed therefor. If changes to Landlord's use or operation within Project, or any alterations or improvements made by Landlord (and not on Tenant's behalf) result in an increase in the premiums charged during the Term on the casualty insurance carried by Landlord on the Project, then the cost of such increase in insurance premiums shall be borne by Landlord, and said increase shall be excluded from Project Expenses for purposes of this Lease. (2) Tenant shall at all times during the Term, carry, at its own expense, property insurance covering its personal property and trade fixtures installed by or paid for by Tenant or any additional improvements which Tenant may construct on the Premises, which coverage shall be no less than replacement value. Tenant shall furnish Landlord with a certificate evidencing that such coverages are in full force and effect. Such coverages shall not be canceled or amended on less than thirty (30) days notice to Landlord. (e) Waiver of Subrogation. This Section 11(e) shall govern any contrary or inconsistent provisions of this Lease. Landlord and Tenant hereby release, and shall cause their respective insurance companies to waive all rights of recovery against, each other and each other's employees, agents, customers and invitees from any and all liability for any loss, damage or injury to property occurring in, on or about or to the Premises or Project, improvements to the Project or personal property within the Project, by reason of fire or other casualty which are covered by applicable standard fire and extended coverage insurance policies. 12.) GENERAL PUBLIC LIABILITY, INDEMNIFICATION AND INSURANCE (a) At all times during the Term, Landlord and Tenant shall each carry, at its own expense, for the protection of the other party, one or more policies of general liability insurance with one or more insurance companies rated A:X or better in Best's Insurance Guide, providing minimum coverages of $2,000,000 combined single limit for bodily injury and property damage per occurrence and location with $5,000,000 aggregate coverage. Such general liability insurance shall include a separation of insureds/cross liability endorsement, broad form -13- 14 property damage coverage and afford coverage for "personal injury" liability. At all times during the Term, Landlord and Tenant shall each carry comprehensive automobile liability insurance covering all owned, non-owned and hired automobiles, with limits of not less than $1,000,000 in primary coverage per accident for both bodily injury and property damage liability. All such insurance policy or policies shall name the other party as additional insureds and shall provide that they may not be canceled or materially changed on less than thirty (30) days prior written notice to the other party. Each party shall furnish the other with certificates of insurance evidencing such coverages prior to the Commencement Date and prior to the date of renewal. Should any party fail to carry such insurance and/or furnish to the other party within ten (10) days following such other party's request a certificate of insurance evidencing such coverage, such other party shall have the right to obtain such insurance and collect the cost thereof from the non-performing party, in which event the non-performing party shall reimburse such other party for the cost of such coverage within thirty (30) days following such other party's written demand therefor. Each party shall also provide the other with certificates evidencing workers' compensation insurance coverage as required by law and employer's liability coverage for injury, disease and death, with coverage limits of not less than $1,000,000 per accident. The insurance coverages required hereby shall be deemed to be additional obligations of each party and shall not be a discharge or limitation of such party's indemnity obligations contained hereinbelow. (b) Except for any loss, damage, or injury to person or property caused by the negligence or intentional misconduct of Landlord or its agents, employees, contractors, invitees or guests, Tenant shall be responsible for, shall insure against, and shall indemnify Landlord and hold it harmless from, any and all liability for any loss, damage or injury to person or property, arising out of use, occupancy or operations of Tenant and occurring in, on or about the Project, and Tenant hereby releases Landlord from any and all liability for the same. Tenant's obligation to indemnify Landlord hereunder shall include the duty to defend against any claims asserted by reason of such loss, damage or injury and to pay any judgments, settlements, costs, fees and expenses, including attorneys' fees, incurred in connection therewith. Landlord shall give prompt written notice to Tenant of the occurrence of any loss, damage, or injury to which Tenant's duty to indemnify and hold harmless the Landlord may pertain and Tenant shall have the right to defend any claim asserted by any party with respect to such loss, damage, or injury through counsel of Tenant's selection. (c) Except for any loss, damage, or injury to person or property caused by the negligence or intentional misconduct of Tenant or its agents, employees, contractors, invitees or guests, Landlord shall be responsible for, shall insure against, and shall indemnify Tenant and hold it harmless from, any and all liability for any loss, damage or injury to person or property occurring in, on or about the common areas and facilities for the Project and the use, occupancy or operations of Landlord and occurring in, on or about any portion of the Project, and Landlord hereby releases Tenant from any and all liability for the same. Landlord's obligation to indemnify Tenant shall include the duty to defend against any claims asserted by reason of such loss, damage or injury and to pay any judgments, settlements, costs, fees and expenses, including attorneys' fees, incurred in connection therewith. Tenant shall give prompt written notice to Landlord of the occurrence of any loss, damage, or injury to which Landlord's duty to indemnify and hold harmless the Tenant may pertain and Landlord shall have the right to defend any claim -14- 15 asserted by any party with respect to such loss, damage, or injury through counsel of Landlord's selection. 13.) EMINENT DOMAIN If the whole or any part of the Premises or Project (including parking areas) shall be taken for public or quasipublic use by a governmental authority under the power of eminent domain or shall be conveyed to a governmental authority in lieu of such taking, and if such taking or conveyance shall cause the remaining part of the Premises to be untenantable and inadequate for use by Tenant for the purpose for which they were leased, then Tenant may, at its option, terminate this Lease as of the date Tenant is required to surrender possession of the Premises as a result of such taking. If a part of the Premises or Project shall be taken or conveyed but the remaining part is tenantable and adequate for Tenant's use, then this Lease shall be terminated as to the part taken or conveyed as of the date Tenant surrenders possession; Landlord shall make such repairs, alterations and improvements as may be necessary to render the part not taken or conveyed tenantable; and the rent shall be reduced in proportion to the part of the Premises so taken or conveyed. Tenant shall not have the right to assert a claim against the governmental authority exercising its power of eminent domain based upon the value of Tenant's leasehold interest. All compensation awarded for such taking or conveyance shall be the property of Landlord without any deduction therefrom for any present or future estate of Tenant and Tenant hereby assigns to Landlord all its right, title and interest in and to any such award. However, Tenant shall have the right to recover from the governmental authority, but not from Landlord, such compensation as may be awarded to Tenant on account of the interruption of Tenant's business, moving and relocation expenses and depreciation to and removal of Tenant's trade fixtures and personal property. 14.) LIENS If, because of any act or omission of Tenant or anyone claiming by, through, or under Tenant (other than Landlord), any mechanic's lien or other lien shall be filed against the Premises or the Project for work performed by or on behalf of Tenant (whether or not such lien is valid or enforceable as such), Tenant shall, at its own expense, cause the same to be discharged of record within a reasonable time, not to exceed sixty (60) days after the date of filing thereof, and shall also defend and indemnify Landlord and hold it harmless from any and all claims, losses, damages, judgments, settlements, cost and expenses, including attorneys' fees, resulting therefrom or by reason thereof. If such lien is not discharged of record within sixty (60) days after the date of filing thereof, Landlord, at its sole option, may take all action necessary to release and remove such lien (without any duty to investigate the validity thereof) and Tenant shall promptly upon notice reimburse Landlord for all sums, costs and expenses (including reasonable attorneys' fees and Landlord's Costs) incurred by Landlord in connection with such lien. 15.) RENTAL, PERSONAL PROPERTY AND OTHER TAXES (a) Tenant shall pay before delinquency any and all taxes, assessments, fees or charges (hereinafter referred to as "taxes"), including any sales, gross income, rental, business -15- 16 occupation or other taxes, levied or imposed upon Tenant's business operation in the Premises and any personal property or similar taxes levied or imposed upon Tenant's trade fixtures, leasehold improvements or personal property located within the Premises. In the event any such taxes are charged to the account of, or are levied or imposed upon the property of Landlord, Tenant shall reimburse Landlord for the same as additional rent. Notwithstanding the foregoing, Tenant shall have the right to contest in good faith any such tax and to defer payment, if required, until after Tenant's liability therefor is finally determined, provided Tenant furnishes Landlord with reasonably acceptable security from which may be satisfied any judgment arising from such taxes. (b) If any tenant improvements made by Tenant during the Term or any of Tenant's trade fixtures or equipment located in, on or about the Premises, regardless of whether they are installed or paid for by Landlord or Tenant and whether or not they are affixed to and become a part of the realty and the property of Landlord, are assessed for real property tax purposes at a valuation higher than that at which other such property in other space in the Project is assessed, then Tenant shall reimburse Landlord as additional rent for the amount of real property taxes shown on the appropriate county official's records as having been levied upon the Project or other property of Landlord by reason of such excess assessed valuation. 16.) ASSIGNMENT AND SUBLETTING Tenant may not assign or otherwise transfer its interest in this Lease or sublet the Premises or any part thereof without the prior written consent of Landlord, which Landlord may refuse in its sole discretion. Tenant shall notify Landlord thirty (30) days in advance of its intent to transfer, assign or sublet all or any portion of the Premises and shall, at the time Tenant requests Landlord's approval, provide Landlord with financial information on the proposed assignee or subtenant. In any event, Tenant shall reimburse Landlord for fees and expenses incurred by Landlord (including expert and attorneys' fees) in reviewing any proposed assignment or subletting. In the event of any such assignment or subletting, Tenant shall nevertheless at all times remain fully responsible and liable for the payment of rent and the performance and observance of all of Tenant's other obligations under the terms, conditions and covenants of this Lease. No assignment or subletting of the Premises or any part thereof shall be binding upon Landlord unless such assignee or subtenant delivers to Landlord an instrument (in recordable form, if requested) containing an agreement of assumption of all of Tenant's obligations under this Lease. Upon the occurrence of an event of default after the expiration of any applicable notice and cure period herein, if all or any part of the Premises are then assigned or sublet, Landlord, in addition to any other remedies provided by this Lease or by law, may, at its option, collect directly from the assignee or subtenant all rent becoming due to Landlord by reason of the assignment or subletting. Any collection by Landlord from the assignee or subtenant shall not be construed to constitute a novation or release of Tenant from the further performance of its obligations under this Lease. Any rents received by Tenant from the assignment or subletting of the Premises which exceed rents payable by Tenant hereunder shall be immediately paid to Landlord as additional compensation. Landlord shall, at its option, have the right to recapture all or any part of the Premises Tenant proposes to assign or sublet upon notice from Tenant of its intent to assign or such sublet part of the Premises. Notwithstanding the preceding to the contrary, Tenant shall have the right, without the prior written consent of -16- 17 Landlord, to transfer or assign the Lease or sublet the Premises to any entity controlling, controlled by or under the common control of Tenant or in connection with a sale of stock, merger or sale of substantially all of the assets of Tenant. 17.) SUBORDINATION OF LEASE TO MORTGAGES This Lease shall be subject and subordinate to any mortgage or similar encumbrances, including ground or underlying leases, whether presently existing or hereafter voluntarily placed upon the Project or the Premises, including any renewals, extensions or modifications thereof, provided that, with respect to any such encumbrances hereafter placed on the Project or Premises, the holder of such encumbrance enters into a non-disturbance and attornment agreement with Tenant in a customary form, including, among other provisions, an agreement that Tenant's possession of the Premises will not be disturbed in the event of mortgage foreclosure or other similar exercise of remedies, so long as Tenant is not in default hereunder after the expiration of any applicable notice and cure periods. Tenant shall, at Landlord's request, execute and deliver within ten (10) days to Landlord, without cost, a subordination, non-disturbance and attornment agreement for purposes of confirming the subordination of this Lease. 18.) DEFAULTS AND REMEDIES (a) Default by Tenant. The occurrence of any one or more of the following events shall be a default and breach of this Lease by Tenant: (1) Tenant shall fail to pay any installment of Base Rent within ten (10) days after it is due or shall fail to pay any Project Expenses, Building Expenses, Taxes or additional rent within ten (10) days after written notice that the same is past due; (2) Tenant shall fail to perform or observe any other term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after written notice thereof from Landlord; provided, however, that if the term, condition, covenant or obligation to be performed by Tenant is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Tenant commences such performance within said thirty day period and thereafter diligently completes the same; (3) Tenant shall abandon the Premises; or (4) Tenant declares bankruptcy, is declared bankrupt, makes an assignment for the benefit of creditors; or substantially all of Tenant's assets in, on or about the Premises or Tenant's interest in this Lease are attached or levied upon under execution (and Tenant does not discharge the same within sixty (60) days thereafter). (b) Remedies of Landlord. Upon the occurrence of any event of default set forth in Section 18(a) hereof, Landlord shall have the following rights and remedies, in addition to those allowed by law, any one or more of which may be exercised without further notice to or demand upon Tenant: -17- 18 (1) Landlord may reenter the Premises and cure any default of Tenant, in which event Tenant shall reimburse Landlord as additional rent for any costs and expenses which Landlord may incur to cure such default. (2) Landlord may terminate this Lease as of the date of such default, in which event: (A) neither Tenant nor any person claiming under or through Tenant shall thereafter be entitled to possession of the Premises, and Tenant shall immediately thereafter surrender the Premises to Landlord; (B) Landlord may reenter the Premises and dispossess Tenant or any other occupants of the Premises by summary proceedings, ejectment or otherwise, and may remove their effects, without prejudice to any other remedy which Landlord may have for possession or arrearages in rent; and (C) notwithstanding the termination of this Lease, Landlord may relet all or any part of the Premises for a term different from that which would otherwise have constituted the balance of the Term and for rent and on terms and conditions different from those contained herein, whereupon Tenant shall be obligated to pay to Landlord as liquidated damages the difference between the rent provided for herein and that provided for in any lease covering a subsequent reletting of the Premises, for the period which would otherwise have constituted the balance of the Term, together with all of Landlord's costs and expenses for preparing the Premises, for reletting, including all repairs, tenant finish improvements, marketing costs, broker's and attorney's fees, and all loss or damage which Landlord may sustain by reason of such termination, reentry and reletting, it being expressly understood and agreed that the liabilities and remedies specified above shall survive the termination of this Lease. (3) Landlord may terminate Tenant's right of possession of the Premises and may repossess the Premises by unlawful detainer action, by taking peaceful possession or otherwise, without terminating this Lease, in which event Landlord may, but shall be under no obligation to, relet the same for the account of Tenant, for such rent and upon such terms as shall be satisfactory to Landlord. For the purpose of such reletting, Landlord is authorized to decorate, repair, remodel or alter the Premises. If Landlord fails to so relet the Premises, Tenant shall pay to Landlord as damages a sum equal to the rent which would have been due under this Lease for the balance of the Term or exercised renewal period as such rent shall become due and payable hereunder from time to time during the Term. If the Premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the costs and expenses of all decoration, repairs, remodeling, alterations and additions and the expenses of such reletting and of the collection of the rent accruing therefrom to satisfy the rent provided for in this Lease, Tenant shall satisfy and pay the same upon demand therefor from time to time. Tenant shall not be entitled to any rents received by Landlord in excess of the rent provided for in this Lease. (4) Landlord may sue for injunctive relief or to recover damages for any loss resulting from the breach. Any agreement for an extension of the Term or any additional period thereafter shall not thereby prevent Landlord from terminating this Lease for any reason specified in this Lease. If any such right of termination is exercised by Landlord during the Term or any extension thereof, Tenant's right to any further extension shall thereby be automatically canceled. Any such right -18- 19 of termination of Landlord contained herein shall continue during the Term and any subsequent extension hereof. (c) Default by Landlord and Remedies of Tenant. It shall be a default and breach of this Lease by Landlord if it shall fail to perform or observe any term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after written notice thereof from Tenant; provided, however, that if the term, condition, covenant or obligation to be performed by Landlord is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Landlord commences such performance within said thirty day period and thereafter diligently completes the same. Upon the occurrence of any such default, Tenant may sue for injunctive relief or to recover damages for any loss resulting from the breach, but Tenant shall not be entitled to terminate this Lease or withhold or abate any rent due hereunder. (d) NonWaiver of Defaults. The failure or delay by either party hereto to enforce or exercise at any time any of the rights or remedies or other provisions of this Lease shall not be construed to be a waiver thereof, nor affect the validity of any part of this Lease or the right of either party thereafter to enforce each and every such right or remedy or other provisions. No waiver of any default and breach of this Lease shall be held to be a waiver of any other default of breach. The receipt of rent by Landlord at a time after rent is due under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of less than the full rent due shall not be construed to be other than a payment on account of rent then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the rent due or to pursue any other remedies provided in this Lease. No act or omission by Landlord or its employees or agents during the term of this Lease shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. (e) Attorney's Fees. If Tenant defaults in the performance or observance of any of the terms, conditions, covenants or obligations contained in this Lease and Landlord places the enforcement of all or any part of this Lease, the collection of any rent due or to become due or the recovery of possession of the Premises in the hands of an attorney, or if Landlord incurs any fees or out-of-pocket costs in any litigation, negotiation or transaction in which Tenant causes Landlord (without Landlord's fault) to be involved or concerned, Tenant agrees to reimburse Landlord for the attorney's fees and costs incurred thereby, whether or not suit is actually filed. 19.) BANKRUPTCY OR INSOLVENCY (a) If either party shall file a petition in bankruptcy or for a reorganization or arrangement or other relief under the United States Bankruptcy Code or any similar statute, or if any such proceeding shall be filed against either party and is not dismissed or vacated within sixty (60) days after its filing, or if a court having jurisdiction shall issue an order or decree appointing a receiver, custodian or liquidator for a substantial part of the property of either party which decree or order remains in force undischarged and unstayed for a period of sixty (60) days, -19- 20 or if either party shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts as they become due, the other party may terminate this Lease upon five days written notice. (b) Except as otherwise expressly provided in this Lease, neither party shall be required to accept performance under this Lease from any person, including, without limitation, owner or manager, as the case may be, should it become a debtor in possession under the United States Bankruptcy Code, or any trustee of either appointed under the United States Bankruptcy Code and any assignee of such party or trustee, other than the other party. 20.) ACCESS TO THE PREMISES Landlord, its employees and agents and any mortgagee of the Project shall have the right to enter any part of the Premises following at least twenty-four (24) hours' written notice (except in the event of an emergency, in which case only such notice as is reasonably possible shall be required) for the purposes of examining or inspecting the same, showing the same to prospective purchasers, mortgagees or tenants (during the last six months of the Term) and for making such repairs, alterations or improvements to the Premises or the Project as Landlord may deem necessary or desirable. Notwithstanding anything to the contrary herein contained, Landlord agrees that it shall not unreasonably interfere with the use of the Premises by Tenant and shall use diligent and good faith efforts to preserve all confidentiality of Tenant. Tenant shall have the right to require that any Landlord or any of its representatives be accompanied by a representative of Tenant during any such entry. If (i) Landlord is unable to timely gain access to the Premises due to Tenant's security or other reasons within Tenant's control, and (ii) Landlord incurs loss or damage as a result thereof (e.g., damage caused by a ruptured pipe), then Tenant shall be obligated to reimburse Landlord within ten (10) days after demand for any such loss or damage to the extent insurance proceeds are not recovered by Landlord for the same. 21.) SURRENDER OF PREMISES Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord, together with all keys, access cards, alterations, improvements, and other property as provided elsewhere herein, in broom clean condition and in good order, condition and repair, except for ordinary wear and tear, damage created by casualty loss and damage which Tenant is not obligated to repair. If Tenant fails to so surrender the Premises to Landlord, Landlord may restore the Premises to such condition at Tenant's expense, which shall be payable upon demand. Subject to the provisions of Section 10(e) hereof, upon such expiration or termination Tenant's trade fixtures, furniture and equipment shall remain Tenant's property, and Tenant shall have the right to remove the same prior to the expiration or earlier termination of this Lease. Tenant shall promptly repair any damage caused by any such removal. Any of Tenant's trade fixtures, furniture or equipment not so removed shall be considered abandoned and may be retained by Landlord or be destroyed or disposed of at Tenant's expense. 22.) HOLDING OVER -20- 21 If Tenant remains in possession of the Premises without the written consent of Landlord after the expiration or earlier termination of this Lease, Tenant shall be deemed to hold the Premises as a tenant at will subject to all of the terms, conditions, covenants and provisions of this Lease (which shall be applicable during the holdover period), except that the Base Rent shall be increased to 125% of the last current Base Rent. Tenant shall vacate and surrender the Premises to Landlord upon Tenant's receipt of notice from Landlord to vacate. No holding over by Tenant, whether with or without the written consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided herein. 23.) QUIET ENJOYMENT If and so long as Tenant pays the prescribed rent and performs or observes all of the terms, conditions, covenants and obligations of this Lease required to be performed or observed by it hereunder, Tenant shall at all times during the term hereof have the peaceable and quiet enjoyment, possession, occupancy and use of the Premises without any interference from Landlord or any person or persons claiming the Premises by, through or under Landlord. The foregoing is subject to the rights of any mortgages, underlying leases or other matters of record to which this Lease is or may become subject, provided that any such mortgagees or lessor shall be required to provide Tenant with a nondisturbance agreement allowing Tenant to remain in the Premises under the terms of this Lease in the event of a default under the mortgage by Landlord. 24.) NOTICE AND PLACE OF PAYMENT (a) All rent and other payments required to be made by Tenant to Landlord shall be delivered or mailed to Landlord at the address set forth below or any other address Landlord may specify from time to time by written notice given to Tenant. (b) All payments required to be made by Landlord to Tenant shall be delivered or mailed to Tenant at the address set forth in Section 24(c) hereof or at any other address within the United States as Tenant may specify from time to time by written notice given to Landlord. (c) Any notice, demand or request required or permitted to be given under this Lease or by law shall be deemed to have been given if reduced to writing and mailed by Registered or Certified mail, postage prepaid, to the party who is to receive such notice, demand or request at the address set forth below or at such other address as Landlord or Tenant may specify from time to time by written notice. When delivering such notice, demand or request shall be deemed to have been given as of the date it was so delivered. To Tenant: Cray, Inc. P. O. Box 6000 Chippewa Falls, WI 54729 Attn: Bill Howard To Owner: Union Semiconductor Technology Corporation 15301 Highway 55 West Plymouth, Minnesota 55447 -21- 22 Attn: Erik Berger 25.) MISCELLANEOUS GENERAL PROVISIONS (a) Payments Deemed Rent. Any amounts of money to be paid by Tenant to Landlord pursuant to the provisions of this Lease, whether or not such payments are denominated "rent" or "additional rent" and whether or not they are to be periodic or recurring, shall be deemed rent or additional rent for purposes of this Lease; and any failure to pay any of same as provided in Section 18(a) hereof shall entitle Landlord to exercise all of the rights and remedies afforded hereby or by law for the collection and enforcement of Tenant's obligation to pay rent. Tenant's obligation to pay any such rent or additional rent pursuant to the provisions of this Lease shall survive the expiration or other termination of this Lease and the surrender of possession of the Premises after any holdover period. (b) Estoppel Letters. Tenant shall, within ten (10) days following written request from Landlord, execute, acknowledge and deliver to Landlord or to any lender, purchaser or prospective lender or purchaser designated by Landlord a written statement in a form provided by Landlord certifying (i) that this Lease is in full force and effect and unmodified (or, if modified, stating the nature of such modification), (ii) the date to which rent has been paid, (iii) that there are not, to Tenant's knowledge, any uncured defaults (or specifying such defaults if any are claimed), and (iv) such further matters regarding this Lease and/or the Premises customarily included in estoppel letters or certificates as may be reasonably requested by Landlord, provided that disclosure of confidential information by Tenant shall not be required. Any such statement may be relied upon by any prospective purchaser or mortgagee of all or any part of the Project. Tenant's failure to deliver such statement within such period shall be conclusive upon Tenant that this Lease is in full force and effect and unmodified, and that there are no uncured defaults in Landlord's performance hereunder. (c) Memorandum of Lease. If requested by Landlord or Tenant, a memorandum of lease, containing the information required by applicable law concerning this Lease shall be prepared, executed by both parties and filed for record in the office of the county recorder in Chippewa County, Wisconsin. (d) Claims for Fees. Each party hereto shall indemnify and hold harmless the other party for any and all liability incurred in connection with the negotiation or execution of this Lease for any real estate broker's commission or finder's fee which has been earned by a real estate broker or other person on such party's behalf. Each party represents to the other that each party has retained corporate real estate advisors and that each party shall be responsible for the fees of their own advisors. (e) Applicable Law. This Lease and all matters pertinent thereto shall be construed and enforced in accordance with the laws of the State of Wisconsin. (f) Entire Agreement. This Lease, including all Exhibits, Riders and Addenda, constitutes the entire agreement between the parties hereto regarding the subject matter -22- 23 hereof and may not be modified except by an instrument in writing executed by the parties hereto. (g) Binding Effect. This Lease and the respective rights and obligations of the parties hereto shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto as well as the parties themselves; provided, however, that Landlord, its successors and assigns shall be obligated to perform Landlord's covenants under this Lease only during and in respect of their successive periods as Landlord during the term of this Lease. (h) Severability. If any provision of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions hereof shall not be affected or impaired, and such remaining provisions shall remain in full force and effect. (i) No Partnership. Landlord shall not, by virtue of the execution of this Lease or the leasing of the Premises to Tenant, become or be deemed a partner of Tenant in the conduct of Tenant's business on the Premises or otherwise. (j) Headings, Gender, etc. As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall include any other gender. The topical headings of the several paragraphs of this Lease are inserted only as a matter of convenience and reference, and do not affect, define, limit or describe the scope or intent of this Lease. (k) No Right to Change Buildings Address. Landlord shall have no right to change the street address of the Fab I Building without the prior written consent of Tenant. Landlord reserves the right to change the name of the Project. (l) Execution by Landlord. Submission of this instrument to Tenant, or Tenant's agents or attorneys, for examination or signature does not constitute or imply an offer to lease, reservation of space, or option to lease, and this Lease shall have no binding legal effect until execution hereof by both Landlord and Tenant. (m) Time of Essence. Time is of the essence of this Lease and each of its provisions. (n) Drafting Party. The parties represent that they have been represented by legal counsel in the negotiation and preparation of this Lease and that their respective attorneys have substantially participated in the drafting of this Lease. The parties agree that the rule of construction regarding ambiguities being construed against the drafting party shall not apply. Changes from any prior drafts of this Lease shall not be used in interpreting any of the provisions of this Lease. (o) Counterparts; Facsimile Signatures. This Lease may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one document. Facsimile signatures on this Lease shall be deemed valid and acceptable; -23- 24 however, any party executing this Lease by facsimile signature shall immediately deliver not less than three (3) hard copy originals to the other party. 26.) HAZARDOUS SUBSTANCES. (a) Tenant covenants that Tenant, with respect to its use and operation on the Premises and within the Project during the Term, will remain in compliance with all applicable federal, state and local statutes, ordinances, regulations, rules and other laws presently in force or hereafter enacted relating to public health, safety, protection of the environment, environmental quality, contamination and clean-up of hazardous materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Resource, Conservation and Recovery Act of 1976, as amended, and state superfund and environmental clean-up statutes and all rules and regulations presently or hereafter enacted ("environmental laws"). As used above, the term "hazardous materials" shall mean and include all hazardous and toxic substances, waste or materials, any pollutant or contaminant, including, without limitation, asbestos, PCBs, petroleum and petroleum-based products and raw materials that are included under or regulated by any environmental laws. Tenant shall not release, generate, manufacture, store, treat, transport or dispose of any hazardous material on or about the Project or any part thereof; however, Tenant may store, transport and use such hazardous materials as historically used by Tenant in the ordinary course of the operation of its business in compliance with all applicable environmental laws. Tenant will immediately notify Landlord and provide copies upon receipt of all written complaints, claims, citations, demands, inquiries, reports or notices relating to the condition of the Premises or compliance with environmental laws. Tenant shall maintain all required records and file any necessary documents with the appropriate agencies relating to the use, storage or transportation of any hazardous materials on, to, from or about the Premises. Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord and at Tenant's sole cost), and hold Landlord harmless from and against all losses, liabilities, obligations, penalties, claims, demands, judgments, costs and other damages, that are suffered or incurred by Landlord and arising from the release or other deposit during the Term of any hazardous material by Tenant, its employees, agents or contractors, on, in, under or affecting all or any portion of the Premises or the Project, or any breach of any obligation or agreement of Tenant in this paragraph. This indemnification obligation shall survive the termination of this Lease. (b) Except as provided in subparagraph (a) above, Landlord covenants that Landlord, with respect to its use and operation on the Project during the Term, will remain in compliance with all applicable environmental laws. Landlord shall not release, generate, manufacture, store, treat, transport or dispose of any hazardous material on or about the Project or any part thereof; however, Landlord may store, transport and use such hazardous materials used by Landlord in the ordinary course of the operation of its business in compliance with all applicable environmental laws. Landlord shall indemnify, defend (with counsel reasonably acceptable to Tenant and at Landlord's sole cost), and hold Tenant harmless from and against all losses, liabilities, obligations, penalties, claims, demands, judgments, costs and other damages, that are suffered or incurred by Tenant and caused by the release or other deposit of any hazardous material by Landlord, its employees, agents (not including Tenant under the -24- 25 Management Services Agreement) or contractors, on, in, under or affecting all or any portion of the Project. This indemnification obligation shall survive the termination of this Lease. -25- 26 IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. LANDLORD: UNION SEMICONDUCTOR TECHNOLOGY CORPORATION By: /s/ JAMES LAI 6-29-00 --------------------------------------- Its: PRESIDENT -------------------------------- TENANT: CRAY, INC. By: /s/ DAVID E. FRASCH 6/30/00 --------------------------------------- Its: CHIEF TECH. COUNSEL -------------------------------- Exhibits A) Project Plan B) Premises Plan C) Rules and Regulations D) Parking Areas -26- 27 EXHIBIT A PROJECT PLAN [GRAPHIC] 28 EXHIBIT B PREMISES PLAN [GRAPHIC] 29 EXHIBIT C RULES & REGULATIONS Landlord and Tenant each agrees, for itself, its employees, agents, contractors, invitees and guests, to comply with the following rules and regulations with such reasonable modifications thereof and additions thereto as Landlord and Tenant may agree in writing to make from time to time for the Project. For purposes of these Rules and Regulations, the term "Occupant" shall mean Landlord, Tenant or any other tenant of the Project. 1. The Project sidewalks and the Fab I Building entries, passages, courtyard, corridors, stairways and elevators shall not be obstructed by any Occupant or its employees, agents, contractors, invitees and guests, or used by them for purposes other than ingress and egress to and from their respective premises. 2. Except as expressly provided in the Lease, no sign, advertisement or notice shall be inscribed, painted or affixed by any Tenant on any part of the inside or outside of any Building. 3. Subject to limitations described in the Lease, each Occupant shall have the nonexclusive use in common with other tenants, their guests and invitees, of the automobile parking areas, driveways and footways. Landlord shall have the right to install parking, directional and other signs. Landlord and Tenant shall not be liable to the other if any vehicle of an Occupant or its employees is towed from the Project when illegally parked. Landlord and Tenant shall not be liable to the other for damage to vehicles in the parking areas or for theft of vehicles, personal property from vehicles, or equipment of vehicles. 4. No Occupant shall do or permit anything to be done in the Project or bring or keep anything therein which will in any way increase the rate of fire insurance on the Project, or on property kept therein, or obstruct or interfere with the rights of each other or other tenants, or in any way injure or annoy them, or conflict with the laws relating to fire, or with any regulations of the fire department, or with any insurance policy upon any Buildings or any part thereof, or conflict with any rules and ordinances of the local Board of Health or any governing bodies. 5. No windows or other openings that reflect or admit light into the corridors or passageways in the Fab I Building shall be covered or obstructed by any Occupant. 6. No Occupant shall disturb any other Occupant by the use of any musical instruments, the making of unseemly noises, or any unreasonable noise. No animals or pets of any kind will be allowed in the Fab I Building other than to assist sensory impaired persons. 7. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed, and any damage resulting to them from misuse, or the defacing or injury of any part of the Buildings, shall be borne by the person who shall occasion it. -29- 30 8. Nothing shall be thrown out the windows of the Fab I Building or down the stairways or other passages. 9. No Occupant shall be permitted to use or to keep in the Fab I Building any kerosene, camphene, burning fluid or other illuminating materials, except to the extent necessary to operate building systems. 10. No portion of the Fab I Building shall be used for the purpose of lodging rooms or for any immoral or unlawful purposes. 11. No Occupant shall make or permit any noise, vibration or odor to emanate from its respective premises which would unreasonably interfere with the quiet possession of premises by other Occupants; or do anything therein tending to create, or maintain, a nuisance; or disturb, solicit or canvass any occupant of the Fab I Building. 12. No Occupant shall place anything or allow anything to be placed near the glass of any door, partition, or window which may be unsightly from outside its respective premises; or take or permit to be taken in or out of other entrances of the Fab I Building, or take or permit on other elevators, any item normally taken in or out through the trucking concourse or service doors or in or on freight elevators; or, whether temporarily, accidentally, or otherwise, allow anything to remain in, place or store anything in, or obstruct in any way, any passageway, exit, stairway, elevator, shipping platform, or truck concourse. Each Occupant shall lend its full cooperation to keep such areas free from all obstruction and in a clean condition and move all supplies, furniture and equipment as soon as received directly to the Premises and move all such items and waste, other than waste customarily removed by employees of the Building, to be taken from its respective premises directly to the shipping platform at or about the time arranged for removal therefrom. 13. If any provision of these Rules and Regulations conflict with the terms of the Lease, the applicable provision of the Lease will control. -30- 31 EXHIBIT D PARKING AREAS [GRAPHIC] EX-10.10 4 v71068ex10-10.txt EXHIBIT 10.10 1 EXHIBIT 10.10 CONFERENCE CENTER LEASE AGREEMENT THIS LEASE is entered into and made as of June 1, 2000 by and between UNION SEMICONDUCTOR TECHNOLOGY CORPORATION, a Delaware corporation ("Landlord"), and CRAY, INC., a Washington corporation ("Tenant"). WITNESSETH: Landlord, in consideration of the rents and covenants hereinafter set forth, does hereby demise, let and lease to Tenant, and Tenant does hereby hire, take and lease from Landlord, on the terms and conditions hereinafter set forth, the following described premises, to have and to hold the same, with all appurtenances specified herein, for the term hereinafter specified. 1.) DESCRIPTION OF THE PROJECT, PREMISES, PERSONAL PROPERTY AND COMMON AREAS. (a) Project. The "Project" consists of a multi-building project located in Chippewa Falls, Wisconsin, consisting of approximately seven & 8/10 (7.8) acres of land and four (4) buildings commonly referred to as (i) the Cray Conference Center containing approximately 5,480 square feet ("Conference Center"), (ii) the Development/ I.C. Fab I Building containing approximately 90,260 square feet ("Fab I Building"), (iii) the I.C. Fab II Building containing approximately 42,335 square feet ("Fab II Building"), and (iv) the 890 Building containing approximately 4,033 square feet ("890 Building") (referred to herein individually as a "Building" and collectively as the "Buildings"). As of the Commencement Date, the parties agree that the total square footage of the Buildings located within the Project is 142,108 square feet. A site plan of the project is attached hereto as Exhibit A. (b) Premises. The "Premises" will include the Conference Center located at 920 Lowater Drive, Chippewa Falls, Wisconsin, consisting of approximately 5,480 square feet. A site plan of the Premises is attached hereto as Exhibit B. (c) Personal Property. During the Term, Tenant shall have the right to use, and shall maintain and repair, all personal property of Landlord currently located in the Premises. Upon expiration or earlier termination of the Lease, said personal property shall remain in the Premises and Tenant shall no longer have the right to use the same. All such personal property shall be surrendered to Landlord in the same condition as on the Commencement Date (as hereinafter defined), subject to ordinary and reasonable wear and tear. During the Term, Landlord shall maintain and repair, and shall not remove, any furniture and fixtures owned by Landlord and located within the common areas that are made available for use by Tenant hereunder. (d) Common Areas. Tenant shall have the non-exclusive right to use all common areas of the Project, including, without limitation, sidewalks, driveways, parking areas, recreational facilities and other amenities, in accordance with the terms of this Lease. 2.) TERM 2 (a) The term of this Lease (the "Term") shall be for twenty-four (24) months commencing on June 1, 2000 (the "Commencement Date") and ending on the second anniversary thereof (the "Expiration Date"), unless sooner terminated as provided in this Lease. (b) Landlord hereby grants to Tenant one (1) one year option to extend the Term upon the same terms and conditions of this Lease, except that Base Rent during such extended term shall be equal to one hundred five percent (105%) of the Base Rent payable during the last month of the then existing Term. Tenant may exercise any such option by delivering to Landlord written notice of exercise at least one hundred eighty (180) days prior to the end of the then existing Term. The Term may be extended at the end of the first extension for two (2) additional one year extensions, but only upon the written consent of both parties. The terms and conditions of this Lease, including the rent increase set forth above, shall apply during any such additional extensions. 3.) RENT (a) Base Rent. Tenant shall pay to Landlord, at the address listed in Section 25 below, Base Rent for the Premises in the amount of Three and 60/100 Dollars ($3.60) per square foot per year, which is equal to One Hundred Forty-Three Thousand, Four Hundred Seventy-Four and 40/100 Dollars ($143,474.40), payable in equal monthly installments of Eleven Thousand Nine Hundred Fifty-Six and 20/100 Dollars ($11,956.20) in advance, on or before June 1, 2000 and continuing on or before the first day of each and every month thereafter throughout the Term. If the Commencement Date shall be a day other than the first day of a calendar month or the Expiration Date shall be a day other than the last day of a calendar month, the Base Rent installment for such first or last fractional month shall be prorated accordingly, based on a thirty (30) day calendar month. Tenant shall pay all Base Rent and all other amounts as shall become due from and payable by Tenant to Landlord under this Lease at the times and in the manner provided herein, without abatement and without notice, demand, setoff or counterclaim. (b) Taxes, Project Expenses and Building Expenses. Tenant shall pay as additional rent Tenant's Project Proportionate Share (as defined below) of all Project Expenses (as defined below), Tenant's Taxes Proportionate Share (as defined below) of all Taxes (as defined below), and Tenant's Building Proportionate Share (as defined below) of all Building Expenses (as defined below), which shall accrue and be due and payable from and after the Commencement Date as provided herein below. (1) Definitions. a. "Tenant's Building Proportionate Share" shall be equal to the percentage determined by dividing the aggregate square footage of the Premises by the total square footage of the Conference Center. As of the Commencement Date, Tenant's Building Proportionate Share shall be equal to 100%. Tenant's Building Proportionate Share shall be subject to adjustment during the Term in the event of a reduction in the square footage of the Premises. b. "Tenant's Taxes Proportionate Share" shall mean the percentage determined by dividing the then existing square footage of the Premises by the total square footage of all of the Buildings within the Project. As of the Commencement Date, Tenant's Taxes Proportionate Share -2- 3 shall be equal to 3.86 %. Tenant's Taxes Proportionate Share shall be subject to adjustment during the Term in the event of a reduction in the square footage of the Premises or an increase in the total square footage of the Project. c. "Tenant's Project Proportionate Share" shall mean the percentage determined by dividing the number of Tenant's employees in the Project by the total number of employees in the Project, wherein the total number of employees in the Project is comprised of both Tenant's and Landlord's employees. As of the Commencement Date, Tenant's Project Proportionate Share shall be equal to 50.0%. Tenant's Project Proportionate Share shall be subject to adjustment during the Term in the event of an increase or reduction in the number of either Tenant's or Landlord's number of employees in the Project relative to the total number of employees in the Project by 10% or more. d. "Taxes" shall mean all real estate taxes, installments of special assessments, sewer charges, transit taxes, taxes based upon receipt of rent and any other federal, state or local governmental charge, general, special, ordinary or extraordinary (excluding income, franchise, or other taxes based upon Landlord's income or profit, unless imposed in lieu of real estate taxes) which shall now or hereafter be levied, assessed or imposed against the Project and shall apply to said obligations at such time in which said obligations are accrued or levied. Taxes shall not include any additional taxes attributable to the improvement of any portion of the Project occupied by Landlord or any other occupants of the Project. e. "Project Expenses" shall mean all of Landlord's costs and expenses of operation and maintenance of the common areas of the Project, including, without limitation, the walkways, driveways, parking lots, landscaped areas and other amenities within the Project, as determined in accordance with generally accepted accounting principles or other recognized accounting practices, consistently applied, including costs (including attorneys' fees) incurred in connection with any good faith contest of Taxes; insurance premiums for the insurance required to be maintained by Landlord as provided herein and such other insurance as is otherwise typically maintained by owners of similar projects in the Chippewa Falls area; water, electrical and other utility charges serving the common areas of the Project (but excluding any charges for utilities serving any Building within the Project); fees and charges of any property manager or independent contractor who, under a contract with Landlord, maintains or repairs the Project (which shall not exceed the amount typically paid for property management of comparable properties in the Chippewa Falls area); landscape maintenance costs; costs for removal of trash and recyclables from exterior collection receptacles located within the Project; and costs for removal of snow from driveways, walkways and parking lots within the Project. Notwithstanding the preceding to the contrary, Project Expenses shall not include any costs incurred by Landlord in connection with the construction of any alterations, additions or improvements for the sole benefit of Landlord or other occupants of the Project; financing and refinancing costs, including interest on debts relating to mortgage loans and rental fees under any ground or underlying leases; business or income taxes; depreciation or amortization expense (except as provided below); costs in excess of the insurance deductible (which deductible shall in no event exceed $50,000.00) incurred by Landlord in connection with repairs and restorations following the occurrence of a casualty loss; leasing commissions and other costs of leasing incurred by Landlord; costs of restoring any Building or other improvements following a taking or transfer in lieu thereof; costs incurred by Landlord as a result of any improvements by Landlord required to cause the Project to comply with applicable laws, ordinances, building codes, rules or regulations; costs incurred as a result of the negligent or intentional acts of Landlord, other occupants of the Project or their respective employees, agents or contractors; and any costs which would be capitalized under generally accepted accounting principles (except as provided below). Except as otherwise provided above, and subject to Section 11 below, Project Expenses shall include the cost of necessary capital repairs and replacements to exterior -3- 4 common areas of the Project (excluding any Buildings), which shall be amortized monthly over the useful life of the capital item on a straight-line basis during the Term.. f. "Building Expenses" shall mean all of Landlord's costs and expenses of operation and maintenance of the Conference Center (excluding any Project Expenses) as determined in accordance with generally accepted accounting principles or other recognized accounting practices, consistently applied, including, without limitation, all costs and expenses incurred by Landlord in performing its obligations under Sections 7(a) and 10(b) below; costs incurred in providing card-key access to the Conference Center; and costs of security services for common areas of the Conference Center. Notwithstanding the preceding to the contrary, Building Expenses shall not include any costs incurred by Landlord in connection with the construction of any alterations, additions or improvements for the sole benefit of Landlord or other occupants of the Building or Project; financing and refinancing costs, including interest on debts relating to mortgage loans and rental fees under any ground or underlying leases; business or income taxes; depreciation or amortization expense (except as provided below); costs in excess of the insurance deductible (which deductible shall in no event exceed $50,000.00) incurred by Landlord in connection with repairs and restorations following the occurrence of a casualty loss; leasing commissions and other costs of leasing incurred by Landlord; costs of restoring any Building or other improvements following a taking or transfer in lieu thereof; costs incurred by Landlord as a result of any improvements required to cause the Conference Center to comply with applicable laws, ordinances, building codes, rules or regulations; costs incurred as a result of the negligent or intentional acts of Landlord, other occupants of the Project or their respective employees, agents or contractors; and any costs which would be capitalized under generally accepted accounting principles (except as provided below). Except as otherwise provided above, and subject to Section 11 below, Building Expenses shall include the cost of necessary capital repairs and replacements to the Conference Center, which shall be amortized monthly over the useful life of the capital item on a straight-line basis during the Term. (2) Payment of Taxes. Tenant shall pay to Landlord Tenant's Taxes Proportionate Share of all Taxes on or before the later of (i) the twentieth (20th) day prior to the date the applicable Taxes are due and payable or (ii) the tenth (10th) day following Landlord's written demand therefor (which demand shall be accompanied by a copy of the related tax bill or other accurate statement of the amount of the Taxes). If this Lease shall commence, expire or be terminated on any date other than the last day of a calendar year, then Tenant's Project Proportionate Share of Taxes for such partial calendar year shall be prorated on the basis of the number of days during the year this Lease was in effect in relation to the total number of days in such year. Subject to the foregoing and subject to rights of Landlord to contest or dispute Taxes, Landlord shall pay the Taxes to the applicable taxing authority(ies) on or before the date they are due and payable. (3) Payment of Project Expenses and Building Expenses. (a) Landlord shall deliver to Tenant a written estimate of the Project Expenses and Building Expenses and the portion payable by Tenant for the ensuing year or portion thereof. On or before the first day of each month during the Term, Tenant shall pay -4- 5 such estimated amount of Tenant's annualized share of such Project Expenses and Building Expenses in twelve (12) equal monthly installments, in advance. Following the expiration of each calendar year, Landlord shall furnish Tenant a statement showing in reasonable detail the actual Project Expenses and Building Expenses for the preceding calendar year. Within thirty (30) days after service of the aforementioned statement, Tenant shall pay to Landlord, or Landlord shall credit against the next rent payment or payments due from Tenant, as the case may be, the difference between Tenant's actual proportionate share of Project Expenses and Building Expenses for the preceding calendar year and the amount of Project Expenses and Building Expenses paid by Tenant during such year. If this Lease shall commence, expire or be terminated on any date other than the last day of a calendar year, then Tenant's proportionate share of Project Expenses and Building Expenses for such partial calendar year shall be prorated on the basis of the number of days during the year this Lease was in effect in relation to the total number of days in such year. Subject to the foregoing obligation of Tenant to pay Tenant's proportionate share of Project Expenses and Building Expenses, Landlord shall pay the Project Expenses and Building Expenses on or before the date they are due and payable. Tenant or its accountants shall have the right to inspect, at reasonable times and locations and in a reasonable manner, during the ninety (90) day period following the delivery of Landlord's statement of Project Expenses and Building Expenses for a given calendar year, such of Landlord's books and records as pertain to and contain information concerning such costs and expenses in order to verify the amounts thereof; unless Tenant takes written exception to any item within ninety (90) days after the furnishing of the statement, such statement shall be considered as final and accepted by Tenant; if Tenant shall dispute any item or items included in the determination of Landlord's Project Expenses and Building Expenses for a given calendar year, and such dispute is not resolved by the parties hereto within sixty (60) days after the date on which Tenant gives written notice to Landlord of the disputed items, then either party may, within thirty (30) days thereafter, request that a firm of certified public accountants mutually selected by Landlord and Tenant render an opinion as to whether or not the disputed item or items may properly be included in the determination of Landlord's Project Expenses and Building Expenses for such year; and the opinion of such firm on the matter shall be conclusive and binding upon the parties hereto; the fees and expenses incurred in obtaining such an opinion shall be borne by Tenant unless Landlord's statement contains errors aggregating more than five percent (5%) of the Project Expenses and Building Expenses. (b) Service Charge. Any sum not paid within thirty (30) days of the due date therefor shall bear interest at a rate equal to the greater of eighteen percent (18%) per annum or the then-current prime rate (as listed in the "Money Rates" section of the Wall Street Journal) plus two percent (2%) per annum (or such lesser percentage as may be the maximum amount permitted by law) from the date due until paid. 4.) TENANT FINISH IMPROVEMENTS Tenant accepts the Premises in "AS IS, with all faults" condition, with no representations or warranties of any kind by or on behalf of Landlord with regard to the Premises. Landlord shall have no obligation to construct any tenant improvements or make any other changes to the Premises except as expressly provided herein. -5- 6 5.) CABLE PLANT Tenant shall have the right, at its sole expense, to maintain and to exclusively use all existing cable plant and any related facilities and equipment located within the Conference Center and common areas of the Project. Tenant shall have the right to use such cable plant and such related facilities and equipment in the same manner in which the previous Tenant used the same after the sale and transfer of the Project from the previous Tenant to Landlord. 6.) USE OF THE PREMISES (a) Specific Use. The Premises shall be used exclusively for purposes of general, administrative and sales office, research and development, training, and for any other lawful purpose incidental thereto, and shall not be used for any other purpose (b) Covenants Regarding Use. In connection with its use of the Premises, Tenant agrees to do the following: (1) Tenant shall use the Premises and conduct its business thereon and throughout the Project in a safe, careful, reputable and lawful manner; shall keep and maintain the Premises in as good a condition as they were on the Commencement Date, subject to ordinary and reasonable wear and tear, and shall make all necessary repairs to the Premises other than those which Landlord is obligated to make as provided elsewhere herein. (2) Tenant shall not commit, nor allow to be committed, in, on or about the Premises or the Project, any act of waste, including any act which might deface, damage or destroy the Conference Center, Project or any part thereof; use or permit to be used on the Premises any equipment or other thing which might cause injury to person or property; permit any objectionable or offensive noise or odors to be emitted from the Premises. (3) Tenant shall not overload the floors of the Premises beyond their designed weightbearing capacity. (4) Tenant shall not use the Premises, nor allow the Premises to be used, for any purpose or in any manner which would invalidate any policy of insurance now or hereafter carried on the Project or increase the rate of premiums payable on any such insurance policy. Should Tenant fail to comply with this covenant, Landlord may require Tenant to reimburse Landlord as additional rent for any increase in premiums charged during the term of this Lease on the insurance carried by Landlord on the Premises and attributable to the use being made of the Premises by Tenant. (c) Compliance with Laws. Tenant shall not use or permit the use of any part of the Premises for any purpose prohibited by law. Tenant shall, at Tenant's sole expense, comply with all laws, statutes, ordinances, rules, regulations and orders of any federal, state, municipal or other governmental agency thereof having jurisdiction over and relating to the use of the Premises; provided, however, that Landlord shall be required to make any improvements or alterations to the Premises required to comply with any such laws, statutes, ordinances, rules, regulations or orders unless such repairs are required as a result of Tenant's specific use or -6- 7 improvement of the Premises from and after the Commencement Date. Without limiting the generality of the foregoing, Tenant shall pay the cost of ADA compliance for the Conference Center or affected portion thereof if occasioned solely by Tenant's use or improvements. (d) Compliance with Project Rules and Regulations. Landlord and Tenant shall comply with and conform to the rules and regulations attached to this Lease, made a part hereof and marked Exhibit C. (e) Compliance with Zoning. Tenant knows the character of its operation in the Premises and that applicable zoning ordinances and regulations are of public record. Tenant shall have sole responsibility for its compliance therewith, and Tenant's inability so to comply shall not be cause for Tenant to terminate this Lease. (f) Limited Use of Premises by Landlord. Tenant has sole use of the Premises during the term of this Lease. In the event that the Burgundy Room or the Board Room (individually a "Room", and collectively "Rooms") is not scheduled to be used by Tenant, then on any day that Tenant is open for business Landlord may use either Room between 8:00 a.m. and 5:00 p.m. (Central Time) by providing Tenant with at least 48 hours notice. Landlord may not reserve either Room more than 30 days in advance. Landlord usage of the Burgundy Room shall not exceed 25% of any week and Landlord usage of the Board Room shall not exceed 33% of any week, assuming a 45 hour week. Landlord will not pay any rent for use of a Room, except that upon Tenant's prior written approval, Landlord may request use of either Room so that its employees may attend UNITE class offerings. Class charges will be prorated based on actual attendance at each class of Landlord's and Tenant's employees. Incidental expenses arising from Landlord's use of a Room and class charges shall be borne by Landlord who shall reimburse and pay Tenant monthly for the same. 7.) UTILITIES AND OTHER BUILDING SERVICES (a) Services to be Provided. Landlord shall furnish Tenant with the following utilities and building services to the extent reasonably necessary for Tenant's use and occupancy of the Premises or as may be required by law or directed by governmental authority: (1) Heating, ventilation and air conditioning; (2) Electricity for lighting and operating business machines and equipment in the Premises; and (3) Water for lavatory and drinking purposes. (b) Interruption of Services. Tenant understands, acknowledges and agrees that any one or more of the utilities or building services identified above may be interrupted by reason of accident, emergency or other causes beyond Landlord's control, or may be discontinued or diminished temporarily by Landlord or other persons until certain repairs, alterations or improvements can be made; that Landlord does not represent or warrant the uninterrupted availability of such utilities or building services; and that any such interruption, unless caused by the gross negligence or willful misconduct of Landlord shall not be deemed an eviction or -7- 8 disturbance of Tenant's right to possession, occupancy and use of the Premises or any part thereof, or render Landlord liable to Tenant in damages by abatement of rent or otherwise, or relieve Tenant from the obligation to perform its covenants under this Lease. 8.) PARKING Tenant and its employees, agents, contractors, invitees and guests shall have the non-exclusive right to park vehicles in the parking areas of the Project on an undesignated basis at no additional charge to Tenant or its employees, agents, contractors, invitees and guests; provided, however, that upon termination of that certain Fab I Lease Agreement of even date herewith,, Tenant and its employees, agents, contractors, invitees and guests shall have the exclusive right to use not less than twenty parking spaces within the parking areas of the Project as shown on Exhibit D attached hereto. 9.) SIGNS Landlord and Tenant shall mutually agree on the signage to be retained or installed by Tenant in the Project from and after the Commencement Date. Tenant shall not inscribe, paint, affix or display any additional signs, advertisements, or notices without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Upon the expiration or early termination of this Lease, Tenant shall remove all of its signs and shall repair and restore any damage or injury in connection therewith, at Tenant's sole expense. Landlord shall have the right to erect and/or otherwise install such signage as may be reasonably required by Landlord, including the right to use the existing boulevard pedestal located northeast of the main entrance driveway to the Conference Center, provided that such signage complies with city ordinances and other applicable laws and regulations. Landlord shall pay all costs and expenses for Landlord's signage. 10.) REPAIRS, MAINTENANCE, ALTERATIONS, IMPROVEMENTS AND FIXTURES (a) Repair and Maintenance of Project. Landlord shall maintain and repair the exterior common areas and facilities of the Project, including, without limitation, maintenance and repair of walkways, driveways, parking lots and landscaped areas; removal of trash and recyclables from exterior collection receptacles located within the Project; and removal of snow from driveways and parking lots within the Project. (b) Repair and Maintenance of Building. Landlord shall keep and maintain in good order, condition and repair the roof, roof membrane, exterior and interior load-bearing walls (including any plate glass windows comprising a part thereof), foundation, basement, and electrical and plumbing systems serving the Conference Center; maintain and repair the HVAC equipment serving the Conference Center; and periodically wash exterior windows of the Conference Center. (c) Repair and Maintenance of Premises. Except as provided in Sections 10(a) and 10(b) hereof, Tenant shall, at its own expense, keep and maintain the Premises in good order, condition and repair at all times during the Term, subject to damage by casualty loss and -8- 9 Tenant shall promptly repair all damage to the Premises and replace or repair all damaged or broken furniture, fixtures, equipment and appurtenances with materials equal in quality and class to the original materials, and within any reasonable period of time. If in any one event the cost of such repair or replacement is estimated to exceed Ten Thousand and no/100 Dollars ($10,000.00), then such repair or replacement shall be subject to the reasonable approval of Landlord. If Tenant fails to do so, Landlord may, but need not make such repairs and replacements, and Tenant shall pay Landlord the cost thereof within thirty (30) days following Landlord's written demand therefor, plus an amount equal to fifteen percent (15%) of any costs or expenses paid by Landlord, in order to reimburse Landlord for overhead, general conditions, fees and other costs and expenses arising from Landlord's actions or involvement. (d) Alterations or Improvements. During the Term, Tenant shall have the right to make such alterations, additions or improvements to the Premises ("Improvements") as deemed necessary or desirable by Tenant, provided that such Improvements are constructed in accordance with the terms and conditions of this subSection (d); provided, however, Tenant shall not make any Improvements of a structural nature without obtaining Landlord's prior written consent. At the time Tenant desires to make any Improvements with a cost in excess of Ten Thousand and no/100 Dollars ($10,000.00), Tenant shall submit (i) a general plan or layout to Landlord for Landlord's review ; (ii) an indication of any Structural Improvements which require Landlord' s consent; and (iii) an express written notice that Landlord must notify Tenant within twenty (20) days if Landlord will require Tenant to remove such Improvements prior to the Expiration Date. Within fifteen (15) days following receipt of such plan and notice, Landlord shall notify Tenant in writing if Landlord objects to any such Improvements, in which case Tenant may not proceed, and/or if Landlord will require Tenant to remove such Improvements prior to the Expiration Date ("Removal Notice"). Tenant shall not have the right to make any Improvements to or on the common areas of the Project. All Improvements shall be made in compliance with all applicable laws and building codes, in a good and workmanlike manner and in quality equal to or better than the original construction of the Premises. Tenant shall promptly pay all costs attributable to such Improvements and shall indemnify, defend and hold harmless Landlord from and against any mechanic's liens or other liens or claims filed or asserted as a result thereof and against any costs or expenses which may be incurred as a result of building code violations attributable to such work. Tenant shall promptly repair any damage to the Premises or the Project caused during the construction of such Improvements. Landlord shall give proper notice to Tenant of any possible claim with respect to which Tenant's obligation to indemnify, defend and hold harmless Landlord may apply and Tenant shall have the right to defend any such claim with counsel of Tenant's choosing reasonably acceptable to Landlord. All Improvements made by Tenant to the Premises during the Term shall remain the property of Tenant and Tenant shall be entitled to all depreciation and amortization of costs in connection therewith. All property taxes attributable to such Improvements will be paid by Tenant and not included in Building Expenses. Prior to surrender of the Premises to Landlord, Tenant shall remove any Improvements identified by Landlord for removal in the Removal Notice and, at Landlord's request provided at least fifteen (15) days prior to the Expiration Date or earlier termination of the Lease, such other Improvements constructed by Tenant during the Term which were not submitted to Landlord for its prior review. Any damage caused by such removal shall be repaired at Tenant's cost and expense. Notwithstanding the preceding to the contrary, Tenant -9- 10 shall have no obligation to remove any Improvements that existed on the Commencement Date, or any Improvements that Tenant installed during the Term and which Landlord did not identify for removal following Landlord's review of the general plans. In the event Tenant so fails to remove any Improvements that Tenant is obligated to remove, Landlord may have same removed and the Premises so repaired at Tenant's expense. (e) Trade Fixtures. Any trade fixtures installed on the Premises by Tenant at its own expense during the Term, such as movable partitions, counters, shelving, showcases, mirrors and the like may, and, at the request of Landlord, shall be removed on the Expiration Date or earlier termination of this Lease, provided that Tenant is not then in default, that Tenant bears the cost of such removal, and further that Tenant repair at its own expense any and all damage to the Premises resulting from the original installation of and subsequent removal of such trade fixtures. If Tenant fails so to remove any and all such trade fixtures from the Premises on the Expiration Date or earlier termination of this Lease, all such trade fixtures shall become the property of Landlord unless Landlord elects to require their removal, in which case Tenant shall promptly remove same and restore the Premises to their prior condition. In the event Tenant so fails to remove same, Landlord may have same removed and the Premises so repaired at Tenant's expense. Any such work shall be conducted in a manner consistent with subsection (d) above. (f) Cabling. During the Term, Tenant shall have the right to install such cabling in the Premises as deemed necessary or desirable by Tenant, subject to the terms of this subsection (f). At the time Tenant desires to install any such cabling, Tenant shall submit (i) a general plan or layout to Landlord for Landlord's review and (ii) an express written notice that Landlord must notify Tenant within twenty (20) days if Landlord will require Tenant to remove such cabling prior to the Expiration Date. If, within fifteen (15) days following receipt of such plan and notice, Landlord notifies Tenant in writing that Landlord will require Tenant to remove such cabling prior to the Expiration Date, then Tenant shall remove such cabling identified by Landlord prior to the Expiration Date or earlier termination of the Lease. If Tenant fails to provide such plan and notice to Landlord prior to installation of the cabling, then Tenant shall be required to remove such cabling prior to the Expiration Date or earlier termination of the Lease, unless otherwise notified in writing by Landlord. If Tenant provided said plan and notice, but Landlord does not notify Tenant, then upon the Expiration Date or earlier termination of this Lease, such items shall be deemed to be part of the realty and the property of Landlord (and shall not be removed or disabled by Tenant). If Landlord so notifies Tenant to remove any or all of such items, and Tenant fails to remove the same upon the expiration or earlier termination of this Lease, then Landlord may have the same removed at Tenant's expense. Any such work shall be conducted in a manner consistent with subsection 3(d) above. 11.) FIRE OR OTHER CASUALTY; CASUALTY INSURANCE (a) Substantial Destruction of the Building. If the Conference Center is substantially destroyed (which, as used herein, means destruction or damage to at least seventy-five percent (75%) of the Conference Center) by fire or other casualty, either party hereto may, at its option, terminate this Lease by giving written notice thereof to the other party within sixty (60) days of such casualty. In such event, Base Rent and Additional Rent shall be apportioned to -10- 11 and shall cease as of the date of such casualty. If neither party exercises this option, then the Premises shall be reconstructed and restored, at Landlord's expense, to substantially the same condition as they were prior to the casualty. (b) Substantial Destruction of the Premises. If the Premises are substantially destroyed (which, as used herein, means destruction or damage to at least seventy-five percent (75%) of the Premises), or rendered wholly untenantable for the purpose for which they were leased, by fire or other casualty whether or not the Conference Center is substantially destroyed as provided above, then the parties hereto shall have the following options: (1) Tenant may elect to terminate the Lease or to require that the Premises be reconstructed and restored, at Landlord's expense, to substantially the same condition as the Premises existed prior to the casualty, except for repair or replacement of Tenant's Improvements, Tenant's personal property, equipment and trade fixtures, which shall remain Tenant's responsibility. In the event that Tenant requires that the Premises be reconstructed and restored, Landlord shall not be required to expend for reconstruction and restoration any amount in excess of insurance proceeds received by Landlord as a result of such casualty loss. This option shall be exercised by Tenant giving written notice to Landlord within sixty (60) days after the date of the casualty, and this Lease shall continue in full force and effect for the balance of the Term upon the same terms, conditions and covenants as are contained herein. Base Rent and Additional Rent shall be equitably abated as of the date of such casualty. (2) If the casualty occurs during the last twelve (12) months of the Term, either party shall have the right and option to terminate its Lease as of the date of the casualty, which option shall be exercised by written notice to be given by either party to the other party within thirty (30) days therefrom. If this option is exercised, rent shall be apportioned to and shall cease as of the date of the casualty. (c) Partial Destruction of the Premises. (1) If the Premises are rendered partially untenantable for the purpose for which they were leased (which, as used herein, means the Premises are less than substantially destroyed, as defined in Section 11(b) above) by fire or other casualty, then such damaged part of the Premises shall be reconstructed and restored, at Landlord's expense, to substantially the same condition as it was prior to the casualty, except for repair or replacement of Tenant's Improvements, Tenant's personal property, equipment and trade fixtures, which shall remain Tenant's responsibility. Base Rent and Additional Rent shall be equitably abated as of the date of such casualty in proportion to the ratio between the number of square feet which is untenantable compared to the aggregate number of square feet comprising the Premises. Landlord shall use reasonable diligence in completing such reconstruction repairs, but in the event Landlord fails to complete the same within one hundred twenty (120) days from the date of the casualty, Tenant may, at its option, terminate this Lease upon giving Landlord written notice to that effect, whereupon both parties shall be released from all further obligations and liability hereunder. -11- 12 (2) If the casualty occurs during the last six (6) months of the Term, either party shall have the right and option to terminate its Lease as of the date of the casualty, which option shall be exercised by written notice to be given by either party to the other party within thirty (30) days therefrom. If this option is exercised, rent shall be apportioned to and shall cease as of the date of the casualty. (d) Casualty Insurance. (1) Landlord shall at all times during the Term, carry, as a Project Expense, a "Special Forms and Extended Perils" property insurance policy insuring the Project, including the Conference Center, against loss or damage by fire or other casualty (namely, the perils against which insurance is afforded by the standard fire insurance policy and extended coverage endorsement) for the full replacement cost thereof; provided, however, that Landlord shall not be obligated to insure against any loss or damage to personal property (including, but not limited to, any furniture, machinery, equipment, goods or supplies) of Tenant or which Tenant may have on the Premises or any trade fixtures installed by or paid for by Tenant on the Premises or any additional improvements which Tenant may have constructed within the Premises. Such policy shall provide coverage against physical loss, damage and theft and the perils of fire and extended coverage, including, without limitation, theft, vandalism, malicious mischief, explosion, collapse and underground hazards, sprinkler leakage, water damage, storms, subsidence, sinkhole collapse, landslide, and debris removal. Such property insurance must be from insurance companies rated at least A:X in the latest Best's Insurance Guide. Upon request, Landlord shall furnish to Tenant a certificate evidencing the existence of such insurance coverage and endorsements to such coverage. If changes to Tenant's use or operation on the Premises, or any alterations or improvements made by Tenant pursuant to the provisions of Section 10(c) hereof result in an increase in the premiums charged during the Term on the casualty insurance carried by Landlord on the Project, then the cost of such increase in insurance premiums shall be borne by Tenant, who shall reimburse Landlord for the same as additional rent after being billed therefor. If changes to Landlord's use or operation within Project, or any alterations or improvements made by Landlord (and not on Tenant's behalf) result in an increase in the premiums charged during the Term on the casualty insurance carried by Landlord on the Project, then the cost of such increase in insurance premiums shall be borne by Landlord, and said increase shall be excluded from Project Expenses for purposes of this Lease. (2) Tenant shall at all times during the Term, carry, at its own expense, property insurance covering its personal property and trade fixtures installed by or paid for by Tenant or any additional improvements which Tenant may construct on the Premises, which coverage shall be no less than replacement value. Tenant shall furnish Landlord with a certificate evidencing that such coverages are in full force and effect. Such coverages shall not be canceled or amended on less than thirty (30) days notice to Landlord. (e) Waiver of Subrogation. This Section 11(e) shall govern any contrary or inconsistent provisions of this Lease. Landlord and Tenant hereby release, and shall cause their respective insurance companies to waive all rights of recovery against, each other and each other's employees, agents, customers and invitees from any and all liability for any loss, damage or injury to property occurring in, on or about or to the Premises or Project, improvements to the -12- 13 Project or personal property within the Project, by reason of fire or other casualty which are covered by applicable standard fire and extended coverage insurance policies. 12.) GENERAL PUBLIC LIABILITY, INDEMNIFICATION AND INSURANCE (a) At all times during the Term, Landlord and Tenant shall each carry, at its own expense, for the protection of the other party, one or more policies of general liability insurance with one or more insurance companies rated A:X or better in Best's Insurance Guide, providing minimum coverages of $2,000,000 combined single limit for bodily injury and property damage per occurrence and location with $5,000,000 aggregate coverage. Such general liability insurance shall include a separation of insureds/cross liability endorsement, broad form property damage coverage and afford coverage for "personal injury" liability. At all times during the Term, Landlord and Tenant shall each carry comprehensive automobile liability insurance covering all owned, non-owned and hired automobiles, with limits of not less than $1,000,000 in primary coverage per accident for both bodily injury and property damage liability. All such insurance policy or policies shall name the other party as additional insureds and shall provide that they may not be canceled or materially changed on less than thirty (30) days prior written notice to the other party. Each party shall furnish the other with certificates of insurance evidencing such coverages prior to the Commencement Date and prior to the date of renewal. Should any party fail to carry such insurance and/or furnish to the other party within ten (10) days following such other party's request a certificate of insurance evidencing such coverage, such other party shall have the right to obtain such insurance and collect the cost thereof from the non-performing party, in which event the non-performing party shall reimburse such other party for the cost of such coverage within thirty (30) days following such other party's written demand therefor. Each party shall also provide the other with certificates evidencing workers' compensation insurance coverage as required by law and employer's liability coverage for injury, disease and death, with coverage limits of not less than $1,000,000 per accident. The insurance coverages required hereby shall be deemed to be additional obligations of each party and shall not be a discharge or limitation of such party's indemnity obligations contained hereinbelow. (b) Except for any loss, damage, or injury to person or property caused by the negligence or intentional misconduct of Landlord or its agents, employees, contractors, invitees or guests, Tenant shall be responsible for, shall insure against, and shall indemnify Landlord and hold it harmless from, any and all liability for any loss, damage or injury to person or property, arising out of use, occupancy or operations of Tenant and occurring in, on or about the Project, and Tenant hereby releases Landlord from any and all liability for the same. Tenant's obligation to indemnify Landlord hereunder shall include the duty to defend against any claims asserted by reason of such loss, damage or injury and to pay any judgments, settlements, costs, fees and expenses, including attorneys' fees, incurred in connection therewith. Landlord shall give prompt written notice to Tenant of the occurrence of any loss, damage, or injury to which Tenant's duty to indemnify and hold harmless the Landlord may pertain and Tenant shall have the right to defend any claim asserted by any party with respect to such loss, damage, or injury through counsel of Tenant's selection. (c) Except for any loss, damage, or injury to person or property caused by the negligence or intentional misconduct of Tenant or its agents, employees, contractors, invitees or -13- 14 guests, Landlord shall be responsible for, shall insure against, and shall indemnify Tenant and hold it harmless from, any and all liability for any loss, damage or injury to person or property occurring in, on or about the common areas and facilities for the Project and the use, occupancy or operations of Landlord and occurring in, on or about any portion of the Project, and Landlord hereby releases Tenant from any and all liability for the same. Landlord's obligation to indemnify Tenant shall include the duty to defend against any claims asserted by reason of such loss, damage or injury and to pay any judgments, settlements, costs, fees and expenses, including attorneys' fees, incurred in connection therewith. Tenant shall give prompt written notice to Landlord of the occurrence of any loss, damage, or injury to which Landlord's duty to indemnify and hold harmless the Tenant may pertain and Landlord shall have the right to defend any claim asserted by any party with respect to such loss, damage, or injury through counsel of Landlord's selection. 13.) EMINENT DOMAIN If the whole or any part of the Premises or Project (including parking areas) shall be taken for public or quasipublic use by a governmental authority under the power of eminent domain or shall be conveyed to a governmental authority in lieu of such taking, and if such taking or conveyance shall cause the remaining part of the Premises to be untenantable and inadequate for use by Tenant for the purpose for which they were leased, then Tenant may, at its option, terminate this Lease as of the date Tenant is required to surrender possession of the Premises as a result of such taking. If a part of the Premises or Project shall be taken or conveyed but the remaining part is tenantable and adequate for Tenant's use, then this Lease shall be terminated as to the part taken or conveyed as of the date Tenant surrenders possession; Landlord shall make such repairs, alterations and improvements as may be necessary to render the part not taken or conveyed tenantable; and the rent shall be reduced in proportion to the part of the Premises so taken or conveyed. Tenant shall not have the right to assert a claim against the governmental authority exercising its power of eminent domain based upon the value of Tenant's leasehold interest. All compensation awarded for such taking or conveyance shall be the property of Landlord without any deduction therefrom for any present or future estate of Tenant and Tenant hereby assigns to Landlord all its right, title and interest in and to any such award. However, Tenant shall have the right to recover from the governmental authority, but not from Landlord, such compensation as may be awarded to Tenant on account of the interruption of Tenant's business, moving and relocation expenses and depreciation to and removal of Tenant's trade fixtures and personal property. 14.) LIENS If, because of any act or omission of Tenant or anyone claiming by, through, or under Tenant (other than Landlord), any mechanic's lien or other lien shall be filed against the Premises or the Project for work performed by or on behalf of Tenant (whether or not such lien is valid or enforceable as such), Tenant shall, at its own expense, cause the same to be discharged of record within a reasonable time, not to exceed sixty (60) days after the date of filing thereof, and shall also defend and indemnify Landlord and hold it harmless from any and all claims, losses, damages, judgments, settlements, cost and expenses, including attorneys' fees, resulting therefrom or by reason thereof. If such lien is not discharged of record within sixty (60) days -14- 15 after the date of filing thereof, Landlord, at its sole option, may take all action necessary to release and remove such lien (without any duty to investigate the validity thereof) and Tenant shall promptly upon notice reimburse Landlord for all sums, costs and expenses (including reasonable attorneys' fees and Landlord's Costs) incurred by Landlord in connection with such lien. 15.) RENTAL, PERSONAL PROPERTY AND OTHER TAXES (a) Tenant shall pay before delinquency any and all taxes, assessments, fees or charges (hereinafter referred to as "taxes"), including any sales, gross income, rental, business occupation or other taxes, levied or imposed upon Tenant's business operation in the Premises and any personal property or similar taxes levied or imposed upon Tenant's trade fixtures, leasehold improvements or personal property located within the Premises. In the event any such taxes are charged to the account of, or are levied or imposed upon the property of Landlord, Tenant shall reimburse Landlord for the same as additional rent. Notwithstanding the foregoing, Tenant shall have the right to contest in good faith any such tax and to defer payment, if required, until after Tenant's liability therefor is finally determined, provided Tenant furnishes Landlord with reasonably acceptable security from which may be satisfied any judgment arising from such taxes. (b) If any tenant improvements made by Tenant during the Term or any of Tenant's trade fixtures or equipment located in, on or about the Premises, regardless of whether they are installed or paid for by Landlord or Tenant and whether or not they are affixed to and become a part of the realty and the property of Landlord, are assessed for real property tax purposes at a valuation higher than that at which other such property in other space in the Project is assessed, then Tenant shall reimburse Landlord as additional rent for the amount of real property taxes shown on the appropriate county official's records as having been levied upon the Project or other property of Landlord by reason of such excess assessed valuation. 16.) ASSIGNMENT AND SUBLETTING Tenant may not assign or otherwise transfer its interest in this Lease or sublet the Premises or any part thereof without the prior written consent of Landlord, which Landlord may refuse in its sole discretion. Tenant shall notify Landlord thirty (30) days in advance of its intent to transfer, assign or sublet all or any portion of the Premises and shall, at the time Tenant requests Landlord's approval, provide Landlord with financial information on the proposed assignee or subtenant. In any event, Tenant shall reimburse Landlord for fees and expenses incurred by Landlord (including expert and attorneys' fees) in reviewing any proposed assignment or subletting. In the event of any such assignment or subletting, Tenant shall nevertheless at all times remain fully responsible and liable for the payment of rent and the performance and observance of all of Tenant's other obligations under the terms, conditions and covenants of this Lease. No assignment or subletting of the Premises or any part thereof shall be binding upon Landlord unless such assignee or subtenant delivers to Landlord an instrument (in recordable form, if requested) containing an agreement of assumption of all of Tenant's obligations under this Lease. Upon the occurrence of an event of default after the expiration of any applicable notice and cure period herein, if all or any part of the Premises are then assigned -15- 16 or sublet, Landlord, in addition to any other remedies provided by this Lease or by law, may, at its option, collect directly from the assignee or subtenant all rent becoming due to Landlord by reason of the assignment or subletting. Any collection by Landlord from the assignee or subtenant shall not be construed to constitute a novation or release of Tenant from the further performance of its obligations under this Lease. Any rents received by Tenant from the assignment or subletting of the Premises which exceed rents payable by Tenant hereunder shall be immediately paid to Landlord as additional compensation. Landlord shall, at its option, have the right to recapture all or any part of the Premises Tenant proposes to assign or sublet upon notice from Tenant of its intent to assign or such sublet part of the Premises. Notwithstanding the preceding to the contrary, Tenant shall have the right, without the prior written consent of Landlord, to transfer or assign the Lease or sublet the Premises to any entity controlling, controlled by or under the common control of Tenant or in connection with a sale of stock, merger or sale of substantially all of the assets of Tenant. 17.) SUBORDINATION OF LEASE TO MORTGAGES This Lease shall be subject and subordinate to any mortgage or similar encumbrances, including ground or underlying leases, whether presently existing or hereafter voluntarily placed upon the Project or the Premises, including any renewals, extensions or modifications thereof, provided that, with respect to any such encumbrances hereafter placed on the Project or Premises, the holder of such encumbrance enters into a non-disturbance and attornment agreement with Tenant in a customary form, including, among other provisions, an agreement that Tenant's possession of the Premises will not be disturbed in the event of mortgage foreclosure or other similar exercise of remedies, so long as Tenant is not in default hereunder after the expiration of any applicable notice and cure periods. Tenant shall, at Landlord's request, execute and deliver within ten (10) days to Landlord, without cost, a subordination, non-disturbance and attornment agreement for purposes of confirming the subordination of this Lease. 18.) DEFAULTS AND REMEDIES (a) Default by Tenant. The occurrence of any one or more of the following events shall be a default and breach of this Lease by Tenant: (1) Tenant shall fail to pay any installment of Base Rent within ten (10) days after it is due or shall fail to pay any Project Expenses, Building Expenses, Taxes or additional rent within ten (10) days after written notice that the same is past due; (2) Tenant shall fail to perform or observe any other term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after written notice thereof from Landlord; provided, however, that if the term, condition, covenant or obligation to be performed by Tenant is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Tenant commences such performance within said thirty day period and thereafter diligently completes the same; (3) Tenant shall abandon the Premises; or -16- 17 (4) Tenant declares bankruptcy, is declared bankrupt, makes an assignment for the benefit of creditors; or substantially all of Tenant's assets in, on or about the Premises or Tenant's interest in this Lease are attached or levied upon under execution (and Tenant does not discharge the same within sixty (60) days thereafter). (b) Remedies of Landlord. Upon the occurrence of any event of default set forth in Section 18(a) hereof, Landlord shall have the following rights and remedies, in addition to those allowed by law, any one or more of which may be exercised without further notice to or demand upon Tenant: (1) Landlord may reenter the Premises and cure any default of Tenant, in which event Tenant shall reimburse Landlord as additional rent for any costs and expenses which Landlord may incur to cure such default. (2) Landlord may terminate this Lease as of the date of such default, in which event: (A) neither Tenant nor any person claiming under or through Tenant shall thereafter be entitled to possession of the Premises, and Tenant shall immediately thereafter surrender the Premises to Landlord; (B) Landlord may reenter the Premises and dispossess Tenant or any other occupants of the Premises by summary proceedings, ejectment or otherwise, and may remove their effects, without prejudice to any other remedy which Landlord may have for possession or arrearages in rent; and (C) notwithstanding the termination of this Lease, Landlord may relet all or any part of the Premises for a term different from that which would otherwise have constituted the balance of the Term and for rent and on terms and conditions different from those contained herein, whereupon Tenant shall be obligated to pay to Landlord as liquidated damages the difference between the rent provided for herein and that provided for in any lease covering a subsequent reletting of the Premises, for the period which would otherwise have constituted the balance of the Term, together with all of Landlord's costs and expenses for preparing the Premises, for reletting, including all repairs, tenant finish improvements, marketing costs, broker's and attorney's fees, and all loss or damage which Landlord may sustain by reason of such termination, reentry and reletting, it being expressly understood and agreed that the liabilities and remedies specified above shall survive the termination of this Lease. (3) Landlord may terminate Tenant's right of possession of the Premises and may repossess the Premises by unlawful detainer action, by taking peaceful possession or otherwise, without terminating this Lease, in which event Landlord may, but shall be under no obligation to, relet the same for the account of Tenant, for such rent and upon such terms as shall be satisfactory to Landlord. For the purpose of such reletting, Landlord is authorized to decorate, repair, remodel or alter the Premises. If Landlord fails to so relet the Premises, Tenant shall pay to Landlord as damages a sum equal to the rent which would have been due under this Lease for the balance of the Term or exercised renewal period as such rent shall become due and payable hereunder from time to time during the Term. If the Premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the costs and expenses of all decoration, repairs, remodeling, alterations and additions and the expenses of such reletting and of the collection of the rent accruing therefrom to satisfy the rent provided for in this Lease, Tenant shall satisfy and pay the same upon demand therefor from time to time. -17- 18 Tenant shall not be entitled to any rents received by Landlord in excess of the rent provided for in this Lease. (4) Landlord may sue for injunctive relief or to recover damages for any loss resulting from the breach. Any agreement for an extension of the Term or any additional period thereafter shall not thereby prevent Landlord from terminating this Lease for any reason specified in this Lease. If any such right of termination is exercised by Landlord during the Term or any extension thereof, Tenant's right to any further extension shall thereby be automatically canceled. Any such right of termination of Landlord contained herein shall continue during the Term and any subsequent extension hereof. (c) Default by Landlord and Remedies of Tenant. It shall be a default and breach of this Lease by Landlord if it shall fail to perform or observe any term, condition, covenant or obligation required to be performed or observed by it under this Lease for a period of thirty (30) days after written notice thereof from Tenant; provided, however, that if the term, condition, covenant or obligation to be performed by Landlord is of such nature that the same cannot reasonably be performed within such thirty (30) day period, such default shall be deemed to have been cured if Landlord commences such performance within said thirtyday period and thereafter diligently completes the same. Upon the occurrence of any such default, Tenant may sue for injunctive relief or to recover damages for any loss resulting from the breach, but Tenant shall not be entitled to terminate this Lease or withhold or abate any rent due hereunder. (d) NonWaiver of Defaults. The failure or delay by either party hereto to enforce or exercise at any time any of the rights or remedies or other provisions of this Lease shall not be construed to be a waiver thereof, nor affect the validity of any part of this Lease or the right of either party thereafter to enforce each and every such right or remedy or other provisions. No waiver of any default and breach of this Lease shall be held to be a waiver of any other default of breach. The receipt of rent by Landlord at a time after rent is due under this Lease shall not be construed as a waiver of such default. The receipt by Landlord of less than the full rent due shall not be construed to be other than a payment on account of rent then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction, and Landlord may accept such payment without prejudice to Landlord's right to recover the balance of the rent due or to pursue any other remedies provided in this Lease. No act or omission by Landlord or its employees or agents during the term of this Lease shall be deemed an acceptance of a surrender of the Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. (e) Attorney's Fees. If Tenant defaults in the performance or observance of any of the terms, conditions, covenants or obligations contained in this Lease and Landlord places the enforcement of all or any part of this Lease, the collection of any rent due or to become due or the recovery of possession of the Premises in the hands of an attorney, or if Landlord incurs any fees or out-of-pocket costs in any litigation, negotiation or transaction in which Tenant causes Landlord (without Landlord's fault) to be involved or concerned, Tenant agrees to -18- 19 reimburse Landlord for the attorney's fees and costs incurred thereby, whether or not suit is actually filed. 19.) BANKRUPTCY OR INSOLVENCY (a) If either party shall file a petition in bankruptcy or for a reorganization or arrangement or other relief under the United States Bankruptcy Code or any similar statute, or if any such proceeding shall be filed against either party and is not dismissed or vacated within sixty (60) days after its filing, or if a court having jurisdiction shall issue an order or decree appointing a receiver, custodian or liquidator for a substantial part of the property of either party which decree or order remains in force undischarged and unstayed for a period of sixty (60) days, or if either party shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts as they become due, the other party may terminate this Lease upon five days written notice. (b) Except as otherwise expressly provided in this Lease, neither party shall be required to accept performance under this Lease from any person, including, without limitation, owner or manager, as the case may be, should it become a debtor in possession under the United States Bankruptcy Code, or any trustee of either appointed under the United States Bankruptcy Code and any assignee of such party or trustee, other than the other party. 20.) ACCESS TO THE PREMISES Landlord, its employees and agents and any mortgagee of the Project shall have the right to enter any part of the Premises following at least twenty-four (24) hours' written notice (except in the event of an emergency, in which case only such notice as is reasonably possible shall be required) for the purposes of examining or inspecting the same, showing the same to prospective purchasers, mortgagees or tenants (during the last six months of the Term) and for making such repairs, alterations or improvements to the Premises or the Project as Landlord may deem necessary or desirable. Notwithstanding anything to the contrary herein contained, Landlord agrees that it shall not unreasonably interfere with the use of the Premises by Tenant and shall use diligent and good faith efforts to preserve all confidentiality of Tenant. Tenant shall have the right to require that any Landlord or any of its representatives be accompanied by a representative of Tenant during any such entry. If (i) Landlord is unable to timely gain access to the Premises due to Tenant's security or other reasons within Tenant's control, and (ii) Landlord incurs loss or damage as a result thereof (e.g., damage caused by a ruptured pipe), then Tenant shall be obligated to reimburse Landlord within ten (10) days after demand for any such loss or damage to the extent insurance proceeds are not recovered by Landlord for the same. 21.) SURRENDER OF PREMISES Upon the expiration or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord, together with all keys, access cards, alterations, improvements, and other property as provided elsewhere herein, in broom clean condition and in good order, condition and repair, except for ordinary wear and tear, damage created by casualty loss and damage which -19- 20 Tenant is not obligated to repair. If Tenant fails to so surrender the Premises to Landlord, Landlord may restore the Premises to such condition at Tenant's expense, which shall be payable upon demand. Subject to the provisions of Section 10(e) hereof, upon such expiration or termination Tenant's trade fixtures, furniture and equipment shall remain Tenant's property, and Tenant shall have the right to remove the same prior to the expiration or earlier termination of this Lease. Tenant shall promptly repair any damage caused by any such removal. Any of Tenant's trade fixtures, furniture or equipment not so removed shall be considered abandoned and may be retained by Landlord or be destroyed or disposed of at Tenant's expense. 22.) HOLDING OVER If Tenant remains in possession of the Premises without the written consent of Landlord after the expiration or earlier termination of this Lease, Tenant shall be deemed to hold the Premises as a tenant at will subject to all of the terms, conditions, covenants and provisions of this Lease (which shall be applicable during the holdover period), except that the Base Rent shall be increased to 125% of the last current Base Rent. Tenant shall vacate and surrender the Premises to Landlord upon Tenant's receipt of notice from Landlord to vacate. No holding over by Tenant, whether with or without the written consent of Landlord, shall operate to extend this Lease except as otherwise expressly provided herein. 23.) QUIET ENJOYMENT If and so long as Tenant pays the prescribed rent and performs or observes all of the terms, conditions, covenants and obligations of this Lease required to be performed or observed by it hereunder, Tenant shall at all times during the term hereof have the peaceable and quiet enjoyment, possession, occupancy and use of the Premises without any interference from Landlord or any person or persons claiming the Premises by, through or under Landlord. The foregoing is subject to the rights of any mortgages, underlying leases or other matters of record to which this Lease is or may become subject, provided that any such mortgagees or lessor shall be required to provide Tenant with a nondisturbance agreement allowing Tenant to remain in the Premises under the terms of this Lease in the event of a default under the mortgage by Landlord. 24.) NOTICE AND PLACE OF PAYMENT (a) All rent and other payments required to be made by Tenant to Landlord shall be delivered or mailed to Landlord' at the address set forth below or any other address Landlord may specify from time to time by written notice given to Tenant. (b) All payments required to be made by Landlord to Tenant shall be delivered or mailed to Tenant at the address set forth in Section 24(c) hereof or at any other address within the United States as Tenant may specify from time to time by written notice given to Landlord. (c) Any notice, demand or request required or permitted to be given under this Lease or by law shall be deemed to have been given if reduced to writing and mailed by Registered or Certified mail, postage prepaid, to the party who is to receive such notice, demand or request at the address set forth below or at such other address as Landlord or Tenant may -20- 21 specify from time to time by written notice. When delivering such notice, demand or request shall be deemed to have been given as of the date it was so delivered. To Tenant: Cray, Inc. P. O. Box 6000 Chippewa Falls, WI 54729 Attn: Bill Howard To Owner: Union Semiconductor Technology Corporation 15301 Highway 55 West Plymouth, Minnesota 55447 Attn: Erik Berger 25.) MISCELLANEOUS GENERAL PROVISIONS (a) Payments Deemed Rent. Any amounts of money to be paid by Tenant to Landlord pursuant to the provisions of this Lease, whether or not such payments are denominated "rent" or "additional rent" and whether or not they are to be periodic or recurring, shall be deemed rent or additional rent for purposes of this Lease; and any failure to pay any of same as provided in Section 18(a) hereof shall entitle Landlord to exercise all of the rights and remedies afforded hereby or by law for the collection and enforcement of Tenant's obligation to pay rent. Tenant's obligation to pay any such rent or additional rent pursuant to the provisions of this Lease shall survive the expiration or other termination of this Lease and the surrender of possession of the Premises after any holdover period. (b) Estoppel Letters. Tenant shall, within ten (10) days following written request from Landlord, execute, acknowledge and deliver to Landlord or to any lender, purchaser or prospective lender or purchaser designated by Landlord a written statement in a form provided by Landlord certifying (i) that this Lease is in full force and effect and unmodified (or, if modified, stating the nature of such modification), (ii) the date to which rent has been paid, (iii) that there are not, to Tenant's knowledge, any uncured defaults (or specifying such defaults if any are claimed), and (iv) such further matters regarding this Lease and/or the Premises customarily included in estoppel letters or certificates as may be reasonably requested by Landlord, provided that disclosure of confidential information by Tenant shall not be required. Any such statement may be relied upon by any prospective purchaser or mortgagee of all or any part of the Project. Tenant's failure to deliver such statement within such period shall be conclusive upon Tenant that this Lease is in full force and effect and unmodified, and that there are no uncured defaults in Landlord's performance hereunder. (c) Memorandum of Lease. If requested by Landlord or Tenant, a memorandum of lease, containing the information required by applicable law concerning this Lease shall be prepared, executed by both parties and filed for record in the office of the county recorder in Chippewa County, Wisconsin. (d) Claims for Fees. Each party hereto shall indemnify and hold harmless the other party for any and all liability incurred in connection with the negotiation or execution of -21- 22 this Lease for any real estate broker's commission or finder's fee which has been earned by a real estate broker or other person on such party's behalf. Each party represents to the other that each party has retained corporate real estate advisors and that each party shall be responsible for the fees of their own advisors. (e) Applicable Law. This Lease and all matters pertinent thereto shall be construed and enforced in accordance with the laws of the State of Wisconsin. (f) Entire Agreement. This Lease, including all Exhibits, Riders and Addenda, constitutes the entire agreement between the parties hereto regarding the subject matter hereof and may not be modified except by an instrument in writing executed by the parties hereto. (g) Binding Effect. This Lease and the respective rights and obligations of the parties hereto shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto as well as the parties themselves; provided, however, that Landlord, its successors and assigns shall be obligated to perform Landlord's covenants under this Lease only during and in respect of their successive periods as Landlord during the term of this Lease. (h) Severability. If any provision of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions hereof shall not be affected or impaired, and such remaining provisions shall remain in full force and effect. (i) No Partnership. Landlord shall not, by virtue of the execution of this Lease or the leasing of the Premises to Tenant, become or be deemed a partner of Tenant in the conduct of Tenant's business on the Premises or otherwise. (j) Headings, Gender, etc. As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall include any other gender. The topical headings of the several paragraphs of this Lease are inserted only as a matter of convenience and reference, and do not affect, define, limit or describe the scope or intent of this Lease. (k) No Right to Change Buildings Address. Landlord shall have no right to change the street address of the Conference Center without the prior written consent of Tenant. Landlord reserves the right to change the name of the Project. (l) Execution by Landlord. Submission of this instrument to Tenant, or Tenant's agents or attorneys, for examination or signature does not constitute or imply an offer to lease, reservation of space, or option to lease, and this Lease shall have no binding legal effect until execution hereof by both Landlord and Tenant. (m) Time of Essence. Time is of the essence of this Lease and each of its provisions. -22- 23 (n) Drafting Party. The parties represent that they have been represented by legal counsel in the negotiation and preparation of this Lease and that their respective attorneys have substantially participated in the drafting of this Lease. The parties agree that the rule of construction regarding ambiguities being construed against the drafting party shall not apply. Changes from any prior drafts of this Lease shall not be used in interpreting any of the provisions of this Lease. (o) Counterparts; Facsimile Signatures. This Lease may be executed in one or more counterparts, each of which shall be deemed an original and together which shall constitute one document. Facsimile signatures on this Lease shall be deemed valid and acceptable; however, any party executing this Lease by facsimile signature shall immediately deliver not less than three (3) hard copy originals to the other party. 26.) HAZARDOUS SUBSTANCES. (a) Tenant covenants that Tenant, with respect to its use and operation on the Premises and within the Project during the Term, will remain in compliance with all applicable federal, state and local statutes, ordinances, regulations, rules and other laws presently in force or hereafter enacted relating to public health, safety, protection of the environment, environmental quality, contamination and clean-up of hazardous materials, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, the Resource, Conservation and Recovery Act of 1976, as amended, and state superfund and environmental clean-up statutes and all rules and regulations presently or hereafter enacted ("environmental laws"). As used above, the term "hazardous materials" shall mean and include all hazardous and toxic substances, waste or materials, any pollutant or contaminant, including, without limitation, asbestos, PCBs, petroleum and petroleum-based products and raw materials that are included under or regulated by any environmental laws. Tenant shall not release, generate, manufacture, store, treat, transport or dispose of any hazardous material on or about the Project or any part thereof; however, Tenant may store, transport and use such hazardous materials as historically used by Tenant in the ordinary course of the operation of its business in compliance with all applicable environmental laws. Tenant will immediately notify Landlord and provide copies upon receipt of all written complaints, claims, citations, demands, inquiries, reports or notices relating to the condition of the Premises or compliance with environmental laws. Tenant shall maintain all required records and file any necessary documents with the appropriate agencies relating to the use, storage or transportation of any hazardous materials on, to, from or about the Premises. Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord and at Tenant's sole cost), and hold Landlord harmless from and against all losses, liabilities, obligations, penalties, claims, demands, judgments, costs and other damages, that are suffered or incurred by Landlord and arising from the release or other deposit during the Term of any hazardous material by Tenant, its employees, agents or contractors, on, in, under or affecting all or any portion of the Premises or the Project, or any breach of any obligation or agreement of Tenant in this paragraph. This indemnification obligation shall survive the termination of this Lease. (b) Except as provided in subparagraph (a) above, Landlord covenants that Landlord, with respect to its use and operation on the Project during the Term, will remain in -23- 24 compliance with all applicable environmental laws. Landlord shall not release, generate, manufacture, store, treat, transport or dispose of any hazardous material on or about the Project or any part thereof; however, Landlord may store, transport and use such hazardous materials used by Landlord in the ordinary course of the operation of its business in compliance with all applicable environmental laws. Landlord shall indemnify, defend (with counsel reasonably acceptable to Tenant and at Landlord's sole cost), and hold Tenant harmless from and against all losses, liabilities, obligations, penalties, claims, demands, judgments, costs and other damages, that are suffered or incurred by Tenant and caused by the release or other deposit of any hazardous material by Landlord, its employees, agents (not including Tenant under the Management Services Agreement) or contractors, on, in, under or affecting all or any portion of the Project. This indemnification obligation shall survive the termination of this Lease. -24- 25 IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. LANDLORD: UNION SEMICONDUCTOR TECHNOLOGY CORPORATION By: /s/ JAMES LAI 6-29-00 --------------------------------------- Its: PRESIDENT -------------------------------- TENANT: CRAY, INC. By: /s/ DAVE E. FRACH 6/30/00 --------------------------------------- Its: CHIEF TECH. COUNSEL -------------------------------- Exhibits A) Project Plan B) Premises Plan C) Rules and Regulations D) Parking Areas -25- 26 EXHIBIT A PROJECT PLAN [GRAPHIC] 27 EXHIBIT B PREMISES PLAN [GRAPHIC] 28 EXHIBIT C RULES & REGULATIONS Landlord and Tenant each agrees, for itself, its employees, agents, contractors, invitees and guests, to comply with the following rules and regulations with such reasonable modifications thereof and additions thereto as Landlord and Tenant may agree in writing to make from time to time for the Project. For purposes of these Rules and Regulations, the term "Occupant" shall mean Landlord, Tenant or any other tenant of the Project. 1. The Project sidewalks and the Fab I Building entries, passages, courtyard, corridors, stairways and elevators shall not be obstructed by any Occupant or its employees, agents, contractors, invitees and guests, or used by them for purposes other than ingress and egress to and from their respective premises. 2. Except as expressly provided in the Lease, no sign, advertisement or notice shall be inscribed, painted or affixed by any Tenant on any part of the inside or outside of any Building. 3. Subject to limitations described in the Lease, each Occupant shall have the nonexclusive use in common with other tenants, their guests and invitees, of the automobile parking areas, driveways and footways. Landlord shall have the right to install parking, directional and other signs. Landlord and Tenant shall not be liable to the other if any vehicle of an Occupant or its employees is towed from the Project when illegally parked. Landlord and Tenant shall not be liable to the other for damage to vehicles in the parking areas or for theft of vehicles, personal property from vehicles, or equipment of vehicles. 4. No Occupant shall do or permit anything to be done in the Project or bring or keep anything therein which will in any way increase the rate of fire insurance on the Project, or on property kept therein, or obstruct or interfere with the rights of each other or other tenants, or in any way injure or annoy them, or conflict with the laws relating to fire, or with any regulations of the fire department, or with any insurance policy upon any Buildings or any part thereof, or conflict with any rules and ordinances of the local Board of Health or any governing bodies. 5. No windows or other openings that reflect or admit light into the corridors or passageways in the Conference Center shall be covered or obstructed by any Occupant. 6. No Occupant shall disturb any other Occupant by the use of any musical instruments, the making of unseemly noises, or any unreasonable noise. No animals or pets of any kind will be allowed in the Conference Center other than to assist sensory impaired persons. 7. The water closets and other water fixtures shall not be used for any purpose other than those for which they were constructed, and any damage resulting to them from misuse, or the defacing or injury of any part of the Buildings, shall be borne by the person who shall occasion it. -28- 29 8. Nothing shall be thrown out the windows of the Conference Center or down the stairways or other passages. 9. No Occupant shall be permitted to use or to keep in the Conference Center any kerosene, camphene, burning fluid or other illuminating materials, except to the extent necessary to operate building systems. 10. No portion of the Conference Center shall be used for the purpose of lodging rooms or for any immoral or unlawful purposes. 11. No Occupant shall make or permit any noise, vibration or odor to emanate from its respective premises which would unreasonably interfere with the quiet possession of premises by other Occupants; or do anything therein tending to create, or maintain, a nuisance; or disturb, solicit or canvass any occupant of the Conference Center. 12. No Occupant shall place anything or allow anything to be placed near the glass of any door, partition, or window which may be unsightly from outside its respective premises; or take or permit to be taken in or out of other entrances of the Conference Center, or take or permit on other elevators, any item normally taken in or out through the trucking concourse or service doors or in or on freight elevators; or, whether temporarily, accidentally, or otherwise, allow anything to remain in, place or store anything in, or obstruct in any way, any passageway, exit, stairway, elevator, shipping platform, or truck concourse. Each Occupant shall lend its full cooperation to keep such areas free from all obstruction and in a clean condition and move all supplies, furniture and equipment as soon as received directly to the Premises and move all such items and waste, other than waste customarily removed by employees of the Building, to be taken from its respective premises directly to the shipping platform at or about the time arranged for removal therefrom. 13. If any provision of these Rules and Regulations conflict with the terms of the Lease, the applicable provision of the Lease will control. -29- 30 EXHIBIT D PARKING AREAS [GRAPHIC] EX-10.11 5 v71068ex10-11.txt EXHIBIT 10.11 1 EXHIBIT 10.11 STANDARD LEASE AGREEMENT FOR OFFICE/SERVICE SPACE This LEASE AGREEMENT (hereinafter called the "LEASE AGREEMENT") made as of the 10th day of August, 2000 by and between THE TEACHERS RETIREMENT SYSTEM OF THE STATE OF ILLINOIS, HAVING OFFICES AT C/O United Properties LLC, Suite 200, 3500 West 80th Street, Bloomington, Minnesota 55431 (hereafter called the "LANDLORD"), and CRAY INC., a Washington corporation (hereafter referred to as "TENANT"). ARTICLE 1 -- DESCRIPTION OF PREMISES Landlord, in consideration of the rents and covenants herein contained, hereby leases the following, to wit: approximately 39,507 square feet of office space in the aggregate consisting of (i) approximately 13,887 square feet (the "BUILDING V PREMISES") of the office and service building located at 1345 Mendota Heights Road, Mendota Heights, Minnesota as outlined on Exhibit "A-1" to this lease Agreement ("BUILDING V") and (ii) approximately 25,620 square feet (the "BUILDING VI PREMISES") of the office and service building located at 1340 Mendota Heights Road, Mendota Heights, Minnesota as outlined on Exhibit A-2 of this Lease Agreement ("BUILDING VI") (the Building V Premises and the Building VI Premises are sometimes together referred to as the "PREMISES" and Building V and Building VI are sometimes together referred to as the "BUILDING"). Appurtenant to the Premises shall be a non-exclusive license for access to and use of the common areas of Building V and Building VI of the Mendota Heights Business Center including without limitation the parking lots and driveways thereon (together hereafter the "PARKING AREAS"). ARTICLE 2 -- TERM AND MINIMUM RENT TO HAVE AND TO HOLD the Premises together with all appurtenant rights and privileges, unto Tenant for a term of sixty (60) and a fraction months commencing on the 15th day of September, 2000 and terminating on the 30th day of September, 2005 (hereafter called the "TERM"), Tenant to pay therefore during the Term a monthly minimum rent ("MINIMUM RENT") as follows:
Period of Term Annual Rate Per SF Monthly Minimum Rent -------------- ------------------ -------------------- 9/15/00 to 9/30/03 $9.19 $30,255.78 10/1/03 to 9/30/05 $9.69 $31,901.90
Said Monthly installments shall be payable in advance on the first day of each calendar month or any extension or renewal thereof; provided, that said commencement and termination dates are specifically subject to the provisions of Article 4 hereof. In the event of any fractional calendar month, Tenant shall pay for each day in such partial month a rental equal to 1/30 of said Minimum Rent. Minimum Rent for the fractional calendar month of September, 2000 shall be payable on or before the commencement date of this Lease Agreement. ARTICLE 3 -- USE OF PREMISES The Premises shall be used by Tenant for general office purposes and for no other purposes, subject to all regulations imposed by local, state, or other governmental agencies and subject to rules and regulations which may be promulgated by Landlord. ARTICLE 4 -- CONSTRUCTION AND POSSESSION Tenant acknowledges and agrees that it shall be taking possession of the Premises in their existing "as is" condition without any obligation on the part of Landlord to make any alterations, modifications or improvements thereto or provide any allowances therefor. Any improvements to the Premises and the furnishing of the Premises shall be made by tenant at the sole cost and expense of Tenant, subject to all 2 other provisions of this Lease Agreement, including compliance with all applicable governmental laws, ordinances and regulations. In the event of any occupancy of the Premises by Tenant prior to the beginning of the Term, such occupancy shall in all respects be the same as that of a tenant under this Lease Agreement and shall be subject to the terms and conditions of this Lease Agreement; provided, however, the Tenant may enter the Premises rent-free during the Move-in Period (as defined below) only for the purposes hereinafter described. Landlord shall allow Tenant to commence fixturing, wiring for its telecommunications/computer equipment, installing work stations and otherwise moving its personal property, furniture and equipment into the Premises four (4) weeks prior to the commencement of the Term (the "MOVE-IN PERIOD"). Notwithstanding anything herein to the contrary, however, Tenant's obligation to pay rent under this Lease Agreement shall in any case begin on the commencement date of this Lease Agreement of September 15, 2000. ARTICLE 5 -- ADDITIONAL RENT A. Tenant shall pay to Landlord as Additional Rent throughout the Term the following: 1. Real Estate Taxes: Tenant shall pay its pro rata share of the Real Estate Taxes. The term "REAL ESTATE TAXES" herein shall mean all real estate taxes, all assessments, and any taxes in lieu thereof or any tax that may be levied, assessed or imposed upon or measured by the rents reserved hereunder which may become due or payable against or by the Building, the parcel of land upon which it is constructed or Landlord. For purposes of calculating Real Estate Taxes in any given calendar year, special assessments shall be paid over the maximum period allowed by law without incurring interest. All costs and expenses incurred by Landlord during negotiations for or contests of the amount of Real Estate Taxes shall be included within the term "Real Estate Taxes." Tenant shall pay to Landlord in each year during the Term of this Lease Agreement and any extension or renewal thereof, Tenant's proportionate share of all Real Estate Taxes paid in the first instance by Landlord in that year. Anmy tax year commencing during any lease year shall be deemed to correspond to such lease year. In the event the taxing authorities include in the Real Estate Taxes the value of any improvements made by Tenant, or of machinery, equipment, fixtures, inventory or other personal property or assets of Tenant, then Tenant shall pay all the taxes attributable to such items in addition to its proportionate share of said aforementioned Real Estate Taxes. 2. Common Area Operating Expenses: Tenant shall pay its pro rata share of the annual aggregate Common Area Operating Expenses ("OPERATING EXPENSES") incurred by Landlord in the operation, maintenance and repair of the Building, the Parking Area and the parcel of land on which they are located. The term "Operating Expenses" herein shall include but not be limited to maintenance, operation, repair, replacement and care of all heating, lighting, and plumbing fixtures in or serving common areas and of all equipment systems, roofs, exterior glass, landscaped areas, signs, Building exteriors (non-structural) and parking lots; all payments by Landlord for snow removal, refuse removal, insurance premiums, management fees, wages and fringe benefits of personnel employed for the aforesaid work and proportionate costs of equipment purchased and used for such purposes that can not be capitalized under the Internal Revenue Code; and the cost (amortized over such reasonable period as Landlord shall determine on a straight line basis) of any capital improvements made to the Building by Landlord after commencement of the Term which result in a reduction of Operating Expenses or which are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed. Except only as permitted under the immediately preceding sentence, no other capital expenditures of Landlord shall be included in "Operating Expenses." B. In the event the Term shall begin or expire at any time during the calendar year, Tenant shall be responsible for its pro rata share of Additional Rent under subdivisions 1 and 2 of paragraph A for such partial year. C. Prior to commencement of this Lease Agreement, and prior to the commencement of each calendar year thereafter commencing during the Term or any renewal or extension thereof, Landlord may estimate for the following calendar year, or portion thereof remaining, Tenant's share of Real Estate Taxes and Operating Expenses, and the Additional Rent payable by Tenant during such calendar year to cover those charges on a current basis. Said estimates will be in writing and will be delivered or mailed to 3 Tenant at the Premises. The Additional Rent so estimated shall be payable by Tenant in equal monthly installments, in advance, on the first day of each month during such calendar year. In the event that such estimate is delivered to Tenant after the first day of January of such calendar year, the estimated Additional Rent for that year shall be payable as Additional Rent in equal monthly installments, in advance, on the first day of each month over the balance of such calendar year, with the number of installments being equal to the number of full calendar months remaining in such calendar year, with the number of installments being equal to the number of full calendar months remaining in such calendar year after delivery of the estimate. D. For purposes of this Article, Tenant's "pro rata share" shall be determined (except for management fees) on the same ratio as the total square feet in the Premises bears to the total square feet in the Building. E. Upon completion of each calendar year during the Term or any renewal or extension thereof, Landlord shall determine the actual amount of the Real Estate Taxes and Operating Expenses payable by Tenant in such calendar year and deliver a written certification of the amounts thereof to Tenant. If Tenant has underpaid its proportionate share of Real Estate Taxes of Operating Expenses for such calendar year, Tenant shall pay the balance thereof within ten (10) days after the receipt of such statement. If Tenant has overpaid the same, Landlord shall either (i) refund such excess, or (ii) credit such excess against the next monthly installment of Additional Rent payable by Tenant. A pro rata adjustment shall be made for a fractional calendar year occurring during the Term of this Lease Agreement or any renewal or extension thereof based upon the number of days of the Term of the Lease Agreement during said calendar year as compared to three hundred sixty-five (265) days and all additional sums payable by Tenant or credits du Tenant as a result of the provisions of this Article shall be adjusted accordingly. By giving written notice to Landlord no later than one hundred twenty (120) days following receipt by Tenant of Landlord's certification, Tenant by its agents or employees engaged on a non-contingency based fee arrangement, shall have the right, at Tenant's cost and expense, to audit the books and records of Landlord and/or its property manager relating to the Operating Expenses and Real Estate Taxes that are the subject of such certification by Landlord, said audit to be at the offices of Landlord's property manager and on a date reasonably acceptable to Landlord and Tenant. Landlord shall be provided with a written report of such audit in reasonable detail and the results of such audit shall be subject to reasonable verification by Landlord. In the event such audit establishes that Tenant was overcharged for Operating Expenses or Real Estate Taxes, the amount of such overcharge shall be credited against the next monthly installment of Additional Rent payable by Tenant or if at the end of the Term, such overcharge shall be refunded to Tenant within ten (10) days of such audit. Further, in the event Tenant engages the services of an independent auditor on a non-contingency fee based fee arrangement and the results of the audit performed by such auditor establish that Landlord has overcharged Tenant for Operating Expenses and Real Estate Taxes by an amount in excess of five percent (5%) of the Operating Expenses and Real Estate Taxes that should have been paid by Tenant, Landlord shall reimburse Tenant for the cost of the audit up to a maximum amount of $500. Conversely, in the event that such audit establishes that Tenant was undercharged for Operating Expenses or Real Estate Taxes, the amount of such undercharge shall be paid by Tenant to Landlord within ten (10) days of the audit. F. Landlord reserves, and Tenant hereby assigns to Landlord, the sole and exclusive right to contest, protest, petition for review, or otherwise seek a reduction in the Real Estate Taxes. G. It is acknowledged and agreed by Tenant that notwithstanding any other provision of this Lease Agreement to the contrary, Operating Expenses and Real Estate Taxes are determined by Landlord and payable by Tenant under this Article 5 separately for each of Building V and Building VI. Tenant's pro rata share for Building V is currently 46.85% and Tenant's pro rata share for Building VI is currently 100.00%. ARTICLE 6 -- TENANT'S RESPONSIBILITY, CARE OF PREMISES AND UTILITIES A. Tenant shall be responsible for the maintenance of the Premises, including but not limited to maintenance, repair or replacement of entrance doors, overhead garage doors, truck dock doors, the 4 heating, plumbing, electrical, mechanical and air conditioning fixtures exclusively serving the Premises, and equipment used by Tenant. B. Maintenance of heating, mechanical and air conditioning fixtures and equipment shall specifically include the reasonable cost of quarterly inspections and repairs performed by Landlord's own engineers and by an independent mechanical contractor who shall be contracted for by Landlord, said cost to be included in Operating Expenses under Article 5 of this Lease Agreement. C. Tenant shall provide its own dumpster for trash and store the dumpster inside the Building at all times. Tenant shall not leave or store any materials or trash on the grounds or Parking Areas and shall not litter the grounds and Parking Areas. If Landlord makes a trash room or area available to Tenant in the Building or a nearby building, Tenant shall dispose of its trash in said room or area if so requested by Landlord. Tenant shall move or remove fixtures whenever such moving or removal is requested by Landlord for purposes of necessary repair. D. Tenant shall be responsible for prompt and adequate removal of snow, ice and other hazardous conditions accumulating or occurring on all sidewalk and walkways between the Premises and the Parking Areas, and/or street, except that Landlord shall be responsible for the removal of snow from the sidewalk and walkways in excess of one (1) inch and from the Parking Areas and/or street in excess of two (2) inches. E. Tenant further agrees (a) to keep the Premises in as good condition and repair as they were in at the time that Tenant took possession of same, reasonable wear and tear and damage from fire and other casualty expected; (b) to keep the Premises in a clean and sanitary condition; (c) not to commit any nuisance or waste on the Premises, throw foreign substances in plumbing facilities, or waste any of the utilities furnished by Landlord; (d) not to obstruct entries, halls, stairways, lavatories, or other common areas, nor use the same for anything other than their intended purpose; and (e) that the use of the Premises, Parking Areas and the common areas shall be subject to such reasonable Rules and Regulations as may be promulgated by Landlord for the comfort and convenience of the owners, occupants and visitors of the Building. F. If Tenant shall fail to keep and preserve the Premises in the state of condition required by the provisions of this Lease Agreement, Landlord may, at its option upon thirty (30) days written notice by Landlord to Tenant and failure to cure by Tenant during said period of time (except in the case of an emergency, when no notice or opportunity to cure need be given), put or cause the same to be put in the condition and state of repair agreed upon, and in such case, Tenant shall pay the cost thereof. G. Tenant shall pay when due all charges for sewer usage or rental, garbage disposal, refuse removal, water, electricity, gas, fuel oil, L.P. Gas, telephone and/or other utility services or energy source furnished to the Premises during the Term or any renewal or extension thereof. ARTICLE 7 -- LANDLORD'S RESPONSIBILITIES AND QUIET ENJOYMENT A. Landlord shall keep in good order, safe condition and repair the structural parts of the Building, including the outer walls, roof, foundation, and interior support columns and the utilities of the Building not exclusively serving the Premises, except that Tenant shall be responsible for the cost of the repairs that are caused by the fault or negligence of Tenant, its employees, or invitees. Landlord warrants that it has full right to execute and perform this Lease Agreement and to grant the estate demise, and that Tenant, upon payment of the rents and other amounts due and the performance of all the terms, conditions, covenants and agreements on Tenant's part to be observed and performed under this Lease Agreement, may peaceably and quietly enjoy the Premises for the uses permitted hereunder, subject, nevertheless, to the terms and conditions of this Lease Agreement. B. Landlord represents, warrants and covenants that Building V and Building VI shall have separate rooftop HVAC systems serving the respective Premises under this Lease Agreement and that based on an inspection of said HVAC systems to be performed by a qualified engineer, said HVAC 5 systems will on the commencement date of this Lease Agreement be in proper working order. Landlord further represents and warrants that to the best of the Landlord's knowledge, the common areas of Building V and Building VI are in substantial compliance with all applicable statutes, laws, ordinances and regulations. ARTICLE 8 -- ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS A. Each party hereto agrees that at any time, and from time to time during the Term (but not more often than twice in each calendar year), within ten (10) days after request by the other party hereto, it will execute, acknowledge and deliver to such other party or to any prospective purchaser, assignee or mortgage designated by such other party, an estoppel certificate in a form reasonably acceptable to the requesting party. B. Tenant agrees to provide Landlord (but no more than twice in any calendar year), within ten (10) days of request, the then most current financial statements of Tenant and any guarantors of this Lease Agreement, which shall be certified by Tenant, and if available, shall be audited and certified by a certified public accountant. Landlord shall keep such financial statements confidential, except Landlord shall, in confidence, be entitled to disclose such financial statements to existing or prospective mortgagees or purchasers of the Building. ARTICLE 9 --NON PERMITTED USE Tenant agrees not to commit or permit any act to be performed on the Premises or any omission to occur which will be in violation of any statute, regulation, or ordinance of any governmental body or which will increase the insurance rates on the Building or which will be in violation of any insurance policy carried on the Building by Landlord. Tenant, at its expense, shall comply with all governmental laws, ordinances, rules and regulations applicable to Tenant's use of the Premises and shall promptly comply with all governmental orders, rulings and directives for the improvements to the Premises, all at Tenant's sole cost and expense. Tenant shall not disturb other occupants of the Building by making any undue or unseemly noise or otherwise and shall not do or permit to be done in or about the Premises anything which will be dangerous to life or limb. Tenant warrants and represents it shall not nor shall it permit the storage, production, use or disposal of hazardous wastes or substances (as defined under Federal or State law) in or around the Premises, Building or Parking Areas, except for relatively small amounts of the foregoing that are routinely and customarily used for office and cleaning purposes in compliance with applicable statutes and laws. Tenant's indemnification ion the next Article shall be deemed to include any breach of this representation and warranty. There shall be no sale of food or beverages by mobile facilities, by vending machine or equipment, or otherwise on the Premises without the written consent of Landlord. Tenant further agrees not to use or permit the use by its employees or visitors of the Parking Areas for the overnight storage of vehicles. ARTICLE 10 -- INSURANCE AND INDEMNITY A. Tenant shall maintain in full force and effect during the Term a policy of public liability insurance under which Landlord is named additional insured. The minimum combined limit of liability of such insurance shall be $2,000,000.00. This limit shall apply per location. Said insurance shall also provide for contractual liability coverage by endorsement. Tenant shall further provide for business interruption insurance to cover a period of not less than six (6) months. Tenant agrees to deliver a duplicate copy of said policy or a certificate of insurance evidencing such coverage to Landlord prior to occupancy. Such policy shall contain a provision requiring thirty (30) days written notice to Landlord before cancellation of, material change or failure to renew the policy. All insurance shall be with companies and in form reasonably acceptable to Landlord. Tenant further covenants and agrees to indemnify and hold Landlord and Landlord's manager of the Building harmless from any claim, loss or damage, including reasonable attorney's fees, suffered by Landlord, Landlord's manager or Landlord's other tenants caused by; (i) any act or omission by Tenant, Tenant's employees or anyone claiming through or by Tenant in, at, or around the Premises or the Building; (ii) the conduct or management of any work or thing whatsoever done by Tenant in or about the Premises; or (iii) Tenant's failure to comply with any and all governmental 6 laws, rules, ordinances or regulations applicable to Tenant's use of the Premises. If Tenant shall not comply with its covenants made in this Article 10, Landlord may, at its option upon five (5) days written notice by Landlord to Tenant and failure to cure by Tenant during said period of time (unless expiration of such insurance is imminent, in which case no notice or opportunity to cure need be given), cause insurance as aforesaid to be issued, and in such event Tenant agrees to pay the premium for such insurance promptly upon Landlord's demand. B. Landlord shall carry and cause to be in full force and effect a fire and extended coverage insurance policy on the Building but not contents owned, leased to or otherwise in possession of Tenant. The cost of such insurance shall be an Operating Expense as defined in Article 5 of this Lease Agreement. C. Landlord and Tenant hereby release the other from any and all liability or responsibility to the other or anyone claiming through or under them by way of subrogation or otherwise for nay loss or damage to property caused by fire or any of the extended coverage or supplementary contract casualties, even if such fire or other casualty shall have been caused by the fault or negligence of the other party, or anyone for whom such party may be responsible, provide, however, that this release shall be applicable and in force and effect only with respect to loss or damage occurring during such times as the releasing party's policies shall contain a clause or endorsement to the effect that any such release would not adversely affect or impair said policies or prejudice the right of the releasing party to recover thereunder. Landlord and Tenant agree that they will request their insurance carriers to include in their policies such a clause or endorsement. If extra cost shall be charged therefore, each party shall advise the other of the amount of the extra cost, and the other party, at its election, may pay the same, but shall not be obliged to do so. ARTICLE 11 -- NON-LIABILITY OF LANDLORD AND COVENANT TO HOLD HARMLESS A. Except in the event of casual negligence of Landlord, its agents or employees, Landlord shall not be liable for any loss or damage for failure to furnish heat, air conditioning, electricity, elevator service, water, sprinkler system, or janitorial service or due to theft burglary, or fire, nor shall such failure or other temporary failure of such services due to Landlord's maintenance or repair be deemed an eviction of Tenant or relieve Tenant of any of its obligations hereunder. Landlord shall not be liable for personal injury, death or any damage from any cause on or about the Premises or Building. All property, kept stored or maintained in the Premises shall be so kept, store or maintained at sole risk of Tenant. B. Except in the case of casual negligence of Landlord, its agents or employees and subject to the waiver of subrogation provided in Article 10 C., Tenant agrees to hold Landlord harmless of any liability for damages to any person or property occurring on or about the Premises and arising out of, or related to any act ore omission of Tenant or its agents, employees or invitees. ARTICLE 12 -- FIRE REPAIR In the event of damage to the Building or the Premises by fire, the elements, or other casualty and the estimated costs to repair the same are greater than $50,000, Landlord at its option may terminate this Lease Agreement or repair the damage. If Landlord elects to terminate this Lease Agreement, Landlord shall give written notice of termination to Tenant within sixty (60) days after such damage and the termination shall be effective upon such notice. If a portion of the Premises is damaged by fire, the elements or other casualty and Landlord does not terminate this Lease Agreement as provided above, Landlord shall, at its expense, restore the Premises to as near the condition which existed immediately prior to such damage. If the damage renders the Premises untenantable in whole or in such part such that it is impracticable to conduct business therein, the rent shall wholly abate until the damage has been repaired. If the damage renders the Premises untenantable in part but Tenant continues to occupy them in part, the rent shall be reduced in the proportion that the unoccupied portion of the Premises bears to the entire Premises until the damage has been repaired. Notwithstanding the foregoing, if the damage is due to the fault or neglect of Tenant or its employees, there shall be no abatement of rent. Anything herein to the contrary also notwithstanding, if the Premises are not in fact so restored by Landlord within two hundred forty (240) days of the date of such damage, Tenant shall have the right, exercisable by written notice to Landlord no later than twenty (20) days following the expiration of said two hundred forty (240) day period, to 7 terminate this Lease Agreement effective no less than fifteen (15) days, nor more than sixty (60) days after Tenant's notice (except that if Landlord completes such restoration before the effective date of termination, such termination shall be a nullity). Landlord shall not be required to repair any damage or make any repairs or replacements of any leasehold improvements, trade fixtures or other personal property of Tenant. Tenant shall promptly repair all leasehold improvements. ARTICLE 13 -- CONDEMNATION LOSS Should all the Premises be taken in condemnation proceedings or by exercise of any right of eminent domain, then this Lease Agreement shall automatically terminate as of the date the condemning authority or the authority exercising its right of eminent domain takes possession of the Premises. If there is a partial taking but Tenant continues to occupy the Premises in part, the rent shall be reduced in the proportion that the unoccupied part of the Premises bears to the entire Premises. If, as a result of a partial taking, the Premises are no longer usable for the purpose(s) specified in Article 3 of this Lease Agreement, Tenant may terminate this Lease Agreement as of the date the condemning authority or the authority exercising its right of eminent domain takes possession of the Premises by giving written notice thereof to Landlord. If there is a partial taking of the Building or of the Parking Area, Landlord may terminate this Lease Agreement as of the date specified in the foregoing sentence by giving written notice thereof to Tenant. All damages awarded for any such taking shall belong to and be the property of Landlord irrespective of the basis upon which they are awarded provided, however, that nothing contained herein shall prevent Tenant from making a separate claim to the condemning authority for its moving expenses and trade fixtures. For purposes of this Article, a taking by eminent domain shall include Landlord's giving of a deed under threat of condemnation. ARTICLE 14 -- ASSIGNMENT AND SUBLETTING A. Tenant agrees not to assign, sublet, license, mortgage or encumber this Lease Agreement, the Premises, or any part thereof, whether by voluntary act, operation of law, or otherwise, without the specific prior written consent of Landlord in each instance, which consent shall not be reasonably withheld or delayed by Landlord. If Tenant is a corporation or partnership, transfer of a controlling interest of Tenant shall be considered an assignment of this Lease Agreement for purposes of this article. Notwithstanding anything herein to the contrary, Tenant may, without the consent of Landlord, assign this Lease Agreement or sublet all or part of the Premises to an Affiliate of Tenant. As used herein, an "AFFILIATE" OF Tenant shall be deemed to be any entity which controls, is controlled by or is under common control with Tenant, with "control" meaning the power to direct the management and policies, directly or indirectly, through the ownership of voting securities. Consent by Landlord in one such instance shall not be a waiver of Landlord's rights under this Article as to requiring consent for any subsequent instance. In the event Tenant desires to sublet a part or all of the Premises, or assign this Lease Agreement, including to an Affiliate, Tenant shall give written notice to Landlord at least thirty (30) days prior to the proposed subletting or assignment, which notice shall state the name of the proposed subtenant or assignee, the terms of any sublease or assignment documents and if proposed to a person or entity other than an Affiliate of Tenant, copies of financial reports or other relevant financial information of the proposed subtenant or assignee. At Landlord's option, any and all payments by the proposed assignee or sublessee with respect to the assignment or sublease shall be paid directly to Landlord. In any event no subletting or assignment, regardless of whether to an Affiliate, shall release Tenant of its obligation to pay the rent and to perform all other obligations to be performed by Tenant hereunder for the Term of this Lease Agreement. The acceptance of rent by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof. At Landlord's option and with the exception of an assignment or subletting to an Affiliate of Tenant, Landlord may terminate the Lease Agreement in lieu of giving its consent to any proposed assignment of this Lease Agreement of subletting of all the Premises (which termination may be contingent upon the execution of a new lease with the proposed assignee or subtenant). B. Landlord's right to assign this Lease Agreement is and shall remain unqualified upon any sale or transfer of the Building and, providing the purchase succeeds to the interests of Landlord under this Lease Agreement, Landlord shall not be subject to any liability resulting from any act or omission or even occurring after such conveyance. In the event the fee ownership of Building V and Building VI shall ever 8 differ, Tenant shall effective as of the date of such change in ownership, amend and restate the terms, covenants and conditions of this Lease Agreement by entering into two separate lease agreements, one with the Landlord of Building V covering the Building V Premises only and one with the Landlord of Building VI covering the Building VI Premises only, and the Minimum Rent payable under Article 2 of this Lease Agreement and the Termination Fee that would be payable upon early termination under Article 31 of this Lease Agreement shall both be prorated between the Building V Premises and the Building VI Premises based upon their relative square footages. ARTICLE 15 -- MECHANICS' LIEN In the event any mechanic's lien shall at any time be filed against the Premises or any part of the Building by reason of work, labor, services or materials performed or furnished to Tenant or to anyone holding the Premises through or under Tenant, Tenant shall forthwith cause the same to be discharged of record. If Tenant shall fail to cause such lien forthwith to be discharged (or bonded against if Tenant is contesting same in good faith) within ten(10) days after being notified of the filing thereof, then, in addition to any other right or remedy for Landlord, Landlord may, but shall not be obligated to, discharge the same by paying the amount claimed to be dur, or by bonding, and the amount so paid by Landlord and all costs and expenses, including reasonable attorneys' fees incurred by Landlord in procuring the discharge of such lien, shall be due and payable in full by Tenant to Landlord on demand. ARTICLE 16 -- SECURITY INTEREST IN PERSONAL PROPERTY (INTENTIONALLY OMITTED) ARTICLE 17 -- SURRENDER On the last day of the Term or upon the sooner termination thereof, Tenant shall peaceably surrender the Premises in good condition and repair reasonable wear and tear and damage by fire or other casualty excepted. On or before the last day of the Term or the sooner termination thereof, Tenant shall at its expense remove all of its equipment and other personal property from the Premises, repairing any damage caused thereby, and any property not removed shall be deemed abandoned. At the election of Landlord, all alterations, additions and fixtures, other than Tenant's trade fixtures, which have been made or installed by either Landlord or Tenant upon the Premises shall remain as Landlord's property and shall be surrendered with the Premises as part thereof, or Landlord may require removal of the same at the end of the Term; provided, however, Tenant shall not be required to remove the improvements to the Premises existing as of the date of this Lease Agreement or any telephonic, coaxial, ethernet, or other computer, word processing, facsimile or electronic wiring. If the Premises be not surrendered at the end of the Term or sooner termination thereof Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Premises to Landlord at the place then fixed for payment of rent. ARTICLE 18 -- HOLDING OVER In the event Tenant remains in possession of the Premises after the expiration of this Lease Agreement, whether by lapse of time or termination, and without the execution of a new Lease Agreement, it shall be deemed to be occupying said Premises as a tenant or sufferance unless Landlord gives Tenant written notice prior to such expiration, that such tenancy shall be on a month-to-month basis. In either case, Tenant shall pay during that time a monthly rental at the rate of 150% of the Minimum Rent plus all Additional Rent payable hereunder, subject to all the conditions, provisions and obligations of this Lease Agreement insofar as the same can be applicable to said tenancy. ARTICLE 19 -- DEFAULT OF TENANT If any one or more of the following occurs: (2) a rent payment or any other payment due from Tenant to Landlord shall be and remain unpaid in whole or in part for more than five (5) days following written notice form Landlord of non-payment by Tenant; provide, however, if Landlord has given two (2) or more of such notices during the preceding twelve (12) month period, no such prior notice need be given by Landlord and Tenant shall be in default under this Lease Agreement if the payment is not made by Tenant within ten (10) days of the date same is due and payable; (2) Tenant shall not violate or default on any of the other covenants, agreements, stipulations or conditions herein or in any other agreement between Landlord and Tenant relating to the Premises and such violation or default shall continue for a period of thirty (30) days (or such additional period of time, not to exceed and additional sixty (60) days, as is reasonable under the circumstances if the violation or default is of the type that can be reasonably be cured within thirty (30) days and Tenant promptly commences such cure and at all times diligently pursues same) after written notice from Landlord of such violation or default; or (3) if Tenant or any guarantor of this Lease Agreement shall commence or have commenced against Tenant or any guarantor proceedings under a bankruptcy, receivership, insolvency or similar type of action; then it shall be optional for Landlord, 9 without further notice or demand, to cure such default or to declare this Lease Agreement forfeited and the said Term ended, or to terminate only Tenant's right to possession of the Premises, and to re-enter the Premises with or without process of law, using such force as may be necessary to remove all persons or chattels therefrom, and Landlord shall not be liable for damages by reason of such re-entry or forfeiture; but notwithstanding re-entry by Landlord of forfeiture of termination of this Lease Agreement or termination only of Tenant's right to possession of the Premises, the Liability of Tenant for the rent and all other sums provided for herein shall not be relinquished or extinguished for the balance of the Term of this Lease Agreement and Landlord shall be entitled to periodically sue Tenant for all sums due under this Lease Agreement or which become due prior to judgment, but such suit shall not bar subsequent suits for any further sums coming due thereafter. Tenant shall be responsible for, in addition to the rentals and other sums agreed to be paid hereunder, the cost of any necessary maintenance, repair, restoration, reletting (including related cost of removal or modification of tenant improvements) or cure as well as reasonable attorney's fees incurred or awarded in any suit or action instituted by Landlord to enforce the provisions of this Lease Agreement, regain possession of the Premises or the collection of the rentals due Landlord hereunder. Tenant shall also be liable to Landlord for the payment of a late charge in the amount of 10% of the rental installment or other sum due Landlord hereunder if said payment has not been received within ten (10 days) from the date said payment becomes due and payable, or cleared by Landlord's bank within three (3) business days after deposit. Tenant agrees to pay interest at 12% per annum or the maximum permissible rate under the applicable usury statutes, whichever is less, on all rentals and other sums due Landlord hereunder not paid within ten (10) days from the date the same becomes due and payable. Each right or remedy of Landlord provided for in this Lease Agreement shall be cumulative and shall be in addition to every other right or remedy provided for in this Lease Agreement now or hereafter existing at law or in equity or by the statute or otherwise. ARTICLE 20 -- DEFAULT OF LANDLORD Landlord shall not be deemed to be in default under this Lease Agreement until the Tenant has given Landlord written notice specifying the nature of the default and Landlord does not cure such default within thirty (30) days after receipt of such notice or within such reasonable time thereafter as may be necessary to cure such default where such default is of such a character as to reasonably require more than thirty (30) days to cure. ARTICLE 21 -- ALTERATIONS Tenant will not make any alterations, repairs, additions or improvements in or to the Premises or add, disturb or in any way change any plumbing, wiring, life/safety or mechanical systems, or structural components of the Building without the prior written consent of Landlord as to the character of the alterations, additions or improvements to be made, the manner of doing the work, and the contractor doing the work. Such consent shall not be unreasonably withheld or delayed. Notwithstanding anything herein to the contrary, Tenant may without the consent of Landlord make alterations repairs, additions or improvements of a non-structural nature costing no more than $5,000.00 in any one instance so long as (i) the plumbing, wiring, life/safety and mechanical systems of the Building are not disturbed or changed in any way, (ii) the interior wall configuration of the Premises is not changed or altered in any way and (iii) Tenant gives Landlord at least fifteen (15) days written notice prior to making such alterations, repairs, additions or improvements describing in reasonable detail the nature of same and the contractor doing the work. All such work shall comply with all applicable governmental laws, ordinances, rules and regulations. Landlord as a condition to said consent may require a surety performance and/or payment bond from Tenant for said actions. Tenant agrees to indemnify and hold Landlord free and harmless from any liability, loss, cost, damage or expense (including attorney" fees) by reasons of any said alterations, repairs, additions or improvements. ARTICLE 22 -- SIGNAGE The only Tenant signage permitted on or in any part of the Premises and visible from the exterior of the Premises shall be Landlord's standard building signage, approved and installed by Landlord at Tenant's expense. Tenant agrees to maintain its signage in good repair, and to hold Landlord harmless 10 from any loss, cost, or damages resulting from the erection, existence, maintenance, or removal of the signage. Landlord may without notice enter the Premises at any time and, at the expense of Tenant, remove unauthorized signs without liability for damages. Landlord may replace or maintain any signage at the Premises or Building and the cost of such replacement or maintenance shall be the obligation of Tenant payable on demand. ARTICLE 23 -- ENTRY Landlord shall have the right to keep pass keys to the Premises. Tenant agrees that no additional locks will be placed on any of the doors to the Premises without the written consent of Landlord and without first giving Landlord access keys to such locks. Landlord, its agents, and its employees shall have the right, upon reasonable prior notice (except in the event of an emergency) and without any diminution of rent, to enter the Premises during normal business hours (except in the event of an emergency) to inspect, conduct environmental tests, to make repairs, to exhibit the Premises to prospective purchasers, and to maintain the Building, and during the ninety (90) days prior to the expiration of the Term, to exhibit the Premises to prospective tenants and to place upon the doors or in the windows of the Premises any usual or ordinary "For Lease" signs. ARTICLE 24 -- SUBORDINATION It is mutually agreed that this Lease Agreement shall be subordinate to any and all mortgages, including any renewals, modifications, consolidations, replacements and extensions thereof now or hereafter imposed on the Building by Landlord. Tenant's right to quiet possession of the Premises shall not be disturbed if Tenant is not in default and so long as Tenant shall pay the rent and observe and perform all of the provisions of this Lease Agreement, unless this Lease Agreement is otherwise terminated pursuant to its terms. In the event Landlord's mortgagee wishes to waive the subordination rights set forth in this Article, then upon written notice to Tenant, this Lease shall be deemed prior tin incumbrance to said mortgage. In confirmation of such subordination or priority, Tenant, upon request, shall promptly execute and deliver any instrument, as required by Landlord's mortgagee; however, this Lease Agreement shall remain in full force and effect for the full Term hereof so long as Tenant is not in default hereunder. ARTICLE 25 -- GENERAL This Lease Agreement does not create the relationship of principal and agent or of partnership or of joint venture and tenant. The association between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of landlord and tenant. The submission of this Lease Agreement for examination does not constitute a reservation of, or option for, the Premises, and this Lease Agreement shall become effective only upon execution and delivery thereof by Landlord and Tenant. No waiver of any default of Tenant hereunder shall be implied form any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect any default other than the default specified in the express waiver and that only for the time and to the extent therein stated. The covenants of Tenant to pay the Minimum Rent and the Additional Rent are each independent of any other covenant, condition, provision or agreement contained in this Lease Agreement. The marginal or topical headings of the several paragraphs and clauses are for convenience only and do not define, limit or construe the contents of such paragraphs or clauses. All preliminary negotiations are merged into and incorporated in this Lease Agreement. This Lease Agreement can only be modified or amended by an agreement in writing by the parties hereto. All provisions hereof shall be binding upon the heirs, successors and assigns of each party hereto. Any notice required to be served in writing hereunder shall be delivered personally or sent by certified mail to Tenant at the address of the Premises in Building VI and to Landlord at the address then fixed for payment of Rent. The place at which Tenant is to pay all rent shall be designated in a separate writing from Landlord. This Lease Agreement shall be construed under the laws of the State of Minnesota. If Tenant is a corporation, each individual executing this Lease Agreement on behalf of said corporation represents and warrants that he is duly authorized to execute and deliver this Lease Agreement on behalf of said corporation in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the Bylaws of said corporation, and that this Lease Agreement is binding upon said corporation in accordance with its terms. No receipt or acceptance by 11 Landlord from Tenant of less than the monthly rent herein stipulated shall be deemed to be other than a partial payment on account for any due and unpaid stipulated rent; no endorsement or statement of any check or any letter or other writing accompanying any check or payment of rent to Landlord shall be deemed an accord and satisfaction, and Landlord may accept and negotiate such check or payment without prejudice to Landlord's rights to (i) recover the remaining balance of such unpaid rent or (ii) pursue any other remedy provided in this Lease Agreement. Neither party shall record this Lease Agreement or any memorandum thereof, and any such recordation shall be a breach of this Lease Agreement, void and without effect. Time is of the essence with respect to the due performance of the terms, covenants and conditions herein contained. ARTICLE 26 -- SECURITY DEPOSIT Upon execution hereof, Tenant agrees to pay Landlord the sum of $42,769.73 (i.e., $14,801.23 for the Building V Premises and $27,968.50 for the Building VI Premises) to guarantee the payment of rent and the performance by Tenant of all of the terms of this Lease Agreement (the "SECURITY DEPOSIT"). Such amount held as a Security Deposit shall bear no interest. Upon the occurrence of any default hereunder by Tenant, Landlord may use the Security Deposit to the extent necessary to cure such default, whether rent or otherwise. Any remaining balance of said Security Deposit shall be returned to Tenant upon compliance with the terms hereof and acceptance of the vacated Premises by Landlord. Tenant acknowledges that its potential liability under this Lease Agreement is not limited to the amount of the Security Deposit. Use of such Security Deposit by Landlord shall not constitute a waiver of any default, but is in addition to other remedies available to Landlord under this Lease Agreement and under law. Upon the use of all or any part of the Security Deposit to cure any default of Tenant, Tenant shall forthwith deposit with Landlord the amount of Security Deposit so used. ARTICLE 27 -- SUBSTITUTION (INTENTIONALLY OMITTED) ARTICLE 28 -- EXCULPATION Capital Associates Realty Advisors ("CAPITAL") is acting solely as agent for Landlord in connection with this Lease. All of the terms provisions, stipulations, covenants and conditions to be performed by Landlord, are undertaken solely as said agent and not personally or individually by Capital. No personal liability shall be asserted or enforced against Capital or any of its employees, officers, directors, shareholders or agents by reason of any of the terms, provisions, stipulations, covenants and conditions contained in this Lease. Without limitation of any other provision of this Lease, this Lease is being executed by and on behalf of The Teachers Retirement System of the State of Illinois ("TRS"). Neither TRS nor any present or future officer, director, employee, trustee, member or agent of TRS shall have any personal liability, directly or indirectly, and recourse shall not be had against TRS or any such officer, director, employee, trustee, member or agent, under or in connection with this Lease or any other document or instrument heretofore or hereafter executed in connection with same. Tenant hereby waives and releases any and all such personal liability and recourse. Tenant and its successors and assigns and all other persons claiming by, through or under Tenant shall look solely to Landlord's interest in the Building of which the Premises is a part with respect to any claim against Landlord arising under or in connection with this Lease or any other document or instrument heretofore or hereafter executed in connection with this Lease. The limitations of liability provided herein are in addition to, and not in limitation of , any limitations of liability otherwise set forth herein or applicable to TRS by law or in any other contract, agreement or instrument. ARTICLE 29 -- ADA COMPLIANCE The parties acknowledge that the Americans With disabilities Act of 1990 (42 U.S.C. Section 12101 et. Seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively referred to herein as the "ADA"), establish requirements under Title III of the ADA ("Title III") pertaining to business operations, accessibility and barrier removal, 12 and that such requirements may be unclear and may or may not apply to the Premises and Building depending on, among other things: (1) whether Tenant's business operations are deemed a "place of public accommodation" or a "commercial facility"; (2) whether compliance with such requirements is "readily achievable" or " technically infeasible"; and (3) whether a given alteration affects a "primary function area" or triggers so-called "path of travel" requirements. The parties acknowledge and agree that Tenant has been provided an opportunity to inspect the Premises and Building to a degree sufficient to determine whether or not the Premises and Building, in their condition as of the date hereof, deviate in any manner from the ADA Accessibility guidelines ("ADAAG") or any other requirements under the ADA pertaining to the accessibility of the Premises or the Building. Tenant further acknowledges and agrees that, except as may otherwise be specifically provided below, Tenant accepts the Premises and Building in "as-is" condition and agrees that Landlord makes no representation or warranty as to whether the Premises or Building conform to the requirements of the ADAAG or any other requirements under the ADA pertaining to the accessibility of the Premises of the Building. Tenant shall be solely responsible for all title III compliance and costs in connection with the Premises, including any Tenant Improvements or other work to be performed in the Premises under or in connection with this Lease, including pursuant to Article 4 above and shall also be responsible for the cost of any so-called title III "path of travel" requirements triggered by any construction activities or alterations in the Premises; provided, however, Tenant shall not be required to make any structural improvements to the Building. Tenant shall be solely responsible for all other requirements under the ADA relating to Tenant or any affiliates or persons or entities related to Tenant (collectively, "Affiliates"), operations of the Tenant of Affiliates of the Premises, including without limitation, requirements under Title I of the ADA pertaining to Tenant's employees. ARTICLE 30 -- ENVIRONMENTAL Landlord and Tenant agree as follows with respect to the existence or use of hazardous materials and toxic substances on or about the Premises. (a) Tenant shall not cause or permit any hazardous materials or toxic substances to be brought upon, kept or used in or about the Premises by Tenant, its agents, employees, contractors or invitees, without the prior written consent of Landlord. Landlord shall not unreasonably withhold such consent as long as Tenant demonstrates to landlord's reasonable satisfaction that such hazardous materials or toxic substances are necessary or useful to Tenant's business and will be used, kept, stored, and disposed of in a manner that complies with all laws relating to any such hazardous materials or toxic substances so brought upon or used or kept in or bout the Premises. If Tenant breaches the obligations stated in the preceding sentences and such breach results in contamination of the Premises, or if the presence of hazardous materials or toxic substances on the Premises caused or permitted by Tenant results in contamination of the Premises, or if contamination of the Premises by hazardous materials or toxic substances otherwise occurs for which Tenant is legally liable to Landlord for damage resulting therefrom, the Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Premises, damages for the loss or restriction on use of rentable or usable space or any amenity of the Premises, damages arising, from any adverse impact on marketing of space in the Building, and sums paid in settlement of claims, actual and reasonable attorneys' fees, consultant fees and expert fees) which arise during or after the Term of this Lease as a result of such contamination. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions, including regular inspections, or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of the hazardous materials or toxic substances present in the soil or ground water on or under the Building, the Parking Area or the land upon which they are located (herein referred to together as the "Property"). This indemnity and hold harmless obligation of Tenant shall survive any termination of this Lease. Without limiting the foregoing, if the presence of any hazardous materials or toxic substances on the Premises caused or permitted by Tenant results in any contamination of the Premise or Property, Tenant shall promptly take all actions at its sole expense as are necessary to return the Premises or Property to the condition existing prior to the introduction of any such hazardous materials or toxic substances to the Premises; provided that, Landlord's approval of such actions shall first be obtained, which approval shall not be unreasonably 13 withheld so long as such actions, in Landlord's sole and absolute discretion would no potentially have any material adverse long-term or short-term effect on the Premises or Property. (b) If Tenant uses, keeps, or stores hazardous materials or toxic substances on the Premises (other than relatively small amounts of the foregoing that are routinely and customarily used for office and cleaning purposes in compliance with applicable statutes and laws), Landlord shall have the right, at any time, to cause testing wells to be installed on or about the Property, and may at its option cause the ground water to be tested to detect the presence of hazardous materials or toxic substances at least once every twelve (12) months during the term of this Lease by the use of such tests as are then customarily used for such purposes. If Tenant so requests, Landlord shall supply Tenant with copies of such test results. If any suck test disclose improper use, storage or disposal of hazardous materials or toxic substances on the Premises by Tenant, the cost of such tests and of the maintenance, repair and replacement of such wells shall be fully paid for by Tenant within ten (10) days after receiving a statement of charges from Landlord. (c) If Tenant uses, keeps or stores hazardous materials or toxic substances on the Premises (other than relatively small amounts of the foregoing that are routinely and customarily used for office and cleaning purposes in compliance with applicable statutes and laws), Landlord and Landlord's agents shall have the right to inspect the Premises at all reasonable times and upon reasonable written or oral notice for the purposes of ascertaining Tenant's compliance with this Article 30. If any such inspections disclose improper use, storage or disposal of hazardous materials or toxic substances on the Premises by Tenant, the cost of such inspections shall be reimbursed to Landlord by Tenant. In the event of a spill of mishandling of hazardous materials or toxic substances, Tenant shall immediately inform Landlord verbally and in writing. Such notice shall identify the hazardous materials or toxic substances involved and the emergency procedures taken. (d) Landlord may, in its sole and absolute discretion, withhold its consent to any proposed assignment of sublease if I) the proposed assignee's or sublessee's anticipated use of the Premises involves the generation, storage, use, treatment or disposal of hazardous materials or toxic substances substantially different by type or amount from the materials and substances used by Tenant and the Premises or the Property is at a greater risk as a consequence ii) the proposed assignee or subtenant has been required by any prior any prior landlord, lender or governmental authority to take remedial action in connection with hazardous materials or toxic substances contaminating a property if the contamination results from such assignee's or sublessee's actions or use of the property in question; or ii) the proposed assignee is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of any hazardous materials or toxic substance. (e) As used herein, the terms "hazardous materials and/or toxic substances" mean i) any hazardous or toxic substance, material or waste which is or become regulated by any local, state or federal governments or special districts, ii) defined as "hazardous substance" pursuant to Section 1311 or the Federal Water Pollution Control Act (33 U.S.C. Section 1316), iii) defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), or iv) defined as a "hazardous substance" pursuant to section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq. (42 U.S.C. Section 9601). References herein to specific statutes or laws shall also be references to any applicable statutes or laws. (f) If Tenant presently uses in its business materials which are hazardous materials or toxic substances as defined in this Article 30, Tenant shall upon the execution of the Lease deliver to Landlord i) a list of all such hazardous materials and toxic substances, ii) a plan for use, handling, storage and disposal of hazardous materials and toxic substances, iii) the name, address, telephone number and qualifications of a licensed company that will handle emergency clean-up for Tenant, iv) a written contingency plan for any emergency involving said hazardous materials and toxic substances. During the term of this Lease, Tenant shall deliver to Landlord all reports required by any and all regulatory agencies governing the use, handling, storage and disposal of hazardous materials or toxic substances. 14 Exhibit 10.11 (g) Landlord agrees that Tenant may use the enumerated hazardous materials and toxic substances, subject to the terms of this Lease and in full and complete compliance with any and all applicable laws, statutes, ordinances, rules and regulations which may, from time to time, be enacted or promulgated. Tenant shall immediately notify Landlord of any other materials which may be hazardous or toxic, and shall obtain Landlord's written consent prior to such use or storage. (h) Any material increase in the premiums for necessary insurance on the Premises which arises from Tenant's use and/or storage of these materials shall be solely at Tenant's expense. Tenant shall procure and maintain at its sole expense such additional insurance as may be necessary in connection with its use, storage or disposal or hazardous materials or toxic substances to comply with any requirement of any federal, state or local governmental agency or special district with jurisdiction. (i) It is the intent of the parties hereto that the provisions of this Article 30 regarding the use and handling or hazardous materials and toxic substances shall also apply to tenant's storage upon the Premises of any substances, including, but not limited to, gasoline and diesel fuels in, above or below ground storage tanks. ARTICLE 31 -- EARLY TERMINATION OPTION Provided Tenant is not in default under this Lease Agreement beyond the passage of any applicable period of cure, grace or notice at the time of giving the Termination Notice (as defined below) or at any time thereafter to and including the Effective Date of Termination (as defined below) and notwithstanding any other provision of this Lease Agreement to the contrary, Tenant shall have the one time right to terminate this Lease Agreement early as to all of the Premises being leased hereunder effective as of September 30, 2003 (the "EFFECTIVE DATE OF TERMINATION") by (i) giving written notice of termination to Landlord no later than December 31, 2002, Time being of the essence (the "TERMINATION NOTICE" and (ii) paying to Landlord with said Termination Notice a termination fee in the amount of $81,858.00 (the "TERMINATION FEE"). TENANT: CRAY INC. LANDLORD: THE TEACHERS RETIREMENT SYSTEM OF THE STATE OF ILLINOIS, BY CAPITAL ASSOCIATES REALTY ADVISORS, ITS INVESTMENT MANAGER AND DULY AUTHORIZED AGENT. By: James E. Rottsolk By: Thomas J. Paleion -------------------------------- -------------------------------- Its: CEO Its: Executive V.P. --------------------------- --------------------------- By: Kenneth W. Johnson By: -------------------------------- -------------------------------- Its: VP, Finance Its: --------------------------- --------------------------- Date: August 4, 2000 Date: August 10, 2000 EX-23.1 6 v71068ex23-1.txt EXHIBIT 23.1 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference into Registration Statement Nos. 333-36563, 333-60167, 333-44137, 333-67885, 333-76223, 333-83521, 333-83523, 333-30644, 333-57954, and 333-57972 on Form S-3 and Nos. 333-12747, 333-08990, 333-30304, and 333-57970 on Form S-8 of our report dated February 9, 2001 (March 28, 2001 as to Note 15) appearing in the Annual Report on Form 10-K of Cray Inc., formerly known as Tera Computer Company, for the year ended December 31, 2000. DELOITTE & TOUCHE LLP Seattle, Washington March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----